When govt takes charge of IL&FS, everybody behaves differently: Ex-director

IL&FS' former director says the board tried various initiatives, but those didn't succeed

The previous board of directors of Infrastructure Leasing & Financial Services Ltd (IL&FS) had attempted several measures to infuse liquidity into the cash-starved entity. The proposals included an initial public offering, rights issue and even a merger with a larger entity to save the infrastructure major from defaulting on its obligations.

According to Jaithirth Rao, a former independent director of IL&FS, the board and the management were aware about the need for capital infusion three and half years ago, and even tried to tap every possible options in hand. But despite all the efforts, the plan fell through for one reason or the other.
 

“We approached a Middle East based sovereign wealth fund, which almost came through. But, it didn't work towards the end. Then, we proposed a merger with an Indian group, which is pretty cash rich. That went quite further with all agreements, valuation, ratios and board approval. But, we couldn't get shareholders' nod,” Rao, also a serial entrepreneur, told Business Standard.

The company is also learnt to have attempted huge fund infusion from a large foreign fund house into one of its subsidiaries. This subsidiary had entered into an agreement with the fund house in November 2017 which could have deleveraged the entity along with the parent firm. However, this was opposed by a few shareholders as post the fund infusion, IL&FS would have lost majority control over the entity. This discussion continued till April, 2018, but after seven months of due diligence, that investor also walked away.

The situation was turning tricky with time for the infrastructure major as in March 2018, one subsidiary of IL&FS was not meeting RBI norms, while another had reported losses. With no options left, the company then appointed SBI Capital Markets for asset sale post April 2018. But, it was still hoping for a bailout from its biggest shareholders like Life Insurance Corporation (LIC) and State Bank of India (SBI) among others. “It appeared that existing shareholders would support both through liquidity infusion and rights issue. Till July, they were very positive on the proposal, but a month later they in principle decided not to support,” according to sources close to the former board.

IL&FS counts LIC as its biggest shareholder with 25 per cent stake in the entity. SBI, Orix Corp, and Abu Dhabi Investment Authority among others are the other large stakeholders in the entity. The company, with around Rs 910 billion of debt, has defaulted on a series of payments due to asset liability mismatch and its inability to raise funds from the market. Last Monday, the government sacked members of the IL&FS board and put in place six new directors to stem the contagion effect of the credit crisis.

“When the government is in control, everybody behaves differently. Creditors are more patient. Debtors, who owe money to the company, will be more forthcoming. They will not contest on payments. And the government will be tough on the shareholders,” said Rao. “Asset sale would also be a lot easier with government control.” According to market experts, the problem with IL&FS was that while the holding company is a private entity, its subsidiaries are listed. "It should have been the other way round," a legal expert said.

Regarding liability of independent directors arising out of the events at IL&FS, sources said it might not happen unless cases of fund diversion cropped up during audit. The Serious Fraud Investigation Office (SFIO) has already started a probe.