IL&FS crisis: MCA seeks relaxation in provisions of the Companies Act

This will enable the reconstituted board to proceed smoothly and help the board to take important decisions: Ministry

The Ministry of Corporate Affairs (MCA) has sought relaxation in provisions of the Companies Act to enable the reconstituted board of Infrastructure Leasing & Financial Services (IL&FS) to proceed smoothly and help it to take decisions regarding 348 subsidiaries of the beleaguered firm.

On October 1, by an order of the National Company Law Tribunal (NCLT) in Mumbai, IL&FS' previous board was superseded by a government-nominated board of directors, chaired by Uday Kotak, managing director and chief executive officer of Kotak Mahindra Bank.

The NCLT, while hearing the MCA's petition on Monday, observed the Companies Act did not permit exemptions from particular procedural rules.

The MCA argued "all procedures will take a lot of time, which will derail the resolution [of IL&FS]".

The MCA requested relaxation in three aspects of the Companies Act. The first request involves appointing Vineet Nayyar, 80, managing director (MD) of IL&FS. The MCA wants the appointment to be expedited because the Companies Act required a special resolution to be passed by a general body meeting of shareholders to appoint an MD of over 75 years. For this, IL&FS needs to give 21 days' notice to its shareholders.

The second hindrance for the new board is with regard to the management and boards of the 348 entities. The MCA requested the tribunal to provide directions to allow IL&FS' new board to supersede the boards of all group companies, so that important decisions may be taken quicker while finding replacements.

The NCLT is yet to pass a final order in the case and will monitor the developments and decisions the reconstituted board takes. The new board has to provide the tribunal with a road map or resolution plan for “rescuing” the company by October 31.

The MCA has also sought protection (for the new board) from regulatory action by state authorities with respect to defaults. Over the next 30 days the company needs to repay Rs 40 billion of debt, including bonds of Rs 10.66 billion. In case the company defaults on these payments, given that it needs Rs 35 billion of liquidity support, the MCA requested the NCLT to exempt the new board from any regulatory action or action from the authorities.

In a press conference last week, Kotak said the new board would first conduct an audit of the 348 entities and would seek legal as well as financial advice before taking any decisions.

IL&FS has defaulted on loans and liabilities worth Rs 37.6 billion as of September 29. Between September 30 and October 4, the company defaulted on loans from banks, inter-corporate deposits, and commercial paper worth Rs 3.4 billion.

Major public and private banks, mutual funds, insurance companies and pension funds have an exposure to the IL&FS group. With Rs 910 billion in debt, the company needs to raise both equity and debt.