Govt does well to supersede IL&FS’s board PDF Print E-mail
Tuesday, 02 October 2018 03:49
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Since previous board didn't exercise any oversight over management, this was critical; fixing IL&FS will take time though


Though Satyam Computer Services was the analogy most-often drawn after the government approached the NCLT to supersede the management of infrastructure firm IL&FS, it is important to keep in mind that fixing IL&FS will be infinitely more complicated than fixing Satyam, and it will be near-impossible to find a single buyer like Tech Mahindra. For one, with a consolidated debt of over Rs 91,000 crore, the scale of operations is very different; and while Satyam was one firm, IL&FS is several dozen firms in charge of various projects. What makes IL&FS even more complicated is the strong possibility of contagion if it is not handled properly since the group owes money to banks, mutual funds and pension funds; any inability to repay its debts on time can become bigger as, say, mutual funds or pension funds, can start selling other assets to make good their own repayment obligations. That, of course, is why the government got into the act and probably arm-twisted shareholders like LIC to agree to put in money to save IL&FS till such time its assets could be liquidated at reasonable prices.

While winding down IL&FS’s operations will take a long time, it was important to first supersede its board because, despite its very high profile members, they didn’t act as an independent check on the company’s management; indeed, they allowed the powerful management, headed by Ravi Parthasarathy, to have its way without even the most rudimentary of checks. This is despite the IL&FS audit committee being headed by Maruti Suzuki chairman RC Bhargava and with former shipping secretary MP Pinto being another member.

Indeed, IL&FS’s remuneration committee was headed by former LIC chairman SB Mathur and it, for example, had no problem okaying a Rs 20 crore annual salary for Parthasarathy a and Rs 7.8 crore one for vice-chairman and managing director, Hari Sankaran, despite it being clear the company was being run into the ground and that the accounts looked fishy. Between 2014 and 2018, for instance, the group’s debt rose 90% and interest costs doubled while operating profits rose just 42.8%. It was also pretty clear that several of the projects being executed weren’t kosher. Allegations against the GIFT City project, for instance, were first made public in 2015 when a PIL was filed in court, and the flagship Noida toll bridge contract was cancelled by the Allahabad High Court in 2016—by then, the project which was supposed to cost `408 crore had seen costs escalate to Rs 5,000 crore, as a result of which a 30-year concession had got extended to a 100-year one. Apart from the board of the Noida joint venture being headed by Gopi Arora, the powerful former special secretary to the prime minister, other independent directors included former finance secretary, Piyush Mankad.

With the IL&FS board now superseded, investors will feel reassured that the management will no longer have the free-run it had earlier; the presence of Uday Kotak in the new board is reassuring, both for his financial acumen as well as his ability to run a top-notch banking operation. Apart from trying to work with individual lenders to re-negotiate loan terms, the new board will have to get detailed forensics done to rule out siphoning off of funds and have an independent evaluation done to see just how much IL&FS’s assets are worth; with so many allegations of gold-plated projects, such as the Noida toll bridge for instance, it is unlikely IL&FS’s assets will be as high as what the company claims. It is only after this is done that an attempt can be made to try and resolve the mess.



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