INSUBCONTINENT EXCLUSIVE:
With the future stability of the Indian financial system on the line, executives running a giant infrastructure lender gathered at the
company's glassy, modernist headquarters in Mumbai and hammered out an ambitious restructuring plan last Saturday to manage a $12.6 billion
debt burden after a string of defaults.Except that they weren't really calling the shots any more
The very next day, the government in Delhi authorized a plan to sweep in and seize control of Infrastructure Leasing Financial Services
Ltd., a vast conglomerate that's raised billions of dollars in the corporate bond market and powered the nation's public project building
boom.The stunning move, more typical of China's command-and-control economy than a free-wheeling democracy like India, caught investors by
Prime Minister Narendra Modi's government also unveiled an investigation into ILFS's management by the Serious Fraud Investigation
Office.The decision to oust the company's board was taken by Finance Minister Arun Jaitley after the government had quietly reached out, at
least two days earlier, to former bureaucrats and current bankers to orchestrate a board coup, according to people familiar with the matter
The government had been monitoring the lender for two weeks, one of the people said.Following a series of meetings last week, and months
after the first defaults by the systemically important lender, the ministry was worried about the multiple shocks to the financial markets
that would follow from ILFS's collapse."The restoration of confidence of the money, debt and capital markets, the banks and financial
institutions in the credibility and financial solvency of the ILFS Group is of utmost importance for the financial stability of capital and
financial markets," the government said in a statement Monday.Systemic RiskIn addition to handpicking a new board of directors, the
government is expected to overhaul the management and monitor any future restructuring plan, a process that seems likely to extend well into
The newly constituted board led by Asia's richest banker, Uday Kotak, is likely to meet Thursday
It must devise a plan for the group and file a response to the National Company Law Tribunal, which endorsed the government's move, by Oct
The tribunal will next hear the matter on Oct
31.PM Modi's government concluded it had few options
The economy was already grappling with surging fuel prices and a plunging currency
The last thing the government needed was more turmoil in the debt market, with plans underway to raise a net Rs 2.47 lakh crore ($34.7
billion) through March to bridge India's fiscal gap.Another consideration, and a big one, is that PM Modi's Bharatiya Janata Party faces a
general election in early 2019
During his four years in power, PM Modi has tried to cultivate an image of being a champion of the downtrodden
That will be tested as the opposition questions ILFS's loan-fueled expansion."The government was left with no choice but had to act quickly
and decisively," said Mathew Antony, managing partner of Aditya Consulting, an advisory firm based in Mumbai
"The risk from ILFS's default was spreading to all corners of the market and any indecisiveness would have eroded the political capital of
the government further."The troubles at ILFS had been intensifying since July, when company founder Ravi Parthasarathy stepped down, citing
Defaults from August within the group rattled India's money markets, added to pressure on corporate bond yields and sparked a sell-off in
the stock market.The Reserve Bank of India has initiated a special audit, given the potential systemic risk to other non-bank lenders
There were also worries about upcoming group debt payments.Secret MemoOver the past week, Mr Jaitley had come under pressure to act after
receiving formal letters, including one from opposition lawmaker K.V Thomas, raising concerns about operations at ILFS, according to people
Mr Jaitley's team on Sunday sent a confidential note to the Ministry of Corporate Affairs recommending that the company court be approached
for the "reconstitution" of the ILFS board.In the secret memo, the finance ministry said it was concerned that just Rs 2,800 crore of ILFS
securities owned by mutual funds could set off a chain reaction of redemptions by investors
That, in turn, may send sovereign bond yields soaring to 8.5 percent, a level not seen since 2014, and possibly derail the government's
borrowing plan, according to the note seen by Bloomberg
Finance ministry spokesman D.S
Malik declined to comment.On Monday, government lawyers sought the National Company Law Tribunal's approval to oust the board calling the
directors a "parasite on public fund," because of their "hefty" salary packages
Former Managing Director and Vice Chairman Hari Sankaran was paid Rs 7.76 crore in the year ended March 31, while founder Chief Executive
Officer Parthasarathy took home Rs 20.5 crore , according to the company's annual report.The ILFS Group is a bewilderingly complex
conglomerate, with 169 direct and indirect subsidiaries
To defuse the long-running crisis at the company, the financier had considered selling short-term bonds, recapitalizing the company, and
selling or stalling existing infrastructure projects, according to an ousted director, who asked not to be identified because the person
isn't authorized to talk to the media.Another option was a bailout orchestrated by its biggest investors, which include Life Insurance
Corp., India's largest life insurer; State Bank of India, its largest bank; and Housing Development Finance Corp, its largest mortgage
is the company's second-largest shareholder.A plan to raise funds by selling stake to Piramal Enterprises Ltd., controlled by billionaire
Ajay Piramal, in 2015 was rejected by the shareholders
That prompted the firm, which lent for projects that take years to complete, to seek short-term funds, according to the director.Default
RunEnter the Reserve Bank of India
The nation's central bank in an attempt to clean-up a burgeoning pile of stressed debt issued stringent new rules barring fresh loans to
That made it difficult for struggling companies to get new loans from banks.Five special purpose vehicles of ILFS Transportation Networks
failed to service obligations in June, followed by defaults by parent ILFS and its units on commitments including bonds and commercial
A state lender Small Industries Development Bank of India filed an insolvency petition against ILFS and its unit last month over missed
payments.The government in its court filing said ILFS was "indiscriminately" borrowing money
ILFS "has been presenting a rosy picture and camouflaging its financial statements by hiding severe mismatch between its cash flows and
payment obligations, total lack of liquidity and glaring adverse financial ratios," according to the 44-page filing.The events that led to
the firing of the board started with a complaint against an unit written to the Ministry of Corporate Affairs office in Mumbai a few weeks
That was followed by lawmaker Thomas's letter to Mr Jaitley on Sept
20 in which he asked the minister to help ILFS to avoid the world's fastest growing major economy from plunging "into a recession."Following
is the time line of developments in the run up to India's shock decision to oust ILFS's board.Sept
25:Mr Jaitley meets LIC's Chairman V.K
Sharma, central bank Deputy Governor Viral Acharya, State Bank of India Chairman Rajnish Kumar and Central Bank of India Managing Director
27:Mr Jaitley meets RBI officials including Governor Urjit Patel at his residenceSept
28:Economic Affairs Secretary Subhash Garg meets shareholders of ILFS, including LIC and SBI
Separately, the RBI meets LIC and Orix representatives in Mumbai
Finance ministry officials start reaching out to potential board-member candidatesSept
29:ILFS hosts its annual general meeting and decides to raise Rs 15,000 crore from a non-convertible debt issueSept
30:Ministry of Finance writes to Ministry of Corporate Affairs recommending ILFS's board be ousted
Ministry asks India's Serious Fraud Investigation Office to begin probe into ILFS's financesOct
1:A court in Mumbai approves the government's petition to fire ILFS's boardOct
3:Government inducts a seventh board member: Former bureaucrat C.S
RajanShares of the the group's listed units have been rallying since the ousting of the board
ILFS Investment Managers Ltd
surged 10 percent on Wednesday, while ILFS Transportation Networks advanced 19 percent."Investors didn't want to put more money without a
strong leadership and we can't imagine a better team than the newly constituted board," said Gaurang Shah, chief investment strategist at
Geojit Financial Services Ltd
"Assurance by the government and the necessary action taken against the erstwhile board has brought the much needed confidence."
