Can a Satyam-Style Rescue Work for IL&FS?
BloombergQuint spoke to Pallavi Shroff, managing partner at Shardul Amarchand Mangaldas, who helped Satyam board.
In January 2009, the government in a first “managerial rescue” appointed a new board of directors at one of India’s leading information technology companies Satyam Computers Ltd.
The private sector company’s founder, Ramalinga Raju, had just days before confessed to overstating revenue and profit on the basis of fictitious clients and billing. The new Satyam board then arranged for the sale of a strategic stake in the company and after a two-part bidding process, Tech Mahindra Limited was determined winner.
It acquired a 31 percent stake in Satyam and subsequent to an open offer ended up with 42 percent of the beleaguered company. The rescue was accomplished in three months.
The reasons for recounting what happened a decade ago is because the government is now attempting a similar rescue for insolvent infrastructure finance company IL&FS Ltd. After recent defaults, which were the cause of some panic in the credit markets, IL&FS urgently needs to raise more funds and restructure debt.
While the company claimed to be making efforts in that direction, on Monday, 1 October, the government moved the National Company Law Tribunal with a petition to replace the IL&FS board.
The NCLT ruled in favour of doing so. The present board has been replaced by six new members who have to meet on or before 8 October and select a chairman among themselves. The board also has to submit a road map to the NCLT before the next haring on 31 October.
There are distinctions between the Satyam situation and the one facing IL&FS today. Satyam was a promoter-led company, IL&FS has distributed shareholding, the two largest shareholders being Life Insurance Corporation of India and Japan’s Orix Corporation.
Besides IL&FS is a systemically important, non-deposit taking, core investment company, as per RBI’s categorisation. Not just any ordinary company like Satyam was.
It also has four direct subsidiaries, 132 indirect subsidiaries and six joint ventures, adding to the complexity of the situation.
Satyam had fudged its numbers, according to its promoter’s confession.
IL&FS is facing an immediate liquidity crisis and has over Rs 16,500 crore of standalone debt and Rs 91,000 crore of consolidated debt.
Can the Satyam solution work for IL&FS? BloombergQuint’s Menaka Doshi spoke to Pallavi Shroff, managing partner at Shardul Amarchand Mangaldas, who had helped the Satyam board in finding a buyer. Joining the discussion is Malini Shankar, veteran bureaucrat who has just been appointed to the IL&FS board.
Watch the discussion here:
Here’s an edited transcript of the interaction:
What do you make of the government’s efforts for this Satyam-like solution to an entity which is so different?
Pallavi Shroff: This is a welcome step. It is an endeavor to stem all the confusion and the impact it has had on the bond market and the financial services market. This is a solution the government had for Satyam and this is a unique solution because the government removes the old management and brings in a new management, which could be for a longer period. The government itself does not directly involve itself and yet leaves it to the new experts who are on the board to deal with the situation. These experts will carve a roadmap for the company. This is the first step, and an important one. It will now be for the new board to chart their way forward, keeping the position that they don’t get implicated for anything that may or may not have happened in the past.
What do you make of the immediate challenges confronting you as a board member of IL&FS?
Malini Shankar: The challenge is very obvious. It is to study the financial status of IL&FS, see where things went wrong, when things started going wrong, to study the documents and then collectively the board of directors would be responsible for ensuring that it can be brought back to good health and good governance.
What will the new roadmap have in store?
Malini Shankar: This is something the entire board will have to sit down together to consult each other and arrive at a roadmap. I don’t think I can give an opinion unilaterally and single-handedly.
The road map is still a roadmap. It is not a solution yet. I have to look at the documents and take a call.
What do you think will be the first step the new board will have to take?
Pallavi Shroff: They need to take stock of the situation. It is what everybody has read in the newspaper but one never goes by what is in the newspaper. They need to see the business module IL&FS has adopted over the years and understand the cause of the problem. Once they understand this, they can look ahead at a mix of short-term and long-term measures. They will need to take recourse to further order from the NCLT as they move forward.
Read the full interview here.
(This article was originally published on BloombergQuint and has been republished with permission)
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