INSUBCONTINENT EXCLUSIVE:
The collapse of ILFS could have also sparked a liquidity crunch, the government warned.The government said it was forced to take control of
ailing shadow banking firm Infrastructure Leasing Financial Services (ILFS) as it feared its collapse would cause "catastrophic" damage to
the financial markets and the economy, a court filing shows.In the largest intervention of its kind, government this week replaced the board
at ILFS, a construction and infrastructure firm that had defaulted on a series of repayments to creditors as it struggled under a debt pile
of more than $12 billion.The company's downfall has undermined confidence in country's shadow banking sector, triggered declines in the
nation's stock and bond markets, and stoked fears of outflows from the mutual fund industry which has a large exposure to such financing
companies.In a 36-page petition filed by Corporate Affairs Ministry at the company law tribunal, the government does not pull its punches,
referring to ILFS as a "titanic ship" and accusing its board of mismanagement.The petition, which sought permission for the board takeover
and the right to replace executives and was approved by the tribunal, has not been made public, though some media outlets have quoted from
parts of it in recent days
Reuters was able to review the entire petition.Saving ILFS was critical as nearly two-thirds of the firm's accumulated debt of 910 billion
rupees ($12.36 billion) was from public sector banks
Moreover, ILFS accounts for 16 percent of the total exposure of banks to non-banking financial companies (NBFCs), the government said in the
petition."The future impact of more defaults in the group may be catastrophic for the (country's ) financial stability," it said."Any
impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector,
financial markets and the economy," the government added.CRITICAL TIMING FOR MODIILFS, whose top shareholders are state-run Life Insurance
Corporation, the State Bank of India, Japan's Orix Corp and the Abu Dhabi Investment Authority, is one of the largest of thousands of
NBFCs which have mushroomed in recent years.The NBFCs, that currently manage an aggregate loan book of nearly $300 billion, have played a
key role in lending growth as the main banking sector struggled to tackle a bad-debt burden of $150 billion.It is rare for the government to
take control of a private company
In 2009, it took over Satyam Computer Services following an accounting scandal at the firm.But the rescue was critical for Prime Minister
Narendra Modi who can ill afford a financial crisis months before he faces voters at the next election, due by May 2019
His administration is already facing public ire over high fuel prices, a falling rupee currency and farmer protests due to low crop
prices.In a "critical lapse", ILFS' risk management committee, which was tasked to keep tabs on liquidity, credit and market risks, met just
once between 2015 and 2018, the government said.ILFS' proposed restructuring plan, announced just days before the government take over, was
a "sham" and a "disguised way" to further dupe the stakeholders and misguide the general public, the government said.The board was
"responsible for negligence, incompetencies and putting veil on the misleading intent by presenting rosy financial statements," the petition
said.The "unscrupulous" manner in which public money has been managed and is stuck in projects indicates that the management not only failed
but was involved in "operation cover up" till the end and willfully created a financial mess, the government alleged.ILFS' former managing
director and board member, Hari Sankaran, did not respond to a request for comment
Reuters could not immediately contact the other former board members of ILFS, who have not commented publicly on the matter.MAJOR
The group's debt levels rose to more than $12 billion this year, from $6.6 billion in 2014.The government said ILFS was not making enough
profits to take care of its interest expenses, leading to defaults and rating downgrades
The over exposure to loans had been without "prudent commercial practices", it said.The government has ordered its Serious Fraud
Investigation Office to probe the ILFS matter, and the finance ministry on Sept
30 drafted an internal note on possible ramifications of an ILFS collapse.The ministry warned that mutual funds had an exposure of 28
billion rupees ($381 million) to ILFS bonds and were likely to face redemption pressure from their corporate clients following the ILFS
episode, according to the petition.That, the government feared, could trigger an debt market sell-off if mutual funds resorted to selling
government securities because of an illiquid corporate debt market.The collapse of ILFS could have also sparked a liquidity crunch, hit
market sentiment and impacted profitability at NBFCs, the government warned in its petition.ILFS' new board is exploring all possible
options to revive the company and does not underestimate the size of the challenge, its new non-executive Chairman Uday Kotak said on
Thursday.Government on Friday asked the tribunal to allow the new board to act fearlessly and independently as it looks to revive the firm,
TheIndianSubcontinent staff and is published from a syndicated feed.)
