The government of India has rarely stepped in to take control of a private company. But on Monday in an exceptional move, it decided to take control of the debt-laden Infrastructure Leasing and Financial Services (IL&FS), which defaulted on some of its debt obligations in recent weeks triggering wider concerns about risk in the rest of the country’s financial sector..

Last year, the government made an attempt to take control of debt-laden realty firm Unitech. But the move was stalled by the Supreme Court. 

This is only the second time after Satyam Computer Services that the government has taken control of a company board. The government was successful in taking over the control of Satyam Computer Services in 2009 after an accounting scandal.

So what was the Satyam story and why it is relevant to remember that? In one of the biggest corporate scandals in the country, Satyam chairman Raju confessed that the company’s accounts had been falsified. The Company Law Board superseded the company board and appointed 10 nominal directors. The government nominated banker Deepak Parekh, former Nasscom chief Kiran Karnik and former Sebi member C Achuthan to Satyam’s board to control the damage.

In January 2009, the government in a first “managerial rescue” appointed a new board of directors at Satyam, one of India’s leading information technology companies. Ramalinga Raju, the founder of the company, 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 was announced the winner. It acquired a 31 per cent stake in Satyam and subsequent to an open offer ended up with 42 per cent of the beleaguered company. The rescue was accomplished in three months.

Satyam Computer was a multi-billion dollar company spanning 67countries and 6 continents (it served over 650 global companies, 185 of which were Fortune 500 corporations).

On January 7, 2009, Ramalinga Raju, faxed a shocking confession to the stock exchanges: “The balance sheet carries as of September 30, 2008, inflated (non-existent) cash and bank balances of over $1 billion. The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years. I am now prepared to subject myself to the laws of the land and face the consequences thereof.”

The Satyam stock tanked 78 per cent and Indian markets fell over 7 per cent before the stock was swiftly removed from the Sensex. Later that evening, the New York Stock Exch­a­nge halted trading in Satyam. Broking firm CLSA called it ‘India’s Enron, an accounting fraud beyond imagination (and) an embarrassing and shocking episode in Indian corporate governance’.

On April 13, 2009, just three months after that fateful January 7, Satyam Computer Services was sold to a joint venture of British Telecom and India’s Mahindra Group at Rs 58 per share. The Satyam stock more than doubled after it was re-christened Mahindra Satyam

Though some government sources stated that IL&FS move could or could not be akin to Satyam takeover, the central government mounted a rescue operation for IL&FS and its group firms and moved the National Company Law Tribunal (NCLT) for a change in the company’s management.

The government in its petition cited mismanagement on the part of the company’s board of directors in dealing with the crisis.

IL&FS too backed the Centre’s application as it will help resolve all the pending issues and reach at a comprehensive solution for the benefit of all stakeholders.

The government intervention comes after IL&FS defaulted on repayments and has had its debt rating downgraded, which has in turn roiled the markets.

(With agencies)