Can A Satyam-Style Rescue Work For IL&FS?

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 Ltd. 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 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 The present board has been replaced by six new members who have to meet on or before Oct. 8 and select a chairman among themselves. The board also has to submit a road map to the NCLT before the next haring on Oct. 31.

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.