The new IL&FS board’s resolution roadmap submitted to the bankruptcy court may test even the ability of the seven-member board headed by Uday Kotak.

For, the new board hinted at non-transparent and illegal tractions by the previous management in many ways. In particular, selling a group entity in June 2017 has come under lens where the audit committee will conduct a special audit of the books of the key group companies.

Following the crisis at the diversified IL&FS which saw the market mayhem last month, the government stepped in to rescue the infrastructure conglomerate like a Satyam Computers-style and immediately on October 1, it superseded the erstwhile IL&FS board and appointed a seven-member board headed by Uday Kotak as the chairman.

A month after, the new board submitted its action plan to National Company Law Tribunal (NCLT) on Wednesday, paving the way for resolution of the debt-laden conglomerate’s financial crisis. IL&FS, represented by counsel Sanjay Shorey, submitted the plan that consists of a micro-level picture and the resolution plan and the way forward to a bench of judges VP Singh and Ravikumar Duraisamy.

The new board plans to complete resolution process in stages, after getting a go-ahead from the central bank, markets regulator and competition commission of India (CCI), within six to nine months. The next hearing of the matter is scheduled on December 3.

The new board at the IL&FS group laid out a universe of options for deleveraging of the firm’s existing debt, which may be combined to work out the final resolution in a phased manner — three-tiered action plan that includes steps such as capital infusion either from existing or new investors, asset monetisation and resolution with the creditors, considering the complex structure and scale of the group.

As per the new resolution plan, the board will consider capital infusion from a credible and financially strong investor to ensure continuity of operations and employees at the subsidiaries at group level. At the business vertical or platform level, the board will seek private equity and strategic players, which have focused interests in roads, renewables, real estate and thermal power subsidiaries. Similarly, at asset-level resolution, it includes asset-by-asset solution explored through asset monetisation and as a last resort through liquidation of assets.

How it fell into debt trap

The new board found that IL&FS and its subsidiaries, operated as a single enterprise with “no boundaries of legal entities and separate managements”, led to the contagion impact on its creditors and finally, it fell into debt trap due to timely payment to its lenders.

As per the action plan, the new board also found 347 group companies with a fund-based debt of a whopping Rs 94,215 crore.  “Apart from fund-based loan, the non-fund based debt is Rs 5,138 crore. IL&FS has also an exposure of Rs 24,866 crore to group companies while IL&FS Financial Network’s exposure to the group is Rs 6,380 crore,” the report said.

“While it has been under one month since the new board has taken charge and it is still working towards unravelling the complexities pursuant to multiple layers of entities, totalling 347 in all, varied interests of various stakeholders, diverse businesses with varied age, scale and market positions of these businesses, different jurisdictions, and significant intra-group transactions, the new board has provided in the report a high level assessment of the key considerations for the resolution as well as broadly, the options available,” the statement said.

As of October 8, 2018, the overdue amounts relating to financial debt, comprising of defaulted principal amounts and interest payments, within the IL&FS Group aggregates to Rs 47,761 million or Rs 4,776.1 crore. “This figure does not take into account those facilities which have been accelerated (i.e. where demands have been made for repayment of the entire principal amounts on account of existing defaults under the credit facilities); crystallisation of non-fund based facilties; and default interest accruing on account of such defaults,” the statement added.

The report also stated examples of IL&FS Financial Services — which had outstanding loans and investments worth Rs 5,728 crore, Rs 5,127 crore, and Rs 5,490 crore in the fiscal years 2016, 2017 and 2018 respectively—leading to a negative capital adequacy in the last three years, against the regulatory requirement of 10 per cent capital to risk weighted assets ratio for systemically important non-deposit taking non-banking finance company.

Also, borrowings of over Rs 900 crore from other companies within the group such as to Hill County Properties and IL&FS Employee Welfare Trust were not consolidated into the accounts as they were recognised as internal debt by the erstwhile management.

A study of financial records of the company also revealed that the IL&FS Group had routed over Rs 1,500 crore through circuitous transactions through eight of its subsidiaries, in order to circumvent regulatory rescriptions.

Surprisingly, 55 consultants of IL&FS, who were retired employees of the company, were hired at an annual cost of Rs 16.5 crore. Six properties with total monthly lease rent of Rs 15.1 lakh and with a deposit of Rs 2.26 crore were also found to be owned by select employees or their relatives as guest houses of group companies.

Proactive measures taken so far

As per the action plan of the new IL&FS board, several measures have been taken so far. Highlighting a few of the measures, the report focused on control of cash flows, as all material payments over Rs 1crore must be approved by Vineet Nayyar, who was appointed as the vice chairman and managing director of the group.

To begin with, the report suggested that 69 retired employees who were hired as consultants have to be discontinued. Sitting fees of board members and its committees were lowered, along with a 10 per cent reduction of employee salaries with packages of Rs 50 lakh and above. Even the maximum limit for company-owned cars was cut to half to Rs 25 lakh and Diwali gifts distribution was discontinued.

Besides, a special audit of past management actions is also being considered by the new board as well. The new board had also appointed nominee directors for eight subsidiaries within the group in its October 18 board meeting. The board also appointed Arpwood Capital Pvt Ltd and JM Financial Services Ltd as joint financial and transaction advisors, while Alvarez & Marsal were retained as resolution consultants to evolve resolution plans and advise on the resolution process.

The new board, with a debt of over Rs 91,000 crore, is far more complex than expected with a maze of 347 subsidiaries and associate companies. The Serious Fraud Investigation Office (SIFO) is also investigating IL&FS and its subsidiaries amid concerns of financial irregularities. The new board also found that the defaults began in August in which it put pressure on corporate bond yields and caused a massive sell-off in the stock market.

On the top of that, the new board of IL&FS also proposed a multi-pronged strategy to revive the beleaguered company, including significant capital infusion at the group level from credible and financially strong investors, selling of subsidiaries at the vertical level and resolution at the asset level. The new board said that while a resolution at the group level will be complex, asset-level sale may not find any buyers.