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

IL&FS Ltd. is a very different company than Satyam Computers Ltd. was. Can the same rescue plan work?

Two lifeguards on Sydney’s Bondi Beach. Photographer: Michael Caronna/Bloomberg News
Two lifeguards on Sydney’s Bondi Beach. Photographer: Michael Caronna/Bloomberg News

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 The present board has been replaced by six new members who have to meet on or before Oct. 8 and select a chairman among themselves.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 hearing on Oct. 31.

There are distinctions between the Satyam situation and the one facing IL&FS today. Satyam was a promoter-led company and the this majority shareholder stood accused of fraud, IL&FS has distributed shareholding, the two largest shareholders being Life Insurance Corporation of India and Japan’s Orix Corporation. Their shareholding continues.

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.

Heres 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.

Will the incumbent shareholders will now have more confidence in bringing fresh capital to work,with a new board in place now?

Pallavi Shroff: It is too early to say that. Unless they see a roadmap, and unless they see a plan of how this will be put in a good shape, it is difficult for investors to keep pumping in more money. The new board is a high-powered board and it will bring stability in the minds of the stakeholders, and in the market.

Is it easier to get incumbent shareholders to recapitalise IL&FS or look at fresh investors in medium-to-long term?

Malini Shankar: In the medium-to-long term, yes, but for the moment the roadmap is what will set out these modalities.

Will the existing shareholders come aboard in recapitalising IL&FS?

Malini Shankar: One is always hopeful.

What are the key challenges for the board?

Malini Shankar: There are multiple companies involved. Multiple projects across the country, big projects. This can only be done after examining the documents and the procedures and seeing what procedures were followed and not followed properly. Those would be immediate challenges.

IL&FS is different from Satyam; will this make the job twice as difficult for the new board?

Pallavi Shroff: I do think so. I think it is because of the number of companies it has under its different kind of infrastructure projects, and these are long gestation projects. Some of them are half-way through, some of these have huge litigation pending where money needs to be recovered. There are so many more complexities here than those that existed in Satyam. Satyam was equally complex because we were dealing with a lot of projects. Satyam had a lot of foreign companies who had contracts with Satyam’s Indian companies. One of the key challenges was to keep those contracts in place and ensure that work was delivered. In that case, the employees of Satyam played a fabulous role because they delivered projects on time for the on-going contracts. What is going to be key here is how the board perceives the situation, the way they communicate with thousands of employees of IL&FS, and how they instill confidence in them so that they continue delivering what they are doing.

Satyam was eventually sold to Tech Mahindra. There has been no news on the sale of IL&FS. There are talks about selling its subsidiaries but the sale of the company is not one of the solutions discussed by the company. What swung it in Satyam’s favour? Was it because it was a promoter-owned company?

Pallavi Shroff: I don’t think it was a question of only being a promoter-owned company. There are ways to deal with situation where you have to bring a new promoter or if somebody wants to acquire. Unless we understand the cause of the problem, it is difficult to find a solution. We found a solution for Satyam because we knew it didn’t have as many subsidiaries or different parts to it so it was easier to sell it. There were several on-going contracts,too. So, I think, the solution has to emerge, and the board will have to workout a solution tailor-made for IL&FS.

How do you see this working out, with respect to the possibility of a sale? Or will the solution be more short-term, stop-gap kind of solution?

Malini Shankar: All possibilities, short-term and long-term, will have to be considered before taking a decision.

Do you think it is possible to separate the immediate recovery from the issue of assigning blame, and figuring out where the real numbers lie?

Malini Shankar: We’ll look at projects and recognise which ones can be monetised and which ones will not be able to be monetised and then take a decision step-by-step.

How will they go about reconciling this? The identification of the size of the whole situation is important.

Malini Shankar: The positive way to look at it is to see how to recover the assets as much as possible because we will become the custodian of public money. To blame and point fingers will come at a later stage.

Pallavi Shroff: That is not going to be a simple task that the board can do in eight days. This is going to be a much longer time frame. If one thinks the board is going to deliver a roadmap saying, “sell this asset, and don’t sell this asset” in six days, that is not going to be possible. In understanding each of the subsidiaries, the projects that they are doing, the nature of those projects, where they are stuck and for what reasons they are stuck, each of these is a matter that will have to be gone through by the board.

What can you recall from the Satyam experience that this board will have to keep in mind as well?

Pallavi Shroff: The new board is going to have to understand the existing businesses and how they function, where are the gaps, and why IL&FS has reached this situation; that is the first step they need to take. They will need to meet very, very often. Sometimes more than once a week. They will have to assign tasks to different people so that they constantly keep getting feedback to undertake responsibilities so that they can move forward in a faster way. There will be intense work for the board in the next few months.

Do you think it is necessary for the govt to not just stop here but to also stop liabilities?

Pallavi Shroff: If I go by my experience at Satyam, the government left it to the board of directors to figure out what was the most optimum approach for rehabilitating Satyam. In my opinion, that is what the government should do. With all the experience this new board has, they will be able to come up with an approach in six days or few days more than that.

In the future, once the board is done, will there be IL&FS subsidiaries and projects acquired,and a slimmer IL&FS?

Pallavi Shroff: There will emerge a more compact and sustainable institution. Ultimately, it is for the board to decide which approach they wish to take. The same approach does not apply to all companies.