Government’s intervention in IL&FS default

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Dear Editor,

The government’s intervention in Infrastructure Leasing & Financial Services (IL&FS) is symptomatic of the push and pull motions the government faces in liberalizing its economy. Ideally, a few of IL&FS’ infrastructure focussed subsidiaries should have been allowed to fail or revived under the process of the Insolvency and Bankruptcy Code (IBC). This is because a whole lot of companies in the power and shipping sectors may be knocking on the doors of the bankruptcy courts soon, where the government will need to take a tough call of whether “to intervene or not to intervene” very soon.

The fear of destabilizing the financial sector via IL&FS’ failures is the primary reason for the government’s takeover of the board of IL&FS. But now the talk has shifted to a bailout, which means in every such intervention a bailout can be asked for or expected. Bailouts of private companies are nothing new even in developed economies. Chrysler received such sovereign guarantee-based bailouts by the US government during Lee Iacocca’s time there as chairman and CEO. The Indian government too has a history of several “bailouts” by means of nationalization. But such extreme measures are nowhere on the horizon right now. Hence, it would be pragmatic to wait and watch the markets, and the government at this point. The government will not easily give up the gains it has made by successfully rolling out IBC with prized steel assets that saw companies fight to get control over them.

The presumed clarity of systematically closing companies under IBC will meet many hurdles in the future, which includes those posed by the government itself. While IL&FS is a hybrid non-banking financial company, so it may be possible for the government to save it. But for others, the issues of labour or strategic interests will likely make the government intervene in many IBC proceedings and hence distorting its character. The biggest loser on this front would be the government’s own goal to make companies borrow more from debt markets based on their own ratings to create a viable and a deep corporate bond market. With this action, a large class of companies where the government has a majority holding and are publicly listed may be considered off-limits from IBC due to the risk of sudden government intervention.

The government and the committees driving IBC will soon find that creditors – operational or financial – are not the only stakeholders on which IBC focusses mostly. Otherwise, even regular winding-up would be successful minus the hold up at the Board for Industrial and Financial Reconstruction. The initial successes of restructuring prized steel industry assets in IBC, while making huge recoveries in a positive steel pricing cycle, has increased hopes from the IBC process. But random interventions to save companies for one reason or another may diminish continued interest in restructuring the corporate sector. But even barring a few missteps, successive governments have shown remarkable agility and adaptability in a vastly changing economy of India that is racing ahead to fulfil its potential.

Hasit Seth
Independent litigation counsel,
Mumbai