Government’s intervention in IL&FS default

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.

Hasit Seth
Independent litigation counsel,
Mumbai