How Uday Kotak fixed IL&FS


When the crisis at IL&FS (Infrastructure Leasing & Financial Services) exploded in September 2018, many saw it as India’s Lehman Brothers moment, when the US investment banking firm collapsed ahead of the 2008 global financial crisis. The concern was that the fall of one of India’s biggest financiers of infrastructure projects in the NBFC (non-banking financial company) space would trigger a spate of such crashes and loan defaults, sending lakhs of crores of rupees of public money down the drain and leading to thousands of job losses. IL&FS had amassed a debt of Rs 99,355 crore—nearly as much as the Centre’s allocation to states to build infrastructure projects this fiscal—the bulk of it borrowed from public sector banks, and was in no position to repay it. The company closed the 2017-18 financial year with revenues of Rs 18,799 crore on a consolidated basis, and a loss of Rs 1,886.85 crore. In a swift action akin to the one taken in the January 2009 ‘Satyam Scam’, the Centre in October 2018 replaced the entire IL&FS board with a new, six-member board, and made Uday Kotak, managing director & CEO of Kotak Mahindra Bank, its non-executive chairman. On April 2, as Kotak’s term at IL&FS ended and he passed on the baton to the current chairman & managing director C.S. Rajan, the company claimed it had resolved Rs 55,000 crore of its total outstanding debt, with Rs 21,000 crore already out of its books. With this, Kotak and his team met 90 per cent of the target they had set: a realistic Rs 61,000 crore of the outstanding debt.

When the crisis at IL&FS (Infrastructure Leasing & Financial Services) exploded in September 2018, many saw it as India’s Lehman Brothers moment, when the US investment banking firm collapsed ahead of the 2008 global financial crisis. The concern was that the fall of one of India’s biggest financiers of infrastructure projects in the NBFC (non-banking financial company) space would trigger a spate of such crashes and loan defaults, sending lakhs of crores of rupees of public money down the drain and leading to thousands of job losses. IL&FS had amassed a debt of Rs 99,355 crore—nearly as much as the Centre’s allocation to states to build infrastructure projects this fiscal—the bulk of it borrowed from public sector banks, and was in no position to repay it. The company closed the 2017-18 financial year with revenues of Rs 18,799 crore on a consolidated basis, and a loss of Rs 1,886.85 crore. In a swift action akin to the one taken in the January 2009 ‘Satyam Scam’, the Centre in October 2018 replaced the entire IL&FS board with a new, six-member board, and made Uday Kotak, managing director & CEO of Kotak Mahindra Bank, its non-executive chairman. On April 2, as Kotak’s term at IL&FS ended and he passed on the baton to the current chairman & managing director C.S. Rajan, the company claimed it had resolved Rs 55,000 crore of its total outstanding debt, with Rs 21,000 crore already out of its books. With this, Kotak and his team met 90 per cent of the target they had set: a realistic Rs 61,000 crore of the outstanding debt.

It wasn’t easy, as the team worked through the complex maze of the IL&FS group’s companies and transactions, holding two full-day board meetings every month, most of them virtual, for the past two years to resolve the crisis. “We were in the middle of a potential systemic crisis in the Indian financial system,” says Kotak. The board discovered that the group had 347 subsidiaries, almost twice the 169 companies the Ministry of Corporate Affairs had initially estimated, going down, in some cases, to five layers of subsidiaries. Some of these had to be kept as ‘going concerns’ (making enough money to stay afloat in the foreseeable future), since they were “national assets and needed to be protected”. The other challenge was to resolve the debt of an NBFC outside the Insolvency & Bankruptcy Code (IBC) because financial services were not included in the mechanism at the time. They were, thus, navigating “uncharted waters”, as Kotak put it. “We have seen many conglomerates going through a messy IBC process. Their actual recovery was in single-digit percentage of total debt,” he says. The challenge was how to get fair recovery of the money and ensure its fair distribution.

Unlocking Value

“In just four years from 2014-18, the group’s debt rose from Rs 48,000 crore to Rs 91,000 crore,” reveals CMD Rajan, a former IAS officer who retired as Rajasthan chief secretary in 2018. “A large number of units were suffering from time and cost overruns over delays in land acquisition or forest and environmental clearances and project finance.” The group also had investments in several unviable projects and often sacrificed profits for growth. As the new management began to seek out buyers for IL&FS’s assets, they found that the actual market value of these assets was lower than the management’s initial assessment. Other challenges included delays in approval by joint venture partners, government stakeholders hampering the progress of sale transactions, certain state governments withholding legitimate annuities, non-payment of receivables, complicated and time-consuming judicial procedures, and complex intra-group lending that led to inter-linkages and delay in resolution.

“IL&FS had a big mismatch in assets and liabilities and enormous liquidity problems. Uday Kotak very quickly assessed the situation, and classified the companies under three codes—red, green and amber,” says former finance secretary S.C. Garg, who was part of the government team that reconstituted the board and brought in Kotak. Companies with more assets than liabilities were coded green; amber denoted firms that would fetch enough to pay off the secured lenders (ones backed by collaterals) and some to unsecured lenders. The other ext­reme were the red companies, which could not yield enough to pay even the secured lenders. “It was then decided that green and amber should be sold off. Selling the companies was the preferred mode of resolution,” Garg says.

“This classification helped achieve a clear understanding on expectations from asset sales,” says Ashvin Parekh, a banking consultant. “From a situation where few believed any money would be recovered, Uday Kotak and team managed to recover a significant Rs 55,000 crore.” IL&FS management claims the recovery, at around 56 per cent, is way above the 31 per cent lenders recover on an average through IBC.

Road to Recovery

Just as HDFC chairman Deepak Par­ekh had played a critical role in getting together all stakeholders of Satyam Computer to resolve the crisis at the IT firm that was subsequently sold off to the Mahindra Group, Kotak, a go-to person for the government for banking affairs, played catalyst in bringing all options to redeem IL&FS to the table. Hectic parleys with several corporates, lenders and the government helped the team resolve Rs 16,400 crore of IL&FS’s debt through monetising of assets. These included the sale of its wind power assets, its Chinese road assets, its technology group firms, the stake in ONGC Tripura, even its towering headquarters in Mumbai’s Bandra Kurla Complex. In addition, the company has accrued cash and invIT (infrastructure investment trust, a pooled investment vehicle like a mutual fund) units worth Rs 20,000 crore. Another Rs 4,600 crore of debt was discharged via repayments and release of NFB (non-fund based) limits such as letters of credit. Resolutions are in progress for yet another Rs 14,000 crore. IL&FS has filed an application with the National Company Law Appellate Tribunal for allowing it to undertake interim distribution of Rs 20,000 crore of cash, of which Rs 16,000 crore is available for distribution to creditors. Most of this money will be distributed to three large holding companies of IL&FS.

Kotak steered the recovery and resolution through two pandemic years, which is being acknowledged as a feat. In hindsight, however, some say the board should have been more aggressive. “They could have done better by selling the companies; even road companies have been converted to InvITs. They are possibly a safer option, but I don’t agree with that. I think this was something sub-optimal,” says Garg. Shardul Shroff, executive chairman of Shardul Amarchand Mangaldas & Co, says the insolvency law has specific legal provision on how to undertake insolvency of financial service providers and precedent-based procedures for group insolvency; it also prescribes timelines for resolution. “The recovery in IL&FS Group has been substantial,” Shroff concedes, “but how much of that is in cash or REITs (real estate investment trusts) is yet to be put in the public domain. Lenders have a choice whether to accept cash or REITs. This is undetermined at a group level vis-a-vis individual corporate debtors in the IL&FS group.”

The Way Ahead

Experts say CMD Rajan must now build on the momentum Kotak set in motion. “If the company is continued like a ‘going concern’, it is equivalent to being on ventilator. It’s unsustainable,” says a Mumbai-based analyst. “Moreover,” says Shroff, “after 2019, the special procedure of IBC should apply and the company will not have the benefit of the Companies Act where there is no time limit. If it finally goes under IBC or is transferred there, an administrator will be appointed and the board will continue to be superseded.” Given that the cash component is unlikely to be substantial since several projects were incomplete, Shroff believes the lenders will get alternative commercial paper of IL&FS and other subsidiary companies to retire their debt or continue it with alternative instruments. “This may not satisfy secured creditors,” he says.

Once the resolution process is completed, the decision on whether to keep IL&FS or to completely erase it will have to be taken. A narrowly-focused company could emerge. “Many subsidiaries and businesses were part of IL&FS,” says Nilesh Shah, MD, Kotak Mahindra Asset Management Company. “Shut them down or decide what’s working and keep that alive. But IL&FS as a brand name will not be able to raise capital, so shut it down and reincarnate.” There are about 120 companies in the group that still need to be resolved. Garg advocates the company cease to exist once it completes all the transactions in a year from now.

“To prevent such a crisis from happening again, we should show collective responsibility,” says Parekh. “Every aspect of the financial machinery, including the role of the regulator, needs to be strengthened.” Shah believes the market has to introspect as to why it did not penalise the company and allowed it to raise money till the very end. Kotak says the IL&FS experience has taught him many things. One, in a crisis situation such as this, the government needs to move…



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