- The Government of India has taken control of Infrastructure Leasing & Financial Services, a key financier of infrastructure projects which had caused shock waves in the financial markets after defaulting on loan prepayments.
- The move aims to restore confidence in the money, debt and capital markets.
- An investigation found the company had negative cash flows but continued to declare dividends and award “huge” pay to managers.
The Indian Government has taken control of shadow lender Infrastructure Leasing & Financial Services (IL&FS) over fears that its massive debt defaults would destabilise the financial system.
Authorities worried of a failure similar to Lehman Brothers in 2008, which kicked off the GFC, when the 30-year-old IL&FS defaulted on debt repayments in August and September.
The shock waves from that saw investors pull out of managed funds which had invested in infrastructure debt. In turn, the debt market slide then transferred to the equity market, sparking a sell off in financial stocks.
The National Company Law Tribunal has ordered the board of directors be replaced at the company, which has debt of 910 billion rupee ($A17.27 billion).
Among the replacements are Uday Kotak, India’s wealthiest banker, and G.C. Chaturvedi, chairman of ICICI, the second largest bank in India.
The central government says it will also take steps to ensure infrastructure and other sectors of the economy continue to get financial resources to maintain the growth momentum of the Indian economy.
“The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets,” it says.
Infrastructure Leasing & Financial Services had been one of the biggest financiers of infrastructure projects in India.
Its shareholders include Japan’s Orix Corp, Abu Dhabi Investment Authority and Housing Development Finance Corp, and Life Insurance Corp. of India, the country’s largest life insurer.
The central government says it is looking at asset sales, restructuring of some liabilities and a fresh infusion of funds by investors and lenders.
The underlying cause of defaults was said to be “stalled projects” and “wrong decisions” taken before 2014.
“The confidence of the financial market in the credibility of the IL&FS management and the company needs to be restored,” the government said in a statement.
An official investigation found the company had negative cash flows while continuing to pay dividends and “huge” managerial pay.
A Serious Fraud Investigation Office investigation has been ordered.
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