Rescuing The Rescuer: IL&FS Had Hand In Untangling Satyam-Maytas Mess Created By Rajus And YSR Regime

The government’s decision to supersede the board of Infrastructure Leasing & Financial Services Ltd (IL&FS), the beleaguered non-bank finance company, whose loan defaults triggered a market-wide crisis of confidence, is the right one. When confidence is weak, only governments can ensure its restoration.

The choice of Uday Kotak, managing director of the blue-chip Kotak Mahindra Bank, as the new chairman of the new six-member board, is also a good one. Few people carry the credibility and clout of Uday Kotak in today’s financial firmament.

The six-member heavyweight board, which includes former Tech Mahindra chief Vineet Nayyar, ex-SEBI chairman G N Bajpai, and three others apart from Kotak, is expected to take a close look at IL&FS’s financial woes and hold its first meeting not later than 8 October. The government’s move essentially underlines that it is serious about fixing the problem, and not just kicking the can down the road by asking public financial institutions like LIC and State Bank of India to bail it out. A report in The Economic Times suggests that the previous board was sacked precisely because the government did not want to endanger other state-owned firms by forcing them to do what they were unwilling to do. Rescuing IL&FS needed credible change, and not just more of the same.

Kotak and the new board have their work cut out, for they will have to fix the financial haemorrhaging sooner than later. In theory, IL&FS should be solvent, as its assets are said to be around Rs 1.15 lakh crore and borrowings Rs 91,000 crore, but while the liabilities are for certain, the quality of the assets – and their worth – may be in some doubt. The big task is thus to isolate the good assets from the bad ones, hawk some of the goods one to raise cash, and write down the bad ones and figure out what is the net rescue capital – both equity and debt – required to put IL&FS back on its feet.

There are close parallels between the government’s present rescue bid for IL&FS and its earlier rescue of Satyam Computer in 2009. And IL&FS has a link to that event.

In 2009, IL&FS was one of the rescue vehicles used to bail out Maytas – the real estate and infrastructure arm of Satyam Computer promoter B Ramalinga Raju, who confessed to financial fraud in January that year.

Raju had no option but to disclose the fraud to the stock markets after failing to obtain shareholder approval for the merger, which was intended to hide the mismatch between Satyam’s reported and real profits by using Maytas’s cash flows as a prop. But the move was violently opposed by key investors and hence aborted.

Soon after Raju’s confession, the government superseded the board and a new one headed by Deepak Parekh was installed to preserve Satyam’s core business and sell it to a more viable partner. The board ultimately sold the IT business to Tech Mahindra, but that still left Maytas – reverse of Satyam – in the kitty.

Maytas was one of the big Andhra infrastructure and real estate companies with close links to the powerful Congress chief minister, Y S Rajasekhara Reddy (YSR), who was a key fundraiser for the party. In UPA-1, Reddy ensured that Andhra companies commandeered a huge chunk of central infrastructure projects, with the rising stars including the GMR, GVK, Lanco and Nagarjuna groups – not to speak of the Rajus of Satyam and Maytas.

But things started unravelling after the 2008 global financial crisis, when property prices fell and infrastructure projects started stalling. Maytas, which had been awarded over Rs 11,000 crore in irrigation projects by YSR and also the Rs 12,000 crore Hyderabad Metro, found itself coming under attack by activist groups for allegedly being favoured by YSR. After Satyam collapsed, and Maytas failed to tie up the funds for financing the metro, YSR himself was forced to cancel the contract.

YSR’s death in a helicopter crash in September 2009 left Andhra Inc without a godfather, especially as the Congress high command fell out with his son, Jagan Reddy, who wanted to succeed his father as chief minister.

IL&FS was drafted to rescue Maytas in 2009, and finally secured control of both Maytas Infra and Maytas Properties in 2011. Maytas Infra was rechristened IL&FS Engineering & Construction Company.

The irony of the situation is that the company that was brought in to rescue Maytas is now itself the subject of a Satyam-Maytas-style state-led rescue.

Karma is catching up with IL&FS.