In this article, Gaurav Sau discusses the lessons of corporate governance the recent IL&FS crisis teaches us.
The IL&FS Crisis – Teaching to Governance
The Infrastructure Leasing and Financial Services Limited [IL&FS] has elevated a number of questions whirling around corporate governance. Are governance failures to blame for the embarrassing situation in company finds itself? A Question has been said about the role of independent directors, nominee directors, auditors and credit rating agencies. One aspect is missing in the consultation on the specifics of governance issues that affect banks and financial institutions. Traditional corporate governance models are not enough to deal with governments in such companies
As I argue in BloombergQuint, Bank and financial institutions governance are different from other companies because the main concerns are related to immoderate risk-taking. A shareholder-oriented approach in corporate governance would enable to take greater risks in financial institutions. This is the larger impact of the failure of such institutions and peril enclose the expectation of a government bailout. All these points towards the need for more muscular risk management mechanisms in a financial institution, an aspect that appears to have been sorely missed in IL&FS.
Resolving IL&FS – IBC route or Schemes of Arrangement
August 2018 Infrastructure Leasing and Financial Services Limited (IL&FS) has been in headlines for every investor and corporate governance because of several debt payments deadlines. Any legal framework is available for resolving IL&Fs? As on today, India doesn’t have a special resolution regime or comprehensive policy or law on bankruptcy extreme for financial institutions.
In the current legal framework having two routes which can be adopted by IL&FS for recovery for this disease:-
- The schemes of arrangements route under the Companies Act, 2013.
- Although IL&FS has chosen the schemes route to bring itself back on track, Let’s go we understand this two mechanisms and a comparative analysis of their effectiveness as a tool for debt restructuring development of a financial institution like IL&FS.
Background of IL&FS
IL&FS is one of India’s driving foundation improvement and fund organization and is enlisted with the Reserve Bank of India (RBI) as a fundamentally critical non-store tolerating center venture organization (SI-ND-CIC). According to the RBI CIC structure, IL&FS puts resources into and gives credits to its gathering organizations. IL&FS has an exceptionally complex corporate structure and sits on a snare of 24 coordinate backups, 135 circuitous auxiliaries, 6 joint endeavors and 4 relate organizations.
Typically, such money-related foundations are firmly interconnected and once an issue creates in one substance or organization, they rapidly spread to other sound elements. This is actually what has occurred on account of IL&FS and its gathering organizations and goals of such organizationsis no uncertainty going to be an exceptionally unpredictable undertaking.
The IBC route
The IBC was engaged with the bankruptcy laws relating to companies, partnerships as well as individuals. However, financial service providers exclude like banks, insurance companies, stock exchanges, and non-banking financial companies. While the Central Government having power under section 227 of the IBC to formulate rules and notify a financial service provider, on an ad-hoc basis. In the absence of such a notification, though IL&FS being a financial service provider cannot spot to the IBC, its subsidiaries which are not financial service providers (like power and infrastructure projects entities/companies) can avail of the mechanism provided under the IBC on an individual basis. Admittedly, the IBC route provides various advantages which are mention below.
With regards to monetary organizations with a few auxiliaries, it would not be anything but difficult to receive the IBC course in light of the mind-boggling cross section of relations among the gathering organizations. Given that IBC is as yet rising and is in its developmental years it isn’t clear how bunch bankruptcies are to be managed. The way that a definitive holding organization (i.e. IL&FS) can’t be brought inside the domain of IBC will represent a genuine obstacle to the goals procedure. Furthermore, given that this procedure is to a great extent lender driven and the advertisers would lose control and administration, IBC would normally not be the perfect decision for IL&FS.
Some press reports recommend that IL&FS is just confronting a liquidity issue (or, in other words, nature) as denied to an indebtedness organize. In such a state, plan of action to IBC will prompt a frenzy circumstance which would be ridiculous and along these lines hence too the IBC may not be an alluring course.
The schemes of arrangement route under companies act, 2013
Sections 230 to 232 of the Companies Act, 2013 provides that arrangements and engage between a company and its creditors and shareholders. Historically these provisions are rarely used in India as a tool of debt restructuring and are mostly used for the purposes of corporate restructure developing like mergers, demergers, amalgamations. Companies like Essar Oil Limited and BPL Limited are the few exceptions which have used this provision for arrangements route for debt restructuring in the past. Unlike in the UK and Singapore, the schemes of arrangements mechanism did not find many takers in India primarily due to one reason procedural requirements, long retard and hold out by creditors. However, this route is significantly more attractive rather than IBC route for a company like IL&FS for reasons which is mention Below.
The courts defined the terms “arrangements” and “compromises” very broadly to entire transactions including corporate restructure developing and credit restructure developing. Another benefit of this way is that the promoters don’t have to surrender their supremacy over the company during the implementation of this scheme. Thirdly, a condition precedent to Tape the IBC is that the corporate debtor must have committed a ‘default’, while such a condition is not required under section 230 of the Companies Act, 2013.
In any case, not at all like Section 14 of the IBC and the Companies Act, 2013 does not accommodate a ban amid the pendency of a plan Petition before the NCLT or amid the usage of this plan. Curiously, however, under the arrangements of the Companies Act of 1956, the High Court/NCLT had the ability to issue a ban. It is obscure if the oversight is pondered or only an instance of omissions cases. Starting today, the law is a long way from clear and the methodology of the NCLT obscure. Remarkably, a ban can be provisioned for in the plan itself which would be eventually official upon the loan bosses subject to the endorse of the NCLT.
Concluding remarks
IL&FS alongside 40 of its backups have recorded a request of before the NCLT for “specific reliefs regarding documenting of a plan of course of action under area 230 of the Companies Act”. Be that as it may, it is only the start and it will be a long voyage before the organization can land at any goals as the plan will require the recommended endorsement of the leaders and investors of the organizations and the authorize of the NCLT. Going ahead, we anticipate that this case will hurl another arrangement of difficulties and nuanced inquiries of law. While the bigger implications of this case will be known at the appropriate time, essentially, IL&FS has been effective in activating new talks on an earnest requirement for a far-reaching liquidation law for money related specialist organizations.
