India on Monday moved to take control of Infrastructure Leasing and Financial Services (IL&FS), whose recent defaults have roiled Indian markets, in a rare move highlighting the extent of the woes at the debt-laden financing and construction firm.
The government has filed an application with the National Company Law Tribunal (NCLT) to remove the board of the company, warning the continuance of the current directors would be prejudicial and not in the interest of the public.
"The current IL&FS crisis could have an adverse impact on the financial stability of the economy," a government lawyer told NCLT on Monday. A collapse of IL&FS could spark the collapse of many other players in the non-banking financial services sector, the lawyer cautioned.
A government intervention could throw into question IL&FS' restructuring plan for which it has just secured shareholder support. Its string of defaults has already led to several rating cuts on the company and its subsidiaries that house some of its massive 910 billion rupee ($12.55 billion) debt pile.
The government has sought approval from NCLT to nominate 10 directors, including the managing director of Kotak Mahindra Bank Uday Kotak as IL&FS' non-executive chairman.
This comes after IL&FS announced on Sunday that its shareholders had approved a plan to raise funds via debt and equity issuances. Earlier, the firm had said its board would develop a "comprehensive" restructuring plan to pay its dues through asset sales and a rights issue.
India's Life Insurance Corp Ltd, IL&FS' biggest shareholder with a more than 25 percent stake, had said last week that it would participate in the rights issue.
IL&FS's other large investors are Japan's ORIX Corp with a 23.54 percent stake and Abu Dhabi Investment Authority (ADIA) with 12.56 percent.
India's biggest lender by assets, State Bank of India (SBI), also owns a 6.42 percent stake in IL&FS.
LIC and Orix were not immediately reachable for comment on the government's move.
SBI and ADIA declined to comment, while IL&FS said it would not comment as the matter is currently being heard in court.
India has rarely stepped in to take control of a private company. A bid by the government to take control of debt-laden realty firm Unitech Ltd in late 2017 was stalled by the Supreme Court after the move was challenged.
The government did take control of Satyam Computer Services in 2009, when an accounting scandal at the firm shook investor confidence in the information technology sector.
Satyam's board was dissolved by the government after its chairman and founder, Ramalinga Raju, revealed India's biggest corporate accounting fraud.
The government then set up a new board to stabilise the struggling software company, which was later sold to Tech Mahindra.