Calling the government’s decision to supersede the board of investment company IL&FS as “timely and courageous”, five independent directors on the erstwhile board have written to the newly appointed chairman Uday Kotak on October 2 raising several red flags and elaborating on constraints of long-term finance that plague the infrastructure sector.
What has shocked independent directors Michael Pinto, Jerry Rao, Rina Kamath, R C Bhargava, and Sunil B Mathur is the government’s petition in the National Company Law Tribunal which names them and the executive directors including Ravi Parthasarathy and Hari Sankaran but spares the shareholder directors.
The key institutional shareholders were LIC, SBI, Orix, Abu Dhabi Investment Authority, HDFC and Central Bank of India. An independent director who did not wish to be named, told The Indian Express: “For all major decisions such as issue of fresh equity, mergers and so on, the shareholders retained the veto rights and the requirement of an affirmative vote by their nominees on the board. I am fine with the fact that I have been named a respondent in the government’s petition but I am surprised to see that the names of shareholder directors have been omitted.”
Another independent director, who also wished to remain anonymous, said the government’s petition states that the directors of IL&FS failed to “discharge their fiduciary duties”. “Yes, we could have done better. But it is not just the executive and independent directors. All of us, including the shareholder directors failed.”
One instance which the independent directors seek to draw Kotak’s attention to is LIC’s (LIC holds 25.34% in IL&FS) sudden intervention after all directors on the board (including LIC nominees) unanimously approved a proposal to induct a strategic investor (Ajay Piramal group), which agreed to infuse around Rs 5,000 crore in IL&FS for a 40 per cent stake.
In 2015, the board approved Piramal’s proposal to buy IL&FS shares at Rs 750 a piece. More than six months later, LIC said it would completely exit IL&FS, but demanded a significantly higher valuation of Rs 1,198 a share. Piramal backed out. “Valuations and ratios were agreed upon and a firm agreement was signed with unanimous board approval,” one of the two independent directors said. LIC had affirmative voting rights and sought a higher valuation – higher than that recommended by IL&FS investment bankers and the board.
“It (LIC) never came up with a solution on its own but used its veto to stall the board’s decision on selling the majority stake in the company to Ajay Piramal Group, that was willing to buy a majority stake and bring in around Rs 5,000 crore in the company almost three years back,” said the independent director.
Another issue the independent directors pushed repeatedly in board meetings over the last three-four years was succession planning in IL&FS. Parthasarathy had over the last 28 years (until he resigned in June 2018) assumed a larger-than-life persona within the organization. Some had advised Parthasarathy that a search committee be set up to find his successor, fearing Sankaran may not be the best candidate to replace him. But the institutional shareholders showed little or no interest. “They were satisfied with the existing situation. Till September 2018, they did not raise any concerns,” an independent director said.
The note by the independent directors raises concerns over the role of auditors. “In the regular quarterly meetings of the board’s audit committee, both the external and internal auditors made detailed presentations. At no state was there any doubt as to the profitability of IL&FS or of its solvency.”
The independent directors are of the view that the government probably did not have a sinister design in naming the independent directors. “They did not name the shareholder nominees as respondents perhaps fearing they may block the government’s petition and also probably they did not want to scare away foreign investors such as Orix and Abu Dhabi Investment Authority,” said an independent director.