Dues of IL&FS, group firms not to be classified as NPAs without NCLAT nod

The IL&FS board, led by Uday Kotak, had earlier cautioned that the Rs 53,000 crore exposure of banks to IL&FS is “critical to financial stability” as its share in the total exposure of the banks to the NBFC sector is about 16 per cent.

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The two-member NCLAT bench headed by Chairman Justice S J Mukhopadhaya, said this is done in the interest of IL&FS debt resolution plan.

The National Company Law Appellate Tribunal (NCLAT) has ruled that financial institutions cannot declare the loan accounts of debt-ridden Infrastructure Leasing & Financial Services and its group companies as non-performing assets (NPAs) without NCLAT’s permission.

The IL&FS board, led by Uday Kotak, had earlier cautioned that the Rs 53,000 crore exposure of banks to IL&FS is “critical to financial stability” as its share in the total exposure of the banks to the NBFC sector is about 16 per cent.

The two-member NCLAT bench headed by Chairman Justice S J Mukhopadhaya, said this is done in the interest of IL&FS debt resolution plan. “We make it clear that due to non-payment of dues by the Infrastructure Leasing & Financial Services or its entities including the ‘amber companies’, no financial institution will declare the accounts of IL&FS or its entities as NPA without prior permission of this appellate tribunal,” it said.

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The IL&FS group owes Rs 25,767 crore towards investment in non-convertible debentures (NCDs) by investors, commercial paper (CP) Rs 3,028 crore, NBFCs Rs 1,707 crore, corporates Rs 1,102 crore, financial institutions Rs 9,137 crore and foreign banks Rs 6,030 crore.

The management of IL&FS is pursuing asset sales to bail out the company and its group entities from its financial mess and pay back to its lenders over Rs 91,000 crore.

During the last hearing on February 11, NCLAT had allowed IL&FS group’s 22 companies, which were classified in the green category based on their financial health, to service their debt obligations.

Banks, under the auspices of the Indian Banks’ Association, had in December last made a representation to the Reserve Bank of India seeking grant of temporary dispensation of asset classification requirements to their exposure to IL&FS group companies. However, the RBI was reportedly against any exemption for the IL&FS group.

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NCLAT had recently lifted the moratorium and allowed 133 IL&FS firms incorporated outside India to continue with the resolution process.

IL&FS group companies are classified into three groups: green, amber and red. The companies falling under green category will continue to meet their payment obligation, while the companies which cannot meet their obligations but can meet only operational payment obligations to senior secured financial creditors are classified as amber.

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Order comes as relief for both IL&FS and lenders

The NCLAT order will come as a relief for both IL&FS and lenders which are already reeling under huge non-performing assets. The status quo will help banks in not classifying IL&FS exposure of around R 53,000 crore as bad assets and they don’t need to make provisions at least for time being. IL&FS which is mid-way through its asset sales plan to raise funds for repayment to lenders and others can now focus on a sound resolution plan to sort out the big mess that the group has created.

The red category includes those entities which cannot meet their payment obligations towards even senior secured financial creditors. The amount of loan that falls under the amber category is around Rs 16,000 crore.

The IL&FS board had earlier warned that the cascading impact of the default by the IL&FS group on the financial sector would be quite substantial as evidenced from a partial default of some companies and its repercussions in the financial market in September 2018. “The future impact of more defaults in the group, if not addressed in an orderly manner, may be catastrophic for the financial stability,” it had said.

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Any sudden impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature and its borrowing level of Rs 91,000 crore.

“Therefore, the timely intervention by the Union of India was required to prevent collapse of the IL&FS group and to limit the contagion effect on the markets,” a report submitted by the IL&FS board to the National Company Law Tribunal said. As on October 26, 2018, over 130 creditors have issued notices to IL&FS group entities.

After IL&FS started defaulting on debt securities in September 2018, the government superseded the board of the group and appointed an interim board led by Kotak to finalise a resolution plan. Most of the total debt of the group is on the books of subsidiaries and special purpose vehicles.