India Seizes Control of Indebted Lender in Surprise Move
Comment of the Day

October 01 2018

Commentary by Eoin Treacy

India Seizes Control of Indebted Lender in Surprise Move

This article by Saloni Shukla for Bloomberg may be of interest to subscribers. Here is a section:

India’s government will immediately seize control of a shadow lender whose defaults have caused widespread upheaval at mutual funds, a rebuke that’s only happened to one
other firm.

Government officials were granted approval to oust Infrastructure Leasing & Financial Services Ltd.’s board and a new six-member board will meet before Oct. 8, the National Company Law Tribunal said on Monday. India’s richest banker Uday Kotak and ICICI Bank Chairman G.C. Chaturvedi will be part of the proposed board, which will elect a chairperson themselves.

The nation’s corporate affairs ministry has sought to take control of a company on just two prior occasions, and only followed through once, with Satyam Computer Services Ltd. in
2009.

The dramatic move, which unfolded within the span of a hectic day in Mumbai, underscores the government’s concern about IL&FS’s defaults spreading to other lenders in the world’s fastest-growing major economy. Considered systemically important, the group has total debt of $12.6 billion, 61 percent in the form of loans from financial institutions. The ripple effects of its defaults have already seen mutual funds post mark-to-market losses, a slump in corporate bond issuance and a brief but sharp sell-off in equities.

Eoin Treacy's view

Containing the rot from IL&SF’s default is national priority for India considering the extent to which banks, particularly Yes Bank, have pulled back. India has the world’s fastest growing economy right now but valuations are rather elevated, the currency remains weak and the continued uptrend in oil prices is a headwind. Against that background the question of nonperforming loans and how the banking sector can be cleaned up is the primary topic of conversation among international investors.

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