Mumbai: Directors and top executives of Infrastructure Leasing and Financial Services Ltd (IL&FS) desperately pleaded with government officials and the central bank for an urgent bailout just days before the centre moved in to seize control of the debt-laden financier, two people with direct knowledge of the matter said.

“We are in dire straits... please help us," Hari Sankaran (the ousted vice chairman and managing director of IL&FS) told finance ministry officials as recently as 10 days ago, one of the two people cited above said on condition of anonymity. S.B. Mathur, the non-executive chairman of IL&FS, too, held a series of meetings seeking support, this person said.

Sankaran did not respond to phone calls on Tuesday. Mint could not contact Mathur immediately.

The order to supersede the IL&FS board was ultimately cleared by the Prime Minister’s Office after almost a month of deliberations, a government official familiar with the matter said on condition of anonymity.

“Governments usually do not act till things come to a crisis point. IL&FS has been asking the government for support," the first person said.

Fearing the crisis could snowball to affect the entire financial sector, the government on Monday took control of IL&FS by replacing its board with a new six-member one, including Kotak Mahindra Bank managing director Uday Kotak and former chairman of Securities and Exchange Board of India G.N. Bajpai.

The government took this rare step under section 241(2) of the Companies Act, 2013, to prevent further mismanagement and protect public interest. The decision was taken after careful consideration of a report received from the regional director, Mumbai, of the ministry of corporate affairs, which pointed to serious governance lapses in IL&FS and its subsidiaries.

The report said the consolidated financial statement of IL&FS projected an exaggerated depiction of non-current assets in the form of intangibles amounting to over 20,000 crore. Besides, around half of IL&FS’s revenue was receivables locked in litigation and arbitration. Added to this was a sharp increase in bank deposits held in lien, which rose by 1,681.59 crore in the year ended 31 March.

Bringing matters to a head, IL&FS defaulted on several payment obligations since August. “It has been noted that there is deep-rooted mismatch in the debt-equity ratio because of excessive leveraging, which has put a question mark on its ability to continue as a going concern if allowed to continue in the hands of the present management. The high debt stress was clearly visible in the company and its main subsidiaries for the last so many years, but was camouflaged by misrepresentation of facts," the finance ministry said in a statement on Monday. “Besides, the fact that the company continued to pay dividends and huge managerial payouts regardless of looming liquidity crisis shows that the management had lost total credibility."

“The state had to intervene. It was the only convenient option," the second person cited before said on condition of anonymity.

At least 10 days prior to the meeting between Sankaran and finance ministry officials, several departments of the finance ministry held regular meetings with IL&FS board members and the management.

The finance ministry also involved the ministry of road transport and highways in order to seek the latter’s financial and procedural guidance, said the second person.

IL&FS has deep business ties with the roads ministry and its agencies such as National Highway Authority of India. Mint on 21 September reported that states and the centre, including their agencies, owe as much as 16,000 crore in receivables to ILF&S.

Following meetings with officials in the finance and road ministries, the management was summoned by the Reserve Bank of India last week where company executives maintained in front of a deputy governor that they needed to be “bailed out". Simultaneously, RBI met shareholders of IL&FS to assess prospects of a revival.

“But RBI could not have done anything since IL&FS is not an NBFC (non-banking financial company) but one of its subsidiary is... IL&FS is a CIC (core investment company). Therefore, the government had to intervene using the Companies Act," said the second person.

Some shareholders such as ADIA and Orix had also made representations to the finance ministry citing their concerns, the person added.

However, the immediate trigger to approach the bankruptcy tribunal and remove the board could have been a meeting between LIC chairman V.K. Sharma and SBI chairman Rajnish Kumar. They met government officials on Friday to discuss IL&FS, said a government official declining to disclose details.

“In the current case, the government is the majority shareholder in the entities which include LIC and State Bank of India and hence under the rights of the shareholders, the government moved to the tribunal under the sections 241 and 242 of the Companies Act, which deals with the protection of the rights of shareholders and mismanagement in the company," said Mona Bhide, managing partner of law firm Dave Girish & Co.

Elizabeth Roche and Asit Ranjan Mishra in New Delhi, and Maulik Vyas in Mumbai contributed to this story.

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