Five years after the government appointed an independent board to resolve the mega-failure of Infrastructure Leasing & Financial Services (IL&FS), the new management has dragged one of the two water management companies of Tamil Nadu (TN) to the national company law tribunal (NCLT) for having stopped repayment of loan to IL&FS. The case comes of up for hearing on 31st January.
The New Tirupur Area Development Corporation Ltd (NTADCL) was once seen as a unique project to bring water supply to TN’s prosperous hosiery-exporting town of Tirupur, through a public-private partnership. What should have been a profitable and exemplary project is mired in litigation with its largest foreign investor, over mismanagement and dubious dealings by the cabal led by late Ravi Parthasarathy and the apathy of TN bureaucrats.
Even after the IL&FS default caused a systemic shock in the Indian financial system in 2018, nothing changed. When a new management under banker Uday Kotak was charged with resolving the IL&FS mess, it appears to have merely changed the nominee directors at NTADCL and continued to ignore the internal issues and litigation that has been festering for over 12 years.
So, what finally caused IL&FS to resort to legal action against a ‘green’ company that makes operational profits and is under its indirect control?
Back Story to Litigation
The answer lies in how IL&FS controls the two TN water companies. IL&FS set up two joint ventures (JV) with the government of TN (GOTN). Tamil Nadu Water Investment Company Limited (TWICL), in which it has a 54% stake, and NTADCL, the operating unit, where IL&FS has only a direct 15% stake, but controls it by virtue of its shareholding in TWICL. TWICL had a 32.54% stake in NTADCL and AIDQUA Holding (Mauritius) Inc, a foreign investor, held a 28%.
After the corporate debt restructuring (CDR), TWICL’s holding dropped to 28%, GOTN has 20%, IL&FS has 15% and AIDQUA has 15% ownership (which is under dispute).
Even after 2018, the government-appointed IL&FS management (earlier under banker Uday Kotak and now led by Chandra Shekhar Rajan) did little to set things right at NTADCL and TWICL which have continued to operate on the whims of TN bureaucrats.
CDR Mess of 2012
The IL&FS case against NTADCL harks back to the attempt to infuse fresh funds into NTADCL and the third attempt at CDR of 2012 which converted part of the senior debt to equity. It is understood that the CDR left NTADCL with a debt of Rs489 crore which was to be repaid between 2013 and 2026. (Ironically, almost all the debt has been repaid early by selling more water to industrial users than domestic as the CDR had envisaged.) Of the senior debt, Rs90 crore was procured from United State Agency for International Development (USAID) to which NTADCL had apparently been making regular payments, but then it unilaterally stopped repayments on the IL&FS loan (nearly Rs 100 crore), since December 2022. In fact, NTADCL had apparently sought to prepay an amount of Rs47.12 crore and disregarded a sum of Rs52.92 crore, saying it was not owed. According to court documents, NTADCL insisted on reconciliation of money payable and claimed the debt to be a disputed amount.
Muddying the water even further is the NTADCL’s management’s confusing stand on repayment to TWICL (which had routed the TN government funds during the CDR to NTADCL). NTADCL claims that Rs50 crore of a TN government grant (routed through TWICL) was converted to equity in the 2012, giving IL&FS Rs27 crore benefit and the government of Tamil Nadu a Rs23 crore benefit. Strangely enough, sources say that NTADCL has paid another Rs20 crore to TWICL as loan repayment (against the very same grant that was allegedly converted into equity during the CDR). This was done after it had stopped making payments to IL&FS. So why was NTADCL paying TWICL twice over? How can there be equity conversion as well as a loan repayment? Did these decisions have the sanction and authority of the boards? Were they in line with the common loan agreement? Who is running the show at NTADCL and TWICL? The litigation may provide answers.
The forcible reduction of AIDQUA’s shareholding from over 27% to 15% sparked inconclusive litigation in multiple legal forums including the Supreme Court of India. NTADCL’s flip-flop over the conversion of loan to equity adds another layer of drama to the controversy over management of the two water companies.
Had the government-appointed management of IL&FS paid serious attention to the ‘green’ NTADCL and worked at making it fully profitable, there would have been no need for further litigation and an amicable resolution was a possibility. After all, there are three common directors between TWICL and NTADCL including the chairman D Karthikeyan, a TN bureaucrat, L Krishnan and IL&FS has nominee directors on both entities. What action did the nominee directors take when NTADCL made a unilateral decision to stop paying IL&FS?
Water Pricing
It is important to recall that NTADCL was envisaged and marketed as a profitable business opportunity because Tirupur desperately needed water and its industry was willing to pay for it. I remember Ravi Parthasarathy telling me in the mid-1990s, when the Tirupur water privatisation was being discussed, that the town has the highest density of swanky foreign cars in India due to export earnings (when foreign car ownership was rare) and they had also been paying absurdly high prices for water, which was equally scarce. Had water prices been managed correctly, NTADCL should never have needed a debt restructuring. The very basis of the water privatisation project was that hosiery exporters of Tirupur were tired of surviving on tanker water derived from groundwater on agricultural lands and were willing to pay for regular supply. This is where bureaucrats seem to have messed up.
The CDR of 2012, as well as the present financial dispute, is about NTADCL’s inability to increase returns because the price of its only product—water—is not being raised as planned. So NTADCL, a fundamentally sound company making operational profits since inception, failed to earn enough to service its debt obligations when it came due.
TN bureaucrats have repeatedly blocked attempts to raise water prices, although such a decision would not affect domestic users and ordinary people. Their opposition was based on a study by Akara Research & Technologies Pvt Ltd (Akara) in July 2021 which showed that 86% of users would oppose a hike in water prices.
The finding is unsurprising. Why would any consumer support a price hike—whether it is water or petrol? The question is: Can NTADCL afford to keep the price frozen. The same study also says, “For most users, water is an important and key factor for operations, but cost-wise it does not exceed 0.5-1% of total manufacturing cost.” Clearly, hiking water charges for industrial users would not hurt them but make a big difference to NTADCL’s profits.
Ideally, the new IL&FS management ought to have worked with the TN government to make NTADCL profitable. It would have added lustre to the resolution process. Instead, it ignored the mess for five years and has now taken the legal route against its own subsidiary.
The Tirupur water project is a cautionary tale of how mismanagement and litigation can derail even the most well-intentioned projects. The current situation does not have to be lose-lose situation for stakeholders in a water-starved state like TN. There is sufficient and compelling opportunity to turn things around if IL&FS is serious about a resolution.
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