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Mayhem Ends At Maytas?

IL&FS gets control of the scam-tainted company

Ramalinga Raju may be excused for the sense of déjà vu that must have engulfed him on August 31. He had just seen Maytas being taken away from his family's hold, just like Satyam before it. As with Satyam, there was no other option except to wrench it away from the scam-tainted family in order to ensure that the company survived. Maytas is an infrastructure development, construction and project management company, which got caught up in the Raju-led fraud.

The Company Law Board (CLB) of India  handed over Maytas to Infrastructure Leasing & Financial Services Limited (IL&FS), a leading infrastructure development and finance company, effective September 1, 2009. 

In Satyam's case the government was quick to contain the problem, but in Maytas’ case, the problem was allowed to drag on for a considerable time. The government dithered on taking a firm stand on the Maytas case as the company found no takers and the case for its auctioning was too weak to consider. 

IL&FS held 14.5 per cent stake in Maytas. The advantage that IL&FS has here is that it also had control over an additional 22.6 per cent stake in its custody, this was pledged by the Raju's in an attempt to raise urgently-needed cash. On invoking these pledged shares IL&FS had a total 37.1 per cent stake in Maytas. Since an open offer for the takeover can be made by anyone having more than 20 per cent stake in a company, therefore, IL&FS too qualified ahead of everyone else to bag the troubled company. In the meanwhile  Maytas was spilling blood on the streets — nearly Rs 13,000 crore worth of contracts were cancelled and the order book virtually halved. Also, its annual as well as quarterly results for June 2009 were not encouraging.

IL&FS, on its own is a respected lending company, specialising in the development of infrastructure projects and has expertise in project completion — it usually forms a consortium with an infrastructure company to bid for projects.

However, problems for IL&FS will arise once Maytas starts bidding for new contracts. Now that it owns an infrastructure company it may face the issue of ‘conflict of interest’ if it provides any assistance to another infrastructure company. CLB had quoted this very reason  for not allowing IL&FS a board representative on Maytas in February 2009.

Conclusion
Investors in Maytas cannot really rest easy. After seeing the company's stock price plummet from a high of Rs 539 (Oct 17, 2008) to Rs 118 (Sept 1, 2009), they can only wait and hope that IL&FS manages to wriggle free of any 'conflict of interest' charges. Also, how will IL&FS fare, considering this is the first time that a financial entity has been put at the head of a contracting entity (abroad, they are known to sell-off a troubled company piece-by-piece, leaving a hollow shell behind)? Not only that, IL&FS will have to quickly come up with a viable turnaround solution to prevent Maytas from self-destructing — its fund-based and non-fund based liabilities are as high as Rs 1,700 crore and Rs 1,100 crore respectively.