* NCLT approves application to remove IL&FS board
* Govt will ensure no more defaults take place
* Serious fraud office to investigate company, subsidiaries
* Govt intervention could derail debt restructuring plan
India on Monday took control of Infrastructure Leasing and Financial Services (IL&FS), in a rare move that it said was needed to protect the country's financial system and markets from potential collapse.
IL&FS, a major infrastructure financing and construction company, defaulted on some of its debt obligations in recent weeks triggering wider concerns about risk in the rest of the country's financial sector.
The government said it would replace the board of IL&FS with six selected nominees and ensure IL&FS has the liquidity needed to ensure no more defaults take place and the infrastructure projects are implemented smoothly.
"The government was compelled to take this extraordinary step ... to prevent further mismanagement in order to protect public interest," the government said in a statement. It also said the government needed to ensure the solvency of IL&FS to maintain financial stability in the country.
IL&FS's problems could threaten India's economic growth as lenders cut exposure to what are known as non-banking finance companies (NBFCs) in India or shadow banks. More concerning, analysts say, is that potential defaults at so-called shadow banks could cripple many mutual funds that are heavily invested in their commercial paper.
These non-bank finance companies have played a major role in lending growth in India in the last two years, as Indian banks, saddled with roughly $150 billion of bad debt, slowed lending.
A string of defaults by IL&FS has led to a series of credit rating downgrades on the company and its subsidiaries that hold some of its 910 billion rupee ($12.48 billion) debt pile. Its fall from grace has spooked financial markets and sparked fears of contagion.
India has rarely stepped in to take control of a private company. The government's attempt to take control of debt-laden realty firm Unitech Ltd in late 2017 was stalled by the Supreme Court.
India did take control of Satyam Computer Services in 2009 after an accounting scandal.
The government applied to the National Company Law Tribunal (NCLT) on Monday to remove the board of IL&FS.
The NCLT approved the government's interim application to replace IL&FS's board with six nominees, including the managing director of Kotak Mahindra Bank Uday Kotak as IL&FS' non-executive chairman.
"The current IL&FS crisis could have an adverse impact on the financial stability of the economy," Sanjay Shorey a lawyer for the government told the NCLT, a quasi-judicial body for corporate grievances.
IL&FS has infrastructure and financial assets worth more than 1.15 trillion rupees ($15.77 billion) but its debts are the result of "mismanaged borrowings in the past," the government said.
The government fears that IL&FS's inability to finance and support the projects could damage the infrastructure sector.
"There is an emergent need to immediately stop further financial defaults and also take measures to resolve defaulted dues to the claimants," the government statement said.
The government also said the Serious Fraud Investigation Office had been ordered to look into IL&FS and its subsidiaries.
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