The Narendra Modi government has superseded the board of Infrastructure Leasing & Financial Services Ltd (IL&FS) and sought to douse fears of a credit risk contagion sweeping across the country’s financial services industry after a burst of debt defaults at the shadow banking lender.

The action was drastic, measured not just on the yardstick of boardroom interventions but also on the political barometer ahead of the election year.

The rare decision to supersede the board is certain to be read in political circles as an insight into how much the recurring charges of crony capitalism have rattled a leadership whose anti-corruption credentials were considered unassailable.

The timing is telling. The Modi government has been under fire for doing nothing to quell the fears of a credit risk contagion.

Into the financial aspect was injected a political element over the weekend.

After the Rafale and Vijay Mallya escape scandals, the Congress smelt blood and claimed that Modi had gifted a project in Gujarat to IL&FS when he was chief minister. Rahul Gandhi kept up the pressure on Sunday, asking why the Centre risked the hard-earned money of the people by compelling LIC to bail out IL&FS.

On Monday, finance minister Arun Jaitley hit back by saying that a Congress leader, K.V. Thomas, had written to him to save IL&FS.

By then, the Centre had moved the national company tribunal seeking permission to supersede the seven-member IL&FS board, wielding the sledgehammer with the possible objective of nipping the controversy before it snowballed into another scandal about alleged crony capitalism.

Perhaps worried about charges of use of excessive force and meddling, the Union finance ministry insisted that it is “not a takeover”.

Uday Kotak, vice-chairman and managing director of Kotak Mahindra Bank, will head a new six-member board that will manage the affairs of the troubled non-banking financial company that shovels loans to a sprawl of infrastructure projects ranging from highways, tunnels, energy, urban infrastructure and ports through 169 group companies.

The decision to supersede a rump IL&FS board, which has seen the dramatic exit of seven directors from a 14-member board in the past week, brought back memories of the Satyam fraud case that erupted in 2009 and has been billed as India’s biggest financial fraud.

The other members of the new IL&FS board are ICICI Bank non-executive chairman G.C. Chaturvedi, Tech Mahindra executive vice-chairman Vineet Nayyar, former Sebi chairman G.N. Bajpai and former bureaucrats Malini Shankar and Nand Kishore.

The Centre intends to expand the board after it picks four more directors.

The government intends to prosecute the company and the outgoing board of directors who include eminent personalities like Maruti Suzuki chairman R.C. Bhargava, former LIC chairman S.B. Mathur, former shipping secretary Michael Pinto and Mphasis founder Jaitirth (Jerry) Rao.

The government’s petition seeking to supersede the IL&FS board named former chief executive Ravi Parthsarathy who quit the company in July when the first signs of trouble emerged.

The dramatic developments began on Monday morning after the government approached the tribunal’s bench in Mumbai seeking to supersede the seven-member board for negligence and incompetence, and “failing to discharge its fiduciary duties”.

The superseded board was charged with painting a rosy financial picture of IL&FS and “camouflaging its financial statements by hiding the severe mismatch between its cash flows and payment obligations”.

IL&FS has outstanding debt of over Rs 91,000 crore on its books. The debt defaults were blamed on indiscriminate long- and short-term borrowings that IL&FS and its group companies had taken from public sector banks and financial institutions.

Late in the evening, Uday Kotak met finance minister Jaitley in Delhi as speculation swirled that the decision to supersede the board had been taken much earlier — a view that gained some credence because of the spate of resignations from the board in the past week.

Not everyone was convinced about how effective the new board of directors would be in trying to stem the rot.

Former Sebi chairman M. Damodaran said: “Time is a luxury you cannot afford. The first decision should be to induct people with the financial sector experience to help the board understand the problem and find a solution.”

Damodaran said Kotak was an outstanding leader in the financial industry and would bring a semblance of stability to IL&FS.

But he expressed deep reservations about the appointment of Chaturvedi who is battling to restore credibility at ICICI Bank after managing director Chanda Kochhar was forced to go on indefinite leave amid accusations of conflict of interest in granting loans to the Videocon group that had soured. He wondered how Chaturvedi would be able to find the time to sort out the mess at IL&FS.