Wilful defaulter: Who will bell the cat?

Kingfisher Airlines’s promoter Vijay Mallya owes around Rs7,000 crore to a consortium of banks, led by the State Bank of India. Photo: Mint

Live mint :Tamal Bandyopadhyay  Sun, Apr 14 2013. 07 12 PM IST

Banks ask for personal guarantees from high-profile promoters but it does not ensure timely repayment of debt

India’s finance minister P. Chidambaram wants banks to chase affluent promoters of sick companies who have a high-flying lifestyle and yet aren’t willing to clear banks’ dues. He hasn’t cited any instance, but the obvious provocation for his outbursts against rogue promoters seems to be loan default by groundedKingfisher Airlines Ltd. Its promoter Vijay Mallya—known as much for his love of the good life and the popular Kingfisher calendar as for Kingfisher beer—owes around Rs.7,000 crore to a consortium of banks, led by the State Bank of India (SBI).

The consortium in November 2010 had restructured the debt to throw a lifeline to the airline by stretching the repayment period, cutting interest rates, and even sanctioning a fresh loan. The banks also converted Rs.1,355 crore of debt into equity, at a 61.6% premium to the market price of Kingfisher Airlines’s stock then. Following this, banks got a 23.21% stake in the airline’s equity with a rider that they could not sell the shares for the next two years. In April 2011, when the debt was converted into equity, the price of Kingfisher stock was Rs.39.90; now the stock is trading at around Rs.7.60. It’s not difficult to calculate how much banks have lost on account of this. Mallya, meanwhile, has not lost his love for cricket, Formula One racing and other good things in life.

The phenomenon of promoters remaining healthy while their companies going down the drain is not new. A decade back, when the Board for Industrial and Financial Reconstruction (BIFR), the government agency to revive sick companies, was alive and kicking, bankers had seen industrialists junking theirMaruti cars and driving in Mercedes to attend meetings while their once-healthy companies were on a stretcher. Citibank NA in India used to send eunuchs to the houses of loan defaulters to sing and dance and embarrass them. Some banks have also exercised the option of sending musclemen to scare a defaulting borrower and putting up posters with photographs of the borrowers. These tricks can work for retail borrowers and small and medium enterprises but eunuchs cannot shame the high-profile, big-ticket borrowers and musclemen can’t scare them. They are Frankensteins, created by politicians and the banking system.

For the state-run banks, that make up three-quarters of the Indian banking industry, bad assets ballooned in fiscal 2013. At least three such banks have gross non-performing assets (NPAs) of more than 5% of their loans—a level last seen many years ago—and many more between 3% and 5%. (The latest available figures are for December; banks are yet to announce their earnings for the March quarter.) The gross NPAs of 40 listed Indian banks rose to Rs.1.79 trillion from Rs.1.25 trillion in December, up 43.1% from a year ago. After setting aside money, their net NPAs have grown at an even higher pace of, around 55%. According to a finance ministry note, some 7,370 cases of loan defaults have been reported by banks in fiscal 2013, involving Rs.58,556 crore. Indeed, some of them could be wilful defaulters but it’s not easy to brand a borrower as a wilful defaulter.

According to the Reserve Bank of India, a wilful defaulter is one who has the ability to pay up but doesn’t pay; who diverts funds; or, who has sold the property that was used as a security to obtain the loan. Since money is fungible, it is extremely difficult to establish that a borrower has indeed diverted bank funds.

After the collapse of US investment bank Lehman Brothers Holdings Inc. that led to an unprecedented credit crisis globally and sharply eroded value of many companies, quite a few Indian corporations went shopping overseas. Some of them may have used bank loans, raised for some other purposes, for such acquisition, but banks cannot establish this easily. With many such acquisitions going sour, corporations are finding it difficult to pay back the money. So, the deteriorating macroeconomic scenario in Asia’s third largest economy alone is not responsible for the rising bad assets of banks; irresponsible corporate strategy to expand has also contributed to it.

A wilful defaulter cannot raise money from the capital market; and all group firms are also barred from accessing bank finance. The lenders can take legal action against such defaulters to recover money. The debt recovery tribunal is a fast-track route to dispose of such cases but the borrower can appeal against a tribunal judgement in a high court. Simply put, it’s not easy for banks to recover money. In fact, rules are always tilted in favour the borrower and not lender, globally. The bankruptcy proceedings in the US have inherent bias towards borrowers; in India, victims of economic downturn recast their loans on the so-called corporate debt restructuring platform.

SBI, which controls about 20% of the total assets of India’s Rs.75 trillion banking system, classified 274 companies as wilful defaulters in fiscal 2013, after pushing 383 into that category in the preceding fiscal, but caught in this net are all small fishes. It will be able to recover part of its Rs.1,600 crore Kingfisher Airlines loan by selling shares in two group companies, two UB Group properties in Mumbai and Goa and two helicopters. It also holds the Kingfisher Airlines brand as collateral in addition to a personal guarantee from Mallya.

Banks have been increasingly asking for personal guarantees from high-profile promoters but it does not guarantee timely repayment of debt.

Besides, who will give the personal guarantee on behalf of a public sector undertaking or a widely-held company? The best way to ensure timely repayment of loans is intelligent appraisal of proposals, a hawk eye on every account and continuous monitoring. Bankers know how some promoters take the system for a ride but don’t know how to bell the cat.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Email your comments to bankerstrust@livemint.com

Rising NPAs, a major concern for financing infra projects: bankers

Maharashtra Chief Minister Prithviraj Chavan (left) with Union Finance Minister 
P. Chidambaram after a meeting with corporates and bankers in Mumbai on Monday
. Photo: Paul Noronha
BL : MUMBAI, April 8, 2013

Growing non-performing assets (NPAs) is a major hurdle for providing more finances to infrastructure projects, bankers told Finance Minister P. Chidambaram here on Monday.

“We conveyed to the Finance Minister that due to current dispensation regarding NPAs, there are difficulties in providing more finances,” State Bank of India Chairman Pratip Chaudhuri said, while talking to reporters after a meeting the Finance Minister had with bankers and industrialists here.

There would be more meetings and the government would take a final action, he added.

“In the pre-policy meeting with the Reserve Bank of India (RBI), we have asked for at least a 50-basis point cut in the Cash Reserve Ratio. As till the time CRR is not cut, the interest rate will not come down only with the repo rate cut. It is difficult to have a rate cut (by SBI) before the policy,’’ Mr. Chaudhuri said.

“We’ve identified 215 projects, which, for one reason or another, are stalled. We’ve identified another 126 projects that are new projects to which banks have sanctioned loans but which have not taken off,” said Mr. Chidambaram while mentioning about the projects in the western region. “We are sitting with bankers and industry to find out why a particular project has been stalled and try to remove that block,” the Finance Minister said. The main reasons are land acquisition, gas or coal linkages, environmental clearances, forest clearances and in some cases the inability or the unwillingness of the bank to restructure the loans. These apply to all the projects.

The Finance Minister took stock of the situation. But no promises were made.

“We have to deal with them project by project,” Mr. Chidambaram added.

The SBI Chairman said, “We spoke about the reasons why projects were stalled. Among the reasons, the most important ones were coal related, land acquisition and environmental clearance.”

Civil court not to have jurisdiction to entertain any suit in respect of any matter coming under RDDB ACt 1993

“34. Civil court not to have jurisdiction. – No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993)”.

POSTED BY ADVOCATEMMMOHAN ⋅ 

NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION

NEW DELHI

REVISION PETITION NO. 721 OF 2013

(From  order dated 26.11.2012 in Appeal No. 201/2012 of the

               State Consumer Disputes Redressal  Commission,  Uttar Pradesh, Lucknow )

With

IA/1315/2013

(STAY)

Standard Chartered Bank

Through its Authorised Officer, Mr.Ajay Rana

10, Parliament Street, New Delhi                                … Petitioner

Versus

Virendra Rai, S/o Late Sh.Patu Rai

R/o 3/83, Sanjay Gandhi Nagar

P.N.Road, Tehsil & Dist. Lucknow                                      … Respondent

BEFORE:

HON’BLE MR.JUSTICE J. M. MALIK , PRESIDING MEMBER

          HON’BLE MR. VINAY KUMAR, MEMBER

For the petitioner            : Mr. Sanjeev Sagar,  Advocate

For the Respondent :  N E M O

PRONOUNCED ON  01.04.2013

                                                O R D E R

JUSTICE J.M. MALIK

1.      The Civil Court or any other authority can not arrogate to itself  the right to make decisions or interfere with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short ‘SARFAESI Act’).  Here lies the rub in Section 34 of SARFAESI Act  which reads as follows:-

 “34. Civil court not to have jurisdiction. – No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action  taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993)”.

2.      The State Commission, Lucknow, presided over by S/Sh. Rampal Singh, Presiding Member and Jugal Kishore, Member, passed the following order:-

“… The petitioner states that in order dated 24.07.2011 the Consumer Forum has ordered the petitioner bank that during the pendency of this case, the petitioner shall not take possession of property of complainant bearing No.Plot No.14, Gaurbhith,Fazulahganj, Lucknow. The Consumer Forum has also given next date as 25.08.2012 for further proceedings.

The petitioner has prayed before this Forum for setting aside of order dated 24.07.2012 by this Forum. Further, after the passing of the date fixed by the Consumer Forum, i.e. 25.08.2012, the petitioner has not informed us about the orders passed by the Consumer Forum.  After hearing the counsel for petitioner in detail, it is found that the appeal of the petitioner is merit-less and hence liable to be dismissed.

                                         ORDER

          Present appeal does not have any force and hence is dismissed. The order passed by the Consumer Forum dated 24.07.2011 in case No. 780/11 is hereby confirmed. The cost of this appeal shall be borne by the petitioner himself.

          The certified copy of the order be supplied accordingly to rules”.

3.      We  have  also  seen  the order  passed  by the District Forum-II, Lucknow, which has  observed as under :-

“…… The complainant on the other hand objected to objection of respondent and stated that this Forum has jurisdiction to hear the present case.  From their side an order passed by Hon’ble State Consumer Disputes Redressal Forum, U.P. in appeal No.694/09 titled “Gaya Prasad Vs. GIC Housing Finance Limited”  and order dated 01.05.09 has been relied upon, we have gone through the said order from which it is clear that only the Civil Court has been barred from hearing and thus only civil court does not have jurisdiction to hear the present case and not the consumer fourm.  Into this order, the Hon’ble State Consumer Forum, U.P. has also mentioned Section 3 of the Consumer Protection Act, 1986, wherein it has been specifically stated that the provisions of this Act shall be in addition to and not in derogation of provisions of any other law for the time being in force. Referring to this provision, the Hon’ble State Consumer Forum, U.P. has stated that the powers given to the Consumer Court are not in derogation of the provisions of SARFAESI Act.  Hon’ble State Consumer Forum, U.P. and its order in case titled “Kishori LalVs. ESI Corporation has stated clearly that the Consumer Forum has the jurisdiction to hear such cases and section 34 of the SARFAESI Act does not bar the said jurisdiction and in such circumstances, the objection of respondent bank does not have any force”.

4.      Counsel for the petitioner present.  Respondent has not appeared.  However,  his written submissions have been placed on record.  We have gone through the same.  Instead of touching the heart of the problem, the complainant has just skirted it.  He has countenanced the deficiency on the part of the Bank.  He has not spoken about the jurisdiction of this case.

5.      The learned counsel for the petitioner  vehemently argued that the Bank had cited before the State Commission, the order passed by this Bench, titled as “Bank of Baroda Vs. M/s. Geeta Foods”, decided on 08.11.2012 (RP No. 3499 of 2012).  The counsel for the petitioner alleges that this order was not discussed by the State Commission. He contended that the State Commission should have mustered the courage to mention about this order which otherwisetantamounts to Contempt of Court.

6.      We have already held that as per Section 34 of the SARFAESI Act, 2002, the District Forum or the State Commission have no power to interfere with the SARFAESI Act. The District Forum and State Commission are under the misconception that the Consumer Court is not a civil court.  In Patel Roadways Vs. Birla Yamaha Limited, 2000 (4) SCC 91, AIR 2000 SC 461, the Hon’ble Apex court has held :

“The contention that the use of the term ‘suit’ in Section 9 of the Carriers Act shows that the provision is applicable only to the cases filed in a civil Court  and does not  extend to proceedings before the National Commission which is a forum to decide complaints by Consumers following a summary procedure cannot be accepted. The term ‘suit’ is a generic term taking within its sweeps all proceedings, initiated by,  a party for realization of a right vested in him under law.  The meaning of the term ‘suit’ also depends on the context of its use which in turn, amongst other things, depends on the Act or the rule in which it is used.  No doubt the proceeding before a National Commission is ordinarily a summary proceeding and in an appropriate case where the Commission feels that the issues raised by the parties are too contentious to be decided in a summary proceeding it may refer the parties to a civil Court.  That does not mean that the proceeding before the Commission is to be decided ignoring the express statutory provisions of the Carriers Act (Section 8) in a proceeding in which a claim is made against a common carrier as defined in the said Act.  Accepting such a contention would defeat the object and purpose for which the Consumer Protection Act was enacted.  A proceeding before the National Commission comes within the term ‘suit’.

7.      In S.James Vincent Vs. Greater Cochin Development Authority, 1994 (1) CPJ 174 (NC), this Commission held that “a complaint filed by the complainant suppressing the fact that the matter was already sub judice in the Sub-Court, Ernakulam, was dismissed by the State Commission as the case was already sub judice before a Civil Court.  In appeal, the National Commission upheld the order of the State Commission holding that the complaint was gross abuse of the Consumer Protection Act”.                 

8.      In Oswal Fine Arts Vs. H.M.T., 1991 CPC 43: (1991) 1 CPJ 330: 1991 (1) CPR 386 (NC), this Commission upheld the important principle that when a matter is sub judice before the ordinary Civil Courts of the land, the Consumer Commission cannot and will not entertain any claim for compensation in respect of the same subject matter.

9.      It must  be borne in mind that under Section 6 of the Indian Post Office Act, the Consumer Fora  have got limited jurisdiction.

10.    Again,  in Southern Railways Vs. M.Chidambaram, 2002 (1) CPJ 34: (2002) 1 CPJ 342 (NC),  it was held that since it was not disputed that untoward incident as mentioned in Section 124-A of the Act has occurred the proper forum of  adjudication would only be before the Railway Claim Tribunal under Section 15 of the Railway Claims Tribunal Act, 1987.  The consumer court had no jurisdiction in this respect.

11.    The consumer court cannot deal with the directions given to a Company declared ‘sick’ by BIFR.

12.    In Dinesh Kumar Vs. Railway Station Master, Raipur Station, IV (2004) CPJ 136 (Chhattisgarh), it was held that as Section 15 of the Railways Act, clearly bars jurisdiction of any other Court authority, consequently, remedy under Consumer Protection Act, 1986 stands barred and was not available to the complainant.

13.    Last, but not the least, this Commission clearly, specifically and unequivocally  held  in Traxpo Trading Co. Vs. The Federal Bank  Ltd, I (2002) CPJ 31 (NC)  that under Section 18 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, jurisdiction of  this Commission has been barred, where the Bank has filed ‘suit for recovery’,  before DRT.

14.    Under these circumstances, the proceedings pending before the District Forum are hereby quashed and the revision petition is accepted.  The complaint is dismissed. Copy of this order be sent to the State Commission and District Forum to follow the order passed by this Commission, time and again, without caring whatever their personal views are.

    ……..…………………………

(J. M. MALIK,J.)

                                                                                       PRESIDING MEMBER       

…..…..…………………………

(VINAY KUMAR)

                MEMBER

KFA lenders to initiate process to liquidate Mallya's assets next week

B S :Manojit Saha  |  Mumbai  April 11, 2013  00:58 IST

The Goa villa, Mumbai office could be put on the block

The tussle over recovery of loans given to Kingfisher Airlines (KFA) between a 17-member consortium of banks and promoter Vijay Mallya seems to have entered the last lap.

 The lenders are set to start from next week the process to liquidate the physical assets pledged with them.

These assets, given to banks as collateral, include Mallya’s villa in Goa, Kingfisher’s office at Mumbai’s Andheri area, a luxury yacht, buses used by KFA to ferry travellers at airports and other ground-handling equipment.

Apart from physical assets, bankers also hold the pledged shares of United Spirits, Mangalore Chemicals & Fertilizers and KFA, besides corporate guarantees of United Breweries Holdings. 

State Bank of India (SBI), on behalf of the consortium, has already started selling United Spirits shares.

 It had said the total value of the collateral was estimated at Rs 6,500 crore, against the total dues of Rs 7,000 crore to all banks, including the unapplied interest of Rs 850 crore. 

The total value of collateral does not include the Kingfisher Airlines brand, also pledged with banks.

SBI will send the demand notice to KFA under Section 13(2) of the Sarfaesi Act; this means the company will have the chance to repay the loan within 60 days.

 If it fails to repay the loans, the banks would invoke Section 13(4) of the Act. After 90 days from the date the demand notice is sent, banks could sell the assets if the borrower is still not able to repay loans.

SBI sends notice to Kingfisher Airlines

financialexpress:APR 10 2013, 12:14 IST

State Bank of India (SBI) has sent Kingfisher Airlines a legal notice to recover its loans, bankers said on Tuesday. The airline can either suggest an out-of-court settlement or take legal recourse, in which case bankers will move the Debt Recovery Tribunal, a banker explained.

Although the lenders have sold shares of United Spirits and Mangalore Chemicals and Fertilisers, banks are still not confident of recovering their entire loans from Kingfisher.

 “It looks like we will have to invoke the corporate guarantees given by United Breweries Holdings to recover the loans,” a banker with direct knowledge of the development said.

Kingfisher owes over Rs 7,000 crore to a consortium of 17 lenders led by SBI which has the maximum exposure of Rs 1,800 crore.

Chandigarh-born lawyer poised to become top US judge

 IANS: Thursday, April 11, 2013, 10:28 [IST

Washington, April 11:2013:

 Described by President Barack Obama as a "trailblazer", Chandigarh-born Indian-American legal luminary Srikanth 'Sri' Srinivasan appears poised to become the first South Asian judge in a US appeals court. 

Srinivasan, currently the principal deputy solicitor general of the US, Wednesday headed toward confirmation to the prestigious US Court of Appeals for the American capital "often called the nation's second-highest court" with little opposition from Republican senators.

 As he faced the Senate Judiciary Committee Wednesday, Republican Orrin Hatch indicated that he would vote for him even as he pressed Obama's nominee on whether he would be able to step away from his current role as an advocate and be impartial as a judge.

 He repeatedly said he was "impressed" with Srinivasan and, apparently convinced by the nominee's answers, eventually indicated that he intends to support him saying "I think you're going to make a great Circuit Court of Appeals judge," according to Huffington Post. 

Srinivasan outlined a traditionally moderate approach to the law, stressing "open-mindedness and objectivity," according to USA Today.

 "It's a case-by-case approach," he said when asked for his judicial philosophy. "There's no grand unifying theory." 

There is not yet a date scheduled for a vote on Srinivasan, and one likely won't happen for a couple of weeks at the earliest, the Post said. Tea Party conservatives such as Senators Ted Cruz, R-Texas, and Mike Lee, appeared impressed as well, according to USA Today. 

Cruz, who clerked with Srinivasan at the 4th Circuit Court of Appeals, quipped, "I am hopeful that our friendship will not be seen as a strike against you by some." 

There are currently four vacancies on the 11-member court, which is often considered a stepping stone to the US Supreme Court. 

The White House has mounted an all-out effort to win his confirmation, including letters from former solicitors general and top deputies.

 "Sri has a first-rate intellect, an open-minded approach to the law, a strong work ethic and an unimpeachable character," the former law officers wrote last week. They called him "one of the best appellate lawyers in the country." 

If confirmed, Srinivasan, 45, who succeeded another Indian American, Neal Kumar Katyal, in August 2011 in his current job, will be just the third South Asian named to any federal judgeship. Srinivasan was born in Chandigarh and grew up in Lawrence, Kansas.

 He received his BA with honours and distinction in 1989 from Stanford University and his JD with distinction in 1995 from Stanford Law School, where he was elected to Order of the Coif and served as an editor of the Stanford Law Review.

 He also holds an MBA from the Stanford Graduate School of Business, which he received along with his JD in 1995. 

Srinivasan received the Attorney General's Award for Excellence in Furthering US National Security in 2003 and the Office of the Secretary of Defence Award for Excellence in 2005. 

Vijay Mallya set to lose more assets

 Live Mint :Mihir Dalal &   |  P.R. Sanjai  :Wed, Apr 10 2013. 10 43 PM IST

Kingfisher lenders sell pledged shares worth millions in USL, MCF; UBHL’s stake in airline falls to 21.36%

UB Group chairman Vijay Mallya is set to lose more of his assets after lenders to Kingfisher Airlines Ltd invoked pledges worth millions of shares in United Spirits Ltd, Mangalore Chemicals and Fertilizers Ltd (MCF), as well as his grounded airline.

Mallya has investments in the UB Group companies partly through his holding firm, United Breweries (Holdings) Ltd (UBHL).

A group of lenders, led by the State Bank of India, is selling shares to recover some Rs.7,000 crore loaned to Kingfisher Airlines, as the airline— which has been grounded since October—has been unable to repay debt. The shares were pledged by the UB Group as security for loans taken by Kingfisher.

UBHL’s investment in Mangalore Chemicals slumped to just 3.44% from 24.51% earlier, the company said in a filing to the National Stock Exchange on Tuesday.

Mangalore Chemicals said that pledges equal to 10 million shares were invoked by bankers.

On 4 April, Mint reported that Kolkata-based industrialist Saroj Kumar Poddar, chairman of the Adventz Group of which Zuari Agro Chemicals Ltd is part, was keen to take over Mangalore Chemicals from Vijay Mallya’s UB Group because he believes the company is a “great strategic fit” for Adventz Group’s own farm inputs business.

Poddar’s firm owns a 10% stake in MCF acquired from UB Group’s lenders. It wasn’t immediately clear whether he would bid for more Mangalore Chemicals shares that are likely to be sold.

However, a UB Group spokesman said UB Group’s direct shareholding in Mangalore Chemicals is 21% without giving more details on the shareholding pattern.

“Besides this, the articles of association of Mangalore Chemicals gives UB Group the right to nominate three directors which gives board control as 50% of the board has to have independent directors and the maximum is 11. UB Group also enjoys the support of shareholders owning 17% of Mangalore Chemicals. Besides this, Zuari has publicly stated that they will not launch any hostile action,” the spokesperson said.

Over the past two weeks, the lenders sold 38.37 million shares in Kingfisher, bringing UBHL’s stake down to 21.36% from 24.44% earlier.

UBHL’s investment in the group’s crown jewel, United Spirits dropped to 15.73% from 17.75% after lenders invoked the pledge of 2.65 million United Spirits shares, according to a filing on Wednesday.

UB did not respond to queries on whether UBHL had pledged any more United Spirits shares with Kingfisher’s lenders.

Analysts earlier expressed concern that the sale of shares by lenders could hamper United Spirits’ deal with Diageo as Mallya may not have enough shares left to sell to Diageo.

The UK distiller agreed to buy 53.4% of United Spirits in November, including 27.4% stake from Mallya and the firm.

Diageo will follow up the purchase with an open offer to buy 26% of United Spirits from public shareholders at Rs.1,440 apiece—the price paid for the direct purchase.

The open offer began on Wednesday and will end on 26 April. However, many shareholders may not sell their shares as the United Spirits stock was trading significantly higher than the price offered by Diageo.

United Spirits stock closed up 1.16% at Rs.1813 on Wednesday on BSE. Mangalore Chemicals shares closed flat at Rs.41.30. Kingfisher Airlines stock closed at Rs.7.53 and UBHL at Rs.38