Sucheta Dalal :Defaulters Ask Uncomfortable Questions (7 October 2002)
Sucheta Dalal

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Defaulters Ask Uncomfortable Questions (7 October 2002)  

A couple of months ago, banks and financial institutions dashed off scores of notices, each under the asset reconstruction Ordinance (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002), in the hope of recovering their money from wilful defaulters. But after the 60-day notice period has ended, the prospect of making huge recoveries looks rather bleak. Many companies have indeed come forward to pay up their dues, but the amounts offered are a fraction of their outstanding dues and only meant to open negotiations with the lenders for restructuring their loans. The recovery process is hampered by the following developments.

Firstly, the lenders themselves have begun to squabble about sharing the proceeds and giving their consent to the recovery effort. Secondly, companies such as Mardia Chemicals and Modern Syntex have challenged the Ordinance with a mixed response from the courts. The litigation and hectic lobbying by defaulter groups have made lenders wary about seizing assets, or they would end up with a case of backdoor nationalisation of hopeless projects, as has happened with the Rajinder Steel companies and the Usha group’s steel companies.

Thirdly, potential buyers have turned wary; nobody wants to pay for assets until the asset reconstruction Ordinance has run the gauntlet of various court cases. Although ICICI Bank has deployed an army of top officials and sought the help of legal luminaries such as former law minister Arun Jaitley to help fight their case, the going is tough. On Friday (October 4) the Supreme Court gave a new twist to the proceedings by telling the lending institutions that they could go ahead and issue notices and seize assets, but could not create third party liability in them.

While the details of the Supreme Court order are not yet known, it seems to have ordered that lending institutions can takeover assets but cannot sell them. In which case, the takeover of defaulting companies with large outstanding dues will only add to the woes of the lenders. The Supreme Court order could act as a fresh damper to the recovery process, and will force them to answer several uncomfortable questions with regard to their lending, their project appraisal and the even-handedness of their recovery process.

It is true that non-performing assets of the financial sector have topped Rs 1,10,000 crore and lenders need sweeping, if not draconian, powers to force money out of wilful defaulters. But let us not forget that incompetence, pressure from political mentors, corruption and the over-ambitiousness of institutional heads is responsible for a great deal of reckless lending.

These are some of the issues that are now being raised by defaulter companies fighting a last ditch battle to save their corporate empires. Without going into the rights or wrongs (since it is subjudice) of the matter, here are some issues raised by Mardia Chemicals in its writ petition, which calls for a fair, transparent and non-arbitrary recovery policy by the lenders.

The company has challenged the constitutionality of Sections 13 and 34 of the Ordinance, which deal with methods of recovery and jurisdiction and allegedly allow the lenders to be judge of their own cause.

The Ordinance gives sweeping powers to lenders and their enforcement has far-reaching consequences for companies. But it does not have clear guidelines for implementation or specify an independent authority/officer who would exercise the power. This, it claims, could “result in corruption, despotism, favouritism and biased decisions”.

Thirdly, it raises the issue of lenders’ liability saying that many of its problems are due to the failure of institutions to disburse sanctioned money. It alleges that ICICI’s failure to disburse Rs 300 crore out of a sanctioned sum of Rs 413 crore for a set of expansion projects in the late 1990s is the root of its many problems (apart from a wrong closure ordered on the grounds of environmental problems). The issue of companies suffering because of the lenders’ failure to make timely disbursals of sanctioned loans after project implementation has commenced will probably be a recurring theme in the litigation to prevent seizure of assets under the Ordinance.

Fourthly, lenders may also have to answer specific allegations of bias or favouritism of the sort made by Mardia Chemicals. For instance, the company claims that its problems with ICICI Bank started after it refused to allow the institution to arm-twist it into selling its caustic chlorine plant to Reliance Industries at “a throw away” price. It accuses ICICI of trying “to ruin” the company due to this refusal and says that it led to other banks and institutions also withdrawing their support to the company.

Fifthly, Mardia claims that ICICI and other institutions have “waived huge amounts of money to various industrial houses and even disbursed further amounts despite being in default in order to bailout these industrial houses for extraneous considerations”. It goes on to name names and mentions Arvind Mills, the Essar Group (Essar Steel, Essar Shipping and Essar Power), Ispat Group (Ispat Alloys, Ispat Steel and Ispat Industries), Jindal Vijaynagar, Malvika Steel, Bellary Steel, Kirloskar Ferro Alloys, Jain Irrigation, Andhra Cement, Star Paper Mills and Lloyds Steel as some of the companies which have benefited from such bailouts. This will probably be the toughest question for institutions to answer. The restructuring of Arvind Mills is especially sticky because a bunch of foreign banks, led by Commerz Bank, had also challenged ICICI’s actions in court. The large lending to politically powerful business groups and the frequent restructuring of their loans, continued classification as standard loans, and large waivers of interest are being questioned by several smaller companies.

Sixthly, the claim made by the institutions are themselves disputed, if not “extravagant or fanciful” as claimed by Mardia. The Ordinance allows the lending institutions to be their own judge in such matters without any room for appeal.

And finally, Mardia claims that there is no provision to “undo” actions if the Debt Recovery Tribunal or the Appellate Tribunal holds in favour of companies whose assets have been sold under the Ordinance.

Many of these are pertinent questions and although the investing public and the people are in favour of recovery powers for lending institutions, these powers cannot be arbitrary and untrammelled. The institutions will have to draw up guidelines to prove that their actions are just, fair and accountable.

-- Sucheta Dalal