JOIN USThe ‘King of Good Times’, Vijay Mallya has finally left the country to avoid his creditors here.
He departed, despite a loan default case pending with the Supreme Court, which has raised several questions and has far reaching implications for the debt recovery system of the national banking sector. Does this make him an offender or not? The fact that Mallya is an NRI and not an Indian citizen for all legal purposes, his travel overseas, does not constitute an offence under any law in force.
The Ministry of Finance’s entity, the Debt Recovery Tribunal (DRT) had directed the London-based Diageo not to disburse any monies and thereby block Mallya’s access to the $75 million payout as the bank creditors claimed their ‘first rights’ on this amount.
Whether the severance payment made to him by a foreign company, the London-based Diageo, empowers Indian creditors rights over the money which he received abroad as a personal ‘non-compete’ obligation is highly questionable.
This constrains Mallya not to engage in a similar line of business due to the brand equity associated with his name for five years.
Moreover, the SARFAESI Act 2002 lacks the teeth to attach the overseas assets of a defaulter to satisfy the dues to be paid to the banks.
Weak enforcement of SARFAESI
The concept of ‘limited’ in a Limited Liability Partnership constrains the liability of the owner to repay the loans procured from banks. To that extent, the debt recovery law, the SARFAESI Act 2002 due to inefficient enforcement has failed to aid banks in speedy recovery of large loans. The RBI and SEBI have also initiated regulations to tackle wilful defaulters.
The two major tools the financial regulators have introduced so far are wilful defaulter tag and most recently the provision for Strategic Debt Restructuring power for banks to acquire a controlling stake in companies which fail to turn around from the ‘red’ (loss making) into the ‘black’ (profit making).
Today, the consortium of the SBI-led 17 Indian banks, which has lent the beleaguered industrialist Rs 9,091 crore seek to bolt the stable after the horse has run out.
This move by the creditor banks happened only after the announcement of the Diageo exit payout of Rs 517 crore. Neither the Karnataka High Court nor the DRT did take adequate steps to arrest Mallya, which compelled the petitioners to approach the Supreme Court.
Only after the Supreme Court heard the bank petitioners, it sought a reply from Mallya within two weeks, as to why his passport should not be impounded and also demanded his presence before the apex court.
Also, the Service Tax Department has moved the Bombay High Court, because the now grounded Kingfisher Airlines has not paid large sums collected from airline passengers as service tax to the government treasury. This amounts to a violation of Section 89 (1)(d) of the Finance Act, 1994. The Department has sought to freeze Mallya’s passport and restrict his movement abroad.
Money laundering case
On the other hand, much before the banking consortium approached the DRT, based on a 2015 FIR filed by the CBI in yet another loan default case, the Enforcement Directorate (ED) had registered a case against him and six other Kingfisher executives.
This CBI case was registered under the Prevention of Money Laundering Act 2002 (PMLA), over the alleged default of around Rs 900 crore loans from the IDBI. The ED move has set the pace to probe various charges of foreign exchange violations under FEMA. The ED now plans to probe into whether or not these bank loans availed were deployed for the purpose obtained, or instead was invested into other illegal activities.
The ED is set to start an audit investigation into the loans which were grossly in excess of the credit limits. The other aspects of the investigation include the role of directors in capital infusion and diversion of funds to foreign accounts.
However, the liquor baron now under pressure in the money laundering case, apparently has managed to flee the domestic jurisdiction despite the CBI’s lookout circulars at all international airports to prevent his escape. Clearly, this reflects poorly on the coordination between the judicial and law enforcement systems.
The entire episode is emblematic of crony capitalism, which involves banks and big names. The legal dimensions would focus on the banks’ decisions to lend massive sums of money to Mallya when the pledged assets were only one-tenth of the value of the borrowed amount, which only suggests inconsistencies.
From a wilful defaulter to a debt fugitive, the case against Mallya highlights the embedded politicised web of bankers and industrialists characterised by vivid fissures of the country’s legal system. Examples abound where ‘wilful defaulters’ like Mallya have used legal loopholes to delay the loan recovery process to become ‘freeloaders’. Consequent to such inordinate delays by the judiciary to act with agility against the defaulter, the value of the realisable assets which includes the brand equity begin to erode.
Prevent financial fiasco
The Mallya affair highlights the need for major reforms in banking and legal sectors to ensure that people’s money is not squandered by collusion between bankers and borrowers.
Importantly, banks need to ensure that its clientele does not divert borrowed funds for purposes other than what they were availed for.
Perhaps timely forensic audits by the banks could have helped to prevent the financial fiasco. Unless the government supports the judiciary to bring the industrialist to book, only then will it set an example and deter other wilful defaulters from following in his tracks.
Clearly corporate and labour laws need to be revised considering that former Kingfisher employees who were denied their legitimate dues from the now defunct company really have no legal recourse.
(The writer is an Assistant Professor at the School of Law, Christ University, Bengaluru)