RBI aiding Corporate frauds ?

 DECCAN INQUIRER 

Bi-Weekly e news paper 

Editor: Nagaraja.M.R.... Vol.04.....Issue.46.............14  / 06 / 2023

RBI aiding corporate frauds ?

To

Shri Shaktikanta Das

Governor

RBI

 

Dear Shri Das,

I refer to RBI’s latest guidelines issued on 8-6-2023 (Notification No.RBI/2023-24/40

DOR.STR.REC.20/21.04.048/2023-24 8-6-2023) on Framework for Compromise Settlements and Technical Write-offs, modifying the earlier guidelines issued on 7-6-2019 (Notification RBI/2018-19/203 DBR.No.BP.BC.45/21.04.048/2018-19 7-6-2019).

Para 34 of the 2019 notification stipulated, “Borrowers who have committed frauds/ malfeasance/ wilful default will remain ineligible for restructuring. However, in cases where the existing promoters are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management, lenders may take a view on restructuring such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters/management”

In contrast, the latest notification dated 8-6-2023 reads as follows:

“Para 6 (ii): proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter, as permitted in terms of clause 13 of this Annex, shall require approval of the Board in all cases.

Para 13 (Annexe): REs (regulated entities) may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors“

In other words, RBI has, for reasons best known to it, made a volte-face and abruptly relaxed the 2019 stipulation that no “compromise settlement” would be permitted in the case of “borrowers who have committed fraud/ malfeasance/ wilful default“, implying that a borrower who has committed fraud or one against whom criminal proceedings for fraud are ongoing, in respect of funds borrowed from a bank, would hereafter be eligible for loans from that bank. Fraud implies a promoter falsifying accounts and syphoning off the borrowed money for personal gains. It may also involve laundering of the borrowed money to overseas shell companies either for tax evasion or for misusing it to manipulate the domestic stock market, as has been the case with several wilful defaulters in recent times.

Allowing wilful defaulters charged with violating the law of the land and misappropriating funds already borrowed from the banks, to borrow additional amounts from the same banks, would amount to outright condonation of fraud and making a mockery of the legal system we have.

Compromise settlements such as this one, which amount to condoning fraud, not only expose the hard-earned savings of the banks’ depositors to considerable risk but also encourage wilful defaulters to take further risks including committing acts of malfeasance, at the cost of the banking system. It is clearly a case of undue risks being taken by borrowers, with the corresponding costs inflicted on depositors.

Does not the RBI have the statutory obligation, as the banking regulator, to safeguard the interests of the depositors and the interests of the government which holds dominant shareholding in PSU banks? By issuing such an imprudent set of guidelines, is not the RBI triggering yet another crisis of non-performing assets that plagued the banking system during the last decade?

Section 21 of the Banking Regulation Act in pursuance of which the RBI issued the above 2023 notification reads as follows:

“Power of Reserve Bank to control advances by banking companies.—(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally”

Since the 2023 notification is neither in the interests of the depositors nor in the public interest, strictly, it violates the letter and the spirit of the above statutory requirement.

While the banks are encouraged to “technically write-off” bad loans from their financial statements to provide false comfort to the government and the public at large, according to statements originating from the Finance Ministry (https://economictimes.indiatimes.com/industry/banking/finance/finance-ministry-wants-state-run-banks-banks-to-enhance-recovery-rate-from-written-off-accounts-to-about-40/articleshow/99908818.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst), the rate of recovery from written-off loans is hardly 15%, suggesting that the so-called “technical write-off” of loans reflects that most of those loans cannot be recovered, which shows that there is no case whatsoever for condoning wilful default by borrowers, more so, no case for providing any leeway to those who commit fraud.

The PSU banks, forced to extend credit to the private corporate sector in the name of facilitating economic growth, already face a wide range of problems, such as asset-liability mismatch, unfair competition with private banks etc. RBI’s latest compromise settlement guidelines will only exacerbate the health of the PSU banks by sowing the seeds of yet another NPA crisis, which can cripple the economy.

I feel that the RBI should revisit the 2023 compromise settlement framework and rescind it. Instead, there is a strong case for RBI to tighten the restrictions on wilful defaulters.

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to the Government of India

Legislation loop holes aiding shell cos

To

 

Smt Nirmala Sitharaman

Union Finance Minister

Dear Smt Sitharaman,

I had earlier addressed you vide my letter dated 31-1-2023 (https://countercurrents.org/2023/02/overseas-shell-companies-a-shadow-economy-a-threat-t-national-interest/) pointing out how the government failed to define the term “overseas shell companies” in the Companies Act, SEBI Act and other related legislations, despite admitting to the Parliament as early as 6-2-2018 that there was an urgent need for such a consistent definition, a legislative omission that in turn indirectly helped domestic business houses to park their wealth in overseas shell companies and profiteer at the cost of the domestic economy.

In the same letter, I also referred to the Department of Economic Affairs notification GSR 646(E) dated 22-8-2022 which provided yet another legislative loophole for similar exploitation by domestic private companies.

The Expert Committee constituted by the apex court to examine the implications of the Hindenburg report on the Adani Group, in their findings submitted on 6-5-2023, observed, among others, in [Para 23(b) of their report] that “the very requirement to disclose the last natural person above every person owning any economic interest in the FPI was done away with in 2018” by a SEBI notification (apparently in reference to SEBI/LAD-NRO/GN/ 2018/58. 31-12-2018), suggesting that SEBI created a legislative constraint for itself that came in the way of its subsequent attempts to investigate the post-Hindenburg developments.

In other words, between 2018 and now, a series of legislative gaps either created or left uncovered by the Finance Ministry and SEBI, have indirectly contributed to domestic business houses parking their wealth in overseas shell companies and profiteering at the cost of the domestic economy. This is a matter of serious public concern that calls for an independent enquiry.

May I request the Ministry of Finance to institute such an inquiry to clear the air, not only with reference to the Adani matter but also with reference to overseas shell companies set up by other domestic and foreign-listed business houses operating in India?

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to the Government of India

Visakhapatnam

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