In this article, Padamasre Manoj pursuing M.A, in Business Law from NUJS, Kolkata discusses Is it criminal offence to default on loans – Case Study: Vijay Mallya.
Vijay Vittal Mallya: Jack of all trades!
Mallya is the child of Vittal Mallya and Lalitha Ramaiah, from Bantwal, Karnataka. Vijay Mallya was taught at La Martinière Calcutta, where he was delegated House Captain of Hastings house in his last year, and at St Xavier’s College, Calcutta, where he graduated with a Bachelor of Commerce degree in 1976. While in school, Mallya interned in his privately-run companies. Subsequent to graduating, he interned at the American division of Hoechst AG in the United States. Vijay Mallya became the Chairman of United Breweries Group in 1983 at 28 years old, after his dad’s passing away. Vijay married an airhostess and had a boy; he then married his school girlfriend Rekha and had 2 children. Rekha was divorced and already had 2 children of which one is adopted by Vijay Mallya. He also seem to have had multiple interests and an exhuberant lifestyle that made him the “King of good times”.
Mallya was known for his pompous and diverse interests build into a lavish life style and had a hand in almost all types of industries, recreation and sports including motor racing, football, cricket and made the most of his money from the beverage industry. We will look at the rise and fall of Mallya and most importantly if such entrepreneurs who cause huge debts to the country’s economy should be treated as ‘criminals’ and more serious actions to be taken against them.
Assets & Liabilities
Mallya’s assets had developed into a multi-national combination of more than 60 organizations, with a yearly turnover which expanded by 64% more than previous 15 years to US$11 billion in 1998–1999. He solidified the different organizations under an umbrella gathering called the “UB Group”, spun off non-core and revenue loss making organizations and concentrated on the center business of hard beverages. Over the years, he had differentiated and procured Berger Paints, Best and Crompton in 1988; Mangalore Chemicals and Fertilizers in 1990; The Asian Age daily paper and the distributer of film magazine, Cine Blitz, Bollywood magazine in 2001.
Vijay Mallya has to his credit the bringing back the sword of Tipu Sultan over an auction for Rs.1.7 crores and many other weapons that belonged to India which was captured by the British when they ruled India. He also bid and purchased Gandhi’s glasses, sandals, pocket watch etc for Rs. 1.8 Mn from New York auction.
He is luxury personified and sports more than 250 vintage cars; yachts; private jets; Boeing planes, 200 horses et al. He published the Kingfisher Calendar every year that had top model such as Deepika Padukone and Katrina Kaif modeling in swim suits. He was also the owner of Royal Challengers, team of Indian Premier League. He joined politics in year 2000 and was part of the Janata Party and later became member of Rajya Sabha.
United Kingfisher Beer has more than a half piece of the overall industry in India’s brew segment. This brand was accessible in 52 nations outside India and leads among Indian brews in the worldwide market.
United Spirits Ltd, the leader organization of the UB Group, accomplished the memorable point of reference of offering 10 crore (100 million) cases, turning into the second-biggest spirits organization on the planet by volume under Vijay Mallya’s chairmanship. In 2012, Mallya surrendered administration control of United Spirits Limited to worldwide spirit group Diageo, in spite of the fact that he held a stake in the business. In February 2015 Mallya was compelled to leave as Chairman of United Spirits, and he contracted to get a $75 million severance installment as a feature of that arrangement, however, the courts in India have obstructed that settlement. Kingfisher Airlines, built up in 2005, was a noteworthy business propelled by Mallya. It in the end wound up noticeably ruined and needed to be shut down. As of October 2013, it had not paid wages and salaries to its workers for 15 months, had lost its permit to work as an aircraft, and owed more than US$1 billion in bank advances. By November 2015 the sum owed to the banks had developed to $1.35 billion, and there were multiple levels of obligations owed to various parties.
Charges filed against Vijay Mallya
Vijay was an all-powerful body of business, economic and political power and led the life of a “King”.
Mallya is named and as a “resolute defaulter” under Indian law, including allegations of illegal tax avoidance, shell companies; money laundering, misappropriation, etc.
During July 2015, Central Bureau of Investigation filed a case against IDBI Bank officials and Vijay Mallya alleging that the loans that were sanctioned to Mallya were way above the limit and the right approval processes were not followed by the IDBI officials while granting the loan.
During March 2016, a local Hyderabad court issued a non-bailable arrest warrant against Mallya due to cheque payment default, where cheque issued for Rs.50 lakh to the Hyderabad International Airport was dishonored by the Bank due to lack of funds.
During March 2016, another case against Mallya was filed by the Enforcement Directorate for transfer of funds abroad, to the value of Rs.900 crores. This was filed under the Prevention of Money Laundering Act (PMLA).
During July 2016 there were notices issued to the 17 public sector banks and financial institutions that had loaned money to Mallya. The Serious Frauds Investigation Office (SFIO) sent these notices and questioned the banks on documentation that was validated prior to granting loans for a loss making airline company. Kingfisher airlines was asked to furnish details of source of funds. There was severe malfunction in administration of the airline and poor governance that led to this state of affairs.
There have been multiple cases filed against Vijay Mallya for overall default in payment amounting to about Rs. 9000 crores issued as loans by around 17 different public sector banks. Over a period of 6 years commencing 2012, there have been defaults in repayment of loans. The group of public sector banks that were impacted, including State Bank of India approached the Supreme Court on March 8, 2016, seeking for court order to ban Mallya from leaving the country without paying back the loans. However, Mallya had left the country before this order was issued.
The Mumbai court during July 2016 issued one more non-bailable warrant to Mallya based on the case filed by the AAI. The Airports Authority of India claimed that 2 of the cheques issued by Mallya was not honored by the Banks and its value was Rs.100 crores.
On 11 June 2016, the Enforcement Directorate (ED) detailed it had attached ₹1,411 crore (US$220 million) rupees worth of Mallya’s Indian properties against unpaid credits totaling to ₹807 crore (US$130 million) provisionally. On 3 September, it issued a notice for a further ₹6,630 crore (US$1.0 billion) worth of Mallya’s properties, including a farmhouse, shares in United Breweries and numerous other items in Bengaluru esteemed at ₹565 crore (US$88 million). By December 2016, the ED had appended an aggregate of Rs 9661 crore worth of assets of Mallya and Kingfisher in India. This is one of the biggest notice of claim made by the ED in a Prevention of Money Laundering Act case till now. The ED additionally chose to send letters to the US, the UK and Europe asking for them to help in connection with Mallya’s case.
Mallya has charges against him under IPC 120 B and 420 as well as IPC 13 (1D) and 13 (2) part of Prevention of Corruption Act of Cheating, Conspiracy and Corruption. This case was investigated by a Special Investigating team (SIT) of officers in Delhi while the case was registered in Mumbai.
During the investigation, it was revealed that IDBI officials had a significant hand in enabling the fraudulent transactions and had approved loans amounting to Rs.1300 crores without adequate source of funds or appropriate documentation to Kingfisher Airlines. Except for about Rs.260 crores, which was paid towards staff salaries and payment of loan outstanding the remaining amount of the Rs.1300 crores was used by Mallya for his lavish life style.
Kingfisher airline is charged for cheating Banks, despite being fully aware of the financial situation and fully knowing that the company was a non performing institution. CBI investigations reveal that the Banks have also failed in their due diligence and have been approving high value loans inappropriately.
Is loan default a criminal offense?
Loan defaulters are being viewed as criminals due to the increase of awareness around the non -performing assets of banks and this is seen as corruption and criminal misconduct. Basically, any non-repayment of loan, attributes towards breach of contractual agreement between the bank and the company. The first step in such cases is to take the situation to NCLT for redressal.
Any breach of contractual agreement will not qualify for a criminal offence. Parties impacted by this should file cases at the civil court for investigation and recovery of lost amounts. In such cases the most important aspect is if the defaulter had actually malicious planned for such a default. If the intention of the defaulter was known at the time of commencing the action, then it can be classified as criminal misconduct and cheating.
The Banking industry is carrying around Rs.66190 crores belonging to PSBs and 6816 suits have been filed against 1669 cases while the total number identified is around 7686 willful defaulters.
Such instances of willful default refers to, intentionally not disclosing complete assets, any act of misappropriating funds or misuse of one’s authority etc. falls under frauds category as per the latest amendment in The Companies Act, 2013. The Serious Fraud Investigation Office has been institutionalized under this Act and is empowered to investigate cases and any deviation or finding by this SFIO could lead to imprisonment upto 10 years as per Sec.447 of the Companies Act.
The new ‘willful defaulter’ category that was brought in by the Reserve Bank of India classifies the following :
- Any individual or company not paying dues or loans despite having the financial ability to pay
- If the intention is to divert funds thereby showing a loss situation or inability to repay loans
- Sales or transfer of the assets provided to the Bank as security without informing the Bank.
This ‘willful default’ falls under criminal proceedings against the loan defaulters. This can be initiated after providing sufficient time and notice for the borrower to repay so that the laws of natural justice is adhered to.
Some of the willful defaulters list compiled recently by the Government and the public sector banks shows diamond merchants, airline services, media house, mining companies, realty developers and individual proprietors managing garment companies.
In most cases, borrowers of loans commence the business with positive intent of making profits and diversifying the business. It is when the business does not yield profit over a recurring period of time that companies go into bankruptcy and unable to repay loans. There are also situations when the asset that is being provided as security to the bank is not appropriately assessed. For example, In Mallya’s case, his brand that was pledged for loan was for a value of Rs.6000 crores. However, the value that is now available when banks are trying to sell the brand and remaining assets is hardly Rs.6 crores.
The Directors of companies give their personal assets towards guarantees and this is treated as security for loans to be granted. Banks have the liberty to deal with these assets if the agreement is clear that the asset is pledged in lieu of the loan to the Bank and may be recovered in case of loan default. Indian Company law needs to be tighter in limiting the liability and thereby curtailing the amount of exposure especially in companies such as of Vijay Mallya where the entire business was solely owned by him.
The loan defaults made by Mallya has a significant impact on the following aspects :
Irresponsible behavior by a powerful citizen causes disruption to the socio-economic conditions and tampers the reputation of the country in the world forum on ‘ability to control loan defaults’. This creates a ripple effect on investors wanting to enter India as they hear of the poor governance structure in the country and thereby have low confidence in the ability to do a corruption free business. India is growing as an innovative and promising emerging market and such instances of bad loans weigh down the overall progress. India’s total stressed loan value in February 2016 was around INR 8 Trillion, ie. USD 116 Billion. While Prime Minister Modi is striving to improve the ‘ease of doing business’, the World Bank report released recently shows a movement by only 1 point for the nation. Our country has responded to the World Bank that the 14 step process to commence business has come down to just 5 step process and therefore the ‘ease to do business’ in India has significantly improved. Having said this, the ease to do business rating also takes into account factors such as these, ie in the event of a default or fraudulent transaction, what is our capability to upfront identify, reprimand and curtail further losses. Does our judiciary system show strong action on such default.
The economy and financial sector of India runs centered at the banking industry. There are a large number of public sector banks spread across the nation that lends to the poor and middle class through the profits obtained from the large scale business accounts, such as Kingfisher / UB group. Any default by big ticket owners causes a significant drop in the lending capability and increases the bad debt for loan waivers in Bank books. There is improvement in this segment though. Around year 2000, India had 12.5% of stressed non-performing loans against overall loans granted, during 2016, it has improved to 4.3%. However, China has moved from 22% to 0% during the same period. So there is definitely room for us to tighten our laws and control such non-performing loans across the country’s bank books. When loans are granted to companies without appropriate due diligence there is a false economic situation that is created and this causes sharp imbalance upon identifying default situations.
In Mallya’s case there is also cheating involved in not paying salaries to staff for a prolonged period of time causing living issues for the families and potential debts to pay bills, that those families underwent due to non-payment of money rightfully due to them. There are a number of issues such as repayment of mortgage or personal loans that those staff may have, which is be paid depending on the salary that they get.
IPC classifies criminal cases as those pertaining to security threats; woman related harassment and abuse and any case of violence, armed forces related. Case such as Mallya’s is largely Corruption and exploitation of the system; cheating and fraudulent transactions; manipulation of public money causing loss to investors and shareholders. While it does not directly fall under criminal offence the law needs to be tightened to give higher punishment to such defaults.
While the case does not have loss of life or national threat involved, it has a detrimental and long lasting impact on a far wider population apart from the accused, Vijay Mallya.
In such cases, the system should severely penalize the Bank authorities who have sanctioned loans and failed to monitor payments in a controlled manner. Clearly there is poor process controls and lack of review and governance mechanisms that needs immediate focus.
My view is that our laws should modify and take such large scale, fraudulent and intentioned cases of default for review under the criminal offences category and order high severity punishments, in addition to ordering a tight window for repayment of the defaulted amounts.
Government action to curb the situation
One of the recent reports in the news showed that the Finance Minister Arun Jaitley had named 12 big companies that have joined the defaulters list on account of inability to pay dues and RBI will be initiating Bankruptcy proceedings on these companies.
These cases will be reviewed on priority by the NCLT, as the amounts put together of these 12 companies forms about 25% of the total non-performing assets in the Banking Sector. Each company owes more than Rs.5000 crores each to the Bank. The NCLT is being strengthened to be able to quickly review bankruptcy and insolvency cases.
Public sector banks holds about Rs.6 lakh crore of the total Rs.8 lakh crore non-performing assets in the Banking industry.
RBI should bring in robustness in tracking and resolving the issues with non-performing assets.
Prime Minister Modi, the Finance Ministry and legal body of India has been in discussions to bring in a 180 day timeframe by when defaulters should regularize. In the event of non-compliance legal action will commence immediately towards imprisonment, penalties and recoveries based on the Bankruptcy and Insolvency code.
The new law around insolvency that has been made effective will resolve stressed assets issue by empowering banks to issue action notice against cases. This law also allows for change in leadership and removal of all ownership and rights in the company.
This will largely mitigate unnecessary investigation into banks and will tighten controls over defaulters.
Media plays a key role currently in exposing such cases both through private investigations and information leakages from the Banks themselves. However, this results in blow up of the issue significantly higher than the reality and tarnishes the image of the individual and severely impacts the ability for the individual to restore the situation.
Responsible reporting by the media, honesty and integrity by Banking staff while conducting thorough due diligence prior to granting loans and individual borrower acting with integrity fully understanding the implications of loan defaults; strengthened laws and deployment by NCLT; faster investigation and judgement will all enable move the needle on our capability as a nation, in this area.
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Article: Rise and fall of Kingfisher