Defaulters Beware: Knuckle Dusters Under Kid Gloves!

Defaulters Beware: Knuckle Dusters Under Kid Gloves!

The Finance Minister Arun Jaitley, blithely suggesting that corporate financial defaulters, who owe the banks and others enormous sums, should pay up, or get ready to lose their companies to other entrepreneurs, has articulated a policy stance that must be lauded.

For long, India, neither rich, nor particularly business-friendly, shielded promoters, operating an unfair crony capitalism by default.

This, not in the privately held companies, but in listed companies the promoters often ran with wafer-thin shareholdings.

Even as thousands of public shareholders and institutional investors were held in non-interfering mode by unstated policy.

The public could speak, after a fashion, only at Annual General Meetings(AGMs), and watched proceedings helplessly the rest of the time, hoping for the best for their investments.

These promoters, not only lorded it over their companies, enjoying huge pay and perks all the while, but were allowed to carry on without liability, unscathed by the corporate debts their companies accumulated.

If they didn’t pay on time, or indeed at all, there was little interest to make them on the part of the Government. Nor were they in any real danger of losing their companies or its assets.

Now, as headline news of the real estate sector  Jaypee Group in Noida demonstrates, it will not get away without losing everything.

Jaypee has left hundreds of investors in their apartment offerings in the lurch, in addition to the banks and other creditors.  

This new toughness is being assisted by a new Liquidation & Bankruptcy Law. Not only that, the Reserve Bank of India (RBI) has been empowered to push  hard for settlements at various Public Sector Unit (PSU) Banks, running into lakhs of crores, representing 10%  or more of their loan books, as Non Performing Assets (NPAs). Real Estate companies also have to conform to a new law, RERA, enacted to regulate their workings at last.  

But putting in laws and enabling moves are one thing, and using them to get results is quite another.

Particularly, in a country where neither the Capitalist, nor Labour, has ever been held accountable. And where the judiciary is not only slow and over-burdened, but is generally used by the defaulters to block justice.

That this is happening now via political/administrative and legislative will, is unfamiliar and unprecedented in the annals of Independent India.

Large corporations often saw to it that they were close to powerful politicians. This helped them obtain massive loans from PSU banks without too much difficulty, and no one in the Bank dared to ask them to stick to terms of repayment either.

The ultimate losers in this collusive daylight robbery was the benighted public, and it was powerless to do anything about it.

Alongside, this new strictness with regard to corporate finances the Government has also started confiscating Benami properties.

Already property worth over Rs. 800  crores has been seized, and even political heavyweights like Bihar strongman Lalu Prasad Yadav and his family have not been spared.

A toothless Benami Property law, on the statutes for long years, has recently been empowered with powers to seize property.

And so, the favorite loophole for ill-gotten wealth is on its way to being plugged.

Benami property with the ability to absorb huge amounts of undeclared cash, is a favorite with different classes of people.

They range from tax-evaders and bribe-takers to those who conduct most of their business in illegal and twilight areas of enterprise such as drugs, extortion, sedition, smuggling, illicit arms, flesh-trading, and so on.

Taken together, liquidating defaulting companies and their assets, and seizure of Benami property, -the gains to the National Treasury are likely to be substantial.

Because it is in keeping with international best practices, the moves are already playing very well with foreign investors.

Both foreign direct investment (FDI), which is embedded into infrastructure, business expansion and industry, and foreign institutional investment  (FII) that grows  and swells our stock markets, is seen to be boosted as a consequence.

Our foreign currency reserves are expected to hit an unprecedented $400 billion soon, even as the rupee continues to strengthen against the dollar.

Checking corruption and strengthening the financial and banking systems are part of the good governance overseas investors and international rating agencies want to see.

Greater transparency and further economic reform is expected, with a majority in both houses of parliament. This Government is expected to win another term per present forecasts and rule for the next seven years.

This, even as political contention from a very weak Opposition has less scope to hamper progress.

With a GDP already growing at the fastest pace in the world, at over 7% per annum, the Indian economy is likely to compound its size to more than double at over $ 5 trillion by 2025, according to Morgan Stanley.

Recently implemented GST is gaining ground, and will also contribute to greater Government revenues by way of taxation, now without leakage. It will also help increase the pace of economic growth.

While the new strictness indicates that business and personal wealth accumulation must follow transparent and legal pathways henceforth, it sends out positive signals to professional investors who want to conduct a clean business.

It opens up the possibilities for quantum growth in new institutional, high-tech, and restricted access government-to- government areas, such as defense production, and cyber-security.

(881 words)

August 20, 2017

Gautam Mukherjee