Guarantors of defaulters at risk; SBI to target UB Holdings

Dina Wadia, Partner & Head of Banking & Finance Practice, J Sagar Associates, agreed to Gujarat High Court's observations. In an interview to CNBC-TV18, Wadia said the high court has upheld the power of the RBI to issue such circulars. However, Wadia pointed out that the apex bank circular does not clarify when the willful defaulter tag can be removed.

Speaking on the issue, SBI chairman Arundhati Bhattacharya concurred that independent directors are not always privy to the actions of promoters but the broad intent of the circular is to allow banks to proceed against guarantors. Since UB Holdings is the corporate guarantor for Rs 7,500 crore Kingfisher loan, "we will go after UB Holdings to collect dues."

Below is the transcript of Dina Wadia and Arundhati Bhattacharya’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Yesterday the Gujarat High Court cancelled a part of the earlier circular of the Reserve Bank of India (RBI) naming all directors as liable to be wilful defaulters. Is this going to have a persuasive impact on the circular given day before yesterday as well, will it lose its teeth so to speak?Wadia: The judgment that came two days ago, one of the key things that it upholds is the right of the RBI and holds the issue of the guidelines and the circular valid. it has struck down that by making a declaration of a unit as a wilful defaulter, you cannot star all the directors with the same brush as wilful defaulter or declare all of them as wilful defaulters. They seek to distinguish between promoters and entrepreneurs and the other directors. To my mind I don't think that is fatal in anyway through the existing circular because if you read the existing circular and the existing guidelines it also seeks to hold promoters and entrepreneurs as more responsible and liable to be declared as wilful defaulters because the effect of a declaration is really on them. It is that they cannot then seek additional institutional finance. So, I don't think the circular seeks to paint all directors as wilful defaulters. If you see the recent action that was taken for Kingfisher along with Vijay Mallya only three other directors were so declared, not the entire board. So, there is some learning or basis or some kind of guidance to banks maybe when they are going through the process not to declare the entire board but to perhaps distinguish between promoters and entrepreneurs and other directors such as nominee directors, independent directors. Latha: On the issue of expansion of the ambit of wilful defaulters does it strengthen a banks position? Are you able to put the fear of god or do you think you will be able to put the fear of god in companies and therefore make them pay up when they can?Bhattacharya: Anything that strengthens the wilful defaulter rules they are a positive for the bank. Having said that what the RBI directive currently has done is it allows us to proceed against the guarantors at the same time as we do against the main borrower. Earlier also we could proceed against guarantors but it had to be first the borrower who would have to be considered a wilful defaulter and only then we could go against the guarantor. So, this sequential process resulted in delays and then what we could not do is in case the guarantor had the ability to repay and they were not repaying we could not take them up separately for that. This is what has been empowered by the circular currently.Again I was following the conversion that you just had with Dina Wadia regarding the High Court order which says that you can't tar everybody with the same brush. In a way I think that is important also because we have to also understand that independent directors are not always privy to every single action of the company or its promoters. Therefore to also declare the entire board would make things very difficult going forward because nobody would be willing to come in as a independent director at all in that case which again is counter productive. Latha: We already know of one wilful defaulter case which some banks have identified as Kingfisher. Are you going to proceed now against United Brewery Holdings? Bhattacharya: Yes of course, that automatically comes in. Once you have done Kingfisher automatically the guarantors also will obviously be issued the same notices. United Bank has already done it.

Latha: Are they therefore liable to pay that entire Rs 6000-7000 crore because it is a richer company and can pay. So, will you send such a notice to them? Bhattacharya: I think that will be done. Sonia: I just wanted to get you in on what the way forward could be in terms of whether this whole exercise helps improve the corporate governance, will we see a lot more wilful defaulters coming up and also how does one really make the process watertight now? How will it be easier for banks to identify who the wilful defaulters are?Wadia: I think the banks know very well who their defaulters are and also their wilful defaulters. Banks in India traditionally have given the companies and promoters a very long rope and have usually taken a benign attitude and I think that is changing. I think along with the climate and the fact that there are stresses, the NPAs are increasing the banks are also under more pressure to recover and you will start seeing more recovery.With the tightening up of the wilful defaulter provision and as very rightly Arundhati Bhattacharya said that the extension to non group companies, individuals and the implications that have once you are declared a wilful defaulter not only legally that you can be proceeded against, that your finances or avenues to finance are cut off but also such person may be required not legally as such but it is a kind of a very strong persuasive element to step off boards and boards will not want to have such persons on their boards because it then restricts those companies and has a cascading effect. Those companies then also acquire a kind of taint that they have such persons on the board. So, one hopes to tightening up and a lot better corporate governance, more care on the part of the companies and the promoter to see that they do not get tagged with this tag. The other thing that I would say also is what the Gujarat judgement also showed was that the procedure that has been laid down in the circular to follow is basically a natural justice procedure and it is not unduly onerous to the bank. What seems to have happened in that case is that they said merely saying that somebody is a wilful defaulter or has siphoned funds is not enough. You must give reasons, you must give the person adequate opportunity and then come to an informed decision. So, banks, they maybe at their end of the tether with certain groups but they need to follow the procedure. If the procedure that is laid down is followed then I think they can be at least that their decisions will not be assailed. Even in this case the show cause notice was struck down but they were given the liberty to file a fresh one. So, it is not as if the bank has no remedy left but it is a powerful weapon. I think the overall effect of this will have a very sobering effect on some of our more egregious borrowers.

Latha: Are there other wilful defaulters whom you can now chase and get money because you can encash the personal guarantee or enforce the personal guarantee issued by groups, groups like maybe Winsome; I don’t know if it falls in this category; any other. Are we going to see a bigger recovery this year?Bhattacharya: I don’t know why there is an idea that banks have not been declaring wilful defaulters. If go to the RBI site you will find a whole list of names.If you remember it has also told us that this is for a prospective effect. That means it does not give us retrospective effect on those guarantees that have already been given.

So, it is a law that prospectively taking, going forward, will ensure better corporate governance amongst corporates and also will empower us in respect of those accounts where we start taking guarantees now and against which we might have to execute at a later stage. Latha: Are both prospective, the fact that non group companies and individuals can only be prospectively pursued and the fact that the guarantors liability start the moment the company is declared defaulter, even that is prospective?Bhattacharya: No, the guarantors liability starts the moment a company is declared as a defaulter; this was already there and that is why when you asked me the earlier question I answered that if the main company is declared a defaulter the next step which will be to go after the guarantors. So, to that extent it was already there. What is different now is the fact that we can start both of these processes at the same time and also the other companies in the group, they can also be tagged accordingly. So, to that extent the weapon that was already there has been further strengthened. However, it is not as though we have not been using this and we have been doing this wilful defaulter for a number of companies. In fact the grievance redressal cell meets weekly in our offices. We already have this and it has been happening for the past one year regularly. So, to that extent our efforts to declare wilful defaulters this is an ongoing process; it has been going on. It has been further strengthened with this; that is all I can say.

Sonia: What is your assessment of the situation as far as the coal block allocation is concerned, what is the exposure of loans that State Bank of India (SBI) has to the coal blocks? We are still awaiting the final verdict but in case the 218 coal blocks are cancelled then what is the quantum of loans that are at risk?Bhattacharya: Every case is different. There are people who have dependencies on the coal blocks but where they may not have yet started investment in them. There are other companies that have already invested partly; there are yet other companies who are already producing.Also, in respect of many of these companies some of them for instance for power manufacturers they may have complete pass through. So, even if they lose the coal blocks and in lieu of that if they get coal linkages which I think will be arranged, in that case too it would not impact them all that severely. Not only the power producers, these will also have impact on other steel manufacturers and other such companies.There again it depends whether they are solely dependent on that one mine, whether that company is part of a big group or not. So, to assess immediately as to what would be the exact impact is very difficult. We have to see as it goes forward. In respect of our exposure, we have only six power companies who have direct linkage with one coal block and the exposure to these companies is around Rs 4000 crore. However, we do expect as I said again and we have had informal discussions with ministry officials and they have also assured that in case there is no malafied in respect of these allocations then they would definitely look at coal linkages so that the power units themselves don’t suffer.Therefore at this point of time to exactly tell you what would be the numbers and how would it impact, very difficult. It would mean the loss of some EBITDA, some margin compression in respect of companies which are in much bigger groups, which have other mines as well or who are able to buy coal, import coal. So, there are many other ways of handling this issue and therefore we have to wait as to what will be the fallout of the whole thing. Latha: A bunch of those 40 companies, almost 20 of them are SEBs or state industrial development corporations. There is Karnataka Power Corporation, there is an Arunachal Pradesh Mining Corporation, these are all state bodies and then West Bengal there is an SEB which owns one of the coal mines. Have you exposure to any these and are these more dodgy?Bhattacharya: No, none of them. We don’t have any exposures to those.Latha: Bhushan Steel, is it one the verge of a bad loan at all? Bhattacharya: I don’t really think so. Their production is perfectly in order. We have also inducted technical expert from M N Dastur and we have also inducted from the Big Four somebody to come in as a concurrent auditor. So, that every payment that comes in and goes out is properly audited and we know what is happening with the money. From all reports the company is working and at this point of time we are not seeing immediate issues.

Sonia: If you could tell us what is happening with respect to the stake sale. We understand from reports that nine bankers have been short listed for that particular sale. Will it be done through a QIP or through an FPO and when do you plan to conclude the process?Bhattacharya: There is no plan to do a QIP or a FPO right now. The empanelment is for the whole year. This is a standard process that we do in respect of many of the services that we take. So, it has no connection immediately with any stake sale. Latha: Final word on how is the NPA shaping up, have we peaked off, have you seen any improvement on the ground in terms of better orders and therefore plateauing of bad news?Bhattacharya: Better orders, not really. However, there are many other indicators in the economy that used to be indicating that things are turning for the better. I was talking about a few them in NDTV yesterday for instance freight movement, freight payment. If you look at the RBI survey on consumer confidence, there are a few other leading indicators also; the OECD combined leading indicator. So, all of these seem to indicate that the economy is indeed picking up and confidence is that at the highest level since October 2010. Having said that, it is also a fact that we have seen people being able to raise money from the capital markets. We are also seeing asset sales taking place. So, to that extent the stress has indeed reduced. However, whether this will mean that this is the end and we start seeing the cycle moving up again? I think I will stick to my earlier version that whatever I had said that we need to wait for another two quarters after the GDP turns. If we say that the GDP has already turned last quarter then maybe another two quarters that is up to December end we should wait till then to see how the matter stabilises. However, definitely it looks like as though the stresses have reduced. I will not say that they have disappeared but they have reduced.