KFA case: Decoding implications of 'wilful defaulter' tag

However, in KFA’s case, the bank will step in each and every aspect of it. Now with this wilful defaulter tag on, there would be no debt kind of issuances from the banking sector and this will extend to all group companies as well, said Parekh.

Below is the transcript of Ashvin Parekh’s interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.Menaka: What exactly does this mean in terms of wilful defaulter, what happens now to Kingfisher Airlines (KFA) and Vijay Mallya, can you just take us through what the implications of this tag are?A: Well, there are two sets of implications. To begin with if you are just a defaulter i.e. if you are announced as a wilful defaulter by the banking system then in that case you still have a lot of options, either you can go through the Corporate debt restructuring schemes (CDR) route or you can rebuild business or demonstrate to the banking system and to also the capital market that you have adequate amount of business viability left and you can still go back with a reconstruct. That is something that is as a defaulter.

Menaka: But they are not defaulters, they are now wilful defaulters?A: Yes, that changes the whole thing. That is the point I was trying to make. Now what will happen is the bank step in into each and every aspect of it. Two things happen, the first and the foremost is now as a wilful defaulter there will be no, let’s say, debt kind of issuance from the banking system any longer. Banks will stop issuing any further loans.Menaka: But one might presume that that had already happened with KFA so far?A: It had. The minute the person is announced as a wilful defaulter then there are two sets of provision which apply, one is there are simple business related controls or penalties.Menaka: Such as?A: For instance let’s say, any sale of asset that they want to do without the bank’s permission or let’s say, without keeping Securities and exchange board of India (SEBI) informed about it they cannot really do that which means any reconstruct that you can think about now of his own without the bank’s involvement cannot be done, that is one.Banks will not fund any new activity without a very clear kind of recovery program involved with that.Menaka: That all pertains to KFA, I was also curious that does this spill over to group companies as Senthil was asking because Dr Mallya is the chairman on the board of United Spirits, United Breweries, Mangalore Chemicals. So will it mean that these three companies will also be constrained in some fashion for being able to raise funds?A: There are two ways in which it will. One is, of course, there will be a lot of personal guarantees that he would have issued for instance. Now the banking system does, the minute he is announced as a wilful defaulter, has the right now to press for those guarantees, for example. So automatically all his assets owned by, let’s say, any other capacity basically, but the minute there is a personal guarantee which says that he stands to make up for any dues or any payment that he has to make to the banking system. That is the first implication.The second which is more grave, if I look at the wilful defaulter’s guideline issued by the RBI in addition to the business related controls that the banking system will impose if there is any element of evidence available with the banking system to suggest that an application of the fund was carried out not in keeping with what was promised to the banking system then in that case there is a criminal aspect to that as well. Now if criminal proceedings begin then in that case you are talking about a lot of additional actions that the banking system can really carry out on the wilful defaulter. So we are talking about now a new set of steps that the banking system will now take.