The Reserve Bank of India on Tuesday widened the ambit of wilful defaulters as banks can term key executives of a defaulting company along with non-group entities as wilful defaulters if guarantors refuse to fulfil their obligations to banks despite having adequate resources.
Pratibha Jain, Partner at Nishith Desai Associates believes that a balance is required between overregulation and allowing the market to grow. A guarantor’s role per se is to guarantee, he cannot be the first call for debt payment, she adds.
“The Reserve Bank must go after rogue companies rather than painting all companies with a broad brush,” she says in an interview with CNBC-TV18’s Sonia Shenoy and Latha Venkatesh.
Below is the verbatim transcript of the interview:
Q: How have you read this? Are key management personnel like a CFO in danger of being named wilful defaulter? What are your key takeaways from yesterday’s clarifications?
A: I think broadly whenever there is a big scam or concern that is broadened up for the financial markets, we see the regulators react. This seems to be another reaction.
The worry each time is that there is not overzealousness and there is a balance because knee-jerk reactions don’t help. Reserve Bank of India is usually balanced in its approach. So, we are hoping that this circular will not be overreaching.
I think the role of the guarantor per se should be to guarantee the loan and not be the first call for paying any debts. You have to differentiate between the debtor and the guarantor.
Having said that, you will have to see how the industry reacts. I think clarification around, who it is actually applicable to, will be very important because already with the companies act and the penal provisions with respect to directors and key management personnel in the company has scared off a lot of people in terms of doing businesses. This is actually seeing companies being set up outside India instead of preferring - if they have the means to set up outside India, they will set up outside India even though they are doing business in India.
Q: How many people can afford to set up incorporate the company outside India. It would be obviously a handful. Do you see banks being able to recover more, put the fear of god into defaulters or wilful defaulters really rogue companies because of this or do you think it is going to cast shadows even on well-meaning guys?
A: As long as they use it sparingly, banks use it also sparingly, it is fine but when you have such provisions available for bankers to use, it obviously scares the market and in terms of people being able to take guarantees. So I think we need to figure out a balance between overregulation and allowing the markets to grow. As long as the knee-jerk reaction doesn’t make it even more difficult than it is today to do business in India then it is fine.
In terms of rogue companies, we should go after the rogue companies rather than broad-brush where all companies are looked at the same way.
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