Fixed deposit (FD) investors of Jaiprakash Industries are shocked. On 21st April, The Economic Times reported that the Reserve Bank of India (RBI) had removed 20 companies from the list of 150 entities whose loans had to be provided for by banks against risk of default. One of these was the beleaguered Jaiprakash Associates which figures in Moneylife Foundation’s survey (1,596 complaints) among the top six companies that have the maximum complaints regarding failure to pay the principal or interest on FDs.
While banks celebrate the fact that not providing for the loans will help their bottomlines, hapless depositors are in shock. Worse still, the company has selectively paid a few investors, especially those who had invested through agents who were large fund mobilisers. Media reports also indicate that the RBI breather has followed the Jaypee group’s effort to cut it massive outstanding debt of Rs75,000 crore and its intention to hire experts to restructure its business. Jaiprakash Associates alone has a debt of Rs21,731 crore, according to a Credit Suisse report.
As a proportion of its outstanding, the FD component of Jaiprakash’s debt is bound to be really small and it would be a smart move, reputation-wise, if the company decided to pay them back. A little nudge from the ministry of corporate affairs (MCA) would have made a difference; but it has shown no interest. SD Israni, a well-known lawyer and company secretary and columnist, however, offers an interesting perspective. He says that although the Companies Act, 2013 had not included any provision to punish defaulting companies and their officials, the National Democratic Alliance (NDA) has, in fact, made amends. Section 76A, was inserted into the Companies Act on 29 May 2015 providing imposition of heavy fines and imprisonment for defaults. However, there is a catch. Mr Israni points out that the provision remains a paper tiger because the tribunal that can exercise the power has yet to be constituted and the CLB (company law board) cannot exercise these powers.
Abhay Datar, consumer activist and former banker, points out that Section 76(1) requires companies to create a charge on fixed assets equivalent to the amount of FDs raised. Does this mean that FD-holders are secured creditors, he asks. But here, too, he points out that there is no clarity on whether this would be a first charge or a second charge on the assets. When it comes to small depositors, MCA clearly moves at snail’s pace. So what will push the MCA to give teeth to Section 76A and protect depositors? We are still looking for answers. Meanwhile Moneylife continues to advise savers to avoid investing in corporate FDs lured by a slightly higher interest rate and endangering the principal invested.
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