Will whistleblowers’ missives work?
Even as Subrata Roy is working on a 15-day extension to meet the Supreme Court’s condition to release him from jail, a whistleblower has, after many efforts, managed to catch RBI’s attention on the issues at Sahara India Financial Corporation Limited (SIFCL).
This is a residuary non-banking company which is under RBI supervision. SIFCL was barred from accepting any fresh public deposits in June 2008 and asked to repay existing deposits as and when they mature. In 2011, RBI issued a notice warning depositors about Sahara which also said it would not guarantee repayment of deposits by SIFCL or other group entities. A similar warning was issued by the market regulator.
Little information is available in the public domain about SIFCL, except a fact sheet which says that one Mr Madhukar and BM Chaturvedi are independent directors and Om Prakash Srivastava is a whole-time director of the company as of 5 September 2014. This means that Subrata Roy, who was the chairman of SIFCL, has also stepped down and there is no immediate family member on the board. Nobody is designated chairman either.
This means that the two independent directors, Mr Madhukar and Mr Chaturvedi, who are accused by the whistleblower of colluding with various entities to sell off assets belonging to depositors, form a majority on the board. He claims in a letter to RBI that over Rs500 crore had already been diverted until September this year. The whistleblower also alleges that the two independent directors have been improperly appointed without seeking prior approval from RBI.
Who are these directors? Mr Madhukar is on the board of several Sahara group companies including its mutual fund and Sahara Infrastructure & Housing Limited (SIHL). More importantly, he is a former whole-time member of the Securities & Exchange Board of India (SEBI) and former chairman of United Bank of India.
Mr Madhukar’s faith in Sahara and loyalty to the pariwar seems unshakable, despite all the allegations against the group. He has stayed on, even when another loyalist, Amitav Ghosh, a controversial former deputy governor of RBI, stepped down as independent director on the SIHL board in April 2013 (well after the path-breaking Supreme Court order asking two Sahara group companies to refund Rs25,000 crore raised through hybrid convertible bonds without SEBI approval). Mr Madhukar stepped in to replace by Mr Ghosh on that board.
On 20th August, RBI’s Kanpur office wrote to the whistleblower that the “two issues flagged by you are being examined by our Central Office at Mumbai.” It remains to be seen if RBI will act in time or take shelter behind a long-drawn ‘examination’ of issues. The whistleblower’s emails seem to suggest that nothing has changed at Sahara pariwar.
As for RBI, the stringent action by the Supreme Court has apparently not made this regulator more vigilant about the goings on at this controversial group.
Narendra Modi set twitter records
Prime minister (PM) Narendra Modi is now acknowledged as a master communicator.
His massive electoral victory was a powerful and carefully choreographed multi-dimensional effort, but his big initial breakthrough was in bypassing a hostile mainstream media and reaching out to people directly through social media.
The PM is now using the very same tools to win friends and followers globally with spectacular results, so much so that his tweets to heads of State or the people of Japan (in Japanese) are rewriting the rule book for diplomacy.
After his 100 days in office, Twitter put out a blog post noting some of the new records set by Mr Modi. It says, @narendramodi is the second most followed politician in the world after US President Barak Obama on Twitter. Mr Modi’s election victory tweet, “India has won” (in Hindi and English) is the most re-tweeted tweet (70,620 times) of all times from India.
Today, following @narendramodi and @PMOIndia has become a necessity for diplomats, journalists, companies and policy-makers, since Twitter remains the primary communication tool of India’s prime minister. Given India’s population and the continuous accretion to the number of people acquiring smart phones, mobile connectivity and access to social media, it is only a matter of time before Narendra Modi becomes the most followed politician in the world.
Will it stop wilful default this time?
The notification of the Reserve Bank of India (RBI)—that individuals and companies who fail to honour guarantees provided to wilful defaulters can also be charged with ‘wilful default’—is welcome and long overdue. Especially since the notification says that the ‘group concept’ will come into play when persons, or entities, do not honour guarantees to companies within a group. This is a huge step forward. For the 30 years that we have been reporting on business and finance, there has been endless debate about applying the ‘group concept’ to bad loans, especially when there is deliberate mismanagement of companies in a group. After all, corporates grow when new entities in a group (sister companies and subsidiaries) piggy-back on the parent’s goodwill to raise funds.
But RBI has also said that the new norms would apply prospectively; this means that all the games companies played in the past will have no consequences. In India, corporate guarantees, including personal guarantees of well-known industrialists, had a magical way of disappearing from loan conditions after fund-raising needs were met, or the going got tough. Some of the most respected corporate groups in India have used this trick to evade responsibility for loss-making entities.
The change in loan conditions could not have happened without the active collusion of lenders which means that RBI’s new norms will also work only if the regulator puts in place a system to monitor crucial changes in loan conditions. Vijay Mallya, recently declared a wilful defaulter by United Bank of India (UBI) in connection with Kingfisher Airlines, also escapes the new provisions. While most industrialists used to keep room to wiggle out of the personal guarantee, the flamboyant Mr Mallya wanted to be different. He went to court to fight for the right to pay himself and UB Holdings a fat fee for the loan guarantees provided to Kingfisher. It is a mystery why lenders are still fighting shy to invoke that guarantee.
RBI governor, Dr Raghuram Rajan, recently said that the “wilful-defaulter tag is a powerful weapon in the hands of creditors for resolving distressed assets.” Indeed, it is; but a weapon is powerful only if used correctly and effectively.
One recalls that RBI, bankers and government officials were just as gung-ho about the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) 2002 which was touted as the ultimate statute to end the bad loan problem by giving banks a powerful recovery mechanism.
Strangely, RBI has never been called to explain why the monumental failure of SARFAESI was not anticipated or how just 50 corporates have run up a combined default of about Rs40,000 crore under its watch. If 33 debt recovery tribunals (DRTs) under SARFAESI failed to deliver (as of March 2012, there were 67,000 cases involving over Rs1,36,000 crore pending before the DRTs), will the new norms make a difference? After all, companies will still misuse the judicial system to delay any recovery action.