Should the government accept or not accept Vijay Mallya's latest offer of settlement with the banks. This issue is being hotly debated after Mallya's recent change of heart.
A consortium of 17 banks, led by the State Bank of India (SBI), had sanctioned loans of Rs5,500 crore over a decade back to Mallya's now defunct Kingfisher Airlines. The total amount owed to the banks has now swollen to Rs9,000 crore including interest.
The liquor baron fled the country in March 2016. He has been living in London since then. Despite issue of a number of summons, he has failed to appear before various law enforcement agencies for trial in various related cases.
Yet on 22 June 2018, he approached the Karnataka High Court to allow him and his group companies to sell their assets under judicial supervision and repay creditors, including the state-run banks. On offer are assets of almost Rs14,000 crore for this purpose.
Sudden change of heart!
A number of factors could have led to this sudden change of Mallya's heart.
One, the Indian government has been mounting relentless pressure for his extradition from UK. On 11 July 2018, the Westminster Magistrates' Court in London, will decide the date for the final verdict.
Two, in May 2018, he lost a lawsuit filed by 13 Indian banks in the UK High Court seeking to collect from him more than $1.55 billion.
Three, on 27 May 2018, the Indian government had passed the Fugitive Economic Offenders Ordinance. The same empowers the law enforcing agencies powers to attach and confiscate the proceeds of crime and properties of economic offenders like bank defaulters or bank fraudsters fleeing the country.
Clearly, the legal options and time were running out for Mallya. He has merely offered what the government could have achieved by the Ordinance. Does Mallya expect to be purged of all civil and criminal actions because of this benevolence. Alas, a recent judgement of the Supreme Court of India may come in the way.
Supreme Court judgement
A landmark judgement was delivered on 4 October 2017 by a three member bench of the SC. Briefly, it ruled that financial manipulation is predominantly a criminal offence, it creates a hazard in the financial interest of the society, the gravity of the offence creates a dent in the economic spine of the nation and that such offences cannot be compounded.
To appreciate its significance, it will be in order to first look at some of the basic facts of the case in respect of which the said judgement was passed. About 12 plots of land measuring 32,696 sq ft were held jointly by six brothers and one sister. The value of all the plots put together was about Rs13.7 crore.
Initially a deal was struck for sale of only one of the plots and a down payment was made. Subsequently, not only was the balance payment refused but the family discovered that the Sale deeds have been registered for not only one but all the 12 plots. Forged Power of Attorneys had been used.
A complaint was made to the police and a first information report (FIR) was lodged. Later a settlement was reached between the parties who also gave affidavits to the Court and requested for quashing of the FIR.
The High Court noted that the case involved extortion, forgery, criminal conspiracy and that all the appellants were a potential threat to society, it was therefore not in the interest of the society to accept the settlement and quash the FIR. The order of the HC was appealed in the Supreme Court.
The SC bench led by Justice Dipak Misra, the current Chief Justice, referred to some earlier cases and then reiterated/made some significant observations while upholding the judgement of the HC. It observed:
(a) “ In economic offences, Court must not only keep in view that money has been paid to the bank which has been defrauded but also the society at large……….If the prosecution against economic offenders are not allowed to continue, the entire community is aggrieved ”,
(b) that any compromise between the victim and the offender in relation to the offences under special statutes like the Prevention of Corruption Act or the offences committed by public servants while working in that capacity, etc. cannot provide for any basis for quashing criminal proceedings involving such offences,
(c) the manner in which Letters of credit were issued and funds were diverted had a foundation in criminal law, it is a social wrong and it has immense societal impact,
(d) “…It is an accepted principle of handling of finance that whenever there is manipulation and cleverly conceived contrivance to avail of these kind of benefits it cannot be regarded as a case having overwhelmingly and predominantly of civil character.
The above strictures came in a case involving less than Rs14 crore. One can very well imagine the Court’s stance in a case of Rs9,000 crore. Mallya contention that recovery of loans is a civil matter is also blown away by the above judgement.
Suggestions for Government
At stake, is recovery not only of Rs9,000 crore but lakhs of crores: some known and much more under the carpet. This case is a litmus test for the government. It must ensure that it does not miss the woods for the trees. The least it should do is the following:
Firstly, the government should ensure to recover the tax payers money. It may do so either by accepting the settlement or thru the Fugitive Economic Offenders Ordinance. In all probability, it will be the latter. Mallya has alluded to the haircuts in a number of cases settled under the Insolvency and Bankruptcy Code and is unlikely to pay in full, if at all. The government should ensure full recovery.
Secondly, should the Karnataka High Court accede to his request, the government must make it clear that it will not withdraw the criminal cases filed against Mallya. Given the above SC judgement, it has no choice.
Thirdly, not only Mallya but the bankers and former Kingfisher executives who aided and abetted the fraud wilfully must be tried expeditiously by the Court and sentenced to deterrent punishment to set an example.
Under no circumstances, Mallya and others who are found guilty should be allowed to settle and get away. The common excuse, "Law will take its own course", if used, will undermine government's conviction and credibility. It will only underline that the Rich and powerful can make a mockery of the Rule of Law and set a poor example.
Such a scenario is very likely once the media pressure is off. It must be avoided at all costs. Does anyone remember what happened to the bank chairman who was caught two years back accepting bribe of Rs50 lakh?
Author’s Disclaimer: The article is based on the stand taken by the government and banks and is not intended to adjudge anyone guilty. The focus is on the larger issues involved in such cases.
(Sarvesh Mathur is a senior financial professional, who has earlier worked as CFO of Tata Telecom Ltd, and Pricewaterhousecoopers (PwC India).)