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Cross-Border Loan Default

In a globally interconnected economy, commercial activities and financial transactions frequently surpass regional boundaries. Consequently, the task of collecting debts across international boundaries has become a more frequent and difficult obstacle for both individuals and businesses.

Similarly, one of India's major economy-hampered corporate scams making it the perfect example of Cross-border wilful loan default is the Vijay Mallya Scam. Vijay Mallya, the proprietor of the Kingfisher brand and an IPL team (RCB), and a former member of parliament (Rajya Sabha), shocked everyone when his enormous debt of 9,000 crores became widely known. He had outstanding debts to 17 Indian banks and faced allegations of money laundering and fraud.

The corporation, renowned for its globally popular brand Kingfisher beer, is no longer under his ownership, and his wealth has significantly diminished.

He has limited success in his various other ventures, including an airline company that has been inactive for years now and owes over Rs 9,000 crore to multiple banks.

Kingfisher Airlines was forced to cease operations in 2012 due to its inability to pay employee salaries and its rapidly increasing debt. The airline is currently under investigation for alleged misappropriation of funds and financial errors.

Vijay Mallya is under investigation for money laundering and wilful default in a case initiated by the Enforcement Directorate. The case was registered based on a First Information Report filed by the CBI. The investigation is related to the loans given to Kingfisher Airline, which were reportedly extended in violation of credit limit regulations.

The corporation failed to pay its employees or exhausted its financial resources. The company had to cease its activity in 2012. Vijay Mallya was compelled by United Breweries to step down from his position as chairman of United Spirits, and in return, he was offered a severance payment of $75 million. However, the Indian courts intervened and prevented this payment from being made.

SBI and other banks initiated legal proceedings against Vijay Mallya, however, before any huge penalties were taken, he fled to the United Kingdom.

Given the increasing debts and possible arrest, Vijay Mallya decided to leave the country, he was labelled as an economic fugitive offender and legal action was initiated to capture him and bring him back to India for trial. The Supreme Court in 2017 found him guilty of contempt of court. This decision was made after a group of banks filed multiple proceedings against him for his failure to clear his debts.

After his escape, India submitted a request for his extradition. The London magistrate court has issued an extradition order to India, granting him a 14-day window to challenge the ruling. Before that, in 2017, he obtained bail in an extradition warrant issued by Scotland Yard. After that, his extradition has been revolving in circles without a definitive judgment. In 2019, the Mumbai High Court officially designated him as a Fugitive Economic Offender (FEO), making him the first business in Indian history to receive this designation.

Sarfaesi Act

This legislation allowed the loan providers to recover their principal amount and interest charges by liquidating the property and assets of the borrower. In this particular instance, the lenders at many banks were authorised to recoup the original sum and accrued interest by liquidating the assets and properties belonging to Vijay Mallya's company, Kingfisher.

The auction was conducted electronically, but the assets could not be recovered as there were no buyers. Due to the high pricing, the lenders were unable to locate any potential buyers for the company's assets or properties, increasing the already suffering real estate market. Additionally, there was a settlement proposed by Vijay Mallya, in which he proposed a settlement of 4000 crores to the banks, but his proposal was rejected as the banks were demanding a minimum of 4900 crores as the main payment, in addition to demanding interest.

Criminal Misconduct And Money Laundering

A public worker who engages in criminal misconduct to obtain financial benefits or valuable items by exploiting their influential position and abusing their powers would be legally responsible under Section 13 of The Prevention of Corruption Act, 1988. The individual will face a potential penalty of up to seven years of imprisonment, a monetary fine, or a combination of both. Vijay Mallya, in the current scenario, leveraged his status as a Member of Parliament (Rajya Sabha) to secure loans from banks, despite being declared bankrupt by multiple banks. This was due to his influential nature and abused his power to acquire financial benefits, resulting in his imprisonment under this specific Section.

In addition, he was prosecuted under Sections 3 and 4 of the Prevention of Money Laundering Act, 2002 for the fraud of money. Section 4 stipulates the penalty for the offence, which is a sentence of harsh imprisonment ranging from 3 to 7 years, as well as a fine.

Wilful Defaulters

A wilful default would be deemed to have occurred if any of the following events is noted:
  1. The unit has defaulted in meeting its payment/repayment obligations to the lender even when it can honour the said obligations.
  2. The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed but has diverted the funds for other purposes.
  3. The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
  4. The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it to secure a term loan without the knowledge of the bank/lender.[1]
The Reserve Bank of India (RBI) has implemented stricter regulations on individuals or entities who intentionally default on their financial obligations, known as "wilful defaulters." These defaulters are identified through a specific procedure outlined by the RBI. When the RBI makes such a notification, its regulatory system essentially prevents a deliberate defaulter from obtaining additional bank loans.

Identification Of Wilful Defaulters

  • An investigation should be conducted by a Committee led by an Executive Director and comprising two additional senior officers of the rank of General Manager/Deputy General Manager to examine the deliberate failure of the borrowing firm and its promoter/whole-time director at the specific period.
  • The Committee should determine if a deliberate act of noncompliance has taken place, it will send a formal notice to the borrower in question as well as the promoter/whole-time director, requesting their explanations. After reviewing their responses, the Committee will issue an official order stating the occurrence of the deliberate default and providing the rationale behind it. If the Committee deems it necessary, the borrower and the promoter/whole-time director shall be granted a chance for a personal hearing.
  • The Committee's Order should undergo a review by another Committee led by the Chairman/CEO and MD. This reviewing Committee should also include two independent directors of the Bank. The Order will only be considered final once it is confirmed by the aforementioned Review Committee.

Criminal Action Against Wilful Defaulters

The Reserve Bank analysed the matters concerning the prevention of intentional defaults in collaboration with the Standing Technical Advisory Committee on Financial Regulation, considering the recommendations of the Joint Parliamentary Committee (JPC). Specifically, the focus was on the necessity of initiating criminal proceedings against the borrowers in question.
  • It is crucial to clearly define the offences of breach of trust or cheating that occur in the context of loans under the current laws that regulate banks. These laws should include provisions for criminal prosecution in all circumstances where borrowers intentionally shift funds with dishonest intentions.
  • Banks must diligently oversee the utilisation of money and acquire certificates from borrowers to verify that the funds have been used for their intended purpose.
  • Providing the wrong certification should invite criminal action against the borrower.
Recently, it has become apparent that there is a discrepancy between the Reserve Bank of India's guidelines on wilful defaulters and the ability of these defaulters to obtain funding from the equity capital markets under the regulations set by the Securities and Exchange Board of India (SEBI).

Allegations have arisen suggesting that Vijay Mallya obtained loans with the sole intention of benefiting his personal interests.

These claims assert that the debts acquired by Vijay Mallya were illegally transferred abroad to different jurisdictions with beneficial tax conditions. This was achieved with the help of shell companies. Mallya transferred the loans acquired from banks to these shell businesses, employing phoney directors for this specific purpose.

These companies were inactive and lacked an independent source of revenue. The appointed directors would execute the instructions given by the UB group under the direction of Mallya. The companies were situated in seven nations, namely the United Kingdom, the USA, Ireland, and France.

Unique Identity Of Borrowers (DIN)

The Ministry of Corporate Affairs implemented the Director Identification Number (DIN) through the inclusion of Sections 266A to 266G to the Companies (Amendment) Act, 2006. To prevent any wrong denial of credit facilities to individuals whose names may resemble those of directors listed as wilful defaulters, banks and financial institutions have been instructed to include the Director Identification Number (DIN) as a mandatory field in the data they submit to the Reserve Bank of India.

During the credit appraisal process, banks should verify if any of the directors of the companies are listed as defaulters or wilful defaulters, using their DIN/PAN as a reference.

Genuine Defaulters

A key consequence of loan default is a significant drop in the borrower's credit score.

Failure to make the (EMI) payment on time will lead to a decrease in the credit score and have adverse effects on the borrower's ability to borrow in the future, making it difficult to obtain loans readily.

Each borrower is entitled to a predetermined quantity of reminders and notices from the lending institution. If there is a delay in the EMI payment, reminders are promptly dispatched to address the overdue payments.

If the borrower ignores the reminders and notices and fails to pay the EMI, the lender may take further action, such as classifying the borrower as a Non-performing asset or NPA. This will prohibit the borrower from accessing any form of loan or credit in the future.

If the borrower fails to clear the loan after receiving letters and reminders, lenders have the authority to impose penalties or initiate legal proceedings.

A delayed payment of a few days can still be corrected, but if the payment is outstanding for over a month or two, it might lead to significant repercussions.

If collateral has been provided, it might be utilised to recover the debt by taking it.

According to the order from the RBI, the borrower's rights would never be compromised.

Defaulting on a loan repayment is not a criminal offence, but lenders have the option to seek recourse in a civil court to reclaim the outstanding amount.

When a loan remains unpaid for a period over 180 days, the lender is legally permitted to initiate legal proceedings against the borrower by Section 138 of the Negotiable Instruments Act of 1881.

Occasionally, borrowers may encounter unfortunate circumstances that affect their ability to repay their debt. Instances of this nature will not be deemed as 'cheating', but rather the lender may work with the borrower by altering the repayment conditions in order to guarantee the payback of the loan.

Nevertheless, if it is established that the borrower's motive was wrongful at the moment of entering into the loan agreement, legal action might be taken against the individual for committing fraud as explained above in wilful defaulters.

In conclusion, the Vijay Mallya cross-border loan default case highlights the difficulties presented by global financial transactions and the complicated procedures involved in recovering debts across national boundaries. Vijay Mallya's deliberate failure to repay an enormous debt of 9,000 crores to 17 Indian banks, together with accusations of unlawfully moving money and engaging in fraudulent activities, has resulted in an extensive legal battle with serious consequences.

Vijay Mallya is being legally pursued for alleged violations of the Prevention of Corruption Act, 1988, and the Prevention of Money Laundering Act, 2002. This case also draws attention to the case of wilful defaulters, as defined by the Reserve Bank of India, focusing upon the necessity for strict actions against those who intentionally default on their obligations.

The legal proceedings, including India's extradition efforts and the complex nature of the SARFAESI Act, demonstrate the extensive mechanisms associated with addressing financial fraud. This case highlights the significance of global cooperation in handling complex instances of wilful default.

Moreover, differences between the RBI's guidelines on wilful defaulters and SEBI's rules have shown possible gaps that require attention in order to prevent individuals like Vijay Mallya from profiting at the expense of banks.

The introduction of the Director Identification Number (DIN) and the differentiation between genuine defaulters and wilful defaulters demonstrate a growing framework for regulation designed to improve transparency in the banking sector.

The Vijay Mallya case highlights the need to enhance and strengthen banking laws in order to effectively address and prevent cross-border loan defaults. This is essential to ensure that individuals or businesses involved in financial fraud are held responsible, regardless of their location.

  1. RBI/2014-15/73
Written By: Rahul Gour

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