Some problems of the economy are not easy to understand or analyse in an appropriate and consolidated form. Normally, if we discuss two or more issue together, it may seem irrelevant or not directly related, but if we examine these in an integrated manner, the cloudy picture may convert to a new one and a fresh correlation between two entirely different issues can be drawn. Non-Performing Assets (NPA) and Limited Liability Concept are two such issues in which a close correlation can be identified especially when we examine them in the context of the recent Vijay Mallya episode.
Today, Vijay Mallya, the Ex-Chairperson of Kingfisher Airlines and the biggest willful defaulter with a debt of about Rs.9000 crores, has already left India and settled in another country. The court has already issued a non-bailable warrant against Mallya for diverting 430 crores. But the question is why the law can’t take immediate steps for such an obvious out-in-the-open nonpayer. A warrant was issued a few months back when it was proved that the loan taken by Mallya had been used for purchasing personal property in foreign countries. But could such legal steps not have been taken before? The answer is clear: Kingfisher Airlines was the debtor not Vijay Mallya and a company is a separate entity from its shareholders. All transactions were made through the company. Therefore, it was the company that was liable to pay or suffer the consequences, but neither the shareholders nor the directors or chairperson are liable for it personally. The company has already been declared bankrupt and its assets have been seized but such assets aren’t enough to compensate the banks. A critical question can be raised here – if a company becomes insolvent why are the shareholders, managers, directors or chairperson not liable? The answer to this question is hidden in the concept of limited liability. Before venturing to answer the above question let me offer a brief understanding of the NPA problem facing Indian banks.
For the clear understanding of the layman, Non-Performing Assets refer to loans or advances for which the principal amount (or a part of it) or the amount of interest (or part of it) remains overdue for a period of 90 days or more. Many banking experts are now calling it the big disease that is severely affecting the functioning of banks. Most people don’t know that the losses in the form of NPAs are not only the losses of the banks but also of the citizens of a country and the whole nation, as a major portion of the money lent by the banks, comes from the deposits received from the public and government share. Ultimately the NPAs in public sector banks are compensated by the Government as a result of which the fiscal deficit increases. One of the hidden reason due to which such NPAs are increasing day by day is flaws in certain laws. The major flaw in the present law is that the court of law cannot enforce the director(s) or chairperson to attach their private asset, in case of bankruptcy of a company and as a result, the total debt taken by the company is irrecoverable, and loss will pile up on public finances.
It is known that wilful defaulters are one of the biggest reason behind the increase of such NPAs. Even though the RBI has prescribed certain norms to recognize wilful defaulters in India, but still no strict legal actions could be taken to make recoveries from these wilful defaulters just because of the limited liability. Most of the wilful defaulters are either companies or big business houses or firms. A company which is an association of many persons enjoys many privileges like separate entity concept, perpetual existence, and the division of risk among numerous shareholders and limited liability. Such privileges attract more people to invest their funds in joint stock companies, and as a result, the companies fetch more capital from the public.
The prime advantage of opening a joint stock company, or to convert any firm into a joint stock company, is to enjoy the benefits of limited liability. Such companies were allowed to start by the government to promote industrialization and to create more employment opportunities. Moreover, the concept of limited liability was further encouraged with the development of Limited Liability Partnership (LLP) in the year 2008, which deems the owners of a concern liable only up to a fixed sum, or up to the investment made by the owners, or up to the nominal value of shares held by them whatever may be the amount of total liabilities. In other words, if the outside liabilities increase due to any loss suffered by the concern then the owners are not liable to attach their personal or private assets to pay the debt. A company with a large share capital could raise more debt from banks as in the case of Kingfisher Airlines.
When a part of the Kingfisher Airlines collapses, Mallya was accused of being a “willful defaulter.” He had taken loans from a group of banks in the name of his company and misappropriated the cash. As a result, when Kingfisher became bankrupt, no proper legal actions could be taken immediately because it is the bankruptcy of Kingfisher not the insolvency of the Chairperson, Vijay Mallya.
Most people think that the losses of the banks in the form of Non-Performing Assets (NPAs) are the losses of the banks only. But the people must be aware of the fact that more than 70% of the losses of the banks are written off through the finances provided by the Government of India and these finances are the funds collected in the form of tax from the people. Thus, the finances provided by the Government leads to the fiscal deficit of our nation. Not just Mallya but an amount Rs. 50,000 crore currently stands locked up in the form of NPAs because of the wilful defaulters of India. Companies are clearly taking advantage of this loophole in the law. They are misusing the concept of limited liability and taking loans in the name of the company for personal use. Other defaulting companies like Winsome Diamond & Jewellery Co. Ltd., Electrotherm India Limited, etc. are afloat in the same boat as Kingfisher Airlines.
To safeguard the country against this, few reforms have been made by Security Exchange Board of India (SEBI). Now the director or directors of a company must repay loans within the stipulated time period to continue in the position they hold. However, still many revisions in loan recovery process are required to make a strong credit system in the banking sector. According to Kishore Sansi, the Managing Director of Vijaya Bank and chief operating officer, “Our legal system is old and somewhat complicated. I opine that legal reforms are urgently needed to control the wilful defaulters. The debt recovery tribunals are doing a fine job, but they are handicapped by a number of constraints,” Moreover it is a fact that day by day the number of joint stock companies and limited liability partnership firms are increasing, and it is evident that their demand of loans would also increase. So, can it be possible for the banking sector to provide sufficient finance to the needy or priority sectors without giving prime emphasis to the big business houses? A painful truth that all the people of India must know is that the financial support given by banks to these big defaulting units are irrecoverable now.