In India - Companies Become Sick
But NOT Their Promotors !!
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When Sick Industrial Companies Act was enacted in 1985, some questions were
repeatedly asked in CAIIB examinations at that time. Some of them were:
> What is the definition of a ‘Sick Company’?
> What are the possible causes for a company to become sick?
> What are the measures to be taken to prevent a company from falling sick?
> What are the rehabilitation measures to be taken for making a sick company
> What are the ‘early warning signals’ that can be noticed, in case of a
company that is slowly turning sick?
> What are the recovery mechanisms and tools available to a lending banker
or a group of lenders, in case of a sick company that cannot be
While answering one
such question, I wrote thus: “In
India, Companies become sick, but not their promotors”.
The reasons are only three –
The personal wealth amassed by the promotors in course of time remains untouched
or it keeps growing by leaps and bounds, regardless of the health of the
company/companies they manage. Because their liability is limited to the extent
of the value of shares held by them (as per legal definition), they enjoy legal
person or a group of persons who manage many companies simultaneously are
permitted to continue on the boards of other companies, even after one of their
companies turns sick.
There is no legal disqualification or embargo on a promotor/director of a failed
company to start a fresh venture with public money or with borrowings from banks
and financial institutions.
These are the major lacunae in our system. To add insult to the injury, such
corporate delinquents are rewarded with many more reliefs and concessions in the
form of interest waiver, restructuring of term loans, funding of unpaid interest
on working capital finance through FITL, reduction of margin, increase in the
age of book debts eligible for finance, reduction/waiver of other charges like
processing charges, BG/LC Commission, relaxation of collateral security norms
Due to stiff competition from other market players, banks are nowadays very
slack and not particular about the extent of collateral security to be taken
from big borrowers. It is ironical while small borrowers
are harassed with regard to third party guarantees and collateral securities,
the same banks cannot be equally harsh or insistent when it comes to lending to
powerful individuals and corporates.
From my own experience, I wish to quote this. I was scolded and insulted, when
I had mentioned in one large advance appraisal that the collateral security
extended was ‘Nil’ or ‘Negligible’. I was given lessons on the market
realities and the type of competition we were facing. A
question was posed to me: “If you are so rigid, how can our credit portfolio
will ever grow?”. So, the message was very loud and clear. As I did not
budge, I was abruptly transferred.
have seen some bizarre and funny things also in this respect. They require a
mention here, for the benefit of my fellow bankers.
(a) While extending
finance to a company, a bank readily accepted the promotors’ equity shares
in the same company as collateral security!
(b) While arriving at the Net Worth of a company, usually the
investments made in the subsidiary or associate companies are excluded.
But, many bankers prefer not to do that, so as to favour some companies.
disputed claims/liabilities or huge contingency liabilities not provided for
are deducted while arriving at the Net Worth. But in practice, this is not
followed. This is deliberately done with a view to favour those companies.
(d) In another case, a company showed profit, by showing profit on
(fictitious) sale of assets, another by transfer from general reserves to
Profit & Loss Account and yet another by not providing for depreciation as
per law, for many years in a row.
(e) In another
classic case, a very big company having billions of Rupees as yearly
turnover did not show the Closing Stock of the previous year as the Opening
Stock of the current year. They showed inflated opening stock for the
current year. Thus they were able to boost the profit figures very
cleverly. (In my Excel Sheet, I have a cross check for this).
(f) Many companies, I have noticed, prepare two sets of financial
statements – one for filing with Ministry of Corporate Affairs (ROC) and
another for the lenders. In some cases, a third set is also prepared for
income tax purposes. It is a well known secret in the banking circles. The
cruel joke here is all the three sets are certified and authenticated by
qualified chartered accountants (different people/firms). Then, what kind
of credibility these financial statements will have?
is pertinent to recall here the case of infamous Satyam Computer Services of
(g) When a banker expressed his dissatisfaction regarding the financial
health of a company who came to him with a credit proposal, the company
without any second thought offered to replace the audited and publishedbalance sheet with a fresh one, to suit the needs and expectations of
(h) Many companies do not hesitate to throw lavish
parties to the decision-makers in a bank to achieve their ends. I wish to
quote one relevant incident. The CMD of a bank on the eve of his retirement
visited metro city and a brand new Hyundai car was gifted to him by
the local diamond merchants (who enjoyed credit facilities with the bank).
Similarly, when the Zonal Manager in the metro city retired, his wife
was presented a Diamond Necklace worth a few lakhs of Rupee.
(i) When a lower
level officer/manager points out the negative features in a credit proposal,
in which some influential persons are interested, that officer/manager
is transferred and in his place, a more pliable person is brought in.
(j) If the name of some directors of a company/firm figure in the RBI’s
‘Caution List’ or ‘Wilful Defaulters’ List’, the bankers themselves suggest
to those persons to execute an ‘Indemnity Bond’ declaring that they are not
the ones figuring in such negative list.
(k) A person who has
cheated a bank will first change his location and then start an altogether
different activity and approach the bank/s at the new place for finance.
(l) In another instance, I saw the same person having two different surnames
– one in his latest Income Tax statements and the other in his loan
application submitted to the bankers. Needless to say, his account became
NPA in course of time (It was processed by my predecessor).
(m) In some states
in India, it is quite common for the women acquiring a totally new name
after their marriage (many a time much against their wish). This becomes
convenient for their husbands to utilize their newly acquired identity to
cheat the banks. This is made easier, when these women relocate to a far
off place, after their marriage.
(n) Banks simply
queue up to finance one reputed industrial group company, regardless of its
merits with regard to technical feasibility, economic viability and
compliance with the government policies and the individual banks’ own credit
policies and priorities.
(o) In case of a
small proposal, if the long term solvency ratio exceeds 6, it is liable for
rejection. But, in one very large advance, this ratio (TOL/TNW) was at 46
and yet, the proposal went up to the board/MC and the limits were eventually
sanctioned, throwing all the established norms to the wind.
(p) When a proposal
passes through several stages/offices, even in case of failure of the
advance, no one is touched. But can such a guarantee be given for limits
sanctioned by the branch managers within their delegated powers? Will not
they be tormented to the hilt?
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Many more unethical practices and accounting frauds are perpetrated with the
help of chartered accountants, tax authorities and the lending institutions.
When a big advance fails, the losses have to be borne by
everybody in a bank. Stringent austerity measures are imposed. The post
Harshad Mehta scam and Bhupen Dalal scam period may be recalled here. But,
these austerity measures are only for the small people.
There is no scrutiny from an outside agency like
CAG for the amount spent on board meeting expenses, hospitality to large
clients, foreign jaunts of top management officials etc.
By curtailing small legitimate expenses at the field level, the top executives
continue to enjoy their luxurious way of life at the cost of the bank.
If some serious action from RBI or Ministry of Finance is
contemplated, these people put up their papers in advance, citing ill health and
quit. Thus they escape from the punishment they deserve. In many cases,
these persons after spoiling the financial health of one bank, manage to join
the board of another company or government department with added privileges and
perks and enhanced social status.
long as these things happen, only the poor gullible masses and the bank
employees have to bear the brunt of any big loan losses.
prevent such undesirable events, I suggest these –
(1) Banks must be compelled to disclose in their balance sheets and
annual reports about the losses and sacrifices suffered beyond a certain
amount (say, Rupees One crore in one particular account or a group of
related accounts), on account of restructuring, one time settlement under
compromise and write off.
(2) Individual cases reported as above must be investigated by an agency
like CAG so as to find any possible link between the beneficiaries (!) and
the decision makers.
(3)These balance sheet disclosures and the investigation report must be
covered under ‘Right to Information Act’.
(4) The beneficiaries of the banks’ generosity in this connection must be
legally disqualified to approach the general public or any other banker for
the rest of their life.
(5) By extension of the same logic, their close relatives also may be barred
from raising funds from the general public and the financial institutions
for any purpose whatsoever.
have a few words of caution to my fellow bankers.
(i) Do not obey the
unlawful instructions of your bosses, fearing retribution.
(ii) I always tell my colleagues and sub-ordinates: deviation from the
procedures is one thing and violation of law is another. For the latter,
there is no excuse at all.
you have many more years of service left in your bank, whereas your top
brass will continue in your bank for only a few years.
(iv) There is nothing wrong or shameful, if you yourself apply for a
transfer from a sensitive place or position, before you are transferred to a
hard-living area, if such a situation develops.
Unfortunately, an honest officer like Ashok Khemka,
who received 41 transfers in his 21 years of service, is not appreciated by
his own colleagues, leave alone the society. Such person is branded as one
who does not know the ‘knack of adjustment’.
Most Important: “Whatever you do
and wherever you are, never lose your temper. Always be cool. Do not
reveal all your future plans to everyone. All cannot be trusted. Be very
selective in your consultation and seeking proper guidance in critical
matters, at the defining moments of your life”.
There is a
price to be paid for truthfulness. But, ultimately, the truth alone
The readers of the
article must have noticed that this is a product of hard core banker and based
on practical experience. The author has served for more than
30 years in PSU banks and is well qualified. The readers are advised to
keep the above in mind and follow these as per needs and practical situations
faced by them.
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