Lenders' liability is an evolving law even in western nations. In India, we have but the platitudinous RBI guidelines adopted by banks to show. The BharatPe-Kotak case must thus be understood in this light as things stand.
In October 2021, BharatPe cofounder Grover sent a legal notice to Kotak Mahindra Bank seeking damages of Rs 500 crore against a notional loss that Grover and his wife had allegedly incurred because of the bank not providing them with funds to subscribe to the initial public offer (IPO) of the beauty cosmetic firm Nykaa. According to the notice, Grover and his wife had wanted to apply for the shares of Nykaa, worth Rs 250 crore each in the IPO on 28 October 2021, when the offer had opened for subscription. Grover alleged that on the same day there was an assurance from Kotak Mahindra Bank that all formalities for his funding were done. The gravamen of Grover is later on bank had refused to comply with its assurances on the pretext that it had decided not to finance the Nykaa IPO due to erratic movements in foreign institutional investors (sic) and very high lending rates.
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IPO financing of high-net-worth individuals in India is typically done by NBFCs with most of them being promoted by broking houses. Incidentally the RBI had around the same time tightened the lending limit to Rs 1 crore per investor. Apart from the risks to the lender consisting in the listing gains not materialising and the margin money proving inadequate, the BharatPe incident adds a new dimension to the whole business of lending specially the lender’s liability.
World over, one has been witnessing lenders launching legal proceedings against the borrowers for various defaults mainly non-repayment but winds of change have been blowing in the direction of consumer protection with inexorable force in the western nations. Accordingly, borrowers’ rights and correspondingly lenders’ liabilities have come to be recognised. The easiest wiggle room afforded to the lender is the ‘parol evidence rule’. Shorn of legalese, it means the oral exchanges with the officers and staff of the lender would not be binding on the lender unless they form part of the loan agreement. This of course is trite and only fair to the lender and thus may not exactly amount to wiggling out.
In any case, the Indian law on the subject is not specific or substantial. In India, the SARFAESI Act. was enacted in 2002. On the basis of the recommendations of the working group on Lenders’ Liability Laws constituted by the Government of India, Reserve Bank of India (RBI) had finalised a set of codes of conduct called ‘the Fair Practice Code for Lenders’ and advised banks to adopt the guidelines. All the banks have formulated their own set of Fair Practice Codes as per the guidelines and implemented it from 1st November, 2003. But the guidelines appear platitudinous and goody-goody without holding out any substantial relief for the borrowers from the lender’s highhandedness or irresponsible behaviour giving rise to losses.
Kotak Mahindra Bank says it has replied to the notice and taking other appropriate legal steps but should the push come to shove, it could escalate into an interesting legal battle. It is the standard practice for NBFCs to lend for a maximum of a week to ten days i.e., disbursing the loan on the closing day of subscription and asking for its repayment on the date of listing. NBFCs typically issue short duration commercial paper (CP) and dish out the proceeds by way of IPO financing to HNIs pocketing the spread.
Looks like BharatPe was not in favour of issuing CPs but taking a loan from Kotak instead. BTW it seems to be ambiguous when it says it wanted Kotak loans for the Grover couple to invest in the Nykaa IPO but in the same breath asks Kotak to compensate its own borrowers (potential) for the opportunity lost in booking listing gains. So, whose loss exactly is BharatPe bemoaning and trying to recover from Kotak?
The case throws up a lot of interesting issues. Will the parol evidence rule that is eminently sensible hold sway in India and bail out Kotak assuming there was no formal loan agreement to pin the bank down? Can a potential industrial borrower sue the potential lender for damages for opportunity loss of business profits? Can a wannabe houseowner sue a home loan company for rent he has to pay on denial of home loan or will the Courts take a more charitable view of lender’s conduct especially in the light of availability of alternative sources of loan in a competitive market? Will Courts insist on an ironclad clause to these effects i.e., opportunity losses in various circumstances in the loan agreement? In IPO financing, the objective of the loan is implied—to invest it for listing gains. But a good legal ecosystem leaves nothing to surmises and assumptions. It would be so much better for the government to legislate on lenders’ liabilities in so many words instead of leaving it to a woolly set of guidelines.
— S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.
Read his other columns here
(Edited by : Ajay Vaishnav)
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