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For banks, promoter guarantees could well be a mirage

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What is required is a sound vanguard action—thorough and dispassionate appraisal of loan applications, timely collection of interest and installments of principal and recalling the loan at the earliest opportunity in case of persistent and wilful default.

For banks, promoter guarantees could well be a mirage
Epic has it that Hanumanji had to be reminded of his prowess and powers from time to time before he galvanised into action. Our banks too seem to be displaying the same proclivity, witness the frenetic rearguard action initiated by them post-Supreme Court verdict of last month empowering them to enforce promoters’ guarantees even if a company itself is declared bankrupt under the Insolvency and Bankruptcy Code (IBC).
Reports say they are now asking advisors and valuers to size up the value of the assets of the promoters who have given personal guarantees for their companies’ loans.
What it proves is that hitherto they were not taking such guarantees seriously. Home loan borrowers of yesteryears would recall with trepidation how embarrassing and difficult it was for them to convince their friends and relatives to furnish a guarantee to the home loan company. The guarantors were asked to furnish their salary certificate or income tax returns besides a declaration that they are not simultaneously guarantors for other loans.
Mercifully they have been spared of this burden with the regulators realising that such a guarantee was needless in the face of mortgage. Banks instead ought to have displayed such meticulousness with respect to promoters’ guarantees. It now turns out that they just obtained a perfunctory guarantee from them sans serious and meticulous valuation of their assets in the smug and ostrich-like impression that either such guarantees, in any case, are mere formalities or no harm would befall them. Be that as it may.
Are banks clutching at the straws? Have they swung into action much later in the day? Remember the Modi government brought in the Fugitives Economic Offenders Act, 2018 realising that promoters, as well as economic offenders, often decamped to more salubrious climes (where they would be away from the long arms of the Indian law) after having salted away their ill-gotten money through money-laundering, over-invoicing of imports etc to secret bank accounts abroad.
It also implemented around the same time the Prohibition of Benami Properties Act with stiff penalties and empowerment of CBDT to be the nodal agency for seizing such properties. Indeed the institution of benami and stashing away of wealth abroad have been frustrating the government’s efforts in bringing the defaulters and crooks to justice. Investments through labyrinthine and multi-layered subsidiaries and associates in a manner of a wheel within wheels has been another stumbling block for the law-enforcing and investigating agencies in laying their hands on investments in the form of shares in their group companies by promoters. The problem got acute when the trail led to secretive foreign destinations.
In the event, our banks and financial institutions have to reorient their promoter-guarantee policy so that it really stings and bites. Promoters’ assets of course must be valued and taken into account but in addition, they must also be asked to lay on the table all assets owned by them through conduits like investment companies and subsidiaries. Fresh investments through them made by the guarantor-promoter must also be constantly updated. Otherwise investigating agencies would be stymied in buttonholing the promoters’ assets. Ditto for investments made in the names of near and dear ones.
The point is the recent Supreme Court verdict upholding the 2019 amendment to IBC empowering secured creditors to enforce the personal guarantees of promoters of insolvent companies might have awakened banks and financial institutions to the immense potential of guarantees but such guarantees might prove to be not worth the papers they are written on unless they are couched in a foolproof manner and enforced on the happening of default instead of allowing things to fester and acting when the horses have bolted from the stables. And if the promoter is a parent company, foolproof guarantees must be obtained both from the parent company and its promoter.
As said earlier, enforcing a guarantee is at best a rearguard action. What is required is a sound vanguard action—thorough and dispassionate appraisal of loan applications, timely collection of interest and installments of principal and recalling the loan at the earliest opportunity in case of persistent and wilful default. Otherwise, banks would be condemned to throwing good money after bad, security or no security, guarantee or no guarantee.
—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
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