In a development signalling increasing woes for Vijay Mallya, the state-run United Bank of India has declared the debt-ridden Kingfisher Airlines’ promoter and three directors of the company—Subhash R Gupte, Ravi Nedungadi and Anil Kumar Ganguly—as wilful defaulters. Being a 'wilful defaulter' means unhappy consequences for Mallya which not only puts restriction on further credit channels but also shuts the door on any new ventures. So, what does it mean and under what circumstances do banks resort to something like this?
According to the Reserve Bank’s ‘Master Circular on Wilful Defaulters’ dated July 1, 2014 (as amended from time to time), a ‘wilful default’ is deemed to have occurred in any of the following four circumstances:
When a company/individual defaults in meeting its/his/her payment/repayment obligations to the lender even when it/he/she has the capacity to honour the said obligations.
The funds have not been not used for the specific purposes for which they have been availed for, but diverted for other purposes.
When the funds have been siphoned off or not used for the specific purpose for which finance was availed of.
When the asset bought by the lenders funds has been sold off without the knowledge of the bank/lender.
"Essentially, the identification of a ‘wilful default’ has to be made on the basis of the track record of the person in question and the default to be categorised as wilful must be intentional, deliberate and calculated," said Nishant K Singh, Partner at IndusLaw. The banks and financial institutions are required to file the data with respect to the wilful defaulters with RBI in accordance with the provisions of the master circular.
The penal measures are applicable to a defaulter with an outstanding balance of Rs 25 lakh or more. The list of wilful defaulters is forwarded by RBI to SEBI and CIBIL to prevent their access to capital markets. "This is not the first time in India that banks have declared a person as a wilful defaulter but undoubtedly this is one of the significant cases involving big names," said Lalit Kumar, Partner at JSA Associates.
A 'wilful defaulter' tag for Mallya would mean that no additional finances could be granted to him by any bank or financial institution. He would be debarred from accessing institutional finance from the scheduled commercial banks, development financial institutions, government-owned NBFCs, investment institutions, etc. Besides, he cannot float a new venture for five years from the date the name is published in the list of wilful defaulters by the RBI. Banks can also initiate legal process, which can include criminal proceedings if necessary, against the borrowers/guarantors and foreclosure of recovery of dues.
Not only this, the banks and institutions have been given the right to change the management of wilfully defaulting company. "Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the wilfully defaulting borrower unit," the circular said. Such measures only indicate that this is a list which Mallya would certainly not like to be on.
(Edited by Joby Puthuparampil Johnson)