Can we have an affluent promoter and a sick company? - YES

Finance Minister P. Chidambaram’s reported remark that one cannot have situation of “an affluent promoter and a sick company” was perplexing, to say the least.

Is the Finance Minister trying to goad bankers to read the riot act to reduce NPAs and even breach the ‘limited liability’ principle to recover their dues? The limited liability principle should not be given the go-by. After all, banks not only take collateral but also seek the personal guarantees of promoters before disbursing funds for projects.

If the revival intent has been given up by the promoter, banks should invoke the personal guarantees. It would, however, be imprudent to always expect the promoter to do the bailing out through another group company. Simply put, if one has diversified business interests — say, from salt to software — it would be foolhardy on the part of bankers to expect that none of the companies in the group can be a sick entity. Equally, they should not always expect other companies in the group to stand in for the failed entity.

Personal guarantees

A promoter is a distinct legal person when compared to the promoted company. There is nothing wrong in a promoter being rich and the company turning sick.

It is an altogether different matter if the banks find themselves in a tricky situation where the collateral value falls below the amount of money lent.

Everything boils down to the banks’ capabilities in project appraisal and the ability to ensure sufficient collateral if the account turns non-performing.

But the sad part is that India has always given businesses a long rope and treated them with kid gloves when it comes to recognition of non-performing assets.

As for the current NPA crisis and Chidambaram’s concern, the situation has been exacerbated by the relaxation of forbearance norms in the wake of the global financial crisis. Since 2008, many bad accounts were allowed to be treated as standard assets for a particular period. One can blame this situation on the economic slowdown or on the reckless behaviour of some of the promoters, who divert loans for personal benefit.

NPA rhetoric

Chidambaram’s exhortations can be regarded as ‘NPA rhetoric’ and as an apparent reference to the collapse of Kingfisher Airlines, owned by the flamboyant Vijay Mallya.

It is not right to paint everybody in the business community with the same brush, even if it is true that promoters do look to use shortcuts to make private gains at the cost of public deposits.

Chidambaram’s recent message to bankers asking them not to show leniency to wilful defaulters is indeed welcome, provided he does not go overboard and suggest that it is the latter’s duty to bring in additional capital if their companies run into trouble.

As for sickness, there could be a cure for it. The moot question is whether the system in place can diagnose it early and take corrective action.

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