Banks, regulators sleeping on the wheel

“Leave it to the market” is the smug refrain of market fundamentalists. On a slightly more serious note, their refrain is a shade less smug “leave it to the wisdom of shareholders.”

The truth is rapacious promoters of private sector companies using public funds can be tamed only by strict exogenous regulations. The US realised this after the 2008 financial debacle that rocked its economy as hard as the Great Depression of the 1930s. We in India, however, condone private sector sleaze even while frothing at the mouth at the governmental abdication and negligence. To wit, while Parliament has been brought to a standstill over L’affaire Coalgate, nobody seems to be losing sleep over private sector shenanigans.

The abolition of the office of the Controller of Capital Issues at the dawn of liberalisation in 1991 was hailed gushingly as seminal and catalytic. The market regulator, the Securities and Exchange Board of India (SEBI), ushered in a regime of free pricing that has scorched the palates of retail investors like never before.

FUNDS DIVERSION

A chronicle of undue and undeserving premiums collected by private sector companies in IPOs would reveal loot of Himalayan proportions, but to the opposition parties, it would not make as much a good copy, as going for the jugular of bumbling treasury benches.

Bankers led by Axis Bank with exposure of about Rs 5,000 crore are reportedly crying on the shoulders of the Ministry of Corporate Affairs over the shenanigans of the promoters of Deccan Chronicle with a turnover of less than Rs 1,000 crore.

There have been instances in the past of unobtrusive diversion of funds from the stated purposes while taking loans. Such subtle diversion could be an extenuating circumstance for banks wringing their hands in helpless desperation. But when you do not catch the signals in the air and confront the promoters when they are brazenly diverting funds, well, it is your funeral.

Top-notch bankers as they are, they could have easily sniffed trouble when they knew that Deccan Chronicle promoters were going on an ego trip by bankrolling the high-profile IPL cricket team, Deccan Chargers. Shouldn’t they have called the extravagance to halt by boldly confronting the promoters about the sources of funding for the extravaganza?

Merely writing in intrusive clauses in the loan agreement without keeping one’s eyes and ears open and acting on what they see and hear is useless. Halting the marauders in their tracks is any day more effective than appealing, schoolboy-like, to the authorities who at best can only bolt the stable after the horses have fled.

Critics ask with injured innocence how Deccan Chronicle could borrow this much. Well, our company law Section 293 (d) has never seriously challenged compulsive borrowers and wilful lenders.

IN THE NAME OF SHAREHOLDERS

All that it says is a company cannot borrow without members’ approval — through at least an ordinary resolution in a general meeting — more than its paid-up capital and free reserves. Passing even a special resolution (three-fourths majority) has never held back devil-may-care and lavish company promoters, forget an ordinary resolution.

It is another matter that, according to credible reports, even an ordinary resolution has not been passed by the company. Compounding this legislative permissiveness is the cavalier attitude of the lenders. Shouldn’t they have worried about the company’s ability to service such a massive loan with such a meagre income and turnover?

How could they be privy, albeit passively, to diversion of funds for admittedly an activity that is not the main object of the company?

Why didn’t the Ministry of Corporate Affairs bestir and ask for the source of funding for the IPL circus by invoking Section 293(e) of the Companies Act. This section says a company can contribute no more than 5 per cent of its profits as contributions to funds not germane to its business or welfare of the employees only by passing at least an ordinary resolution. One does not know for sure, however, whether this compliance requirement was also overlooked by the company.

If cricket was the passion of Deccan promoters, the regulatory apparatus should have made sure that public money was not used to bankroll these digressions. One can by all means mix work with pleasure but regulators and lenders should never allow mixing up of business funds with private dream projects.

L’affaire Deccan reminds one of what another equally flamboyant cricket aficionado Vijay Mallya of Kingfisher fame used to say when persistently queried about his extravagant lifestyle, ‘‘I am not answerable to anyone except my shareholders’’.

The touching respect for shareholders stems from the fact that they cannot do anything to promoters whose writ runs in Indian companies, especially when they control a lion’s share of equity acquired cheap; this is vis-à-vis public shareholders who hold a minuscule stake, despite coughing up much more in the form of mind-boggling premiums.

Till shareholders in India become an enlightened lot and constitute a pressure group ready to take on the might of promoters and their overbearing ways, the SEBI should act and speak for them.

(The author is a Delhi-based chartered accountant.)

COMMENT NOW