Stop frivolous litigation: protect the lay investor

IF INVESTOR protection continues to remain a pipe-dream despite a plethora of laws, rules and regulations and an army of regulators in the form of the Reserve Bank of India (RBI), the Company Law Board (CLB) and the Securities and Exchange Board of India (SEBI), the reason is quite simple. There is little co-ordination between these three regulators. Each plays its own tune and hardly respects the other. Amid this confusion, in the event of a default in the repayment of a fixed deposit or a so-called `secured' debenture, it is the innocent, gullible investor who suffers. His pleas to guardians of the law fall on deaf ears as he is too small to be taken note of. In desperation, he appeals to the Central Government to intervene, but finds himself totally lost in the labyrinth of bureaucratic procedures. Ultimately, the poor investor resigns himself to his fate. It is pertinent here to consider the travails of the fixed deposit holder of Kirloskar Investments and Finance Limited (KIFL), a non banking finance company (NBFC) headquartered at Bangalore. KIFL was set up in 1983 by the well-known industrial house Kirloskar, as an NBFC engaged in leasing, hire purchase and property development. It has had a steady growth and was a profit-making and dividend-paying company until three years ago. Unlike many other failed NBFCs it never enticed the public with fancy rates of interest and was paying just 14 to 15% on the deposits accepted by it. Unfortunately, its business was hit by the slump in the real estate sector and its recoveries were affected by the general recession in the engineering industry. The KIFL management was caught off-guard by the stringent NBFC directions brought in by the RBI in January 1998, following the CRB fiasco. In terms of these directions, the company's borrowing capacity was drastically reduced and the company was obliged to repay the "excessive deposits" within a very short span of time. The company suffered losses in 1997-98 and 1998-99. To add to its woes, the RBI did not allow the company to accept or renew deposits effective April 1999 and shortly thereafter cancelled its NBFC licence. The company, saddled with a liability of Rs.1000000000 to its depositors, petitioned the Company Law Board (CLB), Chennai Bench and submitted a scheme of repayment spread over a period of seven years. A000 depositors, including some depositor forums, also filed their petitions before the CLB. The CLB, after hearing all the parties concerned, including the Consortium of Banks, led by Bank of India, passed a fairly reasonable and comprehensive order on March 21, directing KIFL to repay the depositors in a phased manner over 48 months. The matter should have ended there. The RBI, having already appointed a Special Officer in September 1999 to monitor the day to day working of the company, should have allowed KIFL to liquidate its liability to the depositors in accordance with the CLB order. Instead, the RBI has chosen to file a liquidation petition against the company at the Karnataka High Court in Bangalore. To make matters worse, the consortium of the company's bankers, led by Bank of India, has got the CLB order stayed by the Chennai High Court. The net result is that the unsecured depositor of KIIFL continues to remain high and dry. A dispassionate review of the KIFL imbroglio would show that (i) The RBI's petition for liquidation of KIFL is misconceived. While playing its role as the country's apex banking institution, the RBI is also expected to act as the custodian of the lay investor. Small depositors comprising senior citizens - mostly non-pensioners - retired civil and military personnel, widows, handicapped people and other common investors, who depend solely on interest income for their livelihood constitute a sizeable%age of the depositor fraternity of any corporate body. In fact it is the very name of Kirloskar, a household name in Pune, that has prompted nearly 30,000 lay investors in this and nearby cities, constituting nearly 50% of the total number of the company's depositors, to entrust their hard earned savings to KIFL. These investors, being unsecured creditors, will be totally ruined if KIFL were to be liquidated. The winding up action will only benefit the few secured creditors like banks and financial institutions whose debts will get first priority. It is a fact that the secured creditors of KIFL have not initiated any winding up action against the company. (ii) KIFL will shortly be making a foray into the rapidly growing Information Technology (IT) sector in a big way. The company's Annual Report for 1998-99 bears this out. The Special Resolution in respect of the company's entry into the I.T. sector was duly passed by the shareholders at the last Annual General Meeting and the management has since finalised a collaboration with EBC Software of Canada. The CLB Chennai did take into account the company's projected income from the proposed IT venture, as is evident in its order. KIFL thus is still a going concern; hence there is no justification for the RBI to initiate winding up proceedings against it. Such a move will spell doom to000 of innocent families, if not scotched forthwith by the Karnataka High Court. (iii) The Reserve Bank of India Act, 1934, as amended in 1997, contains several provisions for penalising companies, including NBFCs and their managements for defaults. Reference may be made, in this connection, to Sections 58B, 58C, 58E and 58G of the said Act. The RBI has, in fact, proceeded against some of the Directors of KIFL under some of these provisions. The RBI would do well to pursue vigorously such action against those responsible for the mess in KIFL and gracefully, suo motto, withdraw the winding up petition. (iv) The Bank of India, the United Western Bank Limited and other banks forming the Bankers' Consortium of KIFL are secured and, therefore, should show some restraint. They had no locus standi in the CLB proceedings; yet they were heard and their submissions considered by the CLB, which held ``The Banks being secured creditors are entitled to enforce their claim before a competent Court of law, especially when their claim does not fall within the mischief of Section 45QA(2) of the Act. Accordingly, this Bench has neither jurisdiction to entertain the Banks' claim nor has authority to grant any relief sought by them in Section 45QA proceedings....". Further, when the company is still a going concern how can these banks claim priority in repayments and invoke the doctrine of preferential payments as embodied in the Companies Act, 1956? As pointed out by the company in the CLB proceedings, only 75% of the lease and hire purchase business has been refinanced by the banks. As such, the banks cannot legally claim a 100% cover from the lease and hire purchase receivables of the company. The banks, as secured creditors, are at liberty to enforce and realise their respective securities if the company defaults. The CLB Order does not bar any such action on their part. (v)Further, it needs to he pointed out here that Chapter 111 B of the RBI Act, 1934, which was brought into the statute book in 1997 (in the wake of the CRB scam) contains an overriding provision in Section 45Q which reads " The provisions of this chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having any effect by virtue of any such law. In view of this overriding provision in the RBI Act, 1934, the CLB Order dated March 21, 2000 reigns supreme and its sanctity shall not be questioned". (vi)The RBI's actions against KIFL have been discriminatory. There have been a number of NBFC failures in the recent past - Lloyds Finance, Prudential Capital Markets, Ceat Financial Services, Enarai Finance, Indian Seamless Financial Services et all. As the Regulatory Authority for the NBFC Sector why has the RBI chosen to wind up only KIFL? It is also relevant to point out here that Lloyds Finance and Ceat Finance owed their depositors Rs.8000000000 and Rs.3000000000 respectively, when they fell sick, as against KIFL's indebtedness of just Rs.1000000000 to its depositors. (vi)Again, while the RBI has allowed Ceat Financial Services to use the SLR (Statutory Liquidity Ratio) securities to repay its depositors, it has refused this concession to the Management of KIFL. Why? KEFL's SLR securities have a current market value of Rs.220000000. They are unencumbered and are hence an easy prey to the hungry Bankers' Consortium whose dues are a mere Rs.330000000. Small wonder, therefore, that the Bankers are pressing hard with their petitions which have no intrinsic merit and deserve to he thrown overboard. (vii) Out of approximately 56,000 depositors in KIFL, nearly 49,000 or 87% hold deposits ranging from Rs.5,000 to Rs.25,000. This is the category of `small depositors' as defined by the RBI. These small depositors ought to be protected by the judiciary. We have seen several financial scams in the nineties - the major ones that have hogged the limelight are the Securities scam, the M S Shoes scam, and the CRB scam. The SEBI has come out finally with its Regulations on the plantation companies, now officially called 'Collective Investment Schemes', which have defrauded innocent investors. However, things are moving at snail's pace. The existing plantation companies were to get themselves registered with SEBI by the December 15, 1999. As of now, not a single company has been registered by SEBI. The deadline for registration was extended from time to time till March 31, 2000. According to SEBI only 36 applications for grant of registration were received from existing entities by this date. The Regulations provide for compulsory winding up of unregistered entities and repayment of investors' funds. Are these Regulations going to be implemented at all? Most of the promoters of the plantation schemes who perpetuated the massive frauds are scot free. and ,000 of innocent families have been financially ruined. To stem the rot, the following measures need to be taken on a war footing by the powers that be (1) Direct the Consumer Courts to be more proactive, take up investor grievances on a priority basis and dispose of such complaints expeditiously. The Consumer Courts have a tremendous backlog of cases. The administration of justice in these Courts leaves much to be desired. The system needs a thorough overhauling and the judicial officers manning these Courts need to be made more accountable. The Consumer Protection Act was perceived as a consumer friendly legislation to dispose of the consumer's complaint with the least expenditure and within a period of just four months. (2) At present the Company Law Board cannot entertain any contempt petition on its Orders. The complainant has to approach the appropriate High Court. Small wonder that companies flout CLB Orders with impunity. The High Court should consider such contempt petitions out of turn and award exemplary punishments to the contemners. This will send the right signals to company directorates and managements and ensure better compliance with CLB Orders. Many CLB Orders are just dead letters. (3) The RBI should not rush to the Court to wind up any company that has defaulted in the repayment of fixed deposits and debentures just because it is empowered to do so under the RBI Act. A realistic and persuasive approach by the RBI, in consultation with the company, the banks and other major creditors, if any, is the need of the hour. The unsecured depositors should not be treated as sacrificial goats for the secured creditors ( as we see it happening in KIFL). The Courts also should also refrain from admitting such winding up petitions except in the 'rarest of rare cases'. The objective of the Judiciary should be to protect the lay, unsecured creditors to the extent possible. (4) Once the CLB, which is the appropriate Tribunal to adjudicate on matters concerning defaults in repayments of Fixed Deposits, makes an Order, no High Court should entertain any stay application against it at the behest of any party. This is to preserve and protect the sanctity of the CLB Order and observe the overriding provision in Section 45Q of the RBI Act, 1934 in both letter and spirit. Otherwise, the CLB will be rendered a toothless tiger--- surely the law makers did not envisage or contemplate such a situation. (5) The Ministry of Finance (MoF) to which representations are made by hapless depositors should act on such petitions expeditiously and come to the rescue of such lay investors. Further, the MoF should take its own decisions on these matters and not seek the concurrence of the RBI. A stern directive from the Ministry to the RBI that it should resolve such matters, in consultation with the CLB or SEBI, as the case may be, and not rush to the Court will go a long way to improve matters. (6) Last, but not the least, the Government should expedite the enactment of the Companies (Amendment) Act, 1999 which contains some salutary provisions to protect small investors rather than tinkering with a new Investor Protection law. We have enough Regulations to protect the investor, big and small; what is required is stem and proper implementation of the law by diligent, straight forward, upright officials and judges. T.V.Ramachandran