Action against directors of corporate NBFCs draws flak

By K. T. Jagannathan

CHENNAI, JAN. 1. Problems never come singly, they say. The defaulting non-banking finance companies (NBFCs) are beginning to discover this home truth. Ever since the CRB scam, the NBFCs have been through a torrid time. If tough norms set by the Reserve Bank of India in the wake of the scam have immobilised them, the lengthy recession has ensured that they go into oblivion.

The virtual havoc caused by the finance firms of partnership varieties whose owners had walked away with the hard earned monies of depositors by promising them unheard of returns besides a host of freebies has only hastened the disappearance of corporate NBFCs.

Of late, these NBFCs (which are corporate entities and run by boards of directors) have come under problems of a totally different kind and that too from avoidable quarters.

Faced with the increasing fury of depositors who have lost huge sums, the Tamil Nadu Government has apparently decided to demonstrate its concern towards these hapless depositors by turning tough against even the corporate NBFCs. More than the toughness, the methodology adopted to demonstrate it has raised serious questions which will have far-reaching implications for the very growth of the NBFC sector.

A case in point is the recent midnight arrest of a senior and respected chartered accountant who held a directorial post in one of the NBFCs which had defaulted. It appears that the authorities have not bothered to make a distinction between a partnership firm and a corporate NBFC.

In the case of a partnership firm, the contract is between a depositor and the partners who are jointly and severally responsible for repaying the money. In a corporate entity, however, the agreement is between the depositor and the company only.

It is pointed out that the directors of a corporate entity do not have any personal or civil liability. Nor do they have any criminal liability. Personal liability of a director is limited to the extent of his shareholding in the company.

What is important to note here is that deposits of a corporate entity is only an unsecured loan. In case of a wind-up, depositors may have to lose their money. Knowing fully well this position, depositors put money in these corporate entities and let the companies use it for stated purposes. Under pressure from various quarters to show some toughness against defaulting NBFCs , the authorities have apparently discovered an easy but reckless exercise. They have begun to proceed against the directors of these corporate NBFCs by booking them under cheating cases. This has certainly shaken the corporate world as a whole.

In a cheating case, it is presumed that one is accepting deposits with the intention not to pay. Even then, it passes one's comprehension as to how the directors could be booked if a corporate entity defaults. No doubt, it is the board which approves the borrowing of a corporate entity.

Nevertheless, it functions within the framework of RBI norms which prescribes limits for such borrowings. Even then, it gives only a broad approval for accepting deposits. This being the case, how could a director be arrested for the failure of the company to honour its depositors, it is asked.

This kind of action by the authorities against directors of corporate NBFCs appears to be the result of an inability to distinguish between a partnership firm and a corporate outfit. Further, it stems from a lack of knowledge on the part of depositors about the legal standing of these two distinct finance entities.

It is, nevertheless, too much to expect a common man to possess finer legal knowledge about these entities. Precisely here, the authorities - be it RBI or the Government - have failed to create awareness among the general public on the line dividing these types of entities. More than anything else, to a large extent, it is their unbridled greed to make a quick buck that has ultimately done the depositors in. Of course, some of the corporate NBFCs, too, are themselves to blame for their current plight. At least in some cases, the directors chose to quit unable to withstand the rising anger of the depositors.

This has surely dented their reputation and brought disrepute to the entire NBFC sector. Not without reasons though.

Many had invested because of their confidence in men behind these entities. Of course, there are some good ones which do care for their reputation and have ensured that depositors are paid in full.

The depositors have a recourse in the form of a civil suit. This will, however, take a long while given the shortcomings in the Indian legal system.

But the Company Law Board (CLB) can retrieve the situation somewhat for the depositors.

No doubt many corporate NBFCs have moved the CLB for repayment schedules to breathe somewhat easily. Having got the CLB-okayed repayment schedule, some corporate entities have taken it lightly and not bothered to adhere to it.

Surely, this is frustrating for the depositors. It is precisely here the CLB should exercise its powers. It has the powers to turn tough and initiate prosecution proceedings in a magistrate court against the erring NBFCs.

Alternatively, the CLB can refer the `erring' NBFCs to the apex bank which, in turn, can take criminal proceedings against them in magistrate courts.

More than the State authorities, the CLB and the apex bank are the ones which are empowered to take action against wilfully errant NBFCs.

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