Debt recast loophole: Promoter paychecks come under scanner

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New Delhi | Published: November 4, 2014 8:22:15 AM

FinMin has said that promoters have repeatedly got away in CDR packages with very little sacrifice.

Government is considering a probe on how banks allowed promoters of highly leveraged companies to draw salaries in crores. (Thinkstock)Government is considering a probe on how banks allowed promoters of highly leveraged companies to draw salaries in crores. (Thinkstock)

The government is considering a probe on how banks allowed promoters of highly leveraged companies to draw salaries in crores when their companies were not repaying the debt. In fact, what has peeved the government most is that private and foreign banks made bilateral settlements with companies while public sector banks remained passive.

In a note that analyses the drawbacks of the current corporate debt restructuring (CDR) mechanism circulated to all ministries on October 29, and even to investigating agencies, the finance ministry said, “Promoters did not take any cut in salaries. But the banks ended up making huge sacrifices. There should be a formula of sacrifice they (promoters) have to make.”

Hence, it sought a closer monitoring of the CDR schemes either by the Reserve Bank of India or the ministry of finance.

After a due diligence, the government has found that as on December 31, 2013, the exchequer has incurred an aggregate debt of Rs 2,89,398 crore because of the CDR packages of which nearly Rs 30,000 crore is owing to their failure in cases of 115 companies.

Concerned that the CDR packages may have been manipulated by the companies to their own benefits, the government is planning to order an inquiry into it. “We should know why the CDR did not work in chunk of the cases. There is need for a probe into the entire issue,” a source in the government told The Indian Express.

The finance ministry has said that promoters have repeatedly got away in CDR packages with very little sacrifice. “The principle of all stakeholders taking a haircut has to be enforced,” the finance ministry has argued.

Asking for strengthening of the debt restructuring mechanism, the finance ministry has decided to ask all banks and financial institutions to mandatorily participate in CDR reviews.

Once a package has been approved, those exiting should be penalised, according to the note. “Bilateral deals between the lender and borrower after the CDR package should be frowned upon. Monitoring of this mechanism should be done at a very senior level either by the RBI or the government,” the note said. The problem has compounded because of an inefficient debt recovery tribunal (DRT) system as cases are getting unduly delayed, which needs a thorough review, the finance ministry said.

CDR should provide for ballooning of interest so that during the period of reconstruction, the interest burden is lower and after restoration of an enterprise, normal rates are charged. Also innovative measures like allowing external commercial borrowings to the banks and financial institutions for this purpose can be considered, the ministry suggested.

The CDR schemes were drawn up by the finance ministry and the RBI provide that the borrower could approach the CDR cell in the Industrial Development Bank of India and if 75 per cent of lenders agreed to the package then it would be binding on the rest.

CDR Blues

  • Government is considering a probe on how banks allowed promoters of highly leveraged companies to draw salaries in crores when their companies were not repaying the debt
  • Asking for strengthening of the debt restructuring mechanism, the finance ministry has decided to ask all banks and financial institutions to mandatorily participate in CDR reviews

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