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Punish The Fraudulent Promoters

A key initiative of banks, struggling to resolve the huge NPA crisis, is to take the defaulting companies to the insolvency court i.e. the NCLT. The first step that the NCLT takes, upon admitting any bankruptcy plea, is to appoint an Insolvency Professional (IP), who supersedes the board of directors of the company. Upon such appointment by the NCLT, the IP is now in charge of the company, and he immediately takes charge of its business, assets/liabilities and its entire state of affairs. In other words, the promoter/board of directors is dismissed and the company is now put under the supervision/management of an IP, whose responsibility is to serve the interests of the company and its various stakeholders, including creditors, lenders and the shareholders.

The IP thereafter examines the viability of the company’s operations and whether, it should be liquidated, or it should be restructured/revived, including by changing the management of the company. As we are seeing in the cases before the NCLT, many companies are found to be viable, but need a change of management, which is happening under the auspices of the NCLT. These have included companies like Bhushan Steel, Electro Steel, Binani Cement, Alok Industries etc., where instead of liquidating/dissolving the company, it has been found prudent to revive the company by takeover of management, as is happening in the case of Bhushan Steel being taken over by Tata Steel.    

But such takeover of a defaulter company by a new management does not mean that the NPA and the huge loss incurred by banks and other creditors is a closed chapter. Merely in the case of Bhushan Steel’s takeover by Tata Steel, the loss to the lenders and the creditors is about Rs.25000 crores, which is a humongous sum of public money lost. Many creditors of Bhushan Steel who could be SMEs will perhaps go bankrupt, due to these losses suffered. The promoters of these companies need to be thoroughly investigated and severely punished, because in most cases, the companies have defaulted on their bank loans, due to criminal misconduct and malpractices of the promoters, which includes siphoning of money, misappropriation, frauds and misuse of funds. Such company promoters are often powerful/influential businesses, but their criminal and fraudulent acts cannot be allowed to go unpunished. So while a new management takes charge of a company, a parallel investigation must be conducted into its state of affairs, not just to punish the fraudsters, but to also seek to recover their illgotten booties, which truly belong to the company and the public that they cheated.

It is heartening to note that over a dozen companies which are undergoing bankruptcy resolution before the NCLT are being investigated by banks and other agencies, for fraudulent activities, which including siphoning and diversion of funds. Banks are undertaking forensic audits, to punish these wilful defaulters and to hopefully recover their funds from them. As a result of such investigation, the SFIO arrested Mr. Neeraj Singhal, the former promoter of Bhushan Steel, for alleged diversion of Rs.2000 crores, from loans taken from various banks. He did it through advances given to a web of bogus/shell companies. The SFIO is investigating various other companies and other arrests of company promoters are imminent. It is because of these dubious promoters and their complicit auditors that lakhs of crores of rupees of public money has been lost and they deserve appropriate punishment under the law.     

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