Lenders to Reliance Communications Ltd., Reliance Infratel Ltd. and Reliance Telecom Ltd. are preparing for a lengthy courtroom battle as they seek to classify loan accounts of these companies as ‘fraud’.
The consortium of lenders is preparing to challenge a Delhi High Court order dated December 28, which asked them to maintain a status quo on the fraud proceedings, according to three bankers familiar with the matter, who spoke on condition of anonymity.
State Bank of India, Union Bank of India and Indian Overseas Bank have moved to classify accounts of the three Anil Ambani group companies as fraudulent after a 2019 forensic audit found suspicious transactions worth Rs 5,500 crore between the companies. The move was challenged in court by Punit Garg, representing interests of the three companies mentioned above. Garg is a former executive director of Reliance Communications.
In its order, the Court asked banks to send a show-cause notice to the companies and hear their explanation on transactions being classified as fraudulent. In the interim, banks are free to file any complaints against the companies, if they choose to do so. BloombergQuint has reviewed a copy of the order.
SBI, Union Bank of India and Indian Overseas Bank did not respond to queries sent on Monday.
In response to a query from BloombergQuint, a spokesperson for the Reliance Anil Ambani Group reiterated a statement issued on Dec. 30, terming the action by lenders as “entirely unjustified and unwarranted”. “…the Hon’ble Delhi High Court by an interim order has directed the same to be kept in abeyance for the time being, and the matter is now sub judice,” the statement said.
Allegations Versus Process
Transactions among these companies conducted between 2014 and 2018 were reviewed as part of the 2019 audit. According to the bankers quoted above, some of the transactions in question may have eventually led to siphoning off of funds.
Lenders found that bank loans were routed through the three companies to small group firms, without the knowledge of the banks. Once the funds were extended to the smaller companies, they were likely siphoned off, the bankers allege. The three accounts were classified as non-performing in 2018, after failed attempts to restructure the outstanding debt through the strategic debt restructuring scheme of the RBI.
Garg, representing the Reliance Group companies, has claimed that the companies were not given adequate notice or time to respond to these allegations, the bankers quoted above said.
The lenders, however, believe they followed due process.
According to the three bankers, the RBI’s July 2016 directions on dealing with frauds do not require them to send any advance notice to the borrower. This is different from wilful defaulter cases where a show-cause notice must be served to the borrower and a hearing must be conducted before a borrower is declared as a wilful defaulter.
“If through internal investigations a bank finds that the borrower had shown malafide intent while funds are being diverted, they are obligated to follow the RBI’s guidelines in classifying the account as fraud,” said VG Kannan, former chief executive officer of the Indian Banks Association. “The procedure does not require them to seek an explanation from the borrower.”
In the past, a few other firms have challenged this process and prevailed.
In an order passed on Dec. 30 in the BS Ltd. case, the Telangana High Court said that the rules of natural justice must be considered in the regulator’s master direction on frauds.
The court ordered that the borrower must be given a copy of the forensic audit on the basis of which the fraud classification is being sought. The lending consortium must conduct a hearing and only then pass a reasoned order on classifying the account as fraud. The fraud identification committee at the lender, in this case SBI, must then confirm whether the consortium’s decision is valid, the Telangana High Court said in its order.
Lenders to Apple Sponge And Power Ltd. have faced a similar challenge. The Delhi High Court, in June last year, opined that banks must give due hearing to the borrowers. The court barred banks, led by SBI, from proceeding further till a final order on the matter is pronounced.
Rajat Sethi, partner at law firm S&R Associates said the principles of natural justice should ideally be part of regulations from the beginning.
“The criminal aspect of the charges are separate and those can continue, but when you are placing penal measures on a borrower, it is appropriate that the borrower gets a chance to adequately represent their case and only then a final decision be taken. Not allowing someone to access public funding for a long period of time could be quite limiting,” Sethi said.
What’s At Stake?
According to last available data on Reliance Communications’ website, financial creditors to the company have claims worth over Rs 50,000 crore pending. Reliance Telecom owes more than Rs 40,000 crore and Reliance Infratel owes nearly Rs 42,000 crore.
The ability of lenders to recover dues will not be impacted by the process of declaring these accounts as fraudulent. This is because the Insolvency & Bankruptcy Code gives bidders protection against liability from prior offences under Section 32A. Law enforcement agencies are however not barred from prosecuting the former promoters if a complaint is filed by lenders alleging fraudulent transactions in the past.
Insolvency proceedings are underway for the three companies. Mukesh Ambani’s Reliance Jio has received the National Company Law Tribunal’s nod to take over Reliance Infratel, a unit of Reliance Communications. UV Asset Reconstruction Company Ltd. is currently awaiting approvals from the committee of creditors and the tribunal before taking over Reliance Communications and Reliance Telecom.
But the status quo order would come in the way of implementing any penal measures. For instance, the Reserve Bank of India’s directions on classification and reporting of frauds issued in July 2016 say that penal measures against fraudulent accounts can include restricting promoter directors and whole-time directors of the company from raising funds from the banking system or the capital markets by other companies with which they are associate.