Defalcating Indian Banks: Payback Time

IMAGINE a situation where borrowers who have availed themselves of a large sum of loans from public financial institu­tions do not pay the outstand­ing loans to these institu­tions. Multiple criminal cases are registered and costly and lengthy litigation ensues. Fi­nally, the top court of the land says the accused persons can be let off the hook, provided they pay back the money due from them.

Something along those lines has been playing out in India’s judicial system in a matter involving Sterling Biotech, a company whose promoters were accused of defalcating Indian banks. Recently, the Supreme Court agreed to quash criminal pro­ceedings against them if they agreed to pay back `5,100 crore, as demanded by the government’s lawyers. The case marks a successful out­come for investigating agen­cies and those tasked with recovering the money owed to the financial institutions.

The court’s order, passed by justices JK Maheshwari and Vijay Bishnoi on Novem­ber 19, has already led to a furious debate in legal circles. This is probably the first time in India’s legal history that an ‘arrangement’ of this sort has been arrived at a judicial forum. India does have a system of plea bargaining but this case is unique in that all charges were sought to be quashed in return for money owed to public financial insti­tutions. Plea bargaining does not allow for a ‘clean slate’, so to speak. Some level of punishment, even if greatly reduced, is imposed. One argument is that unless that is done, the risk of ‘moral haz­ard’—repeating the offence or carrying out a different offence, in the knowledge that forgiveness can be secured— remains high. Perhaps that is one reason why only criminal offences up to a certain level of punishment are admissible for plea bargaining.

This was a very different case. There were multiple cases against the promoters involv­ing different agencies, CBI, ED, SFIO and charges under differ­ent laws. The promoters had sought relief on 10 different counts. Some of the cases were registered back in 2017. The promoters have paid `3,507.63 crore and another `1,192 crore were recovered by banks through proceedings under the Insolvency and Bank­ruptcy Code (IBC). The court has ordered a further payment of `5,100 crore.

The trade-off involved here, unlike an ordinary criminal case, is between re­covery of money by financial institutions, money that is public money, and inflict­ing punishment for alleged crimes against the petitioners in the case (that is, the pro­moters of Sterling Biotech). Which goal is more impor­tant: recovering the money or inflicting punishment?

There were no straight­forward answers here. If litigation continues but the money is not recovered, one important goal—the recovery of money—will be defeated. But if money is recovered but the alleged wrongdoers are not punished, that defeats the purpose of law, at least in its deterrent aspects.

The court reasoned along the lines that, “…it is appar­ent that since inception, this Court was of the view that if the petitioners are ready to deposit the amount as settled in One Time Settlement [OTS] and public money comes back to lender banks, the continuation of the criminal proceedings would not serve any useful purpose. The tenor of the proceedings apparently indicates peculiarity, with intent to protect the public money and interest and to get deposited the defalcated amount. In furtherance, the consensus has been arrived at as indicated above. In this view, in the peculiar facts and situation of the present case, discretion as prayed, deserves to be exercised for granting the relief, as prayed and to direct for quashment of all the proceedings.”

The court quickly added that the case would not be­come a precedent.

At one level, the case is a success for India’s inves­tigating agencies as this is probably the first time that such large sums have been recovered from persons accused of defalcating public financial institutions. India has an unfortunate history of big borrowers defaulting on repayments and then escaping the clutches of law by escaping abroad. This leads to loss of faith in investigating agencies, courts and the politi­cal system itself. What makes the situation galling for citizens at large is the sense of impotence that the ‘connect­ed’ can do what they please. At another level, the damage inflicted on the banking system is not inconsiderable. There have been multiple such instances in the past two decades. Managing the fallout has been tough for everyone involved. Does this case mark the beginning of a different, more positive trend?

It is hard to say ex ante if matters will improve. A lot will depend on checking abuse of power and connec­tions at multiple levels. For example, lending norms on the part of banks have been tightened considerably and risk-assessment and risk-man­agement practices, too, have improved, at least on paper. Then there is the judicial system where such cases are settled. In this particular case, the judges took a pragmatic view after the banks, the investigating agencies, the government (through its lawyers), the accused and the judges all ended up being on the same page. That is a rare occurrence in a system that is adversarial in nature.

Many times, those who have borrowed large sums from banks are unable to pay back due to losses in business. This can be due to multiple reasons: adverse economic and business circumstances beyond the control of the borrower; poor choices; mistakes, and more. But there is another class as well: borrowers gone bad, for lack of a better expression. This is the case of outright fraud and fraudulent schemes being used to whisk away public money. Should such accused persons be let off? In an ideal world, the money should be recovered and the wrongdoer punished as well. But ideal circumstances rarely obtain and are doubly rare in a com­plex system like India where there are multiple moving parts, often out of sync with each other. It would be wrong to single out India here. This is a situation that prevails in much of the developing world. In such conditions, it is often the case that both goals—recovering money as well as ensuring punishment via courts—are defeated. Which goal should be priori­tised? Who will decide which one is more important and should be pursued? These are not easy questions to answer. One reason for this situation is that the Indian system, unlike say the American one, lacks the idea of optimising both on processes and outcomes. The goal is absolute: go after the crooks and recover what is due from them. This does not mean that the law should be flexible to the point where it gives ‘options’ to those ac­cused of crimes. If that were to be done, the law would lose its bite. But there are cases where pursuing multiple legal goals is unfeasible and there is a risk that none will be achieved. In such cases, a degree of flexibility is necessary. This will not be easy to impart in the Indian system. But it is time that some thought is devoted to exploring the idea. Who knows that the recently decided case may give some impetus to the government and other authorities to think along those lines.