RCom lenders brace for lengthy legal battle to label loan accounts as fraud

The lenders of Reliance Communications Ltd., Reliance Infratel Ltd. and Reliance Telecom Ltd. are preparing for a lengthy court battle as they seek to classify these companies’ loan accounts as “fraud”.

The consortium of lenders is set to challenge an order of the Delhi High Court dated December 28, which asked them to maintain a standstill on the fraud process, according to three bankers familiar with the matter, who requested the anonymity.

State Bank of India, Union Bank of India and Indian Overseas Bank have decided to classify the accounts of the three companies in the Anil Ambani group as fraudulent after a 2019 forensic audit revealed suspicious transactions valued at Rs.5,500 crore between companies. This decision was challenged in court by Punit Garg, representing the interests of the three companies mentioned above. Garg is a former executive director of Reliance Communications.

In its order, the court asked the banks to send a show cause notice to the companies and to hear their explanations on the transactions deemed to be fraudulent. In the meantime, the banks are free to file complaints against the companies if they wish. BloombergQuint has reviewed a copy of the order.

SBI, Union Bank of India and Indian Overseas Bank did not respond to questions sent on Monday.

In response to a question from BloombergQuint, spokesperson for Reliance Anil Ambani reiterated a statement released on December 30, calling the lenders’ action “entirely unwarranted and unwarranted.” “… the High Court of the Honorable Delhi, by an interim order, ordered that it be kept in abeyance for the time being, and the case is now pending,” the statement said.

Claims versus process

The transactions between these companies carried out between 2014 and 2018 were reviewed as part of the 2019 audit. According to the bankers mentioned above, some of the transactions in question could eventually lead to embezzlement.

The lenders discovered that bank loans were channeled by the three companies to small groups, without the knowledge of the banks. Once the funds were extended to small businesses, they were likely embezzled, bankers say. All three accounts were classified as non-performing in 2018, after unsuccessful attempts to restructure outstanding debt through the RBI’s strategic debt restructuring program.

Garg, representing the companies in the Reliance group, said the companies were not given sufficient notice or time to respond to the allegations, the bankers cited above said.

Lenders, however, believe they followed due process.

According to the three bankers, the RBI july 2016 the instructions on dealing with fraud do not require them to give notice to the borrower. This is different from cases of willful default where a show cause notice must be served on the borrower and a hearing must be conducted before a borrower is declared willful default.

“If, during internal investigations, a bank finds out that the borrower has shown dishonest intent while the funds are embezzled, it is obligated to follow RBI guidelines to qualify the account as fraud,” said VG Kannan, former managing director of the Association of Indian Banks. . “The procedure does not require them to ask the borrower for explanations.

In the past, a few other companies have challenged this process and won.

In a Dec. 30 order in the BS Ltd. case, the Telangana High Court said the rules of natural justice must be considered in the regulator’s overall direction on fraud.

The court ordered that the borrower receive a copy of the forensic audit on the basis of which the fraud classification is sought. The lending consortium must proceed to a hearing and only then issue a reasoned order on the qualification of the account as fraud. The lender’s fraud identification committee, in this case SBI, must then confirm whether the consortium’s decision is valid, the Telangana High Court said in its order.

Apple’s lenders Sponge And Power Ltd. faced a similar challenge. The Delhi High Court in June last year ruled that banks must give borrowers a proper hearing. The court banned the banks, run by SBI, from going any further until a final order on the case is issued.

Rajat Sethi, a partner at the law firm S&R Associates, said the principles of natural justice should ideally be part of the regulations from the start.

“The criminal aspect of the charges is separate and these can continue, but when you impose criminal penalties on a borrower, it is appropriate that the borrower has the opportunity to properly represent their case and that a final decision then be made. socket. 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 the latest data available on the Reliance Communications website, the company’s financial creditors have pending debts worth over Rs 50,000 crore. Reliance Telecom owes over Rs 40,000 crore and Reliance Infratel owes nearly Rs 42,000 crore.

The ability of lenders to collect dues will not be affected by the process of declaring these accounts as fraudulent. Indeed, the Insolvency and Bankruptcy Code gives bidders protection against liability for previous offenses under section 32A. Law enforcement agencies are not, however, precluded from prosecuting former developers if a complaint is made by lenders alleging fraudulent transactions in the past.

Insolvency proceedings are underway for the three companies. Reliance Jio of Mukesh Ambani has received the consent of the National Company Law Court to take over Reliance Infratel, a unit of Reliance Communications. UV Asset Reconstruction Company Ltd. is currently awaiting creditors committee and court approvals before taking over Reliance Communications and Reliance Telecom.

But the order of the status quo would hamper the implementation of any criminal measure. For example, the Reserve Bank of India guidelines on the classification and reporting of fraud issued in July 2016 indicate that criminal measures against fraudulent accounts may include the prohibition for promoter directors and full-time directors of the bank. company to raise funds from the banking system or capital markets. by other companies with which they are associated.

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