Fugitives on the ropes as India tries to recover billions of dollars in loan defaults

Flamboyant Vijay Mallya has become the first Indian tycoon to be declared a Fugitive Economic Offender under a new law

In this, Monday, Dec. 10, 2018, file photo, Indian businessman Vijay Mallya is surrounded by the media as he leaves Westminster Magistrates Court in London. An Indian court has declared tycoon Vijay Mallya a fugitive economic offender, a ruling that empowers authorities to confiscate his properties and assets. (AP Photo/Kirsty Wigglesworth)
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Vijay Mallya was once known as the “king of good times”, but things have gone from bad to worse for the flamboyant businessman, who became the first person to be declared a Fugitive Economic Offender this month under a new Indian law.

Under the legislation, passed last year by the Indian parliament, the government is allowed to confiscate his assets as he faces charges of defaulting on loans worth 90 billion rupees (Dh4.7bn). Mr Mallya fled to the UK in 2016. Since then, Indian authorities and banks have been trying to get him extradited to India to face the music.

With the liquor baron now being charged under the new act, the move is seen as a significant step forward in India's efforts to crack down on high-profile defaulters and those involved in fraud cases. These include Mr Mallya and billionaire jeweller Nirav Modi, who have been accused of damaging the country's investment climate as well as hurting the banking sector, analysts say.

“India has a history of economic offenders fleeing the country and never coming back and in the process duping the banks – mainly the public sector banks – with large sums at the cost of exchequer and the average taxpayer,” says Rahul Agarwal, the director of Wealth Discovery, a financial services company in New Delhi.

“This issue had to be resolved on a war footing because India has a large population still living under the poverty line and as such the country cannot afford such pilferage,” he said.

Outstanding loans worth 1.1 trillion rupees, for which lawsuits have been filed, have been taken out by so-called wilful defaulters, as of the end of September 2017, compared to 284bn rupees four years earlier, according to data from CIBIL, a credit information company in India.

"It is absolutely critical to bring the wilful defaulters to book to send a strong message to the business community," says Rajiv Talreja, entrepreneur and author of business book Lead or Bleed. "There is a need for better financial governance in large organisations and moves such as these will only push for being more prudent in business management. Also, for the public, this is important as it gives them the confidence that their money in the banks in safe."

Alongside the Fugitive Economic Offenders act, other steps that have been taken include the government giving the Reserve Bank of India more powers to tackle the problems of non-performing assets, or bad debt, which amounts to some $150bn. Some banks in India have also been naming and shaming wilful defaulters.

Punjab National Bank, IDBI Bank of Baroda, and Syndicate Bank listed 1,815 wilful defaulters as of September 2018, with outstanding loans worth about 420bn rupees. These include Nirav Modi and his uncle Mehul Choksi's companies; Kingfisher Airlines, and Jatin Mehta's Winsome Diamonds. Mr Choksi is in Antigua and Barbuda, while Mr Modi is in the UK, and Mr Mehta is understood to have become a citizen of St Kitts in the Caribbean.

“Such big-ticket defaults reflect poorly on the legal framework and the application of the rule of law in India and therefore discourages foreign investors from investing in India and also leads to investors having a low opinion and confidence in the banking system,” says Mr Agarwal.

The approval of the bill by parliament is “perhaps the most prominent step” to tackle the scourge of defaults and fraud, he adds. The law empowers the authorities to confiscate the assets of economic offenders who have fled the country. Economic offences include fraud, counterfeiting, money laundering, and tax evasion and the law being implemented in letter and spirit in the case of Mr Mallya is a positive step in the right direction, according to analysts.

“This is, in our opinion, a major deterrent towards such acts in the future,” says Mr Agarwal. “This law basically sends a message that economic offenders cannot continue to abuse the legal loopholes and have to eventually face the music.”

Vineet Naik, a senior lawyer in Mumbai, says the FEO act “is still in its nascent stages and the jurisprudence has yet to be evolved, but, it certainly provides the necessary deterrence and would definitely help evolve a credit compliant culture in the country”.


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He points out that the problem of big-ticket economic offences in India “was also due to a significant degree of irrational exuberance displayed by banks in failing to carry out the basic due diligence”.

Mr Mallya was widely considered to be India’s answer to Richard Branson. He built up his inherited empire, United Breweries Group, the prized assets of which were its beverages division and Kingfisher Airlines. He lived a life of luxury, buying Formula One and cricket teams, islands and vintage cars.

But his downfall followed the collapse of Kingfisher Airlines, which stopped flying in 2012 and left his company with huge levels of debts.

Banks, he owes money to – including State Bank of India, the country's largest lender by assets – have all called for him to be jailed as they try to recover the loans. Last month, a British court delivered an order for his extradition, but the case is being challenged in the UK's High Court.

Other examples that have gained global attention include Mr Modi, who was last year accused of being at the centre of a $2bn fraud through issuing fake guarantees at a single branch of Punjab National Bank in Mumbai, India’s second-largest state lender.

Steps being taken by the government and RBI after such scandals to tighten procedures and lending activities are likely to prevent, if not stop them altogether, such incidents from happening in future, according to some experts.

“The government has done a lot of activities on the digitisation of the banking system and it is very difficult [now] for an economic offender or defaulter [to evade the law],” says Aditya Kanoria, the founder and chief executive of Credent Asset Management. “It won't be easy for offenders to run away with money under the current banking system.”

The greater the transparency and regulation, the more confident investors will become in India, he adds.

However, the ripple effect of the defaults that have already taken place, is all too clear for everyone to see in different sectors of economy.

“High-profile defaults suck out liquidity from the banking sector,” says Mr Agarwal. “Either the banks do not have ample funds to lend out or they become too stringent in their lending standards in the aftermath of a high-profile default. This, in turn, starves legitimate business of the much needed credit [facilities] that they require to run [and expand] their business, leading to an environment of muted growth.”

Mr Mallya has argued that he was targeted by the government as a “poster boy” for bank defaults. Ahead of the general elections to be held by May, this has certainly added to the pressure on Prime Minister Narendra Modi's government to show that it is taking action to address the problem of default and fraud cases.

“The problem of economic offenders and defaulters is not just an economic problem or a corporate governance problem,” Mr Talreja said.

“There's also the factor of a media trial being conducted with a strong political narrative being attempted to be created through it. The amount owed by Mr Mallya to the banks is not as high as many other business houses in India. The opposition is cornering the government for being allies to such defaulters and the government is going after these offenders to prove a point to the public.”