Line of Default

Investor Grievances Forum president Kirit Somaiya says that out of around 88 companies which have listed their debentures on the exchanges, nearly 66 have defaulted on payments. Moreover, 384 corporates, whose instruments were not listed, had stopped making regular payments to investors. ‘It’s not only small investors even big investors like UTI had suffered due to the defaults of corporates. If you look at the portfolio of some of the schemes like US-64, you can see a number corporates have defaulted on debentures. This has added to the non-performing assets of UTI,’ said a UTI official.

The debenture defaulters include the who’s who of the corporate sector. ‘Many companies in the textile, chemical and steel sectors have defaulted. You can read the same names in the defaulters list of the Reserve Bank of India. These companies have also taken loans from banks and defaulted. They have now defaulted on debenture payments,’ said Somaiya.

Take the case of Cable Corporation which owes Rs 31.50 crore to investors through a debenture issue. The company, owned by the Khatuas, became a defaulter in June 2000. A steel company which raised nearly Rs 1,700 crore from investors has started defaulting on interest payment two years ago. Jindal Vijaynagar, another steel company, has also turned a defaulter on debentures. Corporates like Parasrampuria, PAL Peugot, Garware Polyester, Montari Leather and DCM are among the prominent defaulters.

The default on debenture repayment to investors has become a common practice despite the instrument being a secured loan unlike fixed deposits which are unsecured. ‘The government and its regulators like Department of Company Affairs and Sebi have not taken action against defaulting companies. This inaction has led to defaults by more companies,’ said an angry investor, saying, ‘UTI has already started taking legal action against some of the defaulters. But what will small retail investors do? They don’t have the ways and means to fight corporates which defaulted.’

The regulators understood the gravity of the problem only recently. DCA has launched a probe into whether several companies have defaulted on interest payment due from their debenture issues. The department had asked for information in this regard from debenture trustees (mostly banks and FIs) and held its first meeting on the issue attended by ICICI and SBI, besides Sebi representatives. Sebi chairman G.N. Bajpai also recently called a meeting with debenture trustees where he expressed concern at the increasing number of companies becoming defaulters with many of them being BIFR cases. He had called for a review of the existing norms regarding the role of debenture trustees and set up a sub-committee to examine the various aspects and formulate new guidelines if necessary.

Debenture trustees are expected to call for periodical reports from the corporate body, inspect the books of accounts, records, registers of the body corporate, take possession of trust property in accordance with provisions of trust deed, enforce security in the interest of debenture holders and carry out such acts as are necessary for the protection of the debenture holders. However, it has been pointed out that the debenture trustees after receiving the one-time acceptance fee, have quietly left the companies to their own devices.

According to investors, the government should come out with tough measures to punish the directors and promoters of debenture defaulters. As per one school of thought, the government should seize the assets of such defaulters on the lines of the ordinance on bank loan defaulters. The government had recently promulgated an Ordinance, giving sweeping powers to banks and institutions to take over the assets of loan defaulters. Tough measures are the need of the hour to get back the investors’ money.