Banking on a bargain: Sandesara settlement raises important questions

The Supreme Court’s recent order closing all criminal cases against Ahmedabad-based Sterling Biotech’s fugitive promoters Nitin and Chetan Sandesara if they deposit ₹5,100 crore by December 17 has raised critical questions concerning the treatment of businesspeople who abscond with large sums of public money. The order refers to a one-time settlement that the promoters had agreed to repay a consortium of banks in return for the state to quash all criminal proceedings against them, including their designation as economic offenders. The brothers, who had managed to abscond on the Albanian passport in 2017 and were running an oil and gas business in Nigeria, had a long list of cases against them filed by the Central Bureau of Investigation, Enforcement Directorate, Serious Fraud Investigation Office, and the Income Tax Department.

 

At the very least, this order raises critical moral issues. In its order, the Supreme Court has argued that since public money is being returned to the lenders, no useful purpose would be served by continuing criminal proceedings against them. This reasoning, effectively decriminalising the offence, may privilege hard-headed pragmatism. But it is hard to justify this in terms of probity, which is the basis of a healthy business environment. The order, thus, effectively rewards defaulters and diminishes the incentives for well-connected borrowers to repay their loans either on time or at all. In fact, the order could be considered a windfall for the brothers because it does not impose a meaningful monetary penalty for their wilful acts of fraud and defalcation under the Prevention of Money Laundering Act and the Fugitive Economic Offenders Act. The dues owed to Indian banks, according to the CBI, were ₹5,383 crore, which the promoters mostly diverted overseas via shell companies to build their Nigerian business and for personal gain such as acquiring private jets and upscale real estate. They have already deposited ₹3,507 crore in an earlier legal proceeding, and lenders recovered ₹1,192 crore under the insolvency process, implying an element of penalty in the settlement amount.

 

The one-time settlement, submitted to the court in a sealed envelope by Solicitor General Tushar Mehta, was said to be a “consensus” figure following discussions with banks. Since the sums owed involve public money, some level of transparency is warranted as to how this number was arrived at. Second, these calculations overlook the interest payments over the intervening period, making the recovery a fraction of the amount owed to banks. A punitive penalty could at least have served as a salutary deterrent to other potential defaulters. The apex court has stated that this judgment is based on the “peculiar facts” of the case and cannot serve as a precedent. It is unclear how the Sandesara brothers and associates are any different from other absconding defaulters such as Vijay Mallya, Nirav Modi, Mehul Choksi, or Jatin Mehta. These absconders could as well seek similar bargain deals as the price of returning without seeing the inside of an Indian prison. It also comes at a time when Indian lenders have just emerged from a painful recovery from the burden of non-performing assets. Such orders run the risk of taking the banking system back to square one.