The money siphoned off by wilful defaulters — if put back into the economy — could have been enough to fund various social welfare-related Budget allocations, argues the 2019-20 Economic Survey, and highlights promoters’ use of related-party transactions (RPTs) and removing assets to destroy wealth in economy.
“Every rupee lent to a wilful defaulter constitutes an erosion of wealth,” the Survey states and raises concerns on rising number of such defaulters since beginning of the current calendar year.
“Rich businesses that want to get richer use wilful default as an instrument to redistribute wealth away from the poor,” the Survey says. As of 2018, wilful defaulters owed nearly Rs 1.4 trillion to lenders.
In India, these defaulters operate with a peculiar modus operandi of an inclination towards excessive pledging and hiding the RPTs. RPTs, which are typically large loans, purchases or sale of goods to other related parties, are a prevalent phenomenon among wilful defaulters, it said.
Also, opacity and lack of regulatory compliance is high among such promoters. Only 40 per cent of wilful defaulters comply with the RPT disclosures that are required legally. Among non-defaulters and the distress-defaulters, the compliance is 60 per cent.
According to the Survey, promoters at the helm of defaulting firms pledge almost 50 per cent of their shareholding to lenders, on an average. The promoters under financial distress tend to have 30 per cent of their shareholding pledged, as against 11 per cent of non-defaulters.
The Survey points out that while there is nothing wrong with pledging, in India it takes a peculiar form.
“Promoters, especially those of wilful defaulter firms, pledge shares to obtain financing not for external ventures or personal endeavours but for the firm's own projects,” the Survey read.
For lenders, this practice is sub-optimal as the value of collateral used to secure loans should not correlate with the value of the project being funded.
Despite the excessive pledging, promoters show little concern over the prospect of losing control of their company as they may have already siphoned off project payouts before market value of promoters’ shares starts to collapse.
“The cost of such wilful default is borne by the common man. Public sector banks get their equity from taxes paid by the common man. They get their debt from deposits made by the common man,” the Survey said.