Search the Internet          Tips  Sites: Finance, Investment

Pay up or else: Damodaran tells defaulters

BS City Editor

Commercial banks may do well to take a leaf from the Unit Trust of India's book to recover sticky assets. Look at what UTI chairman M Damodaran is doing.

In an effort to trim UTI's non-performing assets, he has been calling up companies that have defaulted on interest payments on non-convertible debentures. Then, Damodaran persuades these companies to issue post-dated cheques-most companies cite temporary cash flow problems as the reason for interest payments having been delayed.

But if these companies think they will be able to get away with empty promises, they need to think again. At the third and final stage, UTI files criminal cases under Section 138 of the Negotiable Instruments Act if cheques bounce for want of funds. In fact, a few cheques received by UTI have already bounced and the mutual fund has filed cases against a few small and medium enterprises.

More significantly, the Trust will press for a change of management at big companies which are not ready to clear their dues.

UTI subscribes to the equity of companies, to quasi-equity instruments and to debt instruments. Often, companies do not pay the interest on the debt instruments. UTI's net NPA is pegged at 9 per cent. It had sticky debts of Rs 26.72 billion as on June 30, 2001.

The other prongs of UTI's strategy? Selling collateral and moving the debt recovery tribunals.

Section 138 of the NI Act empowers one to file a criminal case if a cheque is returned by a bank for want of money. But before filing a case, it is mandatory to give a 30-day notice to the company, giving it another opportunity to clear its dues. Once the criminal case is filed, the offender can be jailed for a year and may have to pay a penalty to cover the cheque that bounced.

The government is mulling over the possibility of amending the NI Act and reducing the notice period to 15 days besides increasing the period of imprisonment from one year to two.

The move is also meant to speed up proceedings by clearing the cases in a single hearing, based on a certificate issued by the bank (saying that the cheque bounced for want of funds) and an affidavit filed by the company (to which the borrower owes money).

The draft amendment is being studied by Parliament's standing committee on finance.

Still, Damodaran could come up against one major problem-it takes a long time to recover money under Section 138 of the NI Act.

On March 31, 2001, the number of cases pending across 49 courts in Bombay was 58,000. Some 11,328 new cases were filed but only 5,853 cases were settled. By August 1, the number of pending cases shot up to 64,083. Across India, over 5 million cases are believed to be pending under this section.

Powered by

YOU MAY ALSO WANT TO READ:
The UTI Crisis

The Rediff-Business Standard Special
The Budget 2001-2002 Special
Money
Business News

Tell us what you think of this report