The Jaisalmer Police recently arrested Pratip Chaudhuri, the former Chairman of the State Bank of India, in a loan case. He has been accused of selling a non-performing asset to Alchemist Asset Reconstruction Company at a price that is much lower than the market value of the asset.

How did the problem start?

SBI had lent Rs 24 crore to the Gaudavan Group in 2008, for the construction of Hotel Gaudavan. Unfortunately, the promoter of the project, Dileep Singh Rathore, passed away in 2010, leaving the project stranded, and the loan turned into a non-performing asset.

The under-construction property, and the owners’ other hotel, Fort Rajwada, were both seized by the bank.

Hence, the hotel property was sold to Alchemist Asset Reconstruction Company (Alchemist ARC) for Rs 25 crore. But the Gaudavan Group has alleged that the property was actually worth Rs 200 crore.

In addition, Pratip Chaudhari had joined the same ARC a year after his retirement in 2013.

The Gaudavan Group’s main contention is that the hotel was sold off at throwaway prices to a company whose director had a potential conflict of interest.

In its defence, SBI has said that the sale took place after Chaudhari had retired, and that due procedure was followed. It also said that the bank had attempted to recover money from the hotel group, and was unable to do so. Consequently, the ARC was roped in to recover the money in 2014.

The ARC too, has put forth a similar story. It said that the SBI had assigned the loan in 2014 after the hotel group couldn’t pay back the money it owed SBI. Alchemist ARC took over the two hotels under the previous SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act).

The Act had been implemented to aid loan recovery through property auctions and other means. Nevertheless, the Gaudavan Group filed an appeal with the Debt Recovery Tribunal. The Tribunal then blocked possession of the assets by Alchemist ARC. In turn, the ARC filed an appeal with the Debt Recovery Appellate Tribunal which again upheld the DRT’s decision.

Ultimately, the Delhi High Court allowed the ARC to proceed under the SARFAESI Act. By this point, the Insolvency and Bankruptcy Code had been established, which gave the National Company Law Tribunal power over such matters.

The NCLT allowed the ARC to proceed with its takeover. Nevertheless, the Gaudavan Group appealed to both the Rajasthan High Court and the Supreme Court, but both the courts refused to stay the orders.

The ARC has accused the defaulters of continually trying to scuttle the proceedings of the law. According to the ARC, the non-bailable warrants had been issued against the persons concerned without any summons or prior notice.

Bankers Support Chaudhari

Several bankers have hit out at the way the matter was handled, and have backed Chaudhari. Sunil Srivastava, a former deputy managing director of the bank, has accused the defaulters of gaming the system despite the government’s best efforts.

In addition, bankers have also pointed out that the government had assured them that the investigative agencies would not harass them for a bonafide business decision.

The government had implemented the Uniform Staff Accountability framework for non-performing assets up to Rs 50 crore. The motive behind the move is to suppress fears that business decisions could land bankers in trouble.

Unless the case is a fraud one, bankers would not be troubled under the framework. The move would allow bankers to operate without any apprehensions, allowing faster credit growth.

Wrong Incentives?

However, the case also brings to fore the growing accusations of potential perverse incentives that bureaucrats might have when dealing with private companies.

Often, private companies offer board seats with hefty salaries to ex-bureaucrats after they retire. Thus, these civil servants might not have the right incentives in place to fully discharge their duties as public servants, especially if they already have post-retirement plans.

While companies and bureaucrats both say that they are called in for their domain expertise, it is likely that Indian conglomerates have former government officials on board to increase their power within the bureaucratic machinery.

The Companies Act of 2013 mandates that at least half of the companies’ boards should be composed of non-executive directors. With bureaucrats being brought in as Independent Directors at multiple times their governmental salaries, their “independence” becomes questionable.

Former SEBI (Securities and Exchange Board of India) chief, U. K. Sinha, faced intense criticism from shareholders of Vedanta after the independent directors were accused of not protecting the rights of minority shareholders.

Nevertheless, how the issue is sorted out, remains to be seen.

Alchemist Asset Reconstruction Company

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