Understanding Bank Recovery from Fraudulent Defaulters
When it comes to recovering assets from wilful defaulters and fraudsters, banks generally have a clear plan of action. Typically, this involves attaching properties when the asset value drops to 75% of its resizable value. By the time the case reaches the recovery stage, the value can further decline to as low as 50% of its original value. When considering the additional costs of recovery and the opportunity cost of delays, the effective percentage of recovery can be as low as 25%.
The Case of Nirav Modi, Mehul Choksi, and Vijay Mallya
As we look into the specific case of Nirav Modi, Mehul Choksi, and Vijay Mallya, it's important to note the actions taken by authorities to recover assets. To date, the banks have managed to recover Rs. 9,000 crores, which is a significant amount, but still far from the total default amount of Rs. 60,000 crores. This raises the question: where and how will the banks recover the remaining amount?
Earlier, banks managed to recover some money by seizing all 17 luxury sports cars owned by Mehul Choksi and Nirav Modi, part of the Mallaya properties. However, there have been no notable recoveries from the other properties belonging to these individuals.
Significance of the ED's Action
The recent actions taken by the Enforcement Directorate (ED) in India are significant. For the first time in independent India, a fraudulent and defaulting businessman and his family members' properties have been attached and disposed of, and the amount has been transferred to creditors. This action sends a strong message to the business world.
Historically, defaulting businesses were typically written off, leaving no differentiation between failed business and failed management. The government now makes it clear that if a business fails due to poor management, the promoter or management will be removed, and the business will be given a new chance. Additionally, the government will no longer allow fraudulent promoters to transfer assets to family members and protect their personal wealth while the business fails.
While the quantum of the recovered amount is important, it is the fact that the proceeds from seized properties have been transferred to the creditors that holds significant value. This transfer does not change the original legal rights of the creditors against Vijay Mallya, Nirav Modi, and Mehul Choksi.
Even if these individuals win a legal case against the banks, they will have to initiate recovery against the ED. They cannot directly recover from the banks, ensuring a more transparent and just process.
Conclusion
While the legal process may be lengthy and costly, the actions of the ED represent a significant step towards ensuring that defaulters face the full consequences of their actions. It sends a clear message that no one is above the law in India, and fraudulent practices will not be tolerated.