It may be a bit too early for bankers to celebrate their victory against rogue borrowers.
The Board for Industrial and Financial Reconstruction may have lost its teeth but defaulters can still take shelter under the Bombay Relief Undertakings (Special Provisions) Act, 1958, (BRU) or equivalent laws in other states.
Indeed, defaulting companies that do not wish to come to the negotiating table with bankers to pay their dues are suddenly rushing to the BRU.
According to sources, ever since the Securitisation Bill was passed by Parliament, companies in Gujarat, Maharashtra, Rajasthan and Karnataka are rushing to seek shelter under the BRU Act, the RRU (Rajasthan Relief Undertakings) Act and the KRU (Karnataka Relief Undertakings) Act.
BRU was enacted in 1958 and so covers both Maharashtra as well as Gujarat.
"Suddenly, there is a rush to take cover under the BRU Act, particularly in Gujarat. Companies are going to any extent to take cover. Once this is done, the lenders cannot sell their assets," said a senior banker.
These state laws were enacted to prevent loss of employment and provide relief against unemployment. Companies can take refuge in these laws temporarily -- for a year -- but can seek extensions.
The Securitisation Bill, which gives banks and financial institutions powers to seize and sell assets to recover their dues from defaulting companies, overrides existing central laws like the Sick Industrial Companies Act, but state laws have been kept out of its ambit.
In other words, lenders can issue a recovery notice against a company that has been referred to the BIFR but cannot touch a company that has taken recourse to BRU.
Some of the banks and institutions are consulting legal experts on this issue.
The lenders are feeling helpless as the state law says: "Any right, privilege, obligation or liability accrued or incurred before the undertaking was declared a relief undertaking and any remedy for the enforcement thereof shall be suspended, and all proceedings relative thereto pending before any court, tribunal, officer or authority shall be stayed."
By virtue of the omnibus suspension of rights, even the enforcement of the personal guarantee of promoters gets suspended, a legal source says.
He also points out that the 'relief' is granted by a circular issued by a state government official and none of the other affected parties like lenders are given any information on this.
In one case, after sending a note to an Ahmedabad-based cable manufacturer exercising their right to convert debt into equity, the lenders came to know that the company would not abide by the notice as it was covered by BRU.
