360 Degree View- Watch around

360 Degree View March 2024

1. Fair Hearing to Borrowers whose accounts are classified as “Fraud”

In March 2023, the Supreme Court held that a borrower must be given an opportunity to be heard before its accounts are classified as fraudulent by the Banks and a reasoned order must follow if such action is taken.

With respect to several cases pertaining to the period before March 2023, the Central Bureau of Investigation (“CBI”) asked the Banks whether the borrowers were allowed to explain their position before classifying their accounts as fraudulent. The Bankers stated that the decision to classify their Accounts as “Fraud” was taken prior to the ruling of the Supreme Court and hence, they are not required to comply with the said requirement.

The point of concern in this matter is that if the requirement of the ruling is followed retrospectively, it may hold up the investigations and it may also give borrowers a chance to contest the matter afresh, extend the process of resolving the cases and delay closures.

It has been noted that Frauds linked to loans amount to over 95% of the total frauds and the reporting of the same is done by the Banks in the following manner:

Loan Amount (in Rs.)

Reporting Authority

Between 3 Crore -25 Crore

CBI’s Anti-Corruption Bureau

Between 25 Crore – 50 Crore

CBI’s Banking Cell

More than 50 Crore

CBI Joint Director

The Bankers keeps track of certain activities which works as an “Early Warning Signal” for the Bank to classify the Borrower’s account as a “Red Flagged Account” (RFA). After red flagging, the Banks appoint an External Auditor to conduct the Forensic Audit and based on the findings of the same, the Banks either remove the RFA tag or classify the account as Fraud.

2. Bombay High Court’s Landmark ruling on evidence of “Wilful Default”

According to RBI, a “Wilful Defaulter” is a Person or a Company, who despite having the capacity to repay the loans, has defaulted in repayment of the same by diverting the funds or failing to infuse the committed equity after availing the loan.

In a Landmark ruling, the Bombay High Court directed the Banks to provide evidence of wilful default by the Borrower before invoking the Master Direction on Wilful default. This means that the Bankers now need to provide sufficient material which is evident in the role of the borrower in the alleged wilful default. This Ruling will have a material impact on the process by which the Bankers classify a borrower as a Wilful Defaulter, as earlier it was observed that when a person is accused by the Bank as a Wilful Defaulter, the onus to prove his innocence is upon the accused.

However, pursuant to the ruling of the Bombay High Court, the Banks are now responsible for ensuring that sufficient evidence has been obtained before a person is accused by them of wilful default.

Another issue that has been going on between lenders and borrowers is regarding the anonymity of the officers who spot and identify a person as a wilful defaulter. A recent high court order has directed banks to name the employees who identify a borrower as a wilful defaulter. On the other hand, the Banks contend that they are not under obligation to provide evidence to the borrower. The issue remains a point of discussion, however the High Court in its order stated that Banks and Financial institutions that seek to invoke the Master Circular to declare the occurrence of wilful default must identify the members of the identification committee and the review committee and shall share the reasoned orders passed by such committees.

3. India’s First Class Action suit

The Minority shareholders of Jindal Polyfilms Limited (the Company) filed India’s first Class Action suit against the Company alleging that the Company sold its investments worth over Rs. 2000 Crores at an undervalued rate to SSJ Trust, an entity of the Promoter, Mr. Shyam Sunder Jindal. The Advocate representing the shareholders claimed that the alleged act of the Company has affected the interests of approximately 45,000 shareholders of the Company.

The advocates of the Company represented that the allegations raised by the shareholders are fictional and the transactions being referred by them are past transactions that were undertaken after taking approval of the shareholders hence the petition filed by the shareholders is not maintainable. The matter has been listed for hearing on April 9, 2024.

4. India’s first regulated Infrastructure Tokenisation Platform

India’s first regulated Real Estate and Infrastructure Asset Tokenisation Platform will be set up in Gujarat International Finance Tec-City (GIFT City). A conditional approval has been granted by the International Financial Services Centres Authority (IFSCA), the regulator of IFSC, to a few entities to start the platform.

Significant capital investment is required for making investments in real estate and Infrastructure; hence retail investors find it difficult to grab an opportunity when real estate is booming. On the other hand, the asset owners’ access to growth capital is hindered. Therefore, one of the ideas behind having such platforms is to fill this gap and help connect the Asset Owners who require capital with the Investors.

The Real Estate assets will be boarded on the platform only after due diligence, credit rating, and an independent valuation thereof. With the use of Blockchain Technology, these assets will be converted into digital tokens and be issued to the investors and the same can be traded by the investors on the digital platform.

5. Same-day Settlements System for the Indian Stock Market

The trading done at the Stock Market follows a certain trade settlement cycle i.e. T + 1 cycle, where T means the day of trade and 1 means the day of settlement. This means that trades that are done today will be settled by the next day.  The Indian Stock market initially followed a T + 5 settlement cycle, which was subsequently changed to T + 3 in 2002 and it was further reduced to T + 2 in 2003. Presently, India follows the T + 1 settlement cycle.

On March 28, 2024, The Indian stock market introduced the T + 0 Settlement cycle and to ensure that there is smooth functioning of the shorter settlement cycle, a beta version was implemented. With the implementation of the Beta version, the T + 0 cycle will be available only for 25 Stocks, in addition to the existing T + 1 settlement cycle. This means that both the settlement cycle will co-exist and only a limited number of stock brokers will be allowed to offer this facility.  

It is believed that a shorter settlement cycle will be beneficial to Stock Brokers and will reduce the working capital requirements.

6. National Financial Reporting Authority (NFRA) to directly engage with Companies

Now, if NFRA finds any issue with the financial statements of the companies, then it will directly engage with the companies to gain a proper understanding of the issues found. NFRA is responsible for enforcing compliance with the Accounting Standards and a direct engagement with the companies will be a good facilitation in the inspection process undertaken by the NFRA.

7. GIFT City Formula 1 Track

GIFT City has been developed as a Financial Center to attract International Companies to set up their Businesses in India. Among the various development activities undertaken in GIFT City, developing infrastructure for Entertainment and Leisure has been one of the major focus.

In pursuance of the said development, a project of building a Formula 1 track has been in the works and the Sports Authority of Gujarat has evaluated granting the work order to consultants for designing an F1 race track in the GIFT City.

Among the various consultants competing for the project, the Hermann Tilke led consortium is likely to be granted the work order for developing a design for the F1 Track.

8. Top Audit Firms discontinue providing Non -Audit Services

Section 144 of the Companies Act, 2013 prohibits statutory auditors from providing a range of services such as Internal Audit, Actuarial Services, and Management Services among others, to their clients. The services outside the list provided under Section 144 are permitted. In December 2022, NFRA issued an audit quality inspection report stating deficiencies and weak areas of the audit firms affiliated with the Big Four firms.

With the increasing pressure from regulators worldwide regarding the Independence of the auditors and the conflict of interest thereon, almost all Top Audit Firms have stopped providing non-audit services to their audit clients. However, SR Batliboi & Co., an EY Affiliate continues to provide the permitted non-audit services in compliance with the extant laws and regulations.

9. No change in Gender representation in Leadership roles

Directors, Vice Presidents, and Chief Executive Officers are some of the leadership roles, where it has been observed that there are currently 2 women in the said roles as compared to 10 men, with the statistics remaining unchanged over the last five years.

In recent years, many companies have undertaken various measures to ensure gender diversity in the organization, however the same has not been reflected in the decision-making and leadership roles. It has been reported that potential reasons for the difference in the ratio of men and women in leadership positions are discrimination, mismatch of skills, and Subconscious/Societal biases in the hiring process.

10. Regulators shall work as Partners and not as taskmasters

Mr. Anand Mahindra, the Chairman of Mahindra Group recently delivered the 4th Annual Atal Bihari Vajpayee Memorial Lecture on the role of industry in building a resilient and resurgent India. Among the other valuable insights into the entrepreneurial culture of India, he stated that there needs to be an increase in ease of doing business for new enterprises and businesses.

He further stated that there has been a request from the start-ups for a reduction in the compliance burden and to make the arena of business simpler for the new entrepreneurs to become potential unicorns of the future. He said that “We need regulators to work as partners and proponents rather than being seen as taskmasters”.

Scroll to Top