Fraud loan defaulters may face director ban

New Delhi: The government is examining a proposal from lenders to permanently bar promoters of companies whose loan accounts have been declared fraudulent by them from serving as directors on boards of other companies.The move follows concerns raised by banks, citing cases where such promoters continue to hold directorships elsewhere.

Existing laws do not specifically prohibit such appointments, said people familiar with the matter."We have received suggestions from various stakeholders, including banks, and a final decision will be taken after stakeholder and inter-ministerial consultations," said a government official, who did not wish to be identified.132123471This is seen as a penal and deterrent measure.If the proposal goes through, Section 164 of the Companies Act, 2013, will need to be amended accordingly, the official said.Under existing regulations, any person who is, or has been, a director in a company which has not filed financial statements or annual returns three successive financial years is not considered eligible for reappointment as a director in that company or appointed in any other company for a period of five years from the date on which the company fails to file its financials.A bank executive said that there is a systemic risk in allowing such individuals to stay engaged with firms and that it also impacts their credit approval process.

"Since there is no legal bar, you cannot deny loans to such firms, but we watch out for early warning signals (EWS) in such accounts," he said.As things stand, the Reserve Bank of India (RBI) has prohibited banks from lending to companies whose directors are also associated with wilful defaulters.

Under these lending guidelines, banks must ensure that borrowing companies do not induct individuals who are promoters or directors of companies formally declared as wilful defaulters.

RBI guidelines also stipulate that all regulated entities must issue a detailed show-cause notice to the persons, entities and their promoters or whole-time and executive directors against whom an allegation of fraud is being examined."This move will be credit positive for the economy as a whole as banks will get a better view of risks, helping them make better credit decisions," said Vivek Iyer, partner and financial services risk advisory leader, Grant Thornton Bharat.Last week, a coordination meeting was held between the Central Bureau of Investigation, the Department of Financial Services and chief vigilance officers of banks on continuing structured engagement and institutional coordination to expedite investigations, resolve pending issues and ensure timely completion of investigations. ...