When company deposits don’t pay back
Depositors can take the legal route. But, it is a long process and recovering your money can be difficult
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Recently, the Madras High Court dismissed Chennai-based company Helios and Matheson Information Technology Ltd’s plea to quash a first information report (FIR) registered based on complaints by depositors regarding the company’s failure to repay the company fixed deposit (FD) amount on maturity.
Ahead of the maturity date of some depositors, Helios and Matheson sent a notice in February 2015 to its investors stating that due to a sudden change in the law relating to FDs as per Companies Act 2013, the company is facing difficulty in servicing investors on time. The company wrote in an investor communication letter: “The company has been facing cash flow issues due to change in law relating to the Companies Act 2013, we could not accept fresh FDs but repayments are made from operations to the extent permitted.” In the same circular, it asked for an extension for repayment of FDs with a maturity date of 1 April 2015 to 31 March 2016.
This is not the only company that has failed to repay depositors on time. Companies such as Birla Shloka EduTech Ltd and Ansal Properties and Infrastructure Ltd, too, sent out notices to investors stating that they will need an extension in order to pay the principal and interest of FDs that have matured.
According to Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd, several companies are doing the same thing. “Companies that have either delayed or defaulted on repayment of interest or principal or both, of their corporate FDs in the recent past include Unitech Ltd, Jaiprakash Associates Ltd, Avon Corp. Ltd, Micro Technologies (I) Ltd and Neesa Leisure Ltd,” said Bhaiya. The names Bhaiya mentions are based on investors’ experience and market feedback on the companies that have defaulted or delayed payment. Mint has verified with some of the depositors and companies regarding the same.
If you have invested in FDs of companies going through a similar problem, here is what to do.
If a company is unable to repay your money, it can approach the Company Law Board (CLB) to seek an extension. It can only do so if there is a provision mentioned in the instrument or if it can provide suitable reasons. The company in order to incentivise the depositor to stay invested while seeking an extension may offer a better rate of interest than the prevailing one. The CLB, after going through the company’s financial position, and terms and conditions of the deposit, will take appropriate action. CLB usually asks companies to pay those investors who want to exit within a time period, as well as allow an extension for those who agree with the extension plan.
Depositors, too, can approach CLB and Economic Offences Wing (EOW) of the Central Bureau of Investigation.
If the deposit was made with a housing finance company, in case of default, the depositor may make an application to an authorised officer of the National Housing Bank.
One can even approach consumer and civil court. “Depositors can file a complaint under section 12 of the Consumer Protection Act, 1986. You can also file a complaint with CLB, or file a civil suit,” said Harsh Pathak, a Delhi-based lawyer.
Also keep in mind that the sort of action that a depositor can take depends on the amount the company owes her. “If the amount due is in excess of Rs.1 lakh, then action for winding up may also be considered after giving a statutory notice of 21 days. Though the process of winding up is in itself fairly long, the companies have shown a tendency to settle once a winding up petition is filed. Additionally, recourse under criminal law may be sought against directors and other responsible officers of the company,” said Rajat Malhotra, partner, Laware Associates, a Delhi-based law firm.
Since taking the legal route is a time consuming process, “one should simultaneously approach Securities and Exchange Board of India, Reserve Bank of India and other associated regulators. If investors get to know that the company is cheating, they should file an FIR and proceed for legal action,” said Pathak.
The lengthy legal process makes recovering your money difficult. Which is why Mint Money has always advised its readers to stay away from poorly rated or unrated deposits.
Danger of getting cheated
Company FDs require more due diligence than bank FDs.
This is because, firstly, your investment is not insured. Bank FDs are covered by Deposit Insurance and Credit Guarantee Corp for up to Rs.1 lakh. This is not the case with company FDs. Secondly, before investing, look at the credit rating. Usually, a company FD that comes at a higher coupon rate has a lower credit rating. “This is done to attract customers,” said Dilshad Billimoria, director, Dilzer Consultants Pvt. Ltd. Thirdly, know that the quality of a company FD depends on the underlying asset and not the interest rate.
So, if you want to invest in corporate FDs, look for AAA rated ones. According to Crisil, Bajaj Finance Ltd, Sundaram Finance Ltd, Housing Development Finance Corp. Ltd Corporation Bank, Hero Motocorp Ltd, Tata Sons, and Havells India Ltd are some of the top AAA rated company FDs.
Some of ICRA’s AAA rated company FDs include Bajaj Finance, Canfin Homes Ltd, Gruh Finance Ltd, Havells India, ICICI Home Finance Co. Ltd, and Sundaram Finance. AAA rated FDs usually give lower interest rate compared with those which are not rated or has lower ratings. “However, the chances of default is much lower and you can expect good service,” Srikanth Meenakshi, founder and director, FundsIndia.com.
If you don’t have the time to understand company FDs then you still have the option of investing in bank FDs.