Secured debentures of the non-convertible variety were the rage in the mid-1980s, but their glamour ended on their maturity when it became obvious that there was nothing secured about them. Debenture trustees (DTs) also shirked their fiduciary responsibility of securing the company’s fixed assets against the debenture value. Some companies rolled over their debentures, defaulted on interest payments (Essar Oil was a notorious defaulter in 1999) or went into liquidation. Since then, regulations have been tightened, but the instruments had lost investors’ trust. Some of the large institutional DTs sold their business to smaller banks because the responsibility did not match the returns from the business. (For instance, ICICI sold the debenture trustee business to The Western India Trustee & Executor Company Ltd in 2002).
Meanwhile, investors who had invested in the late 1990s continue to struggle to get their money back, especially in cases of defunct firms. Alpic Finance Ltd, whose ‘festival bonds’ matured in 2001, has been a defaulter for several years, although investors believe that the proceeds of the bonds were invested in realty around the country. In early 2006, Ms Devlaliwala, who was inquiring about her 86-year old mother’s investment, was told that she could at best hope to get 20% of the investment back. All along, investors have been pointing to specific properties owned by Alpic around the country, while it defaulted on bond redemption. Some investors were told by Alpic to discharge the bond certificates and send them to the company for redemption and have still failed to get their money back.
Bank of Baroda (BoB) was the bond’s DT, and its experience in getting justice for investors suggests that debenture regulations remain cumbersome, and the problem is compounded by investors’ ignorance.
“As trustees,” says PKR Iyer, BoB’s assistant general manager (legal), “we can initiate legal action only when 75% of the bondholders (in value) authorise us and provide funds to pursue legal action.” Debenture holders have been calling the bank from as long back as 2002 to recover their dues, but they apparently do not know about the authorisation process. BoB later decided not to wait for 75% consent and initiated proactive action by filing a suit at the Bombay High Court. Alpic’s representatives apparently claimed in court that 75% of the bondholders have already been repaid and sought dismissal of the suit. Shockingly, the company produced as evidence the discharged bond that investors had been lured to submit, rather than proof of payment. Yet, the bank demanded verification of the claims and obtained the court’s permission, but the company refused to show proof of payment on the grounds that the court order had not specified it. It also took the astounding stand that once a cheque is issued, the trustee has no role to play even if it has been dishonoured for lack of funds.
If the government is serious about investor protection, it will have to examine each issue in depth and frame clear-cut rules. Otherwise, the large mass of investors will continue to shun the capital market
“Assessing the situation,” says Iyer, “and to ensure that the debenture holders understand the seriousness of the situation, we have started informing all the debenture holders who contacted us that unless they possess the original bond, we will not be able to assist them.” Meanwhile, more redemption requests were pouring in, and the bank pursued its litigation until it obtained an order from the High Court to sell off Alpic’s assets in Mumbai. The bank expects to raise Rs 20 crore by selling a property that it owns in the Bandra-Kurla business district. The sharp escalation in property prices in the last few years will hopefully turn into a boon for Alpic’s investors. BoB expects to pay back investors once this asset is sold and the proceeds are distributed according to the court’s directions. The wait may soon be over.
The Alpic festive bond case is an amazing example of how a powerful DT can also be stymied by a crooked company. It is also proof of how much investors have begun to distrust all market intermediaries. While BoB was battling to get investors’ their dues, some investors wrote to me voicing suspicion that it was deliberately going slow. Since most investor protection activity these days depends on the proactive approach or zeal of specific officials, such distrust and suspicion demoralises those who wants to fight the investors’ cause. In the Alpic case, the problem will not end with the sale of its Mumbai assets; it will only lead to another problem. BoB as the trustee will only be able to pay those bondholders who can submit an original certificate. The bank itself is unclear what to do about the investors who submitted discharged certificates to the company, which were being brandished by it in court. Some investors, who have taken the trouble to understand the issue, have actually managed to get back their original certificates and have submitted them to BoB. Some of them have even written letters of appreciation to officers handling the issue.
If the government is serious about investor protection, it will have to examine each issue in depth and frame clear-cut rules. Otherwise, we will have to reconcile ourselves to the large mass of investors continuing to shun the capital market.