All about vigil mechanism in reference to credit manager and critical appreciation

All about vigil mechanism in reference to credit manager and critical appreciation

The word “ Vigil” as per oxford dictionary means a” period of keeping awake during the time usually spent asleep, especially to keep watch or pray”.

The purpose of establishing a vigil mechanism as per companies act 2013 is to give an opportunity to directors and employees of companies to report their genuine concerns or grievances in the way the company is run to the authorities concerned so that these concerns or grievances are addressed in the best interest of the company. It is a way for stricter monitoring of good corporate governance.

The banks and financial institutions in India have always been used to subjective lending. The bank managers and officers have to come out of the shackles of traditional ways of lending and adopt themselves to new paradigm of lending particularly to the corporate. Hence an era of self regulation for corporate India is being ushered in and therefore an onerous responsibility is cast on the credit manager to be vigilant in his ways of lending since the Doctrine of Constructive Notice(it is the legal fiction that signifies that a person or entity should have known, as a reasonable person would have , of a legal action taken or to be taken , even if they have no actual knowledge of it) hovers around his head always.

While it is not in dispute that it is the duty of the company to establish a Vigil Mechanise new act, some of the factors which must be taken into consideration by the credit manager are as under:-

Section 177(9) of the Companies Act, 2013 mandates every listed company to establish a Vigil Mechanism (VM) and rule 7(1) of the Companies (Meeting of Board and its powers) Rules, 2014 in addition requires the following class of companies to establish VM.

i.                   Companies which accepts deposits from public and

ii.                 Companies which have borrowed from banks and public financial institutions in excess of 50 crore

From the above point interpretation can be made that all public , listed and unlisted companies , private, whether it is subsidiary or a simply a private company or a one person company will come under the ambit of this section.However, it is not applicable to a partnership firm or a LLP. It is applicable to a Society registered under Societies Registration Act but not to a Co-operative Society. It is applicable to a Government Company but not a Foreign Company. However, it will be applicable to a subsidiary of a foreign company registered in India. Again it is to be noted that a NBFC has to establish a VM if its borrowings from banks and public institutions are in excess of RS. 50 crores but if a company has borrowed money from a NBFC in excess of Rs 50 crores such company need not establish a VM.

Indepth analysis of the term financial institution and public financial institution:-

Sec 2(39) -“Financial Institution” includes a scheduled bank, and any other financial institution defined or notified under the Reserve Bank of India Act, 1934

Sec 2(72)- “Public financial institution” means-

i.                   The LLife insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act,1956

ii.                 The Infrastructure development Finance Company Limited, referred to in clause (vi) of sub- section 4A of the Companies Act, 1956 so repealed under section 465 of this Act

iii.               Specified company referred to in the Unit Trust of India (Transfer of undertaking and Repeal) Act,2002

iv.               Institutions notified by the Central Government under sub section (2) of section 4A of the Companies Act, 1956 so repealed under section 465 of this Act

v.                 Such other institution as may be notified by the Central Government in consultation with the Reserve Bank of India.

Provided that no institution shall be so notified unless-

A.   It has been established or constituted by or under any Central or State Act

B.    Not less than 51% of the paid up share capital is held or controlled by the Central Government or by any State Government or Governments or partly by the Central government and partly by the Central Government and partly by one or more State Governments

So what is sought to be included in this section is the latter i.e public financial institutions.

Again since the section does not specify that the borrowings should be from each bank and public financial institution , it stands to reason that it is aggregate of the loans which may be secured as well as unsecured.

Borrowing – different connotation

All Borrowings are liabilities but all liabilities are not borrowings. It is to be noted that guarantee and L/C are not included as they are contingent liability and is liable to be paid only after happening of a default and are not given away loans in tangible form. Though there is no clarity in the section “borrowings” could include only loans which are fund based only. It can be in any form such as working capital or term loans. Explanation to section 180 (1) describes what are temporary loans and that includes working capital which is exempted from the ambit of that section. No such explanation is found in section 177. It is pertinent to point out that the provisions in section 129 of the Companies Act, 2013, read with Part1 of Schedule III under para 6T , 6C and 6F classifying the liabilities would strengthen the argument that contingent liabilities should not be included in the term “borrowings”

Para 6T: Contingent liabilities shall be classified as:

i.                   Claims against the company not acknowledged as debt

ii.                 Guarantees

iii.               Other money for which the company is contingently liable

 Para 6C : Long term Borrowings include:

i.                   Bonds/debentures

ii.                 Term loans from banks or other parties

iii.               Deferred payment liabilities

iv.               Deposits

v.                 Loans and advances from related parties

vi.               Long term maturities of finance lease obligations

vii.             Other loans and advances

Para 6F: Short term borrowings includes:

i.                   Loans repayable on demand from banks and other parties

ii.                 Loans and advances from related parties

iii.               Deposits

iv.               Other loans and advances(specify nature)

Therefore, the question of whether contingent liabilities should form part of borrowings cannot be answered on the basis of whether they are secured or not, it cannot be answered on the basis of the prevailing practise where bank tend to secure everything with an omnibus charge and sufficient documentation. The non fund based limits would not come under long term borrowings or short term borrowings.

However, it would have been appropriate if in rule 7 (1)(b) instead of words “borrowed money from” , the words “incurred liabilities with” would have been used to have robust view of the company’s financial health .

Trigger point for construction of Vigil Mechanism

The time as and when the loan amount exceeds Rs. 50 crore would be the trigger point for the company to establish a VM. The company may sometimes execute documents but would not have actually availed the loan. That means the date of disbursement of the loan is relevant. The loan should be outstanding and repayable. The question of repayment does not arise only on signing the documents and not availing the facilities. That should be so since the words used in rule 7(1)(b) are “ the Companies which have borrowed money”...It is in the past tense. At some point of time the borrowing should have exceeded Rs 50 crore. If the argument can be stretched further , eve n when the outstanding dues have come to zero and the facility is still available , the vigil mechanism would remain.

Approach of credit manager:-

i.                   He must first examine the existence of an appropriate clause in the borrower company’s AoA for establishing a vigil mechanism. If such a clause does not exist,he must insist that the company amends the AoA appropriately

ii.                 Ensure that there exist clauses in the sanction letter as under:

a.      That the company will undertake to establish a “ Vigil Mechanism” once the borrowings from , all the banks put together in a case of multiple banking or a consortium and also together with borrowings from a public financial institution,if any, if the outstanding in its loan portfolio from these institution exceed Rs. 50 crores.

b.     That the company will undertake to give the details of the mechanism in the form of policy to the bank as and when framed.

c.      That the company will undertake to give a periodical report to the bank on status of grievances and genuine concerns spelt out by the directors and or the employees and how the Audit Committee or the Board as the case may be has addressed these issues and in particular on those issues which have a bearing on the financial affairs of the company.

iii.               The credit manager should also take efforts to periodically visit the MCA site to verify the loans availed by the company from various banks and public financial institutions through the index of charges though the amounts shown therein may not be the outstanding but will give a rough idea of the loans availed. The outstandings can be checked from the financial statements appearing the MCA site.

Conclusion:

Though the new act has not cast any obligation on the companies to report to the banks on VM established or its workings, the purpose of these institutions being included in the class of companies which have to establish a VM itself is to ensure that these financial institutions who are custodians of public money are kept informed so that they benefit in assessing periodically the credit worthiness of the companies to whom the moneys are lent and take effective and appropriate steps at appropriate times to ensure the safety of moneys lent.

Author: ACS Suman Gupta.

Mail id : [email protected]

Please share your feedback via mail. Thank you

Disclaimer: This is only a knowledge sharing initiative and author does not intend to solicit any business or profession. I assume no responsibility for the consequences of use of such information. In no event shall i be liable for any direct , indirect , special or incidental damage resulting from arising out of or in connection with the use of the information . it is not a professional advice so please do consult your professional adviser for your queries