How A Birla Scion Ended Up Being Shut Out Of India’s Banking System

Every now and then you’ll chance upon a newspaper advertisement by a bank declaring a businessman a wilful defaulter. Sometimes it will come with a picture, which banks believe adds to the pressure on errant borrowers.

More often than not you’ll flip the page without much notice.

But a similar advertisement earlier this month caught the attention of many. It was an advertisement declaring Yash Birla —the rambunctious heir to the 158-year old Ashok Birla Group — as a wilful defaulter. Ironically, the declaration came from Kolkata-based UCO Bank, which was conceived by the Birla family in the 1940s, according to the lender’s website. With the declaration, Yash Birla joined the ranks of the likes of Vijay Mallya and Nirav Modi.

The classification of wilful defaulter was formally introduced into India’s banking lexicon in 2015. Reserve Bank of India guidelines say that a person or an entity can be tagged as a wilful defaulter if they do not repay bank dues even though they have the ability to do so. Once declared as a wilful defaulter, that person or entity is virtually blocked out of the country’s banking system.

According to information available on the website of credit bureau TransUnion CIBIL, there were 22,681 wilful defaulters identified in the country as of June 2019. Yash Birla is now among them.

Birla did not respond to requests for an interaction.

A Rough Start; A Rough Road

Yash Birla didn’t have an easy start as a business leader. He took over the reins of the group at the age of 23, after his parents passed away in a plane crash in 1990.

In an interview with Business Standard in 2013, Birla spoke of the difficulties of managing the business at that age. In the early years, affairs of the group were managed by a family member, till Birla could settle in. But even after that, it was the group’s advisers who were more involved in day-to-day affairs. Birla was more visible at social gatherings than at business meetings, said bankers who have dealt closely with the group.

A former public sector banker, who dealt with the group, told BloombergQuint that in his three-decade long banking career, Birla was one of the few business owners that bankers rarely met. Lenders would meet with senior executives of the Yash Birla Group companies, who did not have enough authority to make decisions. This often led to delays in any action initiated by lenders, the banker said, while speaking on condition of anonymity.

The only place that bankers actually saw the businessman was on Page-3 in the entertainment section of leading newspapers, this banker said.

The lack of attention from the promoter has meant that, over the years, many of the group’s businesses have either gone into liquidation or are facing legal troubles. In particular three large businesses — Birla Cotsyn Ltd, Birla Power Solutions Ltd and Birla Surya Ltd — have run into rough weather. Two are under liquidation and a third is facing insolvency. It is on account of Birla Surya that Birla has been declared a wilful defaulter.

The Birla Surya Story

In 2012, the Yash Birla Group announced its foray into the solar power business and set up a company called Birla Surya. The company was to produce solar cells at a manufacturing facility in Satara, Maharashtra. Hong Kong-based Asia Pacific Capital had invested $15 million to buy 15 percent stake in the company.

At the time of launch, Birla had said the group plans to invest up to Rs 5,400 crore through a mix of debt and equity, according to a Reuters report at the time. Lenders had approved credit lines worth over Rs 900 crore for the plant, however, not all the funds were disbursed.

The manufacturing plant never came up.

Two former bankers, who were directly dealing with the account, said that not only was the plant never set up, the equipment that Birla claimed to have imported from Germany also never arrived at the construction site. The bankers spoke on condition of anonymity.

With business in place, the loans were never paid back. In 2013, the account was declared a non performing asset. In February 2014, the company went into liquidation under the Sick Industrial Companies Act.

According to the two bankers quoted above, the liquidation process has not yielded much for the bankers. The land on which the facility was to be constructed is part of a larger parcel and finding buyers has been difficult, the bankers said.

So far, only a small land parcel, which the company owned in Raigad, Maharashtra has been sold, an official at the Mumbai liquidator’s office confirmed over the phone. The reserve price for the land parcel was set at Rs 10.5 lakh. BloombergQuint could not determine the eventual sale price.

Birla Power’s Legal Troubles

Another large Yash Birla group firm that has run into trouble is Birla Power Solutions Ltd, which was in the business of producing power generator sets and related equipment.

In 2012, the company decided it wanted to foray into the IT sector and raised Rs 250 crore through a fixed deposit scheme.

The money was never returned and investors lodged complaints against the company, saying they had been duped. This led to an investigation by Economic Offences Wing (EOW) of the Mumbai police. The police arrested then managing director of Birla Power PVR Murthy under charges of money laundering. Birla was also named in the charge sheet. The investigation led to further scrutiny from the Enforcement Directorate and the Income Tax department.

While investigators alleged that funds raised through Birla Power were used as equity for investment in Birla Surya, there has been no trial to prove the charges so far, the two bankers quoted above said.

In August 2014, the Bombay High Court sent the company for liquidation, saying that it had lost its ability to stay afloat. The court went on to appoint an official liquidator to sell the company’s assets.

The Sinking Flagship Firm

While the initial set of troubles were faced by small group firms, in recent years flagship textile company Birla Cotsyn has also been run aground.

In November 2018, the Mumbai bench of the National Company Law Tribunal (NCLT) admitted an insolvency petition against the company. The insolvency proceedings were initiated by Edelweiss Asset Reconstruction Company (ARC) Ltd, after it bought out Axis Bank Ltd’s exposure to the company.

Birla Cotsyn owes nearly Rs 600 crore to its financial creditors, Rs 20 crore to its operational creditors and about Rs 15 crore to its employees. The process for finding a suitable investor for the company is currently underway.

Birla Cotsyn reported a consolidated loss of Rs 89 crore in the year ended March 2018, according to the company’s last available financial report. In its annual report for the same financial year, the company said that the losses were due to the higher interest it paid on loans categorised as non-performing.

What Next?

Going by the penal provisions in the Reserve Bank of India’s guidelines, Birla or any new venture he floats cannot borrow from the formal financial system.

According to bankers, the focus now is on the few group firms where there could be some hope of revival. Among them is Zenith Birla (India) Ltd, the bankers said. The Yash Birla Group has been attempting to reach a one-time settlement with lenders for a working capital loan worth Rs 175 crore, according to its annual report for the financial year ended March 2018. The company’s total debt stood at Rs 289 crore, according to the annual report.

While some of these discussions are continuing, bankers don’t see much hope for the group.

We have often seen in business houses that by the third generation, interest in the business fizzles out, said one of bankers quoted above while putting down the Yash Birla Group’s fate to generational decay.