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July 17, 2020

RBI moratorium on loan repayments will not apply to mutual funds and debentures

by Mahesh Mara in SEBI

RBI moratorium on loan repayments will not apply to mutual funds and debentures

The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. The lockdown though necessary has led to a disastrous impact on the economy. The Government of India announced a variety of measures to tackle the situation, from food security and extra funds for healthcare and for the states, to sector related incentives and tax deadline extensions. The Reserve Bank of India (RBI) announced an extension of the moratorium on term loan EMIs by three months, i.e. till August 31, 2020 in a press conference dated May 22, 2020. The earlier three-month moratorium on the loan EMIs was ending on May 31, 2020. This makes it a total of six months of moratorium on loan EMIs (equated monthly instalment) starting from March 1, 2020 to August 31, 2020. The extension of the three-month moratorium on repayment of term loans means that borrowers will not have to pay their loan EMI instalments during such period as prescribed by the RBI. 

The Bombay High Court in the case of Zee Learn Ltd (Petitioner) vs UTI Asset Management Co. Ltd. & Ors.(Respondent) has held that the Reserve Bank of India (RBI) circulars issued on March 27 granting a moratorium on payment of instalments of term loan for three months and the May 23 circular subsequently extending moratorium on loan repayments would not apply to mutual funds and debentures. A Division Bench of Justices R D Dhanuka and V G Bisht passed the order after hearing a petition filed by Zee Learn seeking a three-month moratorium of non-convertible debentures (NCDs) due to the UTI Mutual Fund after the government allows schools to reopen, subject to balance debenture amount continuing to bear interest at 10. 4 % per annum until the extended date.

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What do you mean by a moratorium?

A moratorium is a temporary suspension of an activity or a law until future events warrants lifting the suspension or related issues have been resolved. Moratoriums are often enacted in response to temporary financial hardships.  A moratorium period in banking is a period during a loan term when the borrower is not obligated to make a payment. It is a waiting period before the borrower starts making fixed monthly payments.

Facts of the Case:-

  • The petitioner had made a private placement of 650 unlisted redeembale non-convertible debentures of Rs. 10,00,000/- each for cash at par aggregating to Rs. 65,00,000/- in the month of March, 2015 with 10.40% Extended Internal Rate of Return (XIRR) payable at the time of maturity and having redemption date of 8th July, 2020.
  • The respondent is a sole trustee and was a party to the said agreement.
  • The petitioner made various payments to respondent. However, since March 2020 in view of the situation arising out of COVID-19 pandemic, the petitioner committed default in making payment of certain installments to respondent.
  • According to the petitioner, the petitioner has to make payment of Rs. 44 Crores to respondent under the said agreement.
  • The respondent raised demand for making payment of the amount under the agreement. The petitioner, however, could not make any payment.
  • The petitioner accordingly filed this Petition on various grounds impugning the said notice of demand dated 4th June, 2020 and for seeking extension of redemption date which is admittedly fall due on 8th July, 2020.

Observations of the High Court

  • The entire Petition is based on the reliance placed on the moratoriums dated 27th March, 2020 and 23rd May, 2020 issued by Reserve Bank of India.
  • A perusal of the said circular clearly indicates that it applies to all Commercial Banks, all Primary (Urban) Co-operative Banks, States Co-operative Banks, District Central Cooperative Banks, All India Financial Institutions, All Non-Banking Financial Companies and also deals with terms loans and working capital facilities provided by those entities.
  • It is clearly beyond reasonable doubt that those two circulars would not apply in case of mutual funds and debentures.
  • Petitioner could not demonstrate as to how the respondent would fall under any of those categories specifically prescribed under those circulars dated 27th March, 2020 and 23rd May, 2020.
  • Reliance placed by the petitioner on those two circulars for the purpose of availing benefits under those two circulars is misplaced. None of these circulars would apply to the facts of this case. The concession provided under those two circulars cannot be availed by the petitioner.
  • A perusal of the circulars clearly indicate that those circulars only permits those entities to provide moratorium of three months and does not record any directives to grant such moratorium.
  • Respondent is right in his submission that neither of those two circulars are applicable nor the petitioner has made out any case to avail of the benefits under any of these circulars.
  • A perusal of the record further indicates that the petitioner has committed default in making payment to respondent under the Debenture Deed not only during the lock down period since March, 2020 till date but has already been defaulted since 4th July, 2019.
  • The petitioner cannot be allowed to raise the plea that the petitioner has committed default because of lock down situation since March, 2020.
  • The respondent is a sole trustee and has to make payment to 21000 small investors out of the funds which they would receive on redemption of the debentures from the petitioner.
  • If this Court interferes with the two notice of demand and grants extension to the petitioner, the respondent would commit default to those 21000 small investors.
  • The guarantor Zee Entertainment Enterprises Limited is a profit making company and is liable to face the consequence of default committed by the petitioner.
  • It is for the petitioner to make an arrangement for the balance amount on the due date which the petitioner has failed. The Petition was devoid of merits and was accordingly disposed of.

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