RBI circular allowing moratorium on term loans not applicable to mutual funds and debentures: Bombay HC

The Bombay High Court has ruled that the Reserve Bank of India’s circular that allows banks to grant moratorium on term loans would not be applicable to mutual funds and debentures.

A Division Bench of Justices R D Dhanuka and V G Bisht passed the order while hearing a writ plea filed by Zee Learn which moved the Court against UTI Asset Management Co., seeking a three-month moratorium of non-convertible debentures (NCDs) due to the UTI Mutual Fund.

On March 27, 2020 the Reserve Bank of India (RBI) had passed a circular granting moratorium on payment of instalments of term loan for three months and subsequently on May 23, a circular was passed extending moratorium on loan repayments.

The bench noted that the entire petition was based on reliance placed on moratoriums related circulars issued by RBI on March 27 and May 23.

The Court said, that a perusal of the RBI circular clearly indicates that it is applicable 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. The Court added, “It is clearly beyond reasonable doubt that those two circulars would not apply in case of mutual funds and debentures.”

The company – Zee Learn, an Essel Group Company – through senior counsels Aspi Chinoy and Janak Dwarkadas, stated that the company had made a private placement of 650 unlisted redeemable Non-Convertible Debentures of Rs. 10 lakh each for cash at par aggregating to Rs. 65 lakh in March, 2015. payable at the time of maturity and can be redeemed on July 8.

Zee Learn further said that, as per agreement, it had made various payments to UTI Asset Management Company Ltd. However, because of the Covid induced lockdown since March this year, it had defaulted in the balance payment of approximately Rs 44 crore to UTI AMC and sought extension of time.

On the other hand, UTI AMC contested this claim and said that Zee Learn has been a defaulter since July 2019, and that the last default occurred in March this year. According to UTI AMC, any relief to Zee Learn, would impact over 21,000 small investors who are required to be paid by UTI AMC out of the debentures’ proceeds. It further stated that Zee Learn was attempting to protect the guarantor—Zee Entertainment Enterprises Ltd — a profit making company.

The Bombay High Court agreed with UTI AMC that being the guarantor, Zee Entertainment is liable to face consequences of the default. The Court held that Zee Learn can’t be granted any relief on the basis of the RBI circular, which doesn’t apply to mutual funds.

The Court noted that the RBI has only permitted and not directed banks and non-bank lenders to consider grant of a moratorium to their borrowers.