Could the BAI case have been handled more prudently?

The answer is in the affirmative. Economic and financial crimes have taken place in other countries in recent years but governments have handled them with such care and caution that they have not hurt the inherent confidence that the public should always have in the economic architecture of the country.

Since 2nd April 2015, the BAI case has created a full range of tumult in the country. The country has lost its usual serenity. Even if that is restored somehow or other at some stage, one is not certain whether it will be business as usual thereafter.

First, the chaos that has come about.

Disorientation all and sundry

Many workers lost their jobs. A company like Iframac has been scattered out to the point of complete disappearance. Doubts have been cast whether, following the actions taken by the authorities, all the conditions precedent before inviting bids for the purchase of certain BAI businesses were clearly laid down to avoid subsequent disputes with bidders. Or, whether new conditions were laid down en route as an afterthought with the attendant risk of loss of international confidence in our system.

Special Administrators, who were appointed after amending the existing law to round up the businesses of the BAI group in the midst of the storm raised by this whole process, decided to leave in mid-course. The Special Administrators have raised bills for their services which have been the subject of dispute in public. Another Special Administrator has consequently been appointed.

At a time when it is becoming the norm for public projects to be labelled in no less than billions of rupees, the newly appointed Special Administrator has put up a claim of no less than a billion against the insurance company having provided the Directors’ and Officers’ Liability Insurance policy to the BAI group. This is probably related to the case of certain directors of the finance company of the BAI group having been arrested lately for credit and investment decisions they would have taken and which are being reproached to them.

Shops belonging to the group have remained in a state of limbo long after the main blow was delivered in April. So have suppliers to those shops. The insufficient supply of funding, following the sudden stoppage of financial flows from credit institutions belonging to the group put under receivership or under special administration, has been the main reason for this debacle. It was a transition which needed to be carefully monitored and managed, but that was not available once the storm was brought in.

BAI Insurance policyholders have gone through a traumatic time, being unsure for a long time whether they’ll recover their hard-earned savings from the insurance policies they’ve bought. Money has been borrowed from third parties and certain assets realized to pay some of them off while others have been made to hold IOUs in the form of bonds to be redeemed in future years.

The BAI’s flagship hospital, Apollo Bramwell, appears to be headed towards yet more uncertainty. It may be engaged in a process of accumulating more deficits as well as time goes by, while other competing clinics of the country have been doing more brisk business than usual.

At this stage, one is not quite clear whether the owners of the BAI properties have challenged the government and concerned public bodies which have taken the decision to deprive them of their property on the grounds that important sums of money would have been diverted away inappropriately under different guises from the group’s institutions. If that is the case, the suit in damages may claim attention for longer still.

It is not quite clear also whether the ‘Good Governance and Integrity Reporting Bill’ currently under discussion in Parliament – which aims to give powers to a non-judicial Agency in the Ministry to inscribe properties of “unexplained wealth” holders for eventual disposal of such properties by it through sale — will overcome normal legal procedures to defeat claims the owners of the BAI may present against the government in this case. Procedures of the sort will obviously send the signals to all those who may be concerned, notably investors.

The Other Option

No person in his right mind is inclined to permit financial institutions entrusted with the public’s money to take undue risks with it. Nor should any decent person defend company practices which are undefendable. It is the duty therefore of the public authorities to prevent excessive risks being taken with depositors’ or policy holders’ money in the case under discussion by sailing with utmost care and caution through rocks and shallows.

This is the reason why financial regulators have been appointed. Their job is to stop the rot before it becomes alarming and threatening to the public interest. There are clear metrics by which they can come to the conclusion that the situation is getting out of hand, e.g., actuaries’ valuation of the insurance portfolio and their recommendation as to the amount of additional funds to be injected by shareholders to make good losses already incurred and to be incurred in future.

If the financial institutions belonging to the BAI group were not granting financial facilities in accordance with the rules of prudence imposed on them under regulatory rules, the regulators are empowered to stop it before it assumes alarming proportions. Did loans given by the banking arm become non-performing, including from the group’s companies? If so, the banking regulator has the power to ask the shareholders to cease distributing any dividends to themselves and to inject in a timely manner the additional capital required to compensate for loss of capital on account of the non-performing advances. It can even freeze the granting of additional loans until losses so incurred have been made good.

It is understandable that the regulators are not present all the time in financial institutions when the latter are taking decisions to grant loans or to employ premiums for investment in diverse assets. But they can read into the company’s accounts for signs of possible distress and start actions as warranted. They can also ask independent outside experts to evaluate the true value and adequacy of assets financial institutions under their stewardship are actually holding against their liabilities to the public. They base themselves on such findings to prescribe remedial actions in a given timeframe before things get out of hand.

If, despite all, remedial action was not voluntarily forthcoming, our laws lay down the procedures for achieving an “orderly” winding up of business. This is true for both the insurance sector and the banking sector in both of which the BAI group was engaged, notably the Banking Act, the Bank of Mauritius Act, the Insurance Act and the Financial Services Act. These laws have been made not only to prevent financial institutions becoming reckless. They are aimed principally to protect the public interest, such as not having to pull down all at once a whole financial architecture with the type of unwholesome consequences we’ve seen the BAI case has had on the depositor public, insurance policy holders and on the trust and confidence that everybody should have in the country’s financial system.

Aside from direct controls which can be applied under such specific laws, we have the Companies Act which lays down the broad platform for companies to govern themselves properly in relation to their fiduciary responsibilities. We also have the Insolvency Act which prescribes the steps to follow if a business has reached the stage of having to be “realized” to pay off unsatisfied creditors and finally the shareholders of the company if at all. But before such a stage is reached, there are safeguards towards the good conduct of business by companies such as Listing Rules for quoted companies and the National Code of Corporate Governance which has done a tremendous amount of good work for bringing our companies to comply with international standards of good conduct. Similarly, the Bank of Mauritius and the Financial Services Commission have issued several guidelines for businesses to comply with in accordance with law. All such safeguards exist already to prevent the precipitous downfall of businesses and the pains which ensue.

Conclusion

It should be evident that as a rule of law country, all parties – be it the authorities or those in charge of running companies – have to follow a series of laid-down procedures to either turn around a company which can be salvaged or accompany in an orderly manner another which must take the insolvency route. All this has been worked out to get to the heart of the matter – howsoever complex and chaotic it might be – in a rigorous, disciplined and lawful and orderly manner.

We appear to have exercised instead the option to precipitate the group’s downfall, whatever the consequences. This was surely not the best option available on our table.