New Delhi: A sinking shipbuilding firm is behind what is being described as India’s “biggest bank fraud”.
Between 2012 and 2017, ABG Shipyard Ltd (ABG SL), a Gujarat-based firm, purportedly defrauded banks of Rs 22,842 crore total. This revelation has caused the Narendra Modi government to come under fire, with the Opposition Congress accusing it of aiding in the “loot”, given that the fraud occurred in a BJP-ruled state.
The scope and scale of the alleged fraud is staggering, but the crux of the deception, as the Central Bureau of Investigation (CBI) is discovering, was the novel way in which the company apparently created a web of transactions to cheat a consortium of 28 banks including State Bank of India (SBI), IDBI and ICICI.
According to CBI sources, ABG SL took loans from these banks and then diverted them. It allegedly made investments in overseas subsidiaries from the loan amounts, bought assets in the names of affiliated companies, and also transferred money to several related parties.
It is also alleged that the company, whose account became a Non-Performing Asset (NPA) in 2013, violated terms of its arrangement for Corporate Debt Restructuring (CDR) — a relief mechanism in which lender banks either reduce the interest rates on the loans or increase the tenure of the repayment.
The brouhaha around the issue has been exacerbated by the fact that the case seems to be beset with delays. The SBI identified the fraud in January 2019, but filed a complaint only in November that year. A fresh, more comprehensive complaint was filed in August 2020, but the CBI finally registered a case only on 7 February, and booked ABG SL and ABG International Private Ltd.
The investigative agency has also booked ABG SL’s former chairman and managing director Rishi Kamlesh Agarwal, former executive director Santhanam Muthaswamy, and directors Ashwini Kumar, Sushil Kumar Agarwal, and Ravi Vimal Nevatia. Searches were also conducted last Saturday at 13 premises of the accused in Surat, Bharuch, Mumbai, and Pune, leading to the recovery of incriminating documents, sources said.
The case has raised a storm of questions: How did the fraud go undetected for so long? How was the money diverted? How did the fraud come to light? What led to the delay in registration of the FIR by CBI?
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A forensic audit blew the cover
The alleged fraud came to light during a forensic audit that Ernst and Young LLP (also known as EY) conducted in January 2019, for a period between April 2012 and July 2017. The audit found that the fraud had taken place during this period, according to the FIR, a copy of which has been accessed by ThePrint.
The findings of the audit report, details of which were accessed by ThePrint, showed that fraud was conducted through “diversion of funds, misappropriation, and criminal breach of trust, with an objective to gain unlawfully at the cost of the bank’s funds,” the SBI said in its complaint.
According to the FIR, a copy of which is with ThePrint, ABG SL now owes a total of Rs 22,842 crore. Out of this amount, it owes ICICI (which was leading the consortium) Rs 7,089 crore, SBI Rs 2,925 crore, IDBI Bank Rs 3,639 crore, Bank of Baroda Rs 1,614 crore, Punjab National Bank Rs 1,244 crore, Exim Bank Rs 1,327, Indian Overseas Bank Rs 1,244 crore, and Bank of India Rs 719 crore, among others.
Sources in the CBI said that while the loans were given to the company by these banks between 2005 and 2010, the fraud was detected only after the forensic audit. The SBI in its complaint said that the fraud occurred between 2011 and 2017.
“From the initial investigation it appears that the loans were sanctioned between 2005 and 2010. It appears that the money was given out without due diligence from the banks. The fraud amount under investigation could be more or less than what from what is reflected right now,” said a CBI source.
Loan money given to related parties, invested overseas
The SBI complaint noted that ABG SL routed the loan money by paying it to related parties.
The forensic audit — which was based on the ledgers of One Ocean Shipping Private Ltd (OOSPL) and ABG Engineering and Construction (ABG EC) Ltd— noted that money was transferred to another company called PFS Shipping India Ltd. PFS Shipping then allegedly adjusted the receivables to ABG SL.
“Transfer entities show that in previous years ABG SL had transferred funds to OOSPL and ABG EC,” the FIR says.
According to a source in the CBI, the money borrowed from banks was used to repay loans and pay for other expenses of group companies, as well as for letters of credit.
Moreover, according to the Master Restructuring Agreement (MRA), ABG SL should have recovered investment of Rs 236 crore made by its subsidiary ABG Shipyard Singapore in the units of Standard Chartered Trust within two months from the date of Corporate Debt Reconstruction. Instead, ABG SL allegedly invested US$ 43 million in ABG Singapore, which was then “potentially diverted”.
“The company had sought permissions to invest in overseas subsidiaries, which is a general business practice. But a huge chunk was re-routed for some other purpose, other than what was declared,” said the CBI source quoted above. “The money, it is suspected, was diverted to tax havens.”
Web of transactions
The SBI has alleged that there are indications of properties being purchased by related or linked parties from funds provided by ABG Shipyard Ltd.
“After review of annual reports of ABG SL for financial year 2014-15 and ledgers it appears that ABG SL had paid accommodation deposits worth Rs 83 crores in total to companies like Aries Management Services, GC Properties, Gold Croft Properties, before review period (in 2007-08). And these parties were potentially related to ABG SL and its promoters,” the FIR says.
“On review of the financial statements of these companies, it appears that properties were purchased out of security deposits provided by ABG SL during the same year,” the FIR adds.
According to the FIR, based on bank book ledgers, on 15 and 16 March 2016, funds worth Rs 15 crore and 16 crore respectively were transferred to ABG Energy by ABG SL.
Also, funds amounting to Rs 31 crore were received from ABG International Private Ltd in the form of refund of accommodation deposits.
“This indicates that there may not be actual refund of accommodation deposits previously paid by ABG SL amounting to Rs 31 crore and only potential circular transactions,” the FIR says.
These transactions, the FIR adds, “indicate that assets (properties) were purchased out of the funds provided by ABG SL” but were “not part of the fixed assets in the books of ABG SL”.
The FIR also alleges that the company collected back all the deposits paid by it to owners on termination of lease, leave and licence.
“The amount was received back from ABG International Private Limited. On review of the bank book, it noted that out of Rs 300 crore, Rs 95 crore might have been bought in via circular transaction in April 2014 as outflow to linked parties and inflow from ABG International on the same date,” the FIR says.
“It is a very complex case as far as the transactions are concerned. The money has been paid, then sent back to same accounts, then routed to different accounts of different entities,” the CBI source said.
‘Global crisis hit the company’
ABG Shipyard Ltd is the flagship company of the ABG Group, which is engaged in the business of shipbuilding and repair. The company, which was incorporated in 1985, has shipyards in Dahesh and Surat in Gujarat. It was financed under consortium arrangement with 28 banks, sources in the CBI said. The leading bank was ICICI.
The FIR noted that the company was affected by the global financial crisis of 2008, leading to it becoming a non-performing asset.
“ABG SL constructed over 165 vessels in the last 16 years, including specialised vessels like newsprint carriers, self-discharging and loading bulk cement carriers but as the global crisis impacted the shipping industry, it hit the company,” the FIR says.
It adds that due to this crisis, there was a paucity of working capital which caused “significant increase in the operating cycle, thereby aggravating the liquidity and financial problem”.
The company’s account became an NPA on 30 November 2013.
According to a statement by the SBI, several efforts were made to revive ABG SL’s operations. This included restructuring the account under the CDR mechanism in March 2014 by all lenders. However, as the shipping industry was going through a “down turn, one of the worst ever seen, the operations of the company could not revive”, the FIR says.
According to the complaint, there was no demand for commercial vessels as the industry was going through a downturn even as late as 2015 and with no fresh defence orders, the company was finding it difficult to abide by the CDR. Thus, the company was unable to service the interest and instalments on the due date, the complaint says.
As the restructuring failed, the account was classified as an NPA in July 2016 with back-dated effect from 30 November 2013.
Notably, the SBI has alleged that the company may have violated the corporate debt restructuring arrangement, which mentioned that “all cash inflows should be routed through the trust and retention account…” the FIR says.
The ‘delay’ in flagging fraud, registering of case
Although the fraud was identified by June 2019 by a Fraud Identification Committee in a meeting, the first complaint to CBI was made by SBI only in November 2019.
The SBI in a statement released Sunday said there was “no effort to delay the process”.
Press release about ABG Shipyard issue. @DFS_India @FinMinIndia
Our statement -: pic.twitter.com/RP71DBhePD
— State Bank of India (@TheOfficialSBI) February 13, 2022
The SBI said that fraud is declared on the basis of forensic audit report findings that are discussed thoroughly in joint lenders’ meetings. Typically, when a fraud is declared, an initial complaint is usually tendered with the CBI. Based on the investigative agency’s inquiries, further information is gathered. In cases where substantial additional information is gathered, a second complaint incorporating full and complete details is filed, which forms the basis for the FIR. In this case too, the SBI filed a second more comprehensive report, which was sent to the CBI in August 2020.
“The circumstances of the fraud as well as CBI requirements were further deliberated in the various meetings of Joint Lenders and a fresh and comprehensive second complaint was filed,” SBI said in its statement.
Speaking to reporters Monday, Finance Minister Nirmala Sitharaman said there was no delay as determining the elements of fraud usually takes “52 to 56 months”. According to Sitharaman, it was “to the credit of the banks” that they detected the fraud in “less time than average”.
“A forensic audit was done. Every piece of evidence was collected and given to the Central Bureau of Investigation. Meanwhile, in parallel, an NCLT (National Company Law Tribunal) process is also ongoing,” Sitharaman said.
“I don’t want to politicise this too much as I am sitting in the RBI office, but these noises are being made of how this is the biggest fraud under this government. One should not forget that the account was first declared an NPA in 2013,” she said.
CBI sources also said that there was no delay in filing the FIR. “We were in constant touch with the bank. The various complex transactions were being looked into. Not all transactions are dubious — one has to identify when and how the fraud has occurred, which takes time. The investigation is on,” a source said.
According to the FIR, consent to lodge a formal complaint from other consortium member banks was not received when the fraud was identified in 2019 or even when the first complaint was filed. It was only in meetings held with all stakeholders between June and August 2020 that the issue of providing consent to file a complaint was raised and received, the FIR states.
(Edited by Asavari Singh)
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