A forensic audit was conducted. Every piece of evidence was collected and given to the CBI which aided in revealing how ABG Shipyard managed to pull off India’s biggest fraud spanning 5 years with 28 banks involved and a net Rs 23,000 crore in debt.
India’s Biggest Fraud
The “biggest bank fraud” in India is being blamed on a faltering shipbuilding company.
ABG Shipyard Ltd (ABG SL), a Gujarat-based company, is accused of defrauding banks of Rs 22,842 crore between 2012 and 2017. Considering that the theft transpired in a BJP-ruled state, the Narendra Modi administration has come under scrutiny, with the Opposition Congress alleging it of assisting in the “loot.”
The accused fraud’s extent and size are startling, however the essence of the deceit, as the CBI is uncovering, was the company’s creative manner of supposedly creating a network of transactions to defraud a consortium of 28 banks, notably State Bank of India (SBI), IDBI, and ICICI.
ABG SL allegedly acquired loans from these banks and subsequently diverted them, per the CBI sources. It reportedly invested loan proceeds in offshore subsidiaries, purchased assets under associated companies’ names, and moved funds to various relevant personnel.
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The company, whose account became a Non-Performing Asset (NPA) in 2013, is also accused of violating the conditions of its Corporate Debt Restructuring (CDR) agreement, which allows lender banks to cut interest rates on loans or extend the payback period.
The controversy has already been heightened by the reality that the case appears to be plagued by delays. The SBI discovered the scam in January of this year, but did not register a complaint until November of that year. In August 2020, a new, more detailed complaint was made, but the CBI did not lodge a case until February 7, 2019, booking ABG SL and ABG International Private Ltd.
Former head and managing director Rishi Kamlesh Agarwal, former executive director Santhanam Muthaswamy, and directors Ashwini Kumar, Sushil Kumar Agarwal, and Ravi Vimal Nevatia have all been arrested by the investigating agency. Last Saturday, inspections were launched at 13 of the accused’s homes in Surat, Bharuch, Mumbai, and Pune, yielding incriminating documents, according to sources.
The matter has sparked a flurry of inquiries: How did the deception go unnoticed for such a long time? How did the funds become diverted? What led to the discovery of the fraud? What caused the CBI to take so long to register the FIR?
A forensic audit blew the cover
The suspected fraud was discovered during one forensic audit done by Ernst & Young LLP (commonly known as EY) in January 2019 for the months of April 2012 to July 2017. As per the FIR, a copy of which was obtained by media agencies, the audit discovered that the fraud took place throughout this time period.
The media obtained access to the audit report’s conclusions, which revealed that fraud was perpetrated 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.
ABG SL currently owes a total of Rs 22,842 crore, as per the FIR, a copy of which is with ThePrint. It owes Rs 7,089 crore to ICICI Bank (which led the consortium), Rs 2,925 crore to SBI, Rs 3,639 crore to IDBI Bank, Rs 1,614 crore to Bank of Baroda, Rs 1,244 crore to Punjab National Bank, Rs 1,327 crore to Exim Bank, Rs 1,244 crore to Indian Overseas Bank, and Rs 719 crore to Bank of India.
According to CBI sources, the company received loans from these institutions between 2005 and 2010, but the fraud was discovered only after a forensic assessment. According to the SBI’s complaint, the fraud took place 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
According to the SBI complaint, ABG SL diverted the loan funds by transferring them to associated parties.
Money was shifted to another business named PFS Shipping India Ltd, per the forensic audit, which was based on the ledgers of One Ocean Shipping Private Ltd (OOSPL) and ABG Engineering and Construction (ABG EC) Ltd. The receivables were then reportedly changed to ABG SL by PFS Shipping.
“Transfer entities show that in previous years ABG SL had transferred funds to OOSPL and ABG EC,” the FIR says.
Per an insider in the CBI, the funds acquired from banks had been utilized to reimburse loans and compensate for additional expenditures of group firms, as well as for letters of credit.
Furthermore, as per the Master Restructuring Agreement (MRA), ABG SL ought to have retrieved a Rs 236 crore commitment in Standard Chartered Trust units made by its affiliate ABG Shipyard Singapore inside two months of the date of Corporate Debt Reconstruction. Rather, ABG SL is said to have deposited 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
According to the SBI, there are evidence that money supplied by ABG Shipyard Ltd were used to acquire properties by connected or affiliated persons.
“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.
Per the FIR, ABG SL relocated funds between Rs 15 crore and Rs 16 crore to ABG Energy on March 15 and 16, 2016, based on bank book ledgers.
ABG International Private Ltd also provided resources in the amount of Rs 31 crore in the shape of refunds 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.
The FIR says that these transactions “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 further claims that the corporation returned all deposits made to owners upon lease, departure, and license termination.
“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’
The main enterprise of the ABG Group, which would be in the shipbuilding and repair industry, is ABG Shipyard Ltd. The firm, which had been founded in 1985, has shipyards in Gujarat’s Dahesh and Surat. According to CBI sources, it was funded through a consortium agreement with 28 banks. ICICI Bank was the most successful bank.
The business was impacted by the worldwide financial crisis of2008, resulting in it being a non-performing asset, according to the FIR.
“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 goes on to say that there had been a scarcity of operating capital as a result of the recession, which prompted “significant increase in the operating cycle, thereby aggravating the liquidity and financial problem.”
On November30,2013, the company’s account was designated as a non-performing asset (NPA).
Numerous attempts have been taken, according to the SBI, to resurrect ABG SL’s business. This comprised all lenders restructuring the account through the CDR procedure in March 2014. However, because the shipping industry was experiencing “down turn, one of the worst ever seen, the operations of the company could not revive,” according to the FIR.
According to the petition, there was no market for commercial vessels because the business was in decline even as late as 2015, and the corporation was having difficulty adhering to the CDR because there were no new military contracts. As a result, the corporation was incapable to pay off the interest and instalments on time.
The account was categorized as a non-performing asset (NPA) in July2016, with back-dated effect from November30,2013, after the restructuring faltered.
Specifically, the SBI claims that the corporation may very well have broken the corporate debt restructuring agreement, which states that “all cash inflows should be routed through the trust and retention account…” the FIR says.
The ‘delay’ in flagging fraud, registering of case
Even though the scam was discovered by a Fraud Identification Committee in a summit in June 2019, SBI did not report it to the CBI until November 2019.
In a statement issued on Sunday, the SBI stated that there had been “no effort to delay the process.”
The SBI stated that fraud is proclaimed based on the conclusions of forensic audit reports, which are extensively addressed in joint lenders’ conferences. Whenever a fraud is reported, the CBI is normally the first to receive a report. More information is acquired as a result of the investigative agency’s enquiries.
When significant additional material is acquired, a secondary complaint is submitted with full and comprehensive data, which serves as the foundation for the FIR. The SBI produced a second, more complete report in this matter as well, and was submitted 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.
Finance Minister Nirmala Sitharaman told journalists on Monday that there was no lag because establishing the factors of fraud normally takes “52 to 56 months.” According to Sitharaman, the banks’ aptitude for detecting the scam in “less time than average” is “to the credit of the banks.”
“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.
According to CBI sources as well, the FIR was filed without delay. “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.
And according to FIR, additional consortium member banks’ authorization to make an official complaint was not obtained when the scam was discovered in 2019 or even after the first report was lodged. The subject of granting permission to submit a complaint was only mentioned and approved in meetings conducted with all parties during June and August 2020, according to the FIR.