How ABG Shipyard pulled off India's biggest bank fraud - The Story Continues

How ABG Shipyard pulled off India's biggest bank fraud - The Story Continues - 

5 years, 28 banks, Rs 23,000 cr debt. This is how it stands. 

How did the fraud go undetected for so long? How did it come to light? How was the money diverted? And what led to the delay in CBI registering the FIR? All million dollar questions. Let us try to find out all the answers. Like solving a Rubik's cube. 

A sinking shipbuilding firm is behind India’s biggest bank fraud.

Between 2012 and 2017, ABG Shipyard Ltd (ABGSL), a Gujarat-based firm, ostensibly defrauded banks of Rs 22,842 cr. 

The scope and scale of the fraud is overwhelming, but the crux of the deceit was how ABGSL created a web of transactions to cheat a consortium of 28 bankers. Something unheard of. 

ABGSL took loans and diverted them. It made investments in overseas subsidiaries, bought assets in the names of affiliated companies, and also transferred funds to several related parties.

Its account became a Non-Performing Asset (NPA) in 2013, violating 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 term of repayment.

The clamor around the issue has been aggravated by the fact that the case is troubled with delays. SBI identified the fraud in January 2019, but filed a complaint only in November. A fresh and detailed complaint was filed in August 2020, but the CBI finally registered a case only on 7 February 2022, and booked ABGSL and ABG International Private Ltd.

It booked ABGSL’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 leading to the recovery of damning documents.

A forensic audit blew the cover

The fraud came to light during a forensic audit that Ernst and Young LLP (EY) conducted in January 2019, from April 2012 to July 2017. It found that the fraud had taken place during this period as per the FIR.

The fraud was conducted through diversion of funds, misappropriation, criminal breach of trust, to illegally gain at the cost of the bank’s funds. SBI has said this in its complaint.

As per the FIR, ABGSL now owes a total of Rs 22,842 cr. It owes ICICI (which was leading the consortium) Rs 7,089 cr, SBI Rs 2,925 cr, IDBI Bank Rs 3,639 cr, Bank of Baroda Rs 1,614 cr, Punjab National Bank Rs 1,244 cr, Exim Bank Rs 1,327 cr, Indian Overseas Bank Rs 1,244 cr and Bank of India Rs 719 cr, among others.

While the loans were given to ABGSL 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.

It appears that the funds were given without due diligence from the banks. The fraud amount under investigation could be more or less than what is reflected right now.

Loan money given to related parties, invested overseas

ABGSL routed the loan money by paying it to related parties.

The forensic audit — 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. which adjusted the receivables to ABGSL.

Transfer entities show that in previous years ABGSL had transferred funds to OOSPL and ABG EC.

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), ABGSL should have recovered investment of Rs 236 cr 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, ABGSL allegedly invested US$ 43 M in ABG Singapore, which was then potentially diverted.

It had sought permission 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. The money was diverted to tax havens.

Web of transactions

There are indications of properties being purchased by related or linked parties from funds provided by ABGSL.

After review of annual reports of ABGSL for FY 2014-15 and ledgers it appears that it had paid accommodation deposits worth Rs 83 cr to companies like Aries Management Services, GC Properties, Gold Croft Properties, before review period (in 2007-08). And they were related to ABGSL and its promoters

On review of the financial statements of these companies, it seems  that properties were purchased out of security deposits provided by ABGSL during the same year.

Based on bank book ledgers, on 15 and 16 March 2016, funds worth Rs 15 cr and 16 cr respectively were transferred to ABG Energy by ABGSL.

Also, funds amounting to Rs 31 cr 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 ABGSL amounting to Rs 31 cr and only potential circular transactions.

These transactions indicate that assets (properties) were purchased out of the funds provided by ABGSL but were not part of the fixed assets in the books of ABGSL.

It 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 cr, Rs 95 cr 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.

It is a very complex case as far as the transactions are concerned. The money has been paid, then sent back to the same accounts, then routed to different accounts of different entities.

Global crisis hit the company

ABGSL, flagship company of the ABG Group, engaged in shipbuilding and repair, was incorporated in 1985, has shipyards in Dahej and Surat in Gujarat. It was financed under consortium arrangement with 28 banks. The leading bank was ICICI.

It was affected by the global financial crisis of 2008, leading to it becoming a non-performing asset.

ABGSL constructed over 165 vessels in the last 16 years, including specialised vessels like newsprint carriers, self-discharging and loading bulk cement carriers but the global crisis impacted the shipping industry and hit the company.

Hence, there was paucity of working capital causing significant increase in the operating cycle, aggravating the liquidity and financial problem.

The account became an NPA on 30 November 2013.

Several efforts were made to revive ABGSL’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 the worst ever down turn, the operations of the company could not revive.

Without demand for commercial vessels and no fresh defense orders, it was finding it difficult to abide by the CDR. Thus, it was unable to service the interest and installments on the due date.

As restructuring failed, the account was classified as NPA in July 2016 with effect from 30 November 2013.

ABGSL may have violated the corporate debt restructuring arrangement, which mentioned that all cash inflows should be routed through the trust and retention account.

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 said there was no effort to delay the process.

CBI said that there was no delay in filing the FIR. 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.

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.

EY is likely to be the key prosecution witness in India's biggest bank fraud. The audit report will be examined. EY may be quizzed by CBI. The audit report will be examined to ascertain if it missed any lapses. Depending on the evidence CBI will decide who will be prosecuted and who will be made a witness. 

Lookout circulars have been issued against the accused and senior people of ABGSL to stop them from leaving the country via airports and border crossings.

Note - This article was first published on LInkedIn on 15th February, 2022

To be continued