Explained | How did the ABG Shipyard fraud happen?

The CBI registered an FIR against top officials of ABG Shipyard in the first week of February.

The CBI registered an FIR against top officials of ABG Shipyard in the first week of February. | Photo Credit: PTI

The story so far: In early February, the Central Bureau of Investigation (CBI) filed a first information report (FIR) against the former top officials of ABG Shipyard in the biggest known case of bank fraud in the country. Former officials have been charged with causing “wrongful loss” of ₹22,842 crore to an ICICI Bank-led consortium of banks that also includes the State Bank of India. The Congress has accused the Bharatiya Janata Party government of a delay in filing the FIR, an allegation the BJP has dismissed. Earlier, in 2018, diamond merchants Nirav Modi and Mehul Choksi had committed fraud using unauthorised letters of undertaking that caused a loss of more than ₹11,000 crore to Punjab National Bank.

When did troubles at ABG Shipyard begin?

ABG Shipyard, which just about a decade ago called itself India’s largest shipbuilding and ship repair company in the private sector, saw an accelerated fall in its financial well-being after 2011-12, the year in which it made its highest revenues. Within two years of that, it had slipped into losses. By 2014-15, its revenues were just one-sixth of its peak. In its heyday, ABG Shipyard regularly highlighted its ability to construct all types of quality ships, offshore rigs and specialised vessels. It also got orders from the Government.

The fall in its fortunes is linked to the global crisis that impacted the whole shipping industry. The SBI, recounting the history of this case in its complaint letter to the CBI, traces the crisis to a fall in commodity demand and prices and, subsequently, a fall in cargo demand. This, it says, led to order cancellations and an inventory pile-up, which then reflected in the books as a severe financial problem.

With the situation worsening, in March 2014, the high debt-laden ABG Shipyard undertook a Corporate Debt Restructuring scheme, according to which its lenders gave it a breather by allowing for a brief moratorium on interest rates, an extension of the repayment period, a reduction in interest rates, among other such measures. By the next year, when it incurred a huge loss of over ₹900 crore, its long-term borrowings, largely from banks, had crossed ₹4,300 crore.

The debt restructuring exercise failed, with the company itself admitting in a BSE notice that it had defaulted in loan payment as well as in the terms of the scheme. This was when the consortium of banks declared the ABG Shipyard accounts as a non-performing asset, but backdated with effect from November 30, 2013.

After such a declaration, in 2017, ICICI successfully introduced insolvency proceedings against ABG Shipyard at the National Company Law Tribunal, which in April 2019 ordered its liquidation. That process is still underway, the SBI in a statement said a few days ago. The claim amount for ICICI Bank from ABG Shipyard is ₹7,089 crore; IDBI Bank comes next (₹3,639 crore), followed by SBI (₹2,925 crore). This is as per the data shared by the SBI in its complaint letter.

When did the scam take place?

The fraud came to light when Ernst&Young (EY), which was appointed as a forensic auditor in 2018, submitted its report in January 2019. The period studied was between April 2012 and July 2017. The report, the SBI letter says, reveals that the accused —Rishi Kamlesh Agarwal (who was the Chairman and MD), Santhanam Muthaswamy (Executive Director), Ashwini Kumar (Director), Sushil Kumar Agarwal (Director), and Ravi Vimal Nevetia (Director) — “have colluded together and committed illegal activities including diversion of funds, misappropriation and criminal breach of trust and for purposes other than for the purpose for which the funds are released by the bank.” However, the letter also said that “the involvement of unknown persons and public servants may also be examined during investigation.”

The Hindu reported that the “funds were allegedly used for unstated purposes, investments were made through a Singapore-based subsidiary and there were payouts running into hundreds of crores to related parties. Properties were also bought from the funds provided by ABG Shipyard.”

The SBI filed the first complaint in November 2019. Even though ICICI Bank led the consortium, it was SBI that filed a complaint, it being the largest public sector bank among ABG Shipyard bankers. A recent SBI statement says there was “continuous engagement” with the CBI after this. The second complaint, which clarified some of the questions raised by the investigating agency, was filed in August 2020. This was the basis of the FIR that came about in the first week of February.

Almost all the banks in the consortium had reported the account as fraud within about a year of the EY forensic audit report. The first to do so was Exim Bank (March 2019). This was followed by ICICI Bank (April 2019). SBI did so in June that year.

What were the clarifications sought by the CBI after the SBI’s first complaint?

In March 2020, the CBI had sought clarifications on the SBI’s initial complaint. The first of these pointed to the absence of any internal investigation. The SBI responded to this by pointing to the process by which it declared the account a fraud. This, notably, happened some months before its first complaint letter. The CBI follow-up also had a query on the timing and specific instances of the fraud. To this, the SBI has referred to the EY report, which again was the very basis of the first complaint. One other CBI query in the March 2020 follow-up raised the issue of consent of other consortium members in filing the complaint. This, the SBI responded to by saying it hadn’t received the mandate of the other members at the time of filing of the first complaint but that many of them had provided consent for the same in meetings thereon.

The SBI has claimed in a release that at no point was there any effort to delay the process to recover the dues. “Typically when fraud is declared, an initial complaint is preferred with the CBI, and based on their inquiries further information is gathered. In a few cases, when substantial additional information is gathered, a second complaint incorporating full and complete details is filed which forms the basis for the FIR,” it said in the release.

What is the Opposition saying?

Congress general secretary Randeep Singh Surjewala has asked why an FIR wasn’t lodged despite the liquidation process starting five years ago, and the account being declared a fraud in 2019.

Finance Minister Nirmala Sitharaman, in response, has said, “In fact November 2013 is when it was declared a non-performing asset (NPA). After that, because a consortium of banks have had business with them, they have all sat together to see how best any restructuring can be done, which is a due process done for any account under stress — more so because it’s a big account and also was becoming an NPA.” She said, “However, overall, not just for this account, in general, for any account it takes 52 to 54 months to scrutinise it. To the banks’ credit they have taken lesser time than what is normally the average to detect this kind of fraud.”

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Printable version | Feb 20, 2022 4:43:18 pm |