The Clean-up of Corporate India Seems To Have Begun in Earnest!

Modi Sarkar 1.0 ended its term with a lot of unfulfilled promises and a sense of outrage that large industrialists were getting away with defaults again, the promise of good administration had been forgotten and bad loans, which had spiralled past Rs10 lakh crore, were threatening to sink public sector banks (PSBs).

As we headed into the general elections, the brazen shenanigans of the Sandesaras of Sterling Biotech, the multiple defaults of Anil Ambani, and the manipulation of judicial processes by the Essar group created a sense of crushing disappointment. Added to it, there was a massive ‘shadow banking’ crisis precipitated by the collapse of dubious IL&FS (Infrastructure Leasing & Financial Services), with its deep links to India’s top bureaucrats.

But Modi Sarkar 2.0 has started out on a heartening aggressive note. It is common knowledge that India’s investigative agencies act only when there are clear directions from the prime minister’s office (PMO). The slew of actions by multiple investigation agencies, with quick filing of charges or decisive action to bring back absconding industrialists from the cosy comfort of overseas tax havens, is sending shivers down the spine of Indian industry.

But this clean-up has been long overdue, to restore confidence in the system. At a time like this, it is important to remember some simple numbers published by Prof R Vaidyanathan in his book Indian UnInc., in 2014. While big industry accounts for the bulk of our bad loans, they account for only 18% of India’s gross domestic product (GDP). It is India UnInc., comprising unorganised sector and family businesses that contribute 45% of GDP; and, yet, they pay usurious interest rates.

Similarly, household savings contribute over 70% of our domestic savings, he says. Yet, banks have little respect for depositors, while they write off thousands of crores of rupees to benefit crooked industrialists. So let’s hope the government remains unmoved by the lobbying and pleas of big industry to go easy on them.

Over the past three decades, I have watched various governments, including the previous NDA (National Democratic Alliance) government, dilute and bury major scams after the initial photo-ops and arrests. Weak charge-sheets, incompetent filings and decades of litigation, finally, led to meaningless judgements.

Some investigations just vanished. Ours is a country that could not find out who received kickbacks for the Bofors gun deal or hold anyone responsible for the collapse of Unit Trust of India (UTI). We have also never questioned regulatory failure.

For the first time in decades, we are witnessing decisive follow-up action, whether in the form of filing quick charge-sheets in IL&FS, freezing assets of absconding industrialists or the work done to corner Mehul Choksi, Nirav Modi, Vijay Mallya or the Sandesara family, are examples. It is early days yet; we can only hope that the momentum will not flag over the next five years. There is a lot to do.

The breadth of action becomes apparent when one lists these actions.

Regulators, Raters and Auditors: Probably, for the first time ever, the Reserve Bank of India (RBI) has been asked by the SFIO (Serious Fraud Investigation Office) to conduct an Probably, for the first time ever, the Reserve Bank of India (RBI) has been asked by the SFIO (Serious Fraud Investigation Office) to conduct an internal investigation into lax handling of IL&FS, despite the red-flags raised by its inspection report two years earlier.

On 1st July, the rating agency, ICRA Ltd , sent its managing director and group chief executive officer, Naresh Thakkar, on leave until further notice, based on allegations of fixing ratings. A report on Moneycontrol indicates that CRISIL Ltd lost business to ICRA in 2016 for refusing to fix the credit rating.

If only there were a responsibility cast on CRISIL to report this fact to the regulator, the IL&FS debacle may have been averted. It is, probably, time to make such reporting mandatory.

In yet another swift action, the SFIO moved the bankruptcy court on 11th June with a petition to ban two audit firms—Deloitte Haskin & Sells and BSR Associates, statutory auditors for IL&FS Financial Services (IFIN). Deloitte audited IFIN for a decade without raising any red flags (allegedly in exchange for consultancy assignments).

Neeraj Singhal: The promoter of Bhushan Steel (which has been acquired by Tata Steel in one of the earliest and biggest bankruptcy resolutions under the new law) continues to face the heat of relentless investigation and action. Tata Steel paid over Rs32,500 crore to acquire the company; but banks still took a hit of Rs20,000 crore and, hence, the ongoing investigation and recovery effort.

On 1st July, SFIO filed a 70,000 page complaint against the group before a special court at Dwarka. Neeraj Singhal and Nitin Johari, a top executive, were arrested in early May, about a month before the SFIO complaint was filed. They have been charged with fraudulent misuse of letters of credit (LCs), financial misstatements, over-valuing assets to obtain bank credit, fake write-offs and siphoning off over Rs2,000 crore through a network of over 150 companies.

Neeraj Singhal had been arrested by the SFIO even in August 2018 and released on bail, even though he was arrested by the Central Bureau of Investigation (CBI) in 2014, when he was caught bribing the Syndicate Bank chairman.

Sterling Biotech: On 26th June, the Enforcement Directorate (ED) attached the overseas assets worth Rs9,778 crore of Sterling Biotech which, along with previous attachments, now aggregates Rs14,508 crore of assets attached. This includes oil rigs, ships, aircraft, oil-fields and property registered in multiple countries.

Since the promoters are understood to be hiding in Nigeria, where they have a sprawling business empire (while they failed to pay Indian banks), these attachments could deal a hard blow to the wealth stashed overseas . The Sandesara group is understood to have laundered this money through shell companies and fraudulent standby LCs of Rs4,500 crore.

A consortium of banks, led by Andhra Bank, wants to accept a 45% settlement offered by the absconding promoters and withdraw two defaulting companies of the Sterling group (Sterling Biotech and Sterling SEZ) from bankruptcy proceedings. The ED had strenuously objected to the withdrawal.

On 1st July, the ED indicated that it plans to expand this probe to the film industry, with which the star-struck promoters had close ties. The investigation could also lead to a top public sector bank chief and a powerful political family from Mumbai. This brazen misuse of LCs and bank credit would not have been possible without the active collusion of top bankers. In fact, Moneylife has documents from whistle-blowers that could indict some bankers.

Nirav Modi and Mehul Choksi: The action against Nirav Modi, the once high-flying jeweller who scooted after drilling a Rs13,700 crore hole in bank books, is relentless. While he remains incarcerated in London following government action, his assets in India have been attached and auctioned. Government agencies are now going after his overseas assets, built with funds siphoned from Indian banks. They have managed to get the Singapore High Court to order the freezing of a bank account of Nirav’s sister, Purvi Modi, and her husband with Rs44 crore.

Meanwhile Mehul Choksi, of Gitanjali Diamonds, who surrendered his Indian passport and acquired Antiguan citizenship, is also likely to face extradition. Mr Choksi owed over Rs14,000 crore to Punjab National Bank and, like Nirav Modi, had duped it through LC fraud.

The prime minister of Antigua has reportedly indicated that Mr Choksi would lose his newly acquired citizenship of that country and be repatriated to India. Mr Choksi, in long distance interviews, continues to blame the Bank. If he spills the beans on how the Bank colluded with him, hopefully some negligent bankers will also face the music.

Probably for the first time in India’s history, the government has used its clout and influence to bring back fraudsters, instead of helping stash money abroad! What a contrast from a Congress finance minister who told me he could do nothing about bringing a crony of Ketan Parekh back to India, even while he openly traded in India as a foreign institutional investor.

Winsome Diamonds: Until recently, one had believed that Jatin Mehta and family of Winsome Diamonds/ Suraj Diamonds had got away with their heist of bank funds. After duping banks of Rs7,000 crore, he scooted abroad to acquire the citizenship of St. Kitts, a tax haven in the Caribbean islands, and nobody seemed interested in pursuing him.

On 3rd July, the CBI raided 61 places across India, with a team of over 300 officials to go after various companies, but primarily Winsome Diamonds. It is unclear what they will do; but one expects this to lead to extradition efforts along the lines of Vijay Mallya, Nirav Modi and Mehul Choksi.

The Middling Fraudsters : On 3rd July On 3rd July CBI raided the second rung of industrialists, whose defaults are around Rs100 crore. These included Ludhiana-based Supreme Tex Mart (allegedly owes Rs143.25 crore to State Bank of India), Aegan Batteries (alleged loss caused to banks of Rs99 crore), Ramnanndi Hotels and Resorts Ltd (alleged loss Rs131.79 crore), Naftogaz India Pvt Ltd (owes Rs93 crore), SL Consumer Products (Rs55 crore loss), etc.

Such concerted actions make one optimistic, after a very long time, that the government is, indeed, serious about punishing corporate fraud by Indian industrialists. Many of them have built immense personal wealth, most of it stashed abroad, through rampant diversion of funds, inflated project costs and bribing and corrupting bankers and politicians. For many decades, they have dumped bad loans running into thousands of crores of rupees on banks, mainly PSBs, the cost of which was eventually borne by the people through repeated re-capitalisation of banks by the exchequer. Hopefully, this would be a thing of the past, because we need to restore confidence in the system.