Prime Minister Narendra Modi used strong words at The Economic Times’s Global Business Summit last Friday when he said the system will not accept “the theft of public money. That is the key to the new economy and new rules”.

At the same summit, finance minister Arun Jaitley also lamented that regularly occurring bank scams cannot help the economy and India Inc grow smoothly.

The front rows of the audience were occupied by some of the biggest business promoters of India and the sheer irony of the Modi’s assertion would not have been lost on them.

The most poorly kept secret of business operations in India – which is also the main cause of bank scams and wilful loan defaults by businesses – is that promoters greatly inflate project costs against which they access bigger bank loans. A good part of this money is used to build the personal wealth of promoters and to fund political parties. So has this changed in the “new India with new rules”? Going by the current scenario, very little has changed. Scams perpetrated by over-invoicing continue unabated.

The very start of a business, as seen in the case of Nirav Modi and Mehul Choksi’s modus operandi, is premised on a falsehood. The former managing director of Gitanjali Gems Ltd, Santosh Srivastav, who had resigned many years ago, told NDTV that the account books showed gems and diamonds worth over Rs 7,000 crore but physically the company had no more than Rs 200 crore worth of stocks. It is against such exaggerated inventories and receivables that the company likely get increased credit from banks. Srivastav says when he brought this to the notice of Choksi, he was told to mind his own business and look after the retail operations which he was heading then. Srivastav says he resigned soon thereafter.

So whether it is the diamond business or some big infrastructure project, the modus operandi remains the same – inflate the project cost and get the banks and taxpayers to foot the bill.

Gajendra Haldea who, as special secretary in the Planning Commission, specialised in drafting public-private partnership agreements (PPA) in infrastructure sectors during the UPA regime, once told me that all projects whether in roads, power or airports had resorted to inflated capital costs and it was a huge task to design PPA agreements with built-in clauses to counter such manipulations.

The community of chartered accountants and regulators, whom Jaitley now blames for not detecting such manipulations in time, knew all along that promoters inflated project costs in a manner that provided not only their debt component but also paid for the promoter’s equity.

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For instance, if the actual cost of a power project is Rs 100, it would be shown as Rs 150 to the banks. A consortium of banks then would lend Rs 100 to the company based on a normal debt to equity ratio of 2:1. So on an inflated project cost of Rs 150, the promoter manages to get a loan of Rs 100 which actually pays for both the debt and the promoter’s equity in the actual project cost of Rs 100. This has been the standard operating procedure for shady projects during the UPA governments and now as well in “New India”.

Therefore, the finance minister cannot possibly pretend that this is not happening in the “New India” that Modi so fondly talks about. Jaitley has said the auditors and regulators must take responsibility for not detecting such manipulations early enough and has also lamented that only the political class gets the blame for it.

The political class is very much part of this game as inflated and over-invoiced imports by big businesses are used to launder money to political parties.

As we sit and debate these issues in light of the Nirav Modi and Mehul Choksi scam, the finance ministry has appealed strongly in the customs appellate tribunal for the re-examination of a case of alleged over-invoicing of power equipment imports to the tune of nearly Rs 4,000 crore against the Adani Group.

There are other leading business houses too against whom the Directorate of Revenue Intelligence (DRI) has fully investigated reports of over-invoicing. There are two public interest litigations in the Delhi high court pertaining to the same cases of over-invoicing. At least in these cases, Jaitley can’t complain about failure on the part of the regulators or investigators to detect the alleged manipulations. These companies are also among the top borrowers from Indian banks and if a default by them occurs in the future it cannot be categorised as natural defaults owing to business risk until they are cleared in the cases of over-invoicing of imports. If these cases are proved, then their loan defaults will have to be categorised as ‘wilful’ and regulators must put a lien on their personal wealth.

Over-invoicing of imports, if proven, is tantamount to illegal diversion of borrowed bank funds. Therefore, it must be treated as wilful default. So far all cases of wilful default listed by the RBI are largely medium-sized businesses such as Rotomac Pens, Kingfisher Airlines and so on.

It is a surprise that there are no wilful defaulters yet among the top 20 big business houses that owe money to banks and have also defaulted in many instances.

It is evident that the big business groups somehow manage to keep themselves out of the wilful defaulters’ list and avoid a situation where a claim is made on their personal assets. This clout, Mr Jaitley, comes from their proximity to the political class and not regulators.

When many of these highly indebted big business honchos travel with the prime minister on his foreign jaunts, the regulators and investigators get mixed signals.

So, blaming regulators is valid but simply not good enough. The fish, as they say, starts rotting from the head.