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In this issue, we bring to you the much talked about banking scams and insolvency proceedings of steel & cement companies.
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The Fall of the Steel Giant – Bhushan Steel The Background Story and Challenges: In July 2017, out of the 40% of Indian banks’ Non-performing assets (NPA) undergoing resolution under NCLT, Bhushan Steel, the third largest steel producer in the country, owed ₹ 56,000 crores to its lenders and held 40% share in the NPAs. Started by acquiring an ailing steel factory, their steel plant built in Odisha, made the banks eager to provide finance. By 2012, the industry was struggling to make interest payments, due to the drastic fall in the steel prices and started borrowing from one bank to pay to another. Failing to repay loans, bribing for new loans started. Despite this, the bankers confidently kept on funding their projects. In 2014, when Bhushan steel was on the brink of default, the steel prices remained low and the interest cost for the company rose, increasing its total debt by 30% within two years. Trouble in the paradise: In 2017, it was reported that Bhushan Steel is diverting bank loans to a company called First Financial, the shares of which were bought at a cheap rate. It saw a boom of 5000% within a year which helped Bhushan Steel earn a tax-free profit. It was then when SEBI ordered a probe into the matter. The continuously falling share price, negative net worth and the borrowings turning into huge NPAs, led the company to be named one among the 12 biggest defaulters being directed to the bankruptcy court. Rescue by Tata Steel: In May 2018, Tata Steel-owned subsidiary Bamnipal Steel Limited (BNPL) acquired Bhushan Steel’s 73% stake, marking the resolution under the Insolvency and Bankruptcy Code (IBC), 2016. Shares of nearly ₹ 159 crores were bought by BNPL. Lenders also received 7.25 crore equity shares, after conversion of ₹ 14.5 crore worth loans. Due to the deal the financial creditors were to recover ₹ 35,200 crores which covers the principal amount and a stake of 12% in the company. This works out to a 37% haircut for the financial creditors.
Much before declaring the final decision. The committee of creditors decided that they will wait for the Supreme Court to take the final decision on the eligibility of both ArcelorMittal and Numetal before they declare the winning bidder. There is no going back: Though an objection has been filed with NCLT over the takeover and the tribunal has agreed to hear the plea, no stay on the proceedings has been granted. This case is a positive sign for the growth of the banking sector which is under the pressure of huge NPAs. Solutions like this will reform the operating structure of such financial transactions and promote transparency.
By: Srishti Choudhary
Monnet Ispat & Energy Ltd Monnet Ispat energy, established in 1994, was one of the country's foremost steelmakers, that ran a successful coal-based sponge iron plant with an annual capacity of 1.5 million tonnes in Chhattisgarh. Road to insolvency: The company entered into problems when the coal mines attached to the plant was canceled in 2014 after the Supreme Court order. Crashing steel prices intensified its crisis and resulted in bankruptcy. Monnet was one of the 12 accounts that the Reserve Bank had identified in its first list tagged as the 'dirty dozen' for an immediate resolution mid-last year based on one criterion: the total revelation of the company would be at least Rs 5,000 crore and 60% of this revelation have turned non-performing by March 2016. The firm was one of the first insolvency appeals filed, along with Essar Steel, on 27 June. However, the case was stuck after the judge questioned about the claim amount in the appeal being more than the default amount.
The counsel for SBI simplified that the firm defaulted on loans worth Rs. 1,539 crore owed to SBI, as against to the claim amount of more than Rs. 2,239 crore. The remaining Rs. 700 crore is due for repayment. The tribunal agreed to consulting firm Grant Thornton to be the insolvency resolution professional for Monnet. It also gave approval to the promoters of the steel firm to submit a resolution proposal to Grant Thornton. Bid to acquisition:
JSW Steel has won the bid to acquire bankrupt Monnet Ispat and Energy Ltd (MIEL) in the auction. The COC (Committee of Creditors) of Monnet Ispat and Energy is undergoing insolvency proceedings, approved the resolution plan by Sajjan Jindal's JSW Steel and AION Capital. "The consortium has been acknowledged as the successful resolution applicant by the COC of MIEL on 10 April 2018, and has received a Letter of Intent (LOI) dated 12 April 2018,". "The consortium has acknowledged the terms of the LOI. The conclusion of the transaction is subject to obtain necessary regulatory approvals, including from the NCLT and the Competition Commission of India.
Completion of Insolvency resolution plan :
The bankrupt Monnet obliged over Rs 11,000 crore to a group of lenders. On August 31, 2018, the insolvency resolution plan was approved by NCLT, under which JSW Steel has provided a working capital advance of Rs. 125 crore & Rs. 2,457 crore has also been paid to the secure financial creditors.
By: Mahima Jaiswal
The Punjab National Bank Fraud Punjab National Bank is a multinational banking and financial services company. It is a state-owned corporation in New Delhi, India. On February 2018, PNB disclosed non-performing assets of $1.77 billion, out of which, one of the biggest fraud allegedly orchestrated by jeweller and designer Nirav Modi. What went wrong? On January 16, few of partnership firms (Diamond R US, Solar Exports and Stellar Diamonds) approached the bank with a set of import documents, as the firm didn’t have any sanctioned limit , the branch officials requested the firms to furnish a 110% cash margin for issuing the LoU (Letter of Undertaking). Shetty, a former deputy manager at the PNB, and Manoj Kharat, had been worked as the "single window operators" of the scam. On further investigation, it was found that two of their employees use to fraudulently issue LoUs without following any prescribed procedures and then transmitted to SWIFT instructions to the overseas branches (Allahabad bank and Axis bank in Hong Kong) of Indian Banks. And the fund raised for the payment of import bills have not been used for the purpose it was issued. Present scenario : 20 July 2018 - Modi Government was prepared to infuse about Rs. 20 billion into PNB, to help it meet dues on its perpetual bonds. 22 July 2018 -Nirav Modi tried to secure a citizenship of Vanuatu located in the South Pacific Ocean and the Vanuatu government rejected his request for citizenship. 25 July 2018 - The Fugitive Economic Offenders Bill 2018 (empowers authorities to confiscate properties and assets of economic offenders who flee the country), was passed in the Rajya Sabha.
11 August 2018 – Court issued a public notice for appearance against Nirav Modi and his family under Fugitive Act . This Act came into force on 25 July.
20 August 2018 – UK authorities confirmed Nirav Modi, in their country. CBI moved an extradition request for the fugitive tycoon.
11 Sept 2018 - An ED investigation has found that absconding Mehul Choksi diverted Rs. 3,250 crore funds, allegedly defrauded from a PNB branch, to foreign shores.
The road ahead:
Coming quarters too don’t look good for PNB . It has still to do 47% for provisioning towards Nirav Modi fraud . The Pnb stock is still the cheapest among public sector lenders and may remain cheap for quite some more time .
By: Shanciya Rajan
Essar Steel Insolvency and Acquisition Journey to Bankruptcy: After Banking Regulation (Amendment) Ordinance, RBI got the authority to proceed with bankruptcy proceedings by banks against defaulters. RBI identifies 12 defaulters including Essar Steel India Ltd (ESIL) with combined bad loans worth over Rs. 6.14 lakh crore. Insolvency proceedings initiated at National Company Law Tribunal (NCLT) against Essar Steel. SBI and SCB independently filed applications for insolvency proceedings against Essar Steel at NCLT's Ahmedabad bench for outstanding dues of over Rs. 34,000 crore, after being declared defaulter by RBI, ESIL moves in Gujarat High Court against the insolvency proceedings initiated by its lenders, High court issued notice to RBI and restrained NCLT for not conducting any further proceedings against ESIL. Battle for Acquisition : ArcelorMittal and Numetal Ltd, two keen bidders showed interest in Essar Steel. But the problem started by an ordinance the amendment, which introduced Section 29A, bars wilful defaulters, defaulting promoters and related persons from bidding under the insolvency process. Numetal Ltd was found ineligible for the bidding because Rewant Ruia son of Ravi Ruia was a stakeholder in the firm, and ArcelorMittal’s bid was also rejected as its owner LN Mittal owned a controlling stake in defaulting steel company Uttam Galva Steels Ltd both bids were rejected under Section 29(A) of the IBC. Both the bidders challenged the rejection to the National Company Law Appellate Tribunal (NCLAT). ArcelorMittal has time till September 11 to clear its dues on account of defaulting firms, Uttam Galva Steels to become an eligible bidder for Essar. To become eligible for bid Numetal dropped Aurora Enterprises, of which Rewant Ruia is the ultimate beneficiary, till this time a new bidder Vedanta Group joined the race. The Way Ahead: In the second bid, ArcelorMittal, in partnership with Japan’s Nippon Steel & Sumitomo Metal Corporation, has offered Rs 42,000 crore to repay creditors of Essar Steel Ltd. Numetal’s offer stands at around Rs 37,000 crore, they will offer an additional Rs. 2,000 crore to lenders of Odisha Slurry Pipeline Infrastructure Ltd, which brings in about half of the raw materials that Essar Steel’s plant
needs. The new offer by ArcelorMittal led the creditors of Essar Steel to think will wait for the Supreme Court to take the final decision on the eligibility of both ArcelorMittal and Numetal before they declare the winning bidder.
By: Yatharth Mehta
Simbhaoli Sugars and Oriental Bank of Commerce Scam Simbhaoli Sugars was established in 1933 by Sardar Raghbir Singh Sandhanwalia in Hapur, Ghaziabad, UP. It was amongst the first sugar plants to be set up in North India. Simbhaoli Sugars is the largest integrated sugar refinery in India. Apart from refining sugar, the company is also into specialty sugar, quality liquor, extra neutral alcohol, ethanol, co-generated power, bio manure, and technology consultancy.
This company has been in news since 2011 since Central Bureau of Investigation has registered a case against the company for committing a fraud against Oriental Bank of Commerce. Company’s Chairman Gurmit Singh Mann, Deputy Managing Director Gurpal Singh , Chief Executive Officer G S C Rao, Chief Financial Officer Sanjay Tapriya, Executive Director Gursimran Kaur Mann and five non-executive directors have been booked by the agency in connection with bank loan fraud of Rs 97.85 crore, leading to a loss of Rs 1.09 billion for the bank as on November 17, 2017.
Bank had sanctioned a loan of Rs.148.60 crore to the company in 2011 under RBI scheme for financing individual/joint liability groups and self-help groups of 5,762 sugarcane farmers, between January 25 and March 13, 2012. Post sanctions, the bank reported that the company indulged into money laundering and fraudulently diverted the funds for its own use. The account turned NPA on March 31, 2015, and RBI declared it a fraud on May 13, 2015. Subsequently, under multiple banking arrangements, the bank sanctioned another corporate loan of Rs. 110 crore to the company on January 28, 2015, to pay its outstanding loan. The bank adjusted the total liability of Rs. 112.94 crore towards the company by way of deposit of new corporate loan, and this too became NPA on November 29, 2016. Due to the controversy, the shares price of Simbhaoli Sugars was strongly impacted when news came out, The company’s share prices fell 15.7% on the BSE, closing at Rs 14.2 a share. Against the total payables of Rs 4.98 billion, Simbhaoli has paid Rs. 2.2 billion. If the statutory payment window of 14 days is not considered, total payables amount to Rs. 215 billion.
On 10 September 2018 the bank approached the National Company Law Tribunal (NCLT) to initiate insolvency proceedings against Simbhaoli Sugars after the company had posted a net loss of Rs. 180.39 crore during the 2017-18 and the net loss for April-June quarter of the current fiscal was Rs. 1.44 crore.
By: Divya Singh
Jaypee Infratech Limited Jaypee Infratech Limited (JIL) commenced its operations on 5th April 2007 after getting registered under Companies Act, 1956. JIL started its project wish town city project in Noida. It collected Rs. 25,000 crores from around 35,000 homebuyers. However, years after its inception the project remains abandoned and merely a skeleton has been built for the purpose of appeasing the homebuyers that something is built. It was alleged that in the guise of wish town city project that the money was diverted to Jaypee group's other flagship projects such as formula one racing centre and the Yamuna Expressway. The Road to difficulty:
A small group of homebuyers aggrieved by the pace of the project reached to the Apex Court, where they decided to hear the matter through a Public Interest Litigation (PIL) that came after the adjudication by the NCLT. IDBI filed a petition under the Allahabad bench of NCLT when the company didn’t pay back the loan amount of Rs. 526 crores, it raised from IDBI and asked for Insolvency Resolution Process (IRP) under section 7 of the IBC. Jaypee group agreed to pay back the amount to the bank to get legally free from its obligations. After not receiving a hope of getting their payments back, the homebuyers moved to the Supreme Court which recognized the glaring lacuna and error and adjudicated that the interest of the homebuyers are supreme and cannot be left unrecognized & unattended and therefore, it directed Jaypee group to deposit Rs. 2000 crore in instalments to the Supreme Court's registry. Further, Supreme Court through such an order lifted the veil of Jaypee group by holding it accountable for the works of its subsidiaries and it also moved beyond the principle of Limited Liability. It asked the Insolvency Resolution professional Anuj Jain to submit a resolution plan within 45 days, to which IRP has asked entities and companies to invest in the infrastructure project. 16th May 2018, Supreme Court directed Jaiprakash Associates Ltd. (holding company of JIL) to deposit Rs. 1,000 crore by June 15 to provide refunds to homebuyers of debt-ridden JIL.
18th May 2018, NCLT asked JAL to return control of 760-acres of land to Jaypee Infratech Ltd, calling previous transactions “fraudulent, preferential and undervalued”. 20th May 2018, JAL appealed against the NCLT order that directed the company to return nearly 760 acre land to its subsidiary Jaypee Infratech, while declaring the transfer of the land as "fraudulent" and "undervalued". 10th September 2018, JALs 2 independent directors Keshav Prasad and Basant Kumar resigned.
The road ahead:
JAL is in its insolvency proceedings, the homebuyers who invested their money haven’t received any such recovery of their investment. As per claims, if their money was directed towards other projects, it is going to turn out to be very difficult for the company to repay back the amount as it is already debt-ridden from the loan amounts it has already raised from banks.
By: Vibhu Jain
The Rotomac Case Introduction: Rotomac Global Private Limited is one of the leading manufacturers and exporter of a diversified range of ball pens. Vikram Kothari, resident of Kanpur, Uttar Pradesh and owner of Rotomac global private limited, gained the company after the split happened because of the death of his father.
Why did it start? Due to the slowdown in stationary business, Vikram Kothari started new business of Real Estate and Import-Export. This scam is mainly related to Import-Export business of Vikram Kothari. The loans: In felonious manner, Rs. 3000 crore loan was taken by Rotomac from many public sector banks out of which Rs. 456.6 crore was raised from Bank of Baroda and the remaining amount was from Bank of Maharashtra, Bank of India, Allahabad Bank, Oriental Bank of Commerce, Indian overseas Bank and Union bank of India. The loan amount has now increased to Rs. 3695 crore with interest. The scam: The company used to take loans by submitting fallacious documents to banks in order to import the materials from different countries. However, they never actually imported any materials from the loan amount, and the loan amount was divested into different functions. It established several counterfeit corporations so he might transfer the money from one company to a different and show the transactions. Disclosure of the scam : This scam was exposed when Bank of Baroda after checking the details about the foreign suppliers of Rotomac and found that there were no such suppliers. Then, Bank of Baroda filed the case against Vikram Kothari in CBI as he was a willful defaulter that means he has deliberately not paid the loan to the banks.
CBI Involvement:
CBI after filing the case against Vikram Kothari, his wife and son, and also on some bank officials started its investigation and carried a raid on the home and offices of Vikram Kothari and then arrested Vikram Kothari. Enforcement Directorate (ED) has also filed criminal charges on Vikram Kothari under Prevention of Money Laundering Act. Analysis : Rotomac cheated the consortium of banks by siphoning off bank loans. No genuine business transaction were being carried out. The company submitted false and forged documents.
By : Shruti Iyer
THE SBI FRAUD CASE
The new SBI Fraud has been defrauded of about Rs. 824.15 crore committed by the Managing Director of Chennai-based Kanishk Gold Pvt Ltd. SBI alleged that the security available with it to cover the “loss” is only around Rs. 156.65 crore. How did it start?
The primary allegation of defrauding a consortium of 14 private and nationalised banks by reportedly falsifying records since 2009 to avail credit facilities from it and in order to display an increased working capital.
KGPL stopped making payments to all 14 banks from April 2017 and it sold jewellery in the brand name of 'Krizz'.
As early as May 2017, the banks investigation revealed that the stocks against which credit was obtained and input materials were non-existent. SBI declared the account fraudulent to the RBI on November 11, 2017.
In March 2018, CBI raided the properties of KGPL and it questioned its promoters Bhoopesh Kumar Jain and his wife Neeta Jain.
In April 2018, assets worth Rs. 48 crores belonging to KGPL were frozen by the Enforcement Directorate under the Prevention of Money Laundering Act in addition to attaching the Rs. 143.58-crore FDs after a similar attachment of fixed assets (plant and machinery). Impact on Defraud Banks:
In 2008, SBI took over the loans from ICICI at that they amounted to Rs. 50 crore in working capital loan and Rs. 10 crores in term loans.
In March 2011, the banking arrangement was converted into multiple banking arrangement with PNB & BOI.
In 2012, the consortium with SBI as lead bank, sanctioned granting of Metal Gold Loan (MGL) to KGPL.
As news of Rs. 824.15 crore fraud grips India’s largest bank, SBI shares slipped as much as 2.56% to a day’s low of Rs 247.8 from the day’s high of Rs 254.3 on NSE as on March 21, 2018.
Auditors reprovable in fraud:
A criminal case was registered against their auditors Tejraj Achha, partner of Achha Associates, Ajay Kumar Jain, partner, Ajay & Co Chartered Accountants and Sumit Kedia of A K Lunawath & Associates.
Kanishk`s accounting books contradicted the sales and diverted the funds about Rs. 190.21 crores to other bank accounts.
Stock audit was not carried out at the end of every financial year.
Kanishk and its directors colluded with their auditors who overstated the gold inventory for more loans, intended to cheat and gain illegal profit.
By: Prathyusha Reddy
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