Indian federal agency CBI has charged ABG Shipyard Ltd., its promoters, and unnamed public servants with duping Indian banks of Rs 22,842 crore, roughly $3 billion. In what is touted as the largest bank fraud in India, a CBI probe unearthed implicating evidence against ABG Shipyard Limited (ABGSL) and its promoters. Consequently, the CBI has filed complaints against the directors of the company – Rishi Kamlesh Agarwal, Ashwani Kumar, Sushil Kumar Agarwal, Santhanam Murthaswamy, and Ravi Vimal Navetia – for diversion of funds. A statement by the CBI detailed that searches were conducted in 13 locations that led to discovery of documents that suggest financial fraud by the company, duping a consortium of 28 banks.
In a statement, the State Bank of India said that ABG Shipyard was financed under a consortium of 28 Indian banks led by ICICI Bank. Due to dismal company operations and poor performance, the account initially became a non-performing asset (NPA) in November 2013.
In March 2014, all the banks in the consortium decided to restructure the ABG Shipyard account under the Corporate Debt Restructuring (CDR) mechanism. However, the restructuring failed partly due to operational issues at ABG Shipyard and partly due to unconducive economic situations that made a recovery even more arduous. Thereafter, the account was declared as NPA with retrospective effect from November 2013.
However, it was not until State Bank of India filed the first complaint with the CBI on 8 November 2019 alleging ABG Shipyard of defrauding the bank that the scam began to unfold. While the consortium was led by ICICI Bank, the consortium of banks decided that SBI, as the largest public lender, is most suited to bring the matter to attention.
The CBI drills then began.
After checking the forensic audit reports by Ernst and Young, traces of fraud and a number of illegal activities were found during the period from April 2012 to July 2017. It was also found that money was transferred to several subsidiaries of the ABG Group, part of which was used to buy properties. The company is also reported to have breached the terms of its corporate debt restructuring.
Post this, SBI filed a fresh complaint in August 2020 against the company. After inspecting the same, an FIR was filed against ABG Shipyard Limited on 7 February 2021.
The CBI report stated that the fraud was in lines of “misappropriation and criminal breach of trust with an objective to gain unlawfully at the cost of the Bank’s funds”. It indicated that the money was used for purposes other than what it was intended for.
Meantime, the ABG Shipyard account is presently undergoing “liquidation under an NCLT driven process”, and according to an SBI statement, at no point in time, there was “any effort to delay the process”. The banks hope to recover their due once the process is completed.
According to the forensic audit report, the Mumbai-based company owes Rs. 70.89 billion to ICICI Bank, which will have to face the biggest brunt from the scam. Further, ABG Shipyard owes Rs. 36.34 billion to IDBI Bank, Rs. 29.25 billion to the State Bank of India, Rs. 16.14 billion to Bank of Baroda, Rs. 12.44 billion to Punjab National Bank, and Rs. 12.28 billion to Indian Overseas Bank.
ABG Shipyard, one of the most important companies of ABG Group, was engaged in the business of shipbuilding and repair. It operated from Dahej and Surat in Gujrat, which have some of the major shipyards in the country. The shipyard located in Dahejhas a capacity of 1,20,000 DWT and the Surat shipyard has a capacity of building vessels of upto 18,000 DWT. With this, ABGSL became one of the biggest private players in the shipbuilding industry in the country. It was also only the second company to get the license to build vessels for the Indian Navy.
It specialised in building self-loading and self-discharging bulk carriers, split barges, floating cranes, and more. However, due to a shortage of demand for these specialised vessels, the prices fell, followed by a fall in the demand of cargo. Orders started getting cancelled, which resulted in a working capital crisis and the inventories piling up. The operating cycle of the company increased, leading to further pressure on the firm’s liquidity. ABGSL failed to recover from a downturn in the commercial vessel industry during 2015. All of this put a financial load on the company, making repayments to banks unmanageable. It finally filed for insolvency in 2017.
The National Company Law Tribunal has assigned a financial liquidator to sell off the assets of the company. The banks shall be able to recover a good amount during the liquidation process. Moreover, since the failing financial health of ABGSL was uncovered over four years ago, the shock to the stock market is not expected to be as impactful. However, the Bank Nifty, which includes ICICI, PNB, and SBI among the listed players, is expected to see a fall as the share prices of these banks take a plunge. Moreover, after the reports of the banks taking a hit, the Bank NIfty fell over 1,000 points right after opening bell on February 14, 2022. The banking stocks across the market felt a jolt while the books of the aforementioned banks may report a dent due to the scam. However, with the investors somewhat prepared, the fluctuations in the price of bank shares is expected to be just sentimental, which shall recover soon.
Watch this space to see how this impacts the Q4 FY22 results of these banks and what impact does this have on their NPA ratio!