ABG Shipyard: India’s Biggest Bank Fraud

"A lie keeps growing and growing, until it is clear"

-Pinocchio

Every time a lie is used as an instrument to win the way towards the goals, one fails to analyse its after-effects. The ABG shipyard fraud is no exception. In the headlines, these days, India's biggest bank fraud, the Central Bureau of Investigation has booked ABG Shipyard Limited along with its former chairman and managing director Rishi Kamlesh Agarwal, and others for allegedly cheating 28 banks led by the State Bank of India for the mind-blowing amount of Rs 22,842 crores ($3.03 billion) after it raided 13 places during which many incriminating documents were recovered.

About ABG Shipyard    

There are 2 companies duping 28 banks but of the same group whose names are ABG Shipyard and ABG International Private Limited.

ABG Shipyard Limited (the flagship company of ABG Group), was initially incorporated as Magadalla Shipyard Private Limited in 1985 with the main objective of carrying out Ship Building and Ship Repair business. From the year 1991, in a span of 15 years, the company had achieved the status of India’s largest private sector shipbuilding yard with a satisfied customer base worldwide. ABG Shipyard Limited is currently headquartered in Mumbai and the company’s shipyards are in Dahej and Surat, Gujarat.

Lenders to ABG Shipyard

The amount shown in the pie chart is given in Crores (INR) [source: Business Today]

Timeline of ABG Shipyard Scam

2013

The ABG account was turned Non- Performing Asset in November 2013, due to poor performance.

2014

The account was restructured under Corporate Debt Restructuring in March 2014 by all lenders. But the financial health of the company didn’t show any signs of improvement as the shipping industry was going through a downturn.

2016

The account eventually was classified as NPA in July 2016 with backdated effect from 30^th November 2013 as the reconstructing failed.

2018

E&Y (one of the Big 4 accounting firms) was appointed as Forensic Auditor by lenders in April 2018.

2019

The report was submitted by E&Y in 2019 and was placed before the Fraud Identification Committee of 18 lenders. The first complaint was filed with CBI in November 2019 and the account was declared a fraud.

2020

In December 2020, a second complaint was filed.

2022

After “inspecting” for over one and a half-year, the CBI acted on the complaint filing an FIR on February 7, 2022.

Forensic Audit and the Allegations

E&Y was appointed to conduct a forensic audit by the lending banks in 2018 to give clarity as to how the funds were misused. In 2019 the report was placed in front of them and it became quite clear that this was India's biggest scam to date leaving behind Nirav Modi's 13000 crores PNB scam.

The forensic audit by E&Y revealed that there had been a diversion of funds hence ABG Shipyard Company has been booked with diversion of funds, misappropriation, and criminal breach of trust. Apparently the funds obtained from the banks on the pretext of the shipping business were invested in 38 overseas companies and 60 Indian firms to divert funds. Besides Agarwal, the then executive director Santhanam Muthaswamy, directors Ashwini Kumar, Ravi Nevetia, and Sushil Kumar Agarwal the other company ABG International Private Limited were also has named by the agency and alleged offenses of criminal conspiracy, criminal breach of trust, cheating, and abuse of official position under the IPC and the Prevention of Corruption Act.

Currently, the company is undergoing the process of liquidation as reported by SBI.

Impact of scam on the Stock Market

So, the news about ABG Shipyard and promoters under the scanner and being charged with the biggest scam of India breaking in 2022 would result in a bloodbath in the stock market?

Well not really, that's the catch!

Although in the short term there can be a downfall in the banking stocks listed in NIFTY, in the long term there won't be any significant impact as the banks had already made provisions to cover the amount of NPA, hence won't impact their profit/loss.

Instead, this might offer the investors a chance to enter and buy the stocks of the banking sector due to the fall in price momentarily. Even the banks which were not the lender to the company would face the heat and hence a lucrative option worth going for.

The Unanswered

But the above information does raise many questions like: Why was the process so delayed? Why was ICICI being the largest lender wasn't the one to approach CBI to probe in? Is the practice of corporate governance really prevalent or not?

While answers to these questions are still awaited, one thing is sure that there are still a number of loopholes in the banking sector because of which the burden is shifted to the honest taxpayers which isn't a sign of a sound healthy economy!

References:

1. https://www.bloombergquint.com/business/abg-shipyard-how-the-large-bank-fraud-was-executed
2. https://www.moneycontrol.com/news/business/no-effort-to-delay-recovery-process-from-abg-shipyard-promoters-says-sbi-8087751.html
3. https://m.economictimes.com/news/india/ey-likely-to-be-key-prosecution-witness-in-rs-22482-crore-abg-shipyard-fraud-case/articleshow/89579507.cms
4. https://www.livemint.com/industry/banking/abg-shipyard-bank-fraud-sbi-says-liquidation-on-as-per-nclt-process-no-delay-11644753934109.html
5. https://www.businesstoday.in/industry/banks/story/abg-shipyard-fraud-no-delay-in-filing-of-case-says-sbi-322465-2022-02-13
6. https://youtu.be/7gHJiHu2ajs
7. https://www.businesstoday.in/latest/corporate/story/abg-shipyard-loan-fraud-list-of-banks-affected-by-indias-largest-scam-322780-2022-02-16
8. https://m.economictimes.com/industry/transportation/shipping-/-transport/abg-shipyard-allegedly-used-38-overseas-firms-to-divert-funds/articleshow/89649530.cms