Corporate Fraud: Is Promoter Unquestioned Authority Bolstered by Professionals’ Complicity?

By Jacob Puthenparambil

Over the past seven years, corporate India has seen more fraud than in the past 70 years. After the excesses post the GFC � where credit was loose and corporate India ambitions ran faster than their business acumen � it took years to absorb the fall-out from defaults, NPLs and recovery proceedings.

However, the rise in corporate fraud was somewhat perplexing as it was disappointing. Since the IBC was implemented, many such discoveries unearthed as independent resolution professionals take charge of the company’s affairs. Additionally, banks and financial institutions have no incentive to compromise or gloss over transgressions, which in the era before the Insolvency and Bankruptcy Code, would have either gone undiscovered or covertly allowed to exist without acknowledgement of its existence.

Promoters have an unquestionable grip on their companies, lenders and minority shareholders. Even professional employees get the wrong end of that stick. It also depends on how one defines management conduct. Frauds and misdeeds at financial institutions (such as banks and NBFCs) have tremendous ramification given the inherent leveraging of driven business models. The demise of Yes Bank, Religare, Laxmi Vilas Bank, IL&FS and DHFL all have been mired with fraud, corruption and siphoning — showing that the misconduct of whether promoters or professionals has been laid bare.

In contrast, there are the likes of BR Shetty (promoter of NMR Health and Finbar) blaming their professional management for the intricate fraud in their company. Avantha Group (led by promoter Gautam Thapar) received similar blame with the promoter claiming ignorance, delaying the resolution process. Meanwhile, the case of Cox and Kings is more like a thriller movie than a corporate process where the promoter (Peter Kerkar) claims he was duped by collusion between his management, banks and investors. It’s hard to believe that promoters helmed affairs for over two decades in each of these companies and yet don’t know what the company’s true affairs look like.

Anyone who’s interacted with senior management in promoter-owned Indian companies (including the likes of SEBI and RBI) can tell you that the finances of every Indian company are controlled by the promoter’s family with an irongrip. That’s one reason bankers in India always want personal guarantee of promoters, because they are implicitly acknowledging that promoters treat the companies as their own wealth, so transferring between the promoter’s wealth and company assets cannot be prevented.

Hence, bankers should be able to go after the promoter’s assets if the company’s assets are insufficient for debt repayments. Undoubtedly, promoters have the power, authority, ability and opportunity to know if there were rogue employees or if this is a crafty scheme to benefit from perceptions of high performance and stock prices as well as deflecting risk on the way down.

The list of corporate frauds keeps growing, showing corporate India’s underbelly. While there’s hope of startups achieving ‘unicor’ status, there’s also a grave reminder that corporate India has many dark corners that must be cleansed. Measures must be implemented to deter such behaviour — whether by promoters or professionals. Only when such bad behaviour dissipates that banks can resume lending to corporates and have minority investors investing again — regaining the trust within corporate India.

Data reported by RBI paints a grim picture of public money lost in India’s corporate fraud. It’s shocking to see that in the past ten years, reported fraud has gone up by nearly 100 times, increasing from Rs 2,000 crore in FY 2010 to Rs 1,85,000 crore in FY 2020! Interesting, this declined to Rs 138,422 crore in FY2021, although the absolute number remains uncomfortably elevated. The reporting by private sector banks increased in FY21 versus FY20 (+35%) while that of PSU banks declined (-45%) — perhaps reminding us that the fraud is pervasive, not only by hiding in PSU banks but also finding its way into well-managed private sector banks. One would suspect this jump could also be due to the reporting at Yes Bank.

Year of Reporting Amount of Fraud (INR Cr)

2008-09 — 1,683

2009-10 — 1,997

2010-11 — 3,882

2011-12 — 4,497

2012-13 — 8,665

2013-14 — 10,093

2014-15 — 19,456

2015-16 — 18,698

2016-17 — 23,928

2017-18 — 41,167

2018-19 — 71,543

2019-20 — 185,644

2020-21 — 138,422

Some of the large names underlying this fraud include Bhushan Power and Steel (Rs 4,000 crore), Cox and Kings (over Rs 6,000 crore), Religare Group (over Rs 3,600 crore), Dewan Housing (over Rs 6,000 crore), CG Power (Rs 3,000 crore).

(Jacob Puthenparambil, a Singapore based communications person and head of Red Hill)