In 2009, an interesting battle for supremacy in India’s shipbuilding and offshore business was being waged in Mumbai. On one side was India’s second largest shipbuilder, Bharati Shipyard, founded in 1973 by friends Prakash C. Kapoor and Vijay Kumar. On the other side was the fast-growing ABG Shipyard, promoted by Rishi Agarwal, a Purdue University graduate and first-time entrepreneur. The contest was for control of Great Offshore, a supplier of rigs used in offshore drilling and an arm of the Great Eastern Shipping Company.
Agarwal placed an unsolicited bid for Great Offshore as a counter to an ongoing open offer from Bharati Shipyard, making the business world sit up and take notice. While Bharati secured a controlling stake in Great Offshore, Agarwal picked up a 15 per cent stake. The aggressive bids would go down as one of the fiercest corporate battles in the Indian shipping sector.
ABG Shipyard was India’s number one shipbuilder then, with a swelling order book (Rs 16,000 crore in 2012). It’s another story that both the shipbuilders slipped deep into debt soon after, undertook debt-restructuring exercises—where negotiations are done with lenders for reduced interest rates—and before the end of the next decade lost control of their companies. Great Offshore itself, renamed GOL Offshore, shut down operations in 2018 after a failed debt-restructuring exercise.
A little over a decade since the Great Offshore battle, Agarwal, a nephew of Ruia brothers Shashi and Ravi of the Essar Group, is back in the news—this time for the wrong reasons. The CBI (Central Bureau of Investigation) has booked Agarwal, former chairman of ABG Shipyard, and other directors of the firm for alleged misappropriation of Rs 22,842 crore from a consortium of 28 banks, including the State Bank of India (SBI), India’s largest public sector bank, and ICICI Bank, the country’s second-largest private bank.
Agarwal, four ABG Shipyard officials—executive director Santhanam Muthuswamy and directors Ashwini Kumar, Sushil Kumar Agarwal and Ravi Vimal Nevetia—and some ‘unknown public servants’ have been accused in the scam, which has once again exposed loopholes in the banking system that allow fraudsters to siphon off taxpayers’ money. The banking system is already reeling under non-performing assets (NPAs) to the tune of Rs 8.35 lakh crore (March 2021), further squeezing lending.
A fallen star
What caused the downfall of ABG Shipyard and Agarwal’s fall from glory? ABG was born in 1985 when Agarwal bought a small shipbuilding facility in Gujarat, Magdala Shipyard. The ambitious Agarwal went on to build scale and sophistication in his business. From 1990, over a decade, his firm built over 165 ships, a majority of them for clients in Europe and Asia. In 2000, ABG Shipyard got its first government order to build two inceptor boats for the Coast Guard. In 2011, it secured a license to build ships, including submarines, for the Indian defense sector.
The company operated two shipyards, the main one on the banks of the Tapi river in Magdalla, Surat, and spread over 35 acres. The other one was in Dahej, Bharuch, and was set up in collaboration with the Gujarat Maritime Board. It had plans to build a third shipyard in Gujarat with an investment of Rs 2,500 crore. Things went well for ABG Shipyard until the end of 2012-13. That year, the company made a net profit of Rs 107 crore on total revenues of Rs 2,149 crore. The company had three subsidiaries—Western India Shipyard (then a BSE-listed company), ABG Shipyard Singapore Pte, and ABG FPSO Private Limited. But ABG Shipyard’s fall started the following year when it posted a loss of Rs 199 crore. By March 2016, the losses had ballooned to Rs 3,704 crore even as revenues fell to a mere Rs 37 crore.
The cancellation of ship/ vessel orders, a dip in lending from banks, high cost of borrowing and low capacity utilization at the Dahej shipyard were cited as reasons for the firm’s troubles. The end of the central government’s shipbuilding subsidy way back in 2007 had also hit the company’s bottomline over the years. Ultimately, ABG Shipyard owed Rs 22,842 crore to 28 banks. The top three lenders were ICICI Bank (Rs 7,089 crore), IDBI Bank (Rs 3,639 crore) and SBI (Rs 2,925 crore). Most of these loan disbursements took place between 2005 and 2012. Unable to service them, ABG Shipyard went into a corporate debt-restructuring scheme in 2013-14.
A scam unravelled
On August 25, 2020, Balaji Singh Samanta, a deputy general manager with the SBI in Mumbai, walked into the CBI office at Cuffe Parade. He was carrying a complaint from his bank, which stated that ABG Shipyard had intentionally caused a loss of Rs 22,842 crore to the ICICI Bank-led consortium of 28 banks. The SBI had made a similar complaint on November 8, 2019, but there had been no action as the CBI asked for some clarifications a few months later. The fresh complaint was again put in cold storage.
On February 7 this year, the CBI registered an FIR (first information report) against ABG Shipyard and its board of directors, led by Agarwal. The FIR states that the ‘fraud’ was committed through ‘diversion of funds, misappropriation and criminal breach of trust, with an objective to gain unlawfully at the cost of the bank’s funds’. The place the ABG Shipyard case as India’s biggest banking scam ever, overtaking the 2018 Punjab National Bank scam in which diamantaires Nirav Modi and Mehul Choksi stand accused of siphoning off Rs 14,000 crore.
The offense in the ABG Shipyard case has been registered almost a decade after the alleged fraud began and three years after “criminal breach of trust” was pinpointed by auditing firm Ernst & Young (EY). The CBI has yet to make arrests. The agency questioned Agarwal on February 17. A day earlier, the Enforcement Directorate (ED) registered a case against ABG Shipyard executives, suspecting use of shell companies to divert public money.
According to the SBI, which has been handling ABG Shipyard’s account since 2001, the company diverted the loan money to its related parties and made huge investments in its overseas subsidiary between 2005 and 2012. ‘The loan amount was restructured under the Corporate Debt Restructuring ( CDR) mechanism on March 27, 2014. However, the operations of the company could not be revived,’ reads the SBI’s February 14 statement.
Too many fault lines
ABG Shipyard has been on the radar of lenders ever since its financial troubles began. The SBI appointed an auditor, NV Dand and Associates, on September 10, 2014, to conduct a stock audit of ABG Shipyard. In its report submitted in April 2016, the auditor found various faults on the part of ABG Shipyard. On July 20, 2016, the company’s account was declared an NPA with effect from November 30, 2013. The lenders appointed EY in April 2018 to conduct a forensic audit, covering the period between April 2012 and July 2017.
EY’s forensic audit report, submitted on January 18, 2019, elaborated on how ABG Shipyard routed the loan money by paying it to related parties. The money borrowed from banks was also used to repay loans and foot expenses of group companies and for letters of credit. Broadly, there were four instances of misappropriation or diversion of funds. The first was when Rs 1,415 crore was transferred through vendors and group companies and “round-tripped” back to the company. Round-tripping refers to a series of transactions that involve circulation of money across jurisdictions, culminating in its return to the jurisdiction of origin, usually as foreign investment. ABG Shipyard transferred Rs 603 crore to One Ocean Shipping Pvt Ltd and another Rs 812 crore to ABG Engineering & Construction, both partner companies. Second, ABG Shipyard invested in $43.5 million (Rs 326 crore) worth of securities of ABG Singapore, its overseas arm. According to EY’s forensic audit, the money may have been siphoned out of the system. Third, ABG Shipyard transferred Rs 83 crore to related firms. But the assets were not shown as part of the company’s asset pool. ABG Shipyard paid accommodation deposits of Rs 83 crore to entities before 2007-08. One of them is Somerset Estate Pvt Ltd, which was paid Rs 14 crore. Agarwal stays in the Somerset property in Mumbai.
‘Properties were purchased out of security deposits provided by ABG Shipyard in 2007-08 and 2008-09,’ according to the EY report. ABG Shipyard had transferred Rs 15 crore and Rs 16 crore to ABG Energy on March 15 and 16, 2016, respectively. On the same days, ABG International, ABG Shipyard’s corporate guarantor, received Rs 31 crore as refund of accommodation deposits. This ‘indicates there may not be actual refund of accommodation deposits amounting to Rs 31 crore, and only potential circular transactions’, the report states.
Finally, the SBI alleges that ABG Shipyard conducted a breach of the restructuring agreement. Under restructuring, lenders set up a trust and retention account (TRA). The money coming into the company during the restructuring period is held in the TRA so that lenders can monitor its use. The SBI says more than 50 per cent of ABG Shipyard’s receipts had been outside this arrangement. ABG International is the holding company over which directors/ relatives are able to exercise control or significant influence. Neither the EY report nor the FIR gives details of the entire Rs 22,842 crore siphoned off, but experts say further investigations are likely to unearth more such money trails. These ‘illegal acts committed by the accused constitute cognisable offenses under the Indian Penal Code, and the same are committed by the accused with specific intention to cause loss to banks who had sanctioned credit facilities and to gain unlawfully at the cost of the banks’, the EY report concludes.
As efforts to revive the company through the CDR scheme failed, the firm filed for liquidation under the Insolvency & Bankruptcy Code (IBC) in 2019. The liquidation process is on. However, lenders hope to get very little from the proceedings. The firm has a few land parcels, bungalows, staff quarters, half-finished vessels and plant and machinery, but these are likely to fetch only a fraction of the original claims by the lenders. The value of ABG Shipyard’s land assets is reportedly close to Rs 500 crore.
The EY report came as a shot in the arm for the SBI. However, the road ahead was not easy. The SBI’s fraud identification committee took five more months to declare the ABG Shipyard account as a fraud on June 6, 2019. The bank approached the CBI with a complaint on November 8, 2019, but the CBI sought some clarifications on March 12, 2020, to corroborate the allegation of fraud. The agency had stated that no internal investigation was conducted before filing the complaint. According to the CBI, the complaint did not provide the timing of the fraud, specific instances of siphoning of funds or the modus operandi in defrauding the banks. Also, there was no consent from the other banks in the consortium for filing the complaint. The fact is that except for consent from other banks, all conditions were fulfilled by the SBI before filing the complaint.
The consortium, in the meeting of its shareholders between June 4 and August 13, 2020, gave consent for filing the complaint. There seem to be several cardinal failures in this case, the most important being that the fraud was not detected on time. According to banking consultant Ashvin Parekh, “Banks should develop internal mechanisms to keep track as to who the funds are paid to and what the borrower is doing with them.” The bank’s relationship manager should know when to alert the bank to stop giving fresh funds in case of doubts about their use. “All defaults should be immediately brought to the regulator’s attention and recovery actions must be initiated,” adds Parekh.
A blame game started soon after the FIR was registered. Congress general secretary Randeep Surjewala claimed on February 13 that his party had warned the Union government in 2018 that ABG Shipyard was a scam. He asked why the government had taken so long to act. Union finance minister Nirmala Sitharaman, however, maintained that the firm’s account had turned an NPA in 2013 during the Congress-led UPA (United Progressive Alliance) regime.
ABG Shipyard is only the latest scam to rock India’s banking sector. While the case against Agarwal and his associates will drag on, what will be crucial is how the government plugs loopholes in the financial system to prevent misappropriation of funds. Without robust checks and balances, frauds will continue to happen and taxpayers’ money will remain at risk.
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