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HomeBUSINESSIs Bank of India trying to suppress a fraud in its backyard?

Is Bank of India trying to suppress a fraud in its backyard?

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Non-performing assets and bad debts are often indicators of a cat-and-mouse game being played to hide or fudge facts and purposefully present a rosy picture in a bank’s balance sheet –for public consumption.

In the past couple of years, many bank frauds like DHFL, ABG Shipyard, and Biyani group have come to light, still, there are many more that are swept under the carpet because of an unholy alliance between corrupt bankers, pliable auditors and influential defaulting borrowers.

This allegedly seems to be a common practice in Bank of India – one the largest public sector banks in the country, with over 5,000 branches across India and operating in over 20 countries. Bank of India’s gross non-performing assets value amounted to approximately 565.35 billion Indian rupees at the end of the fiscal year 2021.

In a classic case of financial white-washing Bank of India management is reportedly trying to cover the misdeeds of a company called Sushitex Industries (P) Ltd a manufacturer and exporter of textiles and fabric promoted by Harish Arya and his two sons Luv and Kush Arya.

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Interestingly Sushitex Industries (P) Ltd’s current account was categorized as NPA by the Bank of India w.e.f 31st July 2019 because of default in a loan payment. The company has also not been filing its statutory annual reports to the Registrar of Companies for more than two years, still, the company continues to operate from the same premises in the name of Gayatri International owned by the same people i.e. Harish and Luv Arya.

The company is said to have purchased a property for starting their company from Maharashtra Industrial Development Corporation (MIDC) the nodal Investment Promotion agency under the Government of Maharashtra.

As per the rules of MIDC, the said property was equitably mortgaged to the Bank of India in lieu of a Term Loan for purchasing Plant and Machinery and availing project finance for the construction of factory building as well as working capital for local sales and export.

As per procedure, the company took a consent letter from MIDC and signed a lease deed agreement, before mortgaging the property to the Bank of India and disbursement of the loan. A tripartite agreement was also signed by the MIDC, Bank of India, and Sushitex Industries (P) Ltd. According to this, the Company could not sublet the premises to any group company or an independent firm.

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However, Sushitex Industries went ahead and sublet the premises to at least four other group companies and obtained separate meters on the same premises in their name to save on electricity charges with the connivance of MIDC and bank officials – causing a loss of crores of rupees to the State Government. As per the electricity act, the electricity charges vary according to load and obviously anyone who consumes more electricity has to pay a higher bill for the power consumed.   

Interestingly even the plant and machinery being used by Gayatri International to make a profit are mortgaged with the Bank of India. Curiously while this is happening openly — no action is being taken by the bank. This apparently amounts to enjoying the fruits of crime that too without any fear of law.

Even though the sub-let arrangement amounted to a criminal breach of trust, the bank officials overlooked facts and did not inform their superiors or even if they did — no action was taken against the Company.

The story does not end here as the entity to whom the premises were sublet was using the same Plant and Machinery from the same address and doing the same business.

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Diversion of fund

Compounding the financial irregularities Sushitex Industries (P) Ltd floated other group companies/firms like Gayatri International (owned by Harish Arya & Luv Arya),  Bhavana Textiles (Luv Arya), Suvidha Textiles (Kush Arya), and Hariom Enterprises (Harish Arya). Using this maze of Companies Sushitex Industries started rotating transactions within the group companies/firms after availing Export Packing Credit also known as EPC in banking and business circles – seemingly to avoid duties and taxes.    

According to informed sources, the real drama started when the company borrowed money for a car loan and started defaulting on the payment.

As a result, its account was red-flagged and classified as NPA.

But hoodwinking the banking system Sushitex Industries opened a current account with another bank and started routing transactions through the new account, completely bypassing the BOI account, which is not permissible as per RBI norms.

Many irregularities and contradictions were found in the company’s financial records:

  • The sales receivables (export and local sales) started decreasing substantially but sundry creditors kept growing.   
  • The inventories (raw material, semi-finished goods/ finished goods) started declining substantially but sundry creditors kept growing. It is contradictory.
  • While the sales and inventory were lowest in March 2020, the bank borrowings and sundry creditors remained stagnant.
  • The fixed asset kept increasing and depreciation too was not justified.

In the meantime, considering the large sum of money involved, the account was red flagged and a forensic audit was conducted by Shambhu Gupta & Co Chartered Accountants.

After going through the Books of Accounts of Sushitex Industries, the forensic auditors found that the promoters were also running a number of other companies like Sushila Fabrics Pvt. Ltd., Sushitex Exports (India) Ltd., Smriti Silk & Synthetics Pvt. Ltd, and Blufab Fashion Fabrics LLP

The forensic auditors also confirmed that the company was operating as many as 12 bank accounts in  Bank of India (Account No. 009220110000328) IDFC BANK (Current Account No. 10037605148) and the Cosmos Co-Operative Bank Ltd (India)

The forensic auditors also made the following observations during the review period.

  • Major payments were paid to group entities to the tune of Rs. 29.65 crores
  • The company took a loan from Deutsche bank of Rs 259 lacs in 2016-17.
  • During the Financial Year 2019-20 Borrower received around Rs. 8 Crores in its Current Account with IDFC First Bank Ltd. and Cosmos Co-op Bank Ltd. and made payment of around Rs. 8 crores for Salary and creditors when the amount was due to Bank of India. Payment of around Rs. 0.17 Crores is made to group companies after the date of NPA.

It was also observed that the parent company was sending goods for job work to at least four other group entities operating from the same premises and owned by the same promoters  

After analysing the Fund Flow Analysis the auditor made the following observations:

  1. There was a decline in Reserves & Surplus from the year 2018-19. It reduced by Rs. 1169.11 Lakhs in 2018-19 which is a net loss for the Period.
  2. Trade payables Doubled in FY 2017-18 from Rs 328.18 Lakhs to Rs. 800.62 Lakhs.
  3. Attention is invited to Inventories which increased from 16 crores to 22 crores in 2017-18 and then continuously decreased to Rs. 6 crores in two FY. Huge Losses in the company were booked by selling inventory at scrap rate in 2019-20.
  4. Trade receivables also decreased from 10 crores as of 31.03.2018 to 4 crores as of 31.03.2020. We have attempted to verify the genuineness of these receivables.
  5. As per audited financials, Company was making a profit till 31.03.2018. Whereas, in 2018-19 & 2019-20 company has shown huge losses majorly on account of stock clearance.

Curiously, while the forensic auditor managed to find out that an amount of Rs.33.02 Lakhs was paid to Blufab Fashion Fabrics LLP in which Luv Arya & Kush Arya were Directors, they did not bother to dig up the matter in detail and seemingly shed off they responded by claiming that “During the course of audit; we have not checked the Books of Accounts of related parties of the borrower”  

The forensic auditor went on to add that, “After the date of NPA; Borrower made payment to Creditors from other Accounts when the amount was O/s for Bank of India and Net payment made by the borrower to group companies of around Rs. 13.73 Crores during the review period.”

While all these were sufficient grounds for a detailed investigation and follow-up action at all levels, the forensic auditor tried to give a clean chit to Sushitex Industries by claiming that, “During the review, we have observed that major losses were made in the year 2019-20 (Amount Rs. 17.31 Crores) when huge quantity of stock was sold as obsolete items/ at low rates. It seems the borrower was carrying dead stock in hand and on the other side borrower was paying interest on bank loans.

“EWS in the given case was carrying dead stock by the borrower against the bank loan. Liquidation of dead inventory at right time by analysing inventory ageing and implementing a better inventory record system could change this situation. However, we could not find evidence which proves the negligence as fraud” the forensic auditor stated.

Apparently bailing out Sushitex Industries from a prima-facie case of fraud and misappropriation, the auditor added, “We have checked bank payments/transactions during the review period and observed that major payments were made to related entities. The net outflow of Rs. 13.73 crores were made against purchases and job work charges. However we did not find any evidence to term these as diversion/embezzlement/ siphoning of funds,”

“Considering lack of adverse evidence; subject to discussion with management/bankers, we believe that categorization of overall borrower company’s default as fraud is not possible,” the audit report concluded.

Interestingly making the whole exercise seem to be a mockery of the rule of law, the auditor admits, “We were not given access to Books of Accounts of related parties. Hence not able to pass comments.”

Another such lacuna in the forensic report states, “There was a sale of Machinery by the borrower during the FY 2019-20 without prior approval from the bank.”

All this seems to be a prima-facie case of fraud and goes against the spirit of RBI Master Circular on ‘Frauds – Classification and Reporting’ dated July 01, 2016, which clearly states that:

Delays in Reporting of Frauds

3.3.1 Banks should ensure that the reporting system is suitably streamlined so that delays in reporting fraud, and submission of delayed and incomplete fraud reports are avoided. Banks must fix staff accountability in respect of delays in reporting fraud cases to RBI.

3.3.2 Delay in reporting of frauds and the consequent delay in alerting other banks about the modus operandi and dissemination of information through Caution Advice / CFR against unscrupulous borrowers could result in similar frauds being perpetrated elsewhere. Banks should, therefore, strictly adhere to the timeframe fixed in this circular for reporting fraud cases to RBI failing which they would be liable for penal action prescribed under Section 47 (A) of the Banking Regulation Act, 1949.

Also Read: Fitch Ratings: Indian Banks may face intense pressure

This brings us to the fact that as soon as an account became NPA, the junior officers are punished. 

In every NPA account, a Staff Accountability Report (SAR) is submitted to decide whether there was a lapse on the part of a bank official. In this matter, the bank authorities closed the SAR, stipulating that some information needs to be obtained from the branch by Zonal Authority.

Since the export transaction is insured by ECGC Limited (Formerly Export Credit Guarantee Corporation of India Ltd) — a government-owned export credit provider owned by the Ministry of Commerce and Industry, it was mentioned that the SAR could be reopened if insurance claims were rejected.

In this case, the ECGC has agreed to pay an insurance claim of about rupees one crore whereas the Bank of India had filed a claim of Rs.9.50 crore.  

Still, the matter is not being declared as fraud, why – maybe the higher-ups in the Bank of India know better.

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Neeraj Mahajan
Neeraj Mahajanhttps://n2erajmahajan.wordpress.com/
Neeraj Mahajan is a hard-core, creative and dynamic media professional with over 35 years of proven competence and 360 degree experience in print, electronic, web and mobile journalism. He is an eminent investigative journalist, out of the box thinker, and a hard-core reporter who is always hungry for facts. Neeraj has worked in all kinds of daily/weekly/broadsheet/tabloid newspapers, magazines and television channels like Star TV, BBC, Patriot, Sunday Observer, Sunday Mail, Network Magazine, Verdict, and Gfiles Magazine.


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