CBI began probing India’s sixth highest loan default in 2020. It questioned suspects only in November 2022. Accused face eight cases linked to the ‘bank fraud’.
Kalchakra Bureau
Ace investigating agencies of the country are accused of inaction in Rs. 4000 crores bank fraud scam which is just like the Mehul Choksi-Nirav Modi case and other alleged bank frauds. This amount was also declared as just another non-performing asset. The Kanpur based company, Frost International Ltd, is the sixth highest wilful defaulter in the country. But the probe against all the 14 accused, including its directors and related entities, has moved very little since the filing of a CBI FIR in January 2020.
Frost International Ltd. (FIL) is a firm trading commodities between suppliers and consumers in other countries. It had registered a healthy profit of Rs 54.09 crore in 2016-17. But next year came a series of un-serviced loans, which the group tried to fault to companies it claimed couldn’t pay for exports. And as the consortium of 14 banks tried to verify the existence of these foreign debtors, there emerged an alleged fraud of Rs. 3,592.48 crore.
Kalchakra wrote to the agencies in May 2022 about the matter and demanded investigation in the long pending case against FIL. As per sources, FIL’s promoter-director Uday Desai and all other accused in the case were questioned only November 2022. No arrests have been made and no chargesheet filed. Whenever CBI arrests an accused, they require to file a chargesheet within 60 days. But in this case CBI is going slow for the reasons best known to them.
Other cases
It is pertinent to note that FIL’s Directors have been booked in seven related cases being probed by the CBI, ED and the Serious Fraud Investigation Office (SFIO). Except one case wherein CBI officers were accused of taking bribes for sharing information with the accused, others are related to alleged diversion of letters of credit in the range of Rs. 68 crores to Rs. 138 crores.
FIL’s Director Uday Desai and his associates are also involved in the Rotomac bank fraud case. Uday Desai along with his close associate Sunil Verma and Anoop Wadhera are among 69 accused named in this bank fraud case. Unlike the FIL cases, Desai, Verma and Wadhera were jailed for over a year in the Rotomac case being probed by the SFIO. This happened after the CBI case was filed in 2020. Desai and others are out on bail. Desai considers the Kanpur-based Kothari family of the Rotomac Group, as “family friends”.
High Court Refuses to Quash Lookout Notice
Desai and other accused weren’t called for questioning even once until November 2022. This was stated by Desai in July 2022 before the Delhi High Court, which refused to quash the lookout circular against him in the Rotomac case. However, his daughter Sanjana, FIL Director Sunil Verma’s son Saral – both of them accused in the CBI case – and others have been allowed to travel abroad for health and business reasons. (See court order)
Saral Verma’s anticipatory bail was rejected by The Delhi High Court on 1st November 2022 (see court order). One would apply for an anticipatory bail because he is anticipating arrest. Once the bail is rejected the authorities are free to arrest the accused. However, due to reasons best known to the authorities accused Saral Verma and others are roaming freely.
One would wonder why the CBI was acting promptly only in ‘certain cases’. In certain matters, like Delhi Excise case, CBI shows extra efficiency and takes prompt action. It also leaks information for media trials. It is surprising that in a case of such magnitude, the CBI is so lethargic that it has not woken up from its deep slumber.
The modus operandi
Incorporated in 1995, FIL was engaged in import and export of commodities – agriculture, minerals and metals, chemical and petro products, textiles and plastics. In 2011, as many as 14 banks formed a consortium and decided to open for the group a letter of credit – a bank guarantee that a foreign seller will receive its payment once the goods are delivered to the importer.
FIL enjoyed a credit limit of Rs 2,504 crore from the consortium in 2013 and Rs 4,061 crore in 2018 for importing goods, according to a CBI complaint by Bank of India, the lead banker, on January 18, 2020. However, there was no actual transport of goods, all the shipping documents were forged, and shell companies were used for the transactions, according to bank complaints, a forensic audit by Haribhakti & Co LLP and an SFIO report.
Haribhakti claimed that FIL diverted its LC funds by giving away unsecured loans to Mohan Steels Ltd (Rs 250 crore), Comet Overseas Pvt Ltd (Rs 68 crore), Viva Merchants Pvt Ltd (Rs 42.92 crore) and Fisco Metals India Pvt Ltd (Rs 53.94 crore). Uday Desai and Sunil Verma are the former Directors of Mohan Steels.
On transactions with related parties, the auditor alleged that FIL traded with Universal Pte Ltd, Breeze Sails Overseas Ltd and Maple (UK) Ltd – companies run by Ashish Todi, the director of its foreign arm.
All in the family
Company records with the Ministry of Corporate Affairs for financial year 2016-17 show that FIL had two subsidiaries – FTA HSRP Solution Pvt Ltd and Frost Global Pte Ltd with 51 percent and 61 percent stake, respectively. It had three associate companies: Agros Impex India Pvt Ltd (31.15 percent), AFT HSRP Solutions Pvt Ltd (26 percent) and HSRP Solutions Punjab Private Limited (26 percent).
A detailed study of the documents reveal that the Verma and Desai families had around 90 percent of the FIL shares in 2018. These shares were held by Uday Desai, his wife Nilima, son Sujay and daughter Sanjana; Sunil Verma, his wife Rita, and sons Saral and Nipun Verma.
With FIL going bust in 2018, it transferred its shares in group companies to relatives of the directors. FTA HSRP, which manufactures high resolution vehicle number plates, is no longer a subsidiary of FIL with 48.96 percent of its shareholding transferred to Uday Desai’s daughter Sanjana and Saral Verma’s wife Atisha Kapoor Verma. Saral is a common director or CEO in FTA HSRP, Agros Impex India Pvt Ltd and Globiz Exim Private Limited. Interestingly, Globiz was one of the guarantors of the LCs issued to FIL.
FTA HSRP Solutions Pvt Ltd., Agros Impex Pvt. Ltd., Globiz Exim Pvt. Ltd. M/s. Olympic Oil Industries Limited and others are all internally associated and controlled by the promoter families, as evident from the balance sheet of FIL.
As of March 2021, the Verma couple and Sanjana held 39.22 and 12.24 percent in Agros, respectively, and it is no longer an associate company of FIL.
To understand how important the role of associate companies is, a pending Delhi High Court case provides some clues. FIL owes Rs 29 crore in LCs to PNB in the CBI case. In March 2022, FTA HSRP Solutions Private Limited filed a petition against Punjab National Bank for withholding its fixed deposit of Rs 50 lakh. The petition argued that FTA HSRP was working as an independent company and was no longer a subsidiary of FIL. “FIL transferred 44.51 percent of its shareholding in the petitioner (FTA HSRP) in January 2018 and thereafter it completely exited the petitioner by transferring remaining 6.49 percent in May 2018. Since then, FIL holds nil shareholding in the petitioner company,” (copy of the writ petition available with Kalchakra).
The case is scheduled to be heard again in May. However, the Desai and Verma families own 48.96 percent of shares in FTA HSRP.
According to the SFIO report in 2020, Sunil Verma was a Director of Rotomac Exports Private Limited from 2003-04 to 2014-15. FIL is one of the 69 accused in the SFIO case, which is being tried at a local court in Kanpur. In this case, FIL is accused of swindling Rs 4,041 crore.
In 2021, CBI filed an FIR against its four officers, investigating the alleged FIL bank fraud, for allegedly receiving kickbacks allegedly from Uday Desai and his son Sujay.
However when the scam surfaced and his crimes were reported, Saral Varma took steps to EXIT from the companies involved in which he was an instrumental part with a view to hide its complicity and direct involvement in crimes and having knowledge of the impacts and consequences of actions of the agencies.
On 01.01.2020, Saral Varma resigned from the board of FTA HSRP Solutions Pvt. Ltd. This was done in order to protect M/s. FTA HSRP Solutions Pvt. Ltd. from attachments and criminal proceedings. Whereas, on the same day Saral Verma got himself re-appointed in FTA HSRP Solutions Pvt. Ltd. as CEO of the Company. The reason behind resignation of Mr. Saral Verma in FTA, is he is also one of the accused in FIR no. RC0062019A0015 registered by CBI, on 04.11.2019 on Frost International Ltd.
The role of bankers
In the eight ‘fraud’ cases, no banker has been named as accused. In the CBI FIR, unknown bank officials and others have been named. It’s not clear why the consortium kept a collateral of Rs 180 crore against a working capital credit limit of Rs 4,061 crore.
In 2021, the ED attached FIL properties worth Rs 185 crore only. While the RBI has not fixed how much of the total LC limit should be mortgaged with the bank, the regulator asks lenders to remain cautious before issuing LCs.
A forensic auditor, who had worked with the banking sector for two decades, said a collateral of Rs 180 crore is “almost negligible” as compared to the credit limit. “There is no RBI cap. If State Bank of India has a huge appetite for risk and can issue LCs for less collateral, this does not mean that smaller banks can expose themselves to mostly unsecured LCs.”
A public sector bank official said credit for merchanting is high risk. “Goods will never touch the Indian shore. They are imported from one country before their export to a third country. So banks have no clue if goods are actually being transported. But still there are checks and balances…banks do check the credit ratings (D&B reports) of international firms if they are in the same line of business. The client needs to have a long-time association with the LC issuing bank and creditworthiness,” the banker said.
It’s not clear if the lenders checked ratings of international firms and if they were linked to FIL.
The auditor quoted above differed, saying ratings should be the last toolkit. “You know all big companies that went bust had rosy credit ratings. The reason is that these agencies depend on documents supplied by the company. I think there is a greater need to actively push marketing investigation. In fact, the RBI in its circular in 2020 has supported this. Unless you know the end beneficiaries through investigation, LC frauds can’t be prevented.”
The SFIO report had suspected former bankers known to the management of Rotomac group and the FIL of running foreign entities.
One of the eight cases related to the FIL alleged bank fraud is based on a complaint by lender Indian Overseas Bank, which gave a clean chit to a list of six FIL-linked firms in its submission before the CBI.
Meanwhile, as the FIL case ostensibly becomes just another NPA without recovery, the RBI, in a report few months ago, said that NPA recoveries by scheduled commercial banks have improved to 18.4 percent of the amount involved as compared to 14 percent in the previous financial year.
Kalchakra will keep on updating the story as and when we get more information regarding this case.
