8 July 2019: More lenders to bankrupt Bhushan Power and Steel Ltd may say that the company misappropriated funds given to it after state-run Punjab National Bank first reported a ₹3,800 crore fraud, a top bank official said, requesting anonymity.
On Saturday, Punjab National Bank (PNB) disclosed to stock exchanges that it had detected that 85% of its exposure to bankrupt steel mill had been siphoned off and that Bhushan Power had misappropriated bank funds and manipulated account books.
“The forensic audit was initiated by SBI (State Bank of India) and they discussed it with other lenders,” Sunil Mehta, managing director and chief executive of PNB, said in an interview on Monday.
So far, apart from PNB, no other lender to Bhushan Power has reported a fraud related to the company. While PNB’s total exposure is at ₹4,399 crore, more than 85% of it has been classified as fraud, as admitted by the bank in the regulatory filing.
A complaint registered on 5 April by the Central Bureau of Investigation (CBI) pegged the fraud at Bhushan Power at ₹2,348 crore; PNB has now disclosed that the fraud is bigger at ₹3,805.15 crore.
“One year ago, the government had given us all a direction that all non-performing accounts (NPAs) beyond ₹50 crore should go through a forensic audit and be declared as a fraud wherever necessary. (Bhushan Power) is an old NPA and is at an advanced stage of resolution. SBI has the largest share here. We decided to disclose it to the stock exchanges as a matter of extra precaution and also because our exposure is substantial,” said Mehta.
The CBI first information report (FIR) on Bhushan Power could have nudged the forensic audit to reach its conclusion, said a banker who is part of the loan consortium.
Although forensic audits are commissioned in all accounts once they are referred to the National Company Law Tribunal (NCLT), these are inconclusive in most cases, the banker said on condition of anonymity.
Other lenders of the consortium may also be affected because 33 lenders have exposure to Bhushan Power.
“Once an account is reported to be fraudulent to the Reserve Bank of India (RBI), the bank has to fully provide for it and set aside money equal to the outstanding loan to the borrower,” explained the banker.
Bhushan Power is one of the 12 large loan accounts that lenders referred to NCLT following a nudge from RBI.
Meanwhile, JSW Steel, the highest bidder for bankrupt Bhushan Power, will stick to its final bid of ₹19,700 crore for the company in the wake of recent fraud allegations at the company. “JSW Steel might decide to alter its bid in the future, if more information is revealed about the nature of the fraud,” the first person cited earlier said. “At this moment, the company has not made a decision about this. But if there are chances of additional liabilities being imposed on the bidder in future, then JSW might choose not to go ahead with the acquisition.”
JSW Steel made the highest bid for Bhushan Power, with an upfront cash payment of ₹19,350 crore to the lenders and an equity infusion of ₹350 crore to revive the steel mill’s operations. Bhushan Power owed ₹47,204 crore to its lenders as of 30 January 2018. The bid is awaiting NCLT approval. Last week, the Supreme Court stayed an order by the Punjab and Haryana high court and urged NCLT to complete the resolution process.
“Allegations of fraud in some accounts under IBC (Insolvency and Bankruptcy Code) is not new,” said Babu Sivaprakasam, partner at Economic Laws Practice. Also, recent transactions of such nature will be revealed during insolvency process through forensic audit. Simultaneous criminal proceedings will not affect the resolution under the IBC process in general. This legal position is upheld by NCLAT (National Company Law Appellate Tribunal) and by the Bombay high court as well.”
“I believe what the bidders will look for is that they are getting clean, unencumbered property, which won’t be subject to investigation or claims later, like under the Prevention of Money Laundering Act (PMLA),” Sivaprakasam said. “They will want to be sure that the assets are not tainted and the title and ownership will not be challenged at a future date, especially post the recent judgement of the Delhi high court on the overriding effect of PMLA over IBC.”
An email sent to Bhushan Power’s resolution professional Mahender Kumar Khandelwal did not elicit a response till press time. JSW Steel declined to comment.
Under RBI guidelines, bank frauds should be reported to the central bank within three weeks from the date of detection. The provisions can be spread over a period not exceeding four quarters from the quarter in which the fraud has been detected. However, if there is a delay in reporting it, the entire provisioning is required to be made at once.
The CBI FIR named chairman Sanjay Singhal; vice-chairman Aarti Singhal, along with directors of Bhushan Power, as suspects in the case. The FIR said Bhushan Power, through its directors and staff, availed of various credit facilities from 33 different banks and financial institutions between 2007 and 2014 and the outstanding default as on 30 January 2018 was ₹47,204 crore.
“The amount of ₹2,348 crore was dishonestly and fraudulently diverted by Bhushan Power through its directors and staff from five cash credit accounts to more than 200 companies,” it said.