Over the past seven years, Indian companies have seen more frauds than over the past 70 years. After the post-GFC excesses – where credit was loose and Indian companies’ ambitions raced faster than their business acumen – it took years to absorb the fallout from defaults, NPLs and collection procedures .
However, the the increase in corporate fraud was somewhat confusing because it was disappointing. Since the implementation of the IBC, many such findings have come to light as independent resolution professionals take over the business of the company. In addition, banks and financial institutions are not encouraged to compromise or cover up transgressions which, in the days before the Insolvency and Bankruptcy Code, would have either been ignored or secretly allowed to exist. without recognizing its existence.
Developers have a clear grip on their businesses, lenders and minority shareholders. Even professional employees have the bad side of this stick. It also depends on how you define management conduct. Fraud and mischief in financial institutions (such as banks and NBFCs) have huge ramifications given the inherent leverage effect on business models. The demise of Yes Bank, Religare, Laxmi Vilas Bank, IL&FS and DHFL have all been mired in fraud, corruption and siphoning – showing that the fault of promoters or professionals has been exposed.
In contrast, BR Shetty (promoter of NMR Health and Finbar) blames their professional management for the complex fraud in their business. Avantha Group (led by promoter Gautam Thapar) received the same blame, with the promoter claiming ignorance, delaying the resolution process. Meanwhile, the Cox and Kings case feels more like a thriller than a business process where the promoter (Peter Kerkar) claims to have been duped by collusion between his management, banks, and investors. It is hard to believe that the promoters have been running the business for over two decades in each of these companies and yet do not know what the real business of the company looks like.
Anyone who has interacted with the senior management of Indian companies owned by promoters (including SEBI and RBI) can tell you that the finances of every Indian company are controlled by the promoter’s family with an iron fist. This is one of the reasons bankers in India always want personal collateral from promoters, as they implicitly recognize that promoters treat businesses as their own wealth, so that the transfer between promoter’s wealth and assets of the business can not be prevented.
Therefore, bankers should be able to attack the promoter’s assets if the company’s assets are insufficient for debt repayment. Undoubtedly, promoters have the power, authority, ability and opportunity to know if there were dishonest employees or if this is a clever ploy to leverage high performance perceptions and stock prices as well as to deflect downside risk.
The list of corporate fraud continues to grow, showing the underside of Indian companies. While there is hope that startups will achieve “unicor” status, there is also a serious reminder that Indian companies have many dark corners that need to be cleaned up. Measures must be implemented to discourage such behavior, whether on the part of promoters or professionals. It is only when this bad behavior subsides that banks can start lending again to companies and minority investors will invest again, thereby regaining the confidence of Indian companies.
Data reported by RBI paints a grim picture of the public money lost in corporate fraud in India. It is shocking to see that over the past ten years, the number of reported frauds has multiplied by almost 100, from Rs 2,000 crore in 2010 to Rs 1,85,000 crore in 2020! Interestingly, this declined to Rs 138,422 crore in fiscal year 2021, although the absolute number remains uncomfortably high. Reports from private sector banks increased in FY21 compared to FY20 (+ 35%) while that of PSU banks declined (-45%) – perhaps reminding us that fraud is ubiquitous, not only hiding in PSU banks but also finding its way into well-run private sector banks. One might suspect that this jump could also be due to reports from Yes Bank.-IANS