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Story of Rising Banking Fraud in India, Told Through Two Tales

Jun 11, 2021 1:25 PM 5 min read

On June 9th 2021, the National Company Law Tribunal (NCLT) greenlit a purchase offer for Videocon Group of Industries from an Anil Agarwal-led company. 

On June 10th 2021, the CBI filed an FIR against Gautam Thapar, a once-acclaimed business tycoon who is now being investigated on two separate lines of charges related to the Yes Bank scam.

What unites these two episodes, unfortunately, is that they are both glaring instances of the scam- and scandal-hit banking industry

The first one involves collusion between bank executives and borrowers (the Kochhars and Videocon Chairman Venugopal Dhoot). 

The second one involves more than one collusion between bank executives and borrowers (the Thapars and Rana Kapoor's family). 

Both of them are instances of a rich and powerful nexus singularly hijacking the underwriting mechanisms of listed banks for their personal gains. 

Let's explore each of these scandals and try to understand the pattern (if any) in the hopefully erstwhile but corrupted machinery of Indian banks. 

A Yes Man's Claim to Infamy

Let's start with Gautam Thapar. He is the inheritor of the Thapar legacy who was famed for rescuing a once-delinquent Ballarpur Industries (BILT). In a 2010 profile, The Economist compared Mr. Thapar to the fiery Arsenal forward Theo Walcott for the amazing speed with which he steered the growth of BILT, India's largest paper-making company. 

Mr. Thapar presided over a bunch of important companies like BILT, Crompton Greaves, Solaris Chemical, Global Green etc. He also heads his own real-estate firm called Avantha Realty which is a part of the Avantha Group conglomerate.  


The Unreal Real Estate Deal

Things started going awry in 2017 when his name emerged in the loan frauds that happened in Yes Bank during Rana Kapoor's term. At the centre of this emergence was a piece of prime property in the heart of New Delhi - 40, Amrita Shergill Marg. 

Turns out that Avantha Group (more precisely, Avantha Realty), which owned this property, had mortgaged it to borrow ₹400cr ($54.8m) from Yes Bank. A year later, the bank removed the charge from this property after Mr. Thapar decided to sell it. 

But here's the twist. He sold it to an entity called Bliss Abode, a company registered to Bindu Kapoor who is the wife of former Yes Bank CEO Rana Kapoor. 

What was just described is a classic case of related-party transaction. Assets that were pledged under a loan changed hands between a family member of the lender and the borrower. In conservative terms, conflict of interest. In plain terms, bribery in exchange for sanctioning loans. 

Red Flag 1: The property was sold at a seriously undervalued price (₹378cr ($51.8m), much lower than the total ₹1,200cr ($164.6m) the bank had extended to Avantha in the following months against the same property). There was neither any ad out nor any interest shown by the seller to pursue the sale publicly. 

Red Flag 2: A week before Yes Bank approved the loan, rental income from the property increased by nearly 65 times, as reported by Moneycontrol. So we are essentially looking at inflated asset valuation. Which is an irony considering no rent from the property was received in escrow. 


Borrow-Spend Mismatch

Aside from this property, Avantha has been charged with diverting almost 90% of the loans it received from the bank. The ₹515cr ($70.6m) availed over 10 years from 2017 was meant for the operational expenses of Jhabua Power, an Avantha company. But in 2019 the company turned into a non-performing asset and started defaulting on repayments.

Why? Because only ₹15cr ($2m) went to Jhabua and the rest was used to settle the loans of Avantha Group. 


The Crompton Greaves Grief

Mr. Thapar's ignominious decline kept continuing further after he was ousted as Chairman of Crompton Greaves over allegations of "unauthorised transactions". 

Some assets of the company were offered up as collateral against loans taken by company officials (names still undisclosed). Essentially, Crompton Greaves was made a co-borrower and/or guarantor for as many as nine such transactions which lost the company around ₹3,300cr ($452.8m). The matter is still being probed by the SFIO and SEBI. 

Rana Kapoor remains in custody and Gautam Thapar is facing fresh indictments. All the while, Yes Bank is being gradually rescued from bankruptcy using taxpayer money.

The Con of the Videocon Promoter

We did a background on ICICI Bank's and the Kochhars' involvement in the questionable loan deal earlier. This time, we turn our focus to the Dhoots. 

In 2015, Mr. Venugopal Dhoot was the 61st richest man in India with a net worth of $1.8bn. However, his joint promotership with Deepak Kochhar in NuPower Renewables proved unprofitable (to say the least) in the long run. And so did the ₹64cr ($8.7m) "loan" he disbursed to NuPower that was never returned. A loan that was extended merely six months after ICICI Bank sanctioned ₹3,250cr ($446m) to the Videocon Group. 

This story differs from the Thapar-Kapoor story in one particular way. Although both the cases showed corrupt exercises, the scenes came under public view after different parties edged closer to insolvency. 

In the Thapar-Kapoor case, it was the bank (Yes Bank) which turned insolvent whereas in the Kochhar-Dhoot case, it was the corporation (Videocon). 

The 20-bank consortium led by State Bank of India which sanctioned the loan facilities to Videocon Group (and its 13 companies) also included ICICI Bank. But ICICI Bank has less than 10% of the total exposure. The Dhoot family reportedly offered to clear the loans but the lenders turned it down and accepted Vedanta Chairman Anil Agarwal's offer.

One has to say, however, that the second offer wasn't a particularly generous one either. Mr. Agarwal will be paying ₹3,000cr ($411.7m) to purchase a multinational conglomerate which will give a massive boost to Vedanta's oil business. On the other hand, the lenders will be taking almost a 90% haircut on Videocon's debt which has now ballooned to ₹46,000cr ($6.3bn).


The Banking Sorrows of India

The CBI has registered as many as 190 cases of bank fraud in the year 2020 alone. In more than a dozen cases in this lot, the quantum of fraud committed by the officials amounted to more than ₹1,000cr ($137.2m) each.

With a growing number of cases involving collusion between borrowers and bank executives, the losses to the banking institutions have been piling up as well. Individual gains from these transactions end up collapsing the banking infrastructure and the economy (to some extent) which then warrants RBI intervention and bailout money channeled from the public reserves. All the while, the wrongdoing promoters and bankers barely receive any punishment. 

It's a vicious cycle of give-and-take-and-wreck-Indian-banking-in-the-process. 

The regulators are, perhaps, at fault too. In spite of Rana Kapoor steamrolling regulatory agencies and visibly running Yes Bank into ruins, the RBI was reluctant to take action for a long time fearing it would jeopardise the banking edifice of the country. And yet, later it decided to proceed with the bailout of Yes Bank despite protest from other PSBs like SBI. Call it procrastination or regulatory indecisiveness. 

In any case, corporate governance will die a painful death if such transactions are allowed to continue in the future too. And more painful than that will be the distress of the millions of investors and depositors who entrust their faith in banks on a daily basis.


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