Why are fresh allegations of fraud surfacing against Amtek Auto after resolution process is complete?

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A whistleblower has levelled fresh allegations of fraud and irregularities against “key managerial persons” of Amtek Auto, one of a dozen large, bad loan accounts of Indian banks, and the resolution professional tasked with reviving the auto component manufacturer.

While interim resolution professional Dinkar T Venkatasubramanian has alluded to fraud and related-party transactions at the company in his filing with the National Company Law Tribunal, the whistleblower has sought a probe by official investigative agencies into the alleged siphoning of funds to the tune of Rs 12,000 crore.

Arvind Dham, the erstwhile chairman of Amtek Auto, did not respond to multiple requests for comment. The RP declined to comment on the matter.

Jaskaran S Chawla, an advocate at the Delhi high court who represents the whistleblower, has sought an investigation into the siphoning of “Rs 12,000 crore of loans advanced by public banks by key managerial persons of Amtek Auto in criminal conspiracy with bank officers.”

Chawla wrote to the Central Bureau of Investigation, the Directorate of Enforcement, and the Principal Secretary to the Prime Minister on May 23.

Chawla told Moneycontrol that his complaint was based on the forensic audit report prepared by EY dated March 13, 2018, which covers transactions by Amtek Auto for the period from July 1, 2015, to July 24, 2017.

‘Suspiciously silent’

“The said report indicates large-scale fraudulent transactions between Amtek Auto and its over 127 related parties controlled by former Amtek Auto employees who have acted as benamidaars,” Chawla said.

Chawla also cited the whistleblower to further say that the RP ought to have taken steps, as mandated under Section 66 (2) of the Insolvency and Bankruptcy Code, to retrieve the siphoned funds.

“Furthermore, the RP remained suspiciously silent, despite possessing the forensic audit report, which clearly disclosed evidence of siphoning,” Chawla said. “Neither did he move an application before the National Company Law Appellate Tribunal (NCLAT) seeking an appropriate criminal investigation nor did he approach the investigating authorities for what were obviously the criminal transactions.”

Amtek was one of 12 companies that together owed Indian banks Rs 3.45 lakh crore, as per the insolvency regulator’s latest quarterly report. Liquidating these dozen companies would have generated Rs 73,220 crore, or about a fifth of the amount outstanding. To improve realisations, they were brought under the IBC’s resolution process.

Although Amtek was one of eight such accounts that have been resolved, the amount realised was only a fifth of what was owed to creditors and it took almost five years for the company to change hands, according to data from the insolvency regulator.

Amtek’s total outstanding dues were about Rs 12,500 crore. US-based hedge fund Deccan Value Investors bagged the company for about Rs 2,700 crore. DVI also bagged one other Amtek group company, Castex Technologies.

A third group company was bagged by another suitor, while the case for the fourth group company, Metalyst Forgings, is pending.

Why now?

A person familiar with the resolution process, speaking on condition of anonymity, explained that while the new owner of Amtek Auto has been in charge of the business since December last year, an application by the RP, based on the transaction audit report by EY, has been pending with the National Company Law Tribunal (NCLT).

Under the IBC process, the RP is expected to examine all transactions of the company undergoing resolution for the previous two years, get them evaluated by an auditor, and then highlight any wrongdoings to the NCLT. The two processes – resolution and transaction audit – take place independently.

It is now for the NCLT to decide if there was any fraud on the basis of this report.

The Ministry of Company Affairs had started a probe into the goings-on at Amtek Auto through the Serious Fraud Investigation Office (SFIO) in 2019. The SFIO probe was announced for almost all the dozen accounts since the amount of money involved was large, said the person quoted above. The SFIO probe has been going on even as the resolution process concluded and the business is in the hands of the new owner.

Creditor’s allegations

A creditor to the Amtek group who did not wish to be identified alleged that the resolution process involved misleading information to the bidders in terms of liabilities and assets of Amtek Auto.

“For example, the turnover which was shown was bogus because it was based on related-party transactions since it was due to transactions between sister companies within the Amtek Group,” this person said. So loans from creditors were allegedly taken based on this “bogus” turnover and this constituted a fraud.

The creditor also alleged that although the transaction audit report of EY pointed out “clear fraud,” neither the potential bidders for the company nor the committee of creditors (CoC) – a panel representing the company’s lenders – were made privy to the alleged wrongdoings, which ultimately made the Amtek group default on payments to creditors.

This creditor also alleged that the RP decreased the value of assets of Amtek Auto in the balance sheet after the initial bids for the company had come in and failed to file an application to recover money siphoned off by the promoters.

Messages sent to members of the CoC representing State Bank of India, Corporation Bank (now Union Bank), IDBI and Ares SSG, remained unanswered.

However, the first person quoted above said that during a resolution process, stakeholders are usually dissatisfied because what they receive is a fraction of the total amount the insolvent business owes them.

The person also contended that had the CoC not chosen Liberty House of the UK in 2018, when a resolution plan for Amtek Auto was first finalised, the creditors would have realised a larger amount and the process would have concluded sooner.

“At that time, the creditors could have realised Rs 3,500 crore cash up front and other incentives totalling nearly Rs 5,000 crore, or double the realisation they have received now.

But the bidder chosen by the CoC could not raise the required money to fund the transaction. They made allegations against the RP about not providing adequate information and this led to future legal issues and delays in the entire resolution process for Amtek,” this person said.

After the pandemic struck, DVI had also sought permission to withdraw from the insolvency process but the Supreme Court forced its hand.

Transaction audit

The RP had appointed EY to audit Amtek Auto’s transactions from 2015 to 2017, with the mandate including any related-party transactions, review of capital expenditure, and changes in loans and advances. In his submission before the NCLT, the RP quoted the draft EY report to say that prima facie, Amtek Auto had carried out “preferential transactions, undervalued transactions and transactions defrauding creditors under the relevant provisions of the Code during the audit period.”

The RP noted that “other than 33 related parties disclosed by Amtek Auto in its financial statements, there were 96 potentially related parties to the corporate debtor (AA)”.

Other observations by the RP included the absence of supporting documents for loans of Rs 363.98 crore to 10 potential related parties; adjustment of receivable balances of related parties against exempt purchases, and sale/purchase transactions without supporting documents.

IBC delays

Corporate insolvency resolution under the IBC has been a middling success, at best. The latest data from the Insolvency and Bankruptcy Board of India, the regulator, show that at least every third case filed under the IBC since its inception in December 2016 is still awaiting resolution.

Of the 5,258 such cases brought under the code, not even one in 10 has been resolved (only 480 resolved). Almost every second case that completed the resolution process has seen the business being liquidated.