On February 7, 2020, the Central Bureau of Investigation (CBI) registered a First Information Report (FIR) to investigate what may turn out to be one of the biggest banking frauds the country has seen.
The FIR, a copy of which is available on the website of CBI, alleges that M/s ABG Shipyard Limited (ABG), a shipbuilding company, in connivance with its officers have caused a wrongful loss of Rs 22,842 crores to a consortium of 28 banks, including the State Bank of India.
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The FIR is based upon a forensic audit report dated January 18, 2019, conducted by Ernst and Young LLP. The FIR relies upon a four-point summary of a forensic audit report in respect of (a) alleged pay-outs and syphoning off of funds to the related parties, (b) alleged diversion of bank loans to an overseas subsidiary in form of investment, (c) alleged payment of accommodation deposits to allegedly linked parties for purpose of acquiring properties, and (d) alleged receipt of customer receipts in account other than Trust and Retention Account in complete violation of Corporate Debt Restructuring arrangement between the lenders and ABG.
While there can be no doubt that the case in hand requires a full-fledged investigation into the corporate fraud allegedly committed by ABG and its sister concerns, the question that arises is whether the CBI is the investigation agency best placed to continue and complete this investigation. In the author’s opinion, the Serious Fraud Investigation Office (SFIO) is better suited to investigate the case.
Firstly, the SFIO is more empowered than CBI in as much as (a) the statements recorded by SFIO are admissible in trial while the one recorded by CBI has weak evidentiary value, and (b) in cases arrest is made by SFIO, the law imposes more stringent criteria for grant of bail.
Secondly, the SFIO being specifically incorporated to investigate corporate fraud is definitely a more specialised agency. By mandate of law, it comprises experts in the field of banking, corporate affairs, taxation, forensic audit, capital markets, and so on. The FIR reveals that the alleged crime involves complex transactions including inter-corporate circular transactions, accommodation entries, and acquisition of property by related parties. Such transactions, indisputably, require investigation by an expert agency.
Thirdly, the allegations made in FIR and as also apparent from the settlement order of Securities & Exchange Board of India (SEBI) warrants investigation into various offences covered under the definition of frauds under the Companies 2013 Act (Companies Act). The scope of fraud under the Companies Act includes concealment of facts, abuse of power and is much wider than the offences defined under any other law. The Companies Act not only makes the directors liable but also has specific provisions attributing criminal liability to the auditors of the errant company. It is in the fitness of things that investigation is conducted under the Companies Act by an agency specifically incorporated to investigate such offences.
However, as the SFIO does not have suo-moto power to initiate an investigation, the situation warrants that the Central Government assigns the investigation of the case to the SFIO in the public interest. In the author’s view, given the magnitude of the alleged fraud, it would be more appropriate to have a specialised investigating agency that deals with these matters on a regular basis to conduct the investigation.
The nature of transactions discussed in the forensic audit report, which the FIR primarily relies upon, indicates that the auditors of ABG might have played a key role in the perpetuation of the alleged fraud. The findings of the forensic audit are primarily based on book entries, financial statements, annual reports, and data available from Enterprise Resource Planning (ERP) software.
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Although none of the auditors are named in the FIR, the nature of the accusation, especially alleged accommodation entries in the audited books, definitely warrants investigation into the role of the statutory auditors.
The need for investigating the role of auditors in the present case is further fortified by the fact that the SEBI was also of the preliminary view that the auditor of ABG has certified audit report whereby the company has misstated the profits and avoided making disclosures as per the accounting standards and had accordingly issued a show-cause notice to the said auditor. While the said show-cause notice was settled by the auditor and SEBI on a ‘no admission or denial’ basis vide a settlement order passed by SEBI in May 2019, the nature of the allegation, if true, would make the auditor criminally liable for fraud.