Banking frauds like the Nirav Modi one make headlines, but what remains untold is the agony of lenders in getting their money back by selling assets.
Banking frauds like the Nirav Modi one make headlines, but what remains untold is the agony of lenders in getting their money back by selling assets.
At the tip of Worli, just a block away from India’s western watermargin, the Samudra Mahal luxury condominium stands out for its understated grandeur and unobtrusive opulence. In this tony Mumbai neighbourhood of gravity-defying property prices, Samudra Mahal keeps company with Madhuli, another block of ritzy flats offering a spectacular view of the Arabian Sea.
Bankers and lawyers say that the key to recovery in a large fraud case is to ensure that it is handled swiftly out of court — by the government.
The two apartment complexes, home to some of the country’s biggest names in business and finance, now have another attribute in common besides setting the gold standard in downtown living: Flats in Samudra Mahal and Madhuli now feature in India’s tortuous exercise to recover public cash lost to financial fraud.
Samudra Mahal properties vaulted into the centrestage immediately after Punjab National Bank (PNBNSE 0.22 %) announced six weeks ago that it had been a victim of an elaborate web of deception that bilked the lender of $1.7 billion.
Ballpark estimates for what is being billed as India’s biggest banking fraud have since been raised to beyond $2 billion with new claims lodged against fugitive diamond merchants Nirav Modi and Mehul Choksi and a raft of companies controlled by them.
In the 45 days since the scam became public, three probe agencies have been harnessed — the Central Bureau of Investigation (CBI), Enforcement Directorate (ED) and Serious Fraud Investigation Office (SFIO). The ED has so far attached immovable properties of Nirav Modi’s business group to the tune of Rs 7,638 crore. Of course, that’s small change in comparison with about Rs 13,700 crore in embezzlement of funds that could be directly traced to the fugitive diamond merchants.
Yet, can banks even recover whatever is available? Unlikely, if we went by earlier examples. And even if recovery happens, it will be years until banks can get their hands on some assets because investigating agencies in India are only trained to attach properties — not to ensure the recovery of funds. The long list of 31 claimants in this case, the lack of clarity on how to distribute the recovered amount, and India’s slow legal system don’t really point to a swift recovery of cash.
“There is no efficient mechanism to decide that if some asset has been attached, it should be immediately handed over to the secured creditors. I have not seen any law which says that handing over and recovery from these assets have to be immediate. When agencies attach assets, these are placed at the discretion of the judiciary. The judicial process takes a very long time because on their own, these authorities cannot sell and hand over the proceeds to secured creditors,” said Rajesh Narain Gupta, managing partner at SNG & Partners, a law firm.
NOT THE BEST RECOVERY AGENTS
Take Vijay Mallya’s Kingfisher Airlines, which today owes about Rs 9,000 crore to a raft of local banks. So far, the amount recovered from the company is less than Rs 80 crore, largely due to the sale of Mallya’s Kingfisher Villa in Goa for Rs 73 crore. Even that property was sold after three failed auctions. Kingfisher House in Mumbai remains unsold after multiple attempts at auctioning it.
“When there is a fraud investigation, the assets get a bad name and nobody is willing to invest in something with legal complications. This is one reason the recovery gets delayed. This besides the fact that the investigation itself is… difficult for bankers to comprehend,” said GK Sharma, a banking veteran and CEO at Invent ARC.
Kingfisher is the latest major example in a raft of such cases. In the Harshad Mehta scam that involved Rs 1,500 crore in the early 1990s, recovery from physical assets took twenty long years despite the fact that the defaulter was very much in India, and in police custody.
Senior Supreme Court lawyer Mahesh Jethmalani, who represented the deceased Mehta in the case, says the appointment of a special court in the Harshad Mehta case made a lot of difference.
“Harshad Mehta’s assets were easily recoverable because he had not taken them abroad. All his shares, bonds, stocks, and properties were all attached… Where funds have been sent abroad and someone is fleeing the country, recovery becomes very difficult.”
He blames the delay on overworked courts in the country. “There are too few judges in this country. It’s about time that the judiciary starts paying people better. We have the highest rates of commercial crime in this country and we have the lowest rate of judiciary to litigant,” he said.
The extent of judicial delay can be gauged from the fact that though almost all money has been recovered, the case is still open since the past 20 years. One apartment in Madhuli, in the vicinity of Samudra Mahal, remains unsold due to some litigation as it was registered in the name of Harshad Mehta’s mother.
NO END IN SIGHT
Recovery from such cases has always had regulators in a bind. Even the Reserve Bank of India (RBI) Governor Urjit Patel has commented on the delays in recovery. “RBI data on banking frauds suggest that only a handful of cases over the past five years have had closure, and cases of substantive economic significance remain open. As a result, the overall enforcement mechanism – at least until now – is not perceived to be a major deterrent to frauds relative to economic gains from fraud.”
Technicalities of the law also ensure that fraudsters get enough time to delay the recovery from ill-gotten assets.
“The criminal court confiscates these assets but it has no jurisdiction to appropriate assets. Those confiscated assets can only come to you from a civil court or a regulator, which has lawfully realised the claim or damage. Search and seizure is a pre-trial process to collect evidence and to prevent tampering during the course of the trial. What if once the trial is complete and the person is acquitted? It would be unlawful to dispose confiscated assets until such time,” said Sherbir Panag, Partner, Law offices of Panag & Babu.
Bankers and lawyers say that the key to recovery in a large fraud case is to ensure that it is handled swiftly out of court — by the government. And the only case handled efficiently was the Rs 7,000-crore Satyam Computer Services scam which came to light in January 2009.
LESSONS FROM THE SATYAM TAKEOVER
On January 7, 2009, the then Satyam Computers chairman B Ramalinga Raju confessed that he had manipulated the accounts, defrauding the company of Rs 7,000 crore. The government moved into action swiftly. Even as the investigative agencies did their job and Raju was put behind bars, the government started a bidding process for the Hyderabad-based software company.
On April 13, 2009, just over three months after the fraud came to light, Tech Mahindra bought a 46 per cent stake in the company via a formal public auction process in what was a win-win deal because it helped save jobs and gave Tech Mahindra an opportunity to diversify its business.
“Satyam was a rare exception because it was a classic case of how a government can handle such a situation, ensure assets are preserved, value is created and jobs are saved. But in the Nirav Modi case, it is a jewellery company we are talking about and Satyam was an IT company. These are two different businesses and they cannot be compared,” said GK Sharma of Invent ARC.
The bottom line is that there are no clear principles to deal with such situations. And in many cases, the value in the company may not be much less than the dues to be recovered.
Investigation officials are also exasperated by the present situation. “We in the judicial system are following the civil procedure code of 1908 and a criminal procedure code which was redone in 1973: That is the reality and we are all victims of it,” said an officer involved with investigations in the Nirav Modi case.
