A forgotten story of Scam which should be taught in the school of Accounting

Today I was going through the newspaper and suddenly the news flash in front of me- “Religare Finvest (RFL) lenders to approve one time settlement offer at 57% haircut with its secured creditors”.

More than 12 Lenders include Bank of Baroda and Bank of India to whom RFL owes more than 5300 crore rupees, and this would be settled just at around 2300 crore which would mean loss of 3000 crores. ?Whose money was this? It was ultimately the money of common man who deposited in these banks.

Why did this settlement happen?

As per the current management of the company previous management of the company is responsible which includes the Brothers Malvinder and Shivinder Singh, once successful businessmen who were on Forbes' list of billionaires. The broad allegations are that Malvinder and Shivinder, along with other officials of Religare Enterprises Limited (REL), took loans in the name of RFL and diverted the money to other companies.

How did this case unfold?

In November 2016 and in January 2017 RFL invested Rs 750 crore in fixed deposits in Lakshmi Vilas Bank (LVB). It renewed the deposits till July 2017.

In July 2017, RFL allegedly discovered that LVB had credited the proceeds of the FDs to RFL’s current account and debited about Rs 724 crore without prior intimation to RFL.

RFL says it intimated the bank through letters and legal notices demanding immediate reinstitution of the FDs. Following a legal notice, the bank agreed to restore the FDs retrospectively.

Around December 2017, RFL claims it received a letter from LVB saying that certain loans were given to RHC Holding and Ranchem Pvt Ltd (Rs 532 crore and Rs 174.8 crore respectively) after allegedly considering the FDs as a security.

RFL claimed that the FDs were lien free and it sought a confirmation on this from LVB.

RFL claimed that LVB did not send any intimation on placing the FDs as a security against the loans given to RHC and Ranchem. RFL has not executed any documentation for pledging the FDs towards any loans availed by the above two companies.

RFL eventually filed a suit against LVB in Delhi High Court

In August, the Enforcement Directorate raided multiple premises linked to the Singh brothers. Raids were conducted at seven locations in Delhi.

A day after RFL filed an FIR with the EoW of Delhi Police last September, the RBI placed LVB under its prompt corrective action framework. LVB, however, claimed that the RFL FIR had nothing to do with RBI action.

On October 10, the Delhi Police arrested the two brothers along with their associates under section 409 (criminal breach of trust by a public servant, banker, merchant, or agent) and section 420 (cheating) of the Indian Penal Code.

?What are the lessons learnt by Accountant/Auditor?

1.????Management integrity and experience need to be considered for the risk assessment of any audit engagement. Singh’s brothers were facing the legal issues for sale of Ranbaxy before this case was unfolded.

2.?????Third party confirmations play vital role in discovery of frauds. Here the LVB bank has not mentioned that the FD’s were kept as security against the loans. This has been proved in the case of Satyam as well.?

Conclusion: Does Education plays any role with ethics? The brothers studied at Dehradun's Doon School, Delhi's St Stephen's College and Duke University's Fuqua School of Business in the US. Accountant has a bigger role in saving the hard-earned money of common people.