Related Party Transactions & Bank Fraud - A Study

Banks and Financial Institutions are poorer by INR 22842 Cr. AGB Shipyard Ltd ( In Liquidation) , listed, had borrowed from as many as 28 Banks and Financial Institutions. SBI filed a complaint with CBI. Forensic Audit was ordered and finally after one and half year FIR was accepted by CBI.

Forensic Audit Report submitted by Ernst and Young states that between 2012 and 2017, the accused being 5 persons and one company colluded together and engaged in illegal activities which included diversion of funds, misappropriation and criminal breach of trust.

Being a listed company the AGB published quarterly results submitted them to the Stock Exchange. Accounts for the years were audited and adopted by the shareholders .They were submitted submitted to the RoC of Gujarat and Stock Exchange. It was only after the account was declared NPA in July, 2016 by the Banks, investigations were carried out and it was declared that fraud had been committed by the 5 persons and one company.

The fraud committed on the Banks and Financial Institutions point out short coming in our system. Since borrowers like AGB are companies, banks do not pay much heed so long a borrower carries on servicing the loan taken from the bank. There are instances when Bank Branches fail to have the annual accounts filed with MCA . It is through the Balance Sheet detail of comapnies surface. Apart from the schedule to the accounts, notes to the financial statements carry disclosures of actions of the company. Since Auditors Report reveal all irregularities done in the company, the Notes to the Financial Statements include disclosures by the management so that the irregularities do not appear in the Auditors Report.

Banks mostly consider the Balance Sheet, Profit & Loss Account and Cash Flow Statement , Directors Report. It is not understood whether Schedules pertaining to Current Liabilities ( Short-term borrowings), Non-current investments, Long term loans and advances, current investments, short-term loans and advances are examined in depth. It is also not known whether Related Party Transactions disclosed are examined. If the Forensic Report has a statement that the company diverted funds by spending for then the Non-current investments, Long term loans and advances, current investments, short-term loans and advances if examined in depth will reveal all. The para on related party transaction will reveal the extent of misappropriation and criminal breach of trust. Banks ought to examine the Balance Sheets of the companies once the financial statements are finalised. Banks ought to engage auditors to report on related party transactions of companies on some companies each year. This is the first point of diversion of funds. Further the companies in which funds are diverted should be examined.

Banks should require companies to submit Annual Accounts of Subsidiary companies if they are not included in the accounts of the holding company. All associated companies should be made to file their Balance Sheet. Further promoters should be made to submit the Balance Sheet of companies declared to be in the same group.

Merely complying to the laws do not mean that all is well. Close look at the group and inter related companies along with the related party transactions from the very start could reveal many things. We are yet to reach this stage. But if we have to save our Banks from further damange such actions are must. We should not consider the models followed by other countries. It must not be forgotten that most of banking is still in the hands of nationalised banks. In other countries banking is in the hands of private groups. If we have check future scams it is necessary to look for the gaps in our system and make amends wherever repair seems necessary.