9 Major Corporate Frauds in India

Introduction

Corporate frauds occurs when a corporation or an individual intentionally changes and conceals confidential information to appear healthier. Businesses use several techniques, including misinformation in prospectuses, accounting record manipulation, debt concealment, and so on, for committing these frauds. False accounting entries, fraudulent trades for profit inflation, disclosure of price-sensitive information that falls under the scope of insider trading, and false transactions that attract more financial institutions for financing are all examples of financial information falsification.

Companies commit such frauds for several reasons, including making more falsified money, creating a false picture of the market, and misleading government authorities for tax evasion.

The Commission on “Prevention of Corruption” in India wrote in its report that “the advancement of technological and scientific progress is leading to the emergence of mass society with a wide rank in a file and a small controlling elite, promoting the growth of monopolies, the rise of a managerial class, and intricate institutional structures,” Even the honest functioning of the current social, political, and economic systems necessitates strict adherence to high ethical standards of behaviour.

The Vivian Bose Commission, which investigated the Dalmia Jain group of companies in 1963, revealed how major industries participate in frauds, falsification of accounts, and record tampering for personal benefit and tax evasion, among other items.

The current buzzword in company jargon is corporate governance. It has become a topic of debate in boardrooms, academic circles, and governments worldwide. Some of the high-profile corporate failures include Harshad Mehta’s securities fraud, Ketan Parikh’s fraud, C. R. Bansal’s fraud, and the Satyam fraud. These frauds have shattered the expectations of many investors, stunned governments and regulators, and raised concerns about statutory auditors’ accounting standards and corporate governance norms.

Unethical business conduct and actions, failures of boards of directors, lack in external audits, failures in organizational strategy, unbridled power in the hands of the chairman/chief executive officer (CEO), lack of accountability, inadequate disclosures, bribery, lack of proper internal audits, poor internal control, the questionable position of rating agencies, and insufficient regulatory frameworks are the most common concerns. This article will discuss the nine most critical corporate frauds in India that has shaken country’s corporate landscape.

Major Frauds in India

Satyam Computers

Satyam was the first significant fraud of its kind globally, shocking the public and prompting the government to tighten laws, reporting, and governance mechanisms.

The company’s promoters invented ingenious strategies for committing frauds on a wide scale with fake billings for services provided to international clients. Fake proceeds were shown to have been received in numerous bank accounts, opened in different countries, as a logical next move which was later found to be non-existing. The company’s financial statements regularly showed large bank balances out of line with other IT companies, given its size. The promoter was in charge of the entire operation, with the aid of a separate staff dedicated to this, what I would term a fraud factory.

Fake bank confirmations and statements were produced and presented to auditors as proof of balances when the financials were closed and please auditors. The total amount of money involved in the scam was reported to be around USD 1 billion. Satyam had a robust business model and a client list that included some of the world’s largest corporations. To save the company, the government had to undertake an unprecedented rescue mission, which began with the dismissal of the company’s board members, followed by selecting professionals as board members, led by Deepak Parikh. The company was eventually sold to the Mahindra Group, and it is now a big part of the Group’s profitable technology sector.

Kingfisher Airlines

KLA was yet another corporate scam, the first of its kind in the airline industry, which ultimately brought the King of Good Times’ empire to an end. Vijay Mallya, also known as the “King of Good Times,” created the airline. The company took out loans from all possible sources, including related parties and a guarantee of the Kingfisher brand based on an overestimation of its worth.

The good times didn’t last long, and Vijay Malia was forced to sell his family’s cherished liquor and beer company to pay off some of his debts. A consortium of banks led by SBI has an exposure of around Rs. 9000 crores to now a virtually bankrupt airline. Most employees lost or quit jobs as salaries were nor paid for months together. The company went to the extent of defaulting in depositing statutory dues like PF, TDS deducted from salaries to government authorities.

Jet Airways

Lenders’ exposure to airlines is around Rs 8500 crores, with overall liabilities of around Rs 25000 crores, including debts to suppliers, staff, the AAI, and aircraft lessors. The company engaged in a variety of misleading activities, including:

• Overstating commission paid to a Dubai related party based in Dubai for years. As a result, costs were vastly overstated, and revenues were underreported.
• accounting of bogus Jet miles invoices
• Any other similar transactions diversion of funds by giving loans of around Rs.3353 Crores.

Bhusan Steel

Bhushan Steel was a once-in-a-lifetime case of big Indian banks being defrauded. Tata Steel bought the firm, but the matter is still being litigated. Promoters of the otherwise profitable business, which had modern large-scale plants, engaged in a variety of deceptive activities, including:

• Transfer of funds lent by the company to various associated parties in the form of loans or advances.
• Bills for capital and other transactions that were never made,
• Funds generated, as a result, were misappropriated by promoters for their benefit.

The sum involved was calculated to be around Rs. 50000 crores. Another group venture, Bhushan Power and Steel (BPSL) is currently under IBC. BPS is expected to be acquired by JSW Steel. According to the CBI, BPSL diverted around Rs 2,348 crore through its directors and staff from the loan accounts of various banks into the accounts of more than 200 shell companies without any apparent purpose.

PNB

PNB was the country’s first big banking scam, involving a considerable sum of about Rs. 15000 crores. Nirav Modi and Mehul Choksi defrauded the public (Gitanjali Gems, a listed company owned by him). Both companies dealt in rough diamond imports and polished diamond exports.

Both had established retail diamond chains in India and at well-known international destinations over time. Nirav was, mainly, PR and showmanship savvy. At that time no one questioned the source of his funding. After a few years, this unprecedented fraud came to light, which shocked the nation as never before.

With a few junior banking officials’ help, he was defrauding PNB and other banks by opening large LCs with no underlying transactions (essentially paper money). He took advantage of an IT system flaw in which LCs opened with the underlying transactions were not reconciled. As was the requirement for all banks, LCs were not registered in the RTGS system.

As a result, before the fraud was detected, the presence of such LCs was unknown. The amounts involved are estimated to be in the sum of Rs 16000 crores. Several red flags were overlooked by bank management and regulators, contributing to the fraud being detected much sooner.

ILFS

The ILFS fraud was India’s most prominent corporate fraud, triggering a financial crisis because it was an essential vehicle for its infrastructure growth. Even though the most significant shareholders, such as LIC, SBI, and others, had members on the board, fraud occurred. ILFS had the most extensive debt exposure of around Rs. 91000 crores (including Rs, 20000 crores invested by PF and pension funds. The methods through which the frauds were perpetrated are-

• Diversion of lent funds to similar companies of certain members of the top management team
• Imprudent lending to individuals with poor credit for ulterior reasons
• Loans are “evergreened” by routing funds from one group company to another via a third party.
• Vendor overbilling, accounting of fictitious costs, and the difference being diverted back to relevant companies of certain top management team members.
• Overstatement of profits by non- provisioning of loans, accounting of fake expense, inappropriate recognition of project revenue etc.
• Non – disclosure of some of these companies as related parties
• Non-disclosure some of the subsidiaries, associates, joint ventures

DHFL

The DHFL fraud was the first-ever in a housing finance corporation, and it arose primarily as a result of promoters’ active participation in syphoning funds and alleged money laundering. The fraud was committed in the following ways:

• Providing loans to promoters’ associated parties
• The loans issued to parties who were either uncreditworthy or unknown, with the same addresses in different parts of the country.
• Approximately 6 lacs dummy accounts were established at one branch, using the names of borrowers who had already repaid their loans. These accounts were used to issue loans to promoter firms, which were then used to syphon funds. These loans turned out to be non-recoverable in the end.
• Borrowed funds are used for personal reasons, such as purchasing personal estate, yachts, and so on.
• As a result, large sums that were not recoverable were shown as recoverable in the balance sheet.

PMC

Promoters of DHFL, who were de facto in charge of PMC bank activities (a cooperative bank), continued to commit fraud using the same methods. The bank has a greater number of deposits from middle-class depositors who had placed their hard-earned money in the bank for various reasons, including medical care, children’s schooling, retirement, and emergency needs. About 60% of its customers had small deposits in the bank, totalling around $10,000 each.

During the inquiry, it was discovered that real estate company HDIL had taken approximately 70% of its total loan book of Rs 8,383 crore as of March 31, 2019. For several years, the bank was accused of making fraudulent transactions to promote a house’s selling.

Yes Bank

Fraud triggered the untimely and abrupt downfall of a private bank that had been gaining momentum as a viable rival to other private banks. The bank had a distinct business model, emphasizing technology, a vast branch network, and a focus on retail loans, among other things.

• The fraud was committed in the following ways:
• Imprudent lending practices
• Evergreening of loan
• The practice of charging a high commission to borrowers, which was not in line with industry practices
• Overstatement of profits due to front-loading of commission income
• Gross under-provisioning of NPAs compared to RBI guidelines

Analysis

After analyzing the above cases, we assessed who is responsible for the frauds. We concluded that everyone from the Board of Directors, CEO, CFO, Senior Management, Internal Auditors, IT Department, Middle Management, and Operational Management is deeply involved and accountable. The following 5 main categories can be used to describe both the causes and the solutions:

• Decision-Making Processes
• Personal Ethics
• Unrealistic Success Goals
• Corporate Culture
• Management

Many studies of unethical conduct in the workplace have shown that businesses don’t often know they’re acting unethically, so they don’t realize whether the choice they’ve created is ethical or not. The concern is with the systems that do not take ethical issues into account when making business decisions.

One of the critical reasons for corporate fraud is that most organizational cultures have deemphasized business ethics, restricting all decisions to strictly economic considerations. Values and standards form a company’s culture, and culture has a profound effect on the ethics of business decision-making. Unrealistic performance targets and pressure from the parent company, the economy, and society at large, which can only be met by cutting corners or behaving unethically, lead to a large portion of corporate frauds (see Satyam as an example).

However, the corporate entity’s executives are at the centre of it all. Leaders contribute to the organization’s community by providing an example for others to emulate. Other workers in the company also follow and adapt the leadership’s methodology or actions. If the leaders do not behave ethically, there is a fair risk that the company’s employees will as well.

Conclusion and Suggestions

In India, corporate fraud is not a recent phenomenon. Various corporate frauds have been identified, and the offenders have been prosecuted on occasion. These financial scams cost taxpayers and the government a lot of money. While the criminals are prosecuted, the public who spent their money takes a substantial loss in the long run. Victims of corporate financial fraud do not have easy access to their funds. It takes years to make up for the lost time. The new Companies Act of 2013 introduces stringent fines and strict corporate obligations. New corporate frauds are uncovered every year, implying that legislation alone will not be enough to deter these crimes.

The Union Cabinet has approved the creation of the National Finance Reporting Authority (NFRA) in response to the major Nirav Modi-PNB Scam and the auditors’ inability to identify the fraud. NFRA will be an independent authority that does not need parliamentary approval and will have broad powers to prosecute erring auditors and auditing companies found to have aided economic offenders.

The NFRA will operate as a watchdog and take away a substantial portion of the powers currently held by the Institution of Chartered Accountants of India (ICAI). The institute, which had sole authority to regulate and discipline auditors until now, opposed the change. Establishment of NFRA would end the ICAI’s monopoly and self-regulation of the accounting profession in terms of training, qualifying CAs, granting licenses to practice, and controlling them.

Furthermore, to curb financial frauds from Indian companies, strict implementation of the code of conduct is required, as well as zero tolerance for corruption, a whistle-blower system with complete confidentiality and protection for whistle-blowers, non-interference by the government in the punishment of offenders, and a fast and impartial judiciary.