ABG Shipyard Fraud Explained

Magdalla Shipyard Pvt Ltd was formed in 1985 in Surat. The shipyard was involved in the manufacture and repair of ships. Ever since it delivered its first ship in 1990, the ship builders have manufactured and delivered over 165 ships. Out of these 165, some were even made for international markets.

The company was successful in even bagging an order from the Indian Government to make two interceptor boats for the Indian Coast Guard in 2000. By 2011, the company acquired the licence to build defence ships and even submarines.

During the year 2010-2011 the company recorded its highest turnover of ₹114 crore and… Well enough of that!

Magdalla Shipyard Pvt Ltd changed its name to ABG Shipyard Pvt Ltd in May 1995 and went public in June 1995. Yes, the same ABG SL that’s doing its rounds on the news right now.

*thunder and lightning in the background please*

So enough about ships, for we are not sailors. No more “humble beginnings”, for this isn’t a success story.

So, let’s skip to the good juicy part.

India’s Biggest Banking Fraud

Imagine this, you have a friend that has fallen on some tough times. The poor fellow asks your kind self to help them out, and you lend them some money.

Now how would you feel if you found that this friend had a separate pool of money that could have helped them, but instead of using these funds, they asked for your money instead. You’d play the devil’s advocate and give them the benefit of the doubt.

But what if this friend used some of your money to add to said fund. And used what was left to finance their merriment and fun, instead of being responsible with your money in their phoney crisis. And to add insult to injury, it becomes apparent slowly but surely, that this friend has no intentions to return your money.

In case you see red now, and are thoroughly annoyed, imagine the irritation someone would feel if they had no reason to be sympathetic to the borrower, and their entire existence revolved around only money.

Now you know how ICICI, SBI, IDBI and 25 other banks felt as their loans to ABG unravelled to be misappropriated and diverted for purposes other than what ABG borrowed them in the first place.

Now let’s get into the real story. Ever since its formation, ABG SL had been a successful organisation. The ship builders received multiple certificates, awards and signs of recognition from international companies like Lloyds, American Bureau of Shipping, Bureau Veritas, IRS and DNV.

Even with these merits the ship manufacturer was doom bound. Remember the ₹114 crore profit for the year 2010-11? The event; looks positive when isolated, but was the peak and end of ABG SL’s upward moving graph.

The financial crash of 2007-08 caused multiple parties to withdraw their orders from ABG. As a result, the company’s profit for the year 2012-13 fell to ₹107 crore. From the years that followed, the company suffered losses along the lines of ₹199 crore, ₹897 crore and ₹3,704 crore.

Due to this crash, ABG started taking significant loans from multiple banks to keep its business afloat (or so they stated as the “purpose of the loans” on paper). The funds from these loans however, were used for almost all other purposes than trying to revive the sinking business (ba dum tss).

The funds from these loans were instead used to pay the loans and expenses of ABG Group of Companies and diverted to overseas subsidiaries like ABG Singapore and other offshore parties.

Around ₹83 crore were also paid to companies like Aries Management Services, GC Properties, and  Gold Croft Properties, which were possibly related parties to ABG SL.

With the loan amount misused, ABG's performance did not benefit at all from the borrowings. Owing to this poor financial performance, ABG’s account was declared an NPA by SBI in 2013 and was also found to be in breach of its Master Restructure Agreement (MRA). The MRA is a document issued to a company under the debt restructuring policy of NCLT that allows financially ill to have their borrowings restructured at lower interest rates or reduced principal amount. ABG SL’s subsidiary ABG Singapore was supposed to release its investment in units of Standard Chartered Trust.

This investment was worth ₹236 crore and was meant to provide the ship makers with liquid funds. However, instead of releasing the investment, ABG allegedly decided to invest ₹322 crore more into ABG Singapore instead and these funds were eventually diverted to tax havens.

This wasn’t a singular incident either, ABG allegedly floated multiple companies with the funds it had acquired through loans from multiple banks. The total fraud amount came out to be ₹22,842 crore, far surpassing the Nirav Modi PNB scam which was worth ~₹13,000 crore to become India’s biggest banking fraud. While ICICI had lent ABG SL ₹7,089 crore, making it the biggest lender, SBI was the biggest public sector bank with its loan towards ABG amounting to ₹2,925 crore (so much for banks that are too big to fail).

In case it still isn’t very clear, ABG SL is the friend that borrowed the money and the various banks represent you from the story above.

Reporting of the fraud

Due to ABG’s poor financial performance, a shock audit was conducted on the company by Ernst & Young in 2019 for the period between April 2012 to July 2017. The audit found that ABG had committed four counts of fraud which included diversion of funds, misappropriation and criminal breach of trust.

Based on this report a complaint was filed 8 months after the release of the report. You would think that, based on the loan amount, ICICI would be the one to raise an issue with this revelation. However, it was a group of banks, led by SBI that filed the first complaint.

The SBI led complaint was formally acted upon on 7th February, 2022.

The CBI report sheds new light on the whole case, according to the report, the misdirection of funds and critical fraud took place in the period of 2005-2012, contradicting the EY report from 2019.

The CBI has also conducted searches in 13 locations and found incriminating documents including but not limited to; books of accounts, sales/purchase books, minutes of Board meetings, etc. so far.

The Current Situation

As of the date of writing this article, a Look-out Circular (LoC) has been issued against the accused in the case. The list of accused includes Rishi Kumar Agarwal, Santhanam Muthaswamy, Ashwani Kumar, Sushil Agarwal and Ravi Vimal Nevetia.

The National Company Law Tribunal ordered the liquidation of the company in 2019. After an auction of the company’s assets found the bidders, the NCLT allowed the private sale of the same.

The assets attached for the liquidation process include 5 ships, 92,000 sq m residential land in Bharuch and Gaviar, 4.14 lakh sq m industrial land near Magdalla port, and 27 acres of agricultural land in Diamond Harbour, Kolkata.

There is also a lot of political hub-bub around the whole scenario, but we’ll leave that hornet’s nest undisturbed 😅.

But isn't it a bit of a sorry story that a country that tirelessly strives to achieve greatness, the only lists we top are those of frauds and other mishaps? All because a selfish few place their needs over general ethics.

I'll leave you with that little food for thought for today. See you on the next blog.