Transstroy India, the Hyderabad-primarily based infrastructure business has come below the Central Bureau of Investigation (CBI) scanner more than allegations of fraud and involving lending by a consortium of banks. The sums are enormous.
According to a statement by Canara Bank, the leader in a consortium with 13 other banks “though the total limit sanctioned was Rs 4,765.70 crore, the share of Canara Bank is only Rs 678.28 crore.” But other than state its extent of involvement, it also says that “the account was declared as fraud and reported to the Reserve Bank of India (RBI) on February 10, 2020.”
However, Sridhar Cherukuri, the chairman and managing director, and the CEO of Transstroy India, denies any wrongdoing by the business. “There is no fraud in the company and we could not pay the money because in the Polavarum irrigation project, the Andhra Pradesh government overnight invoked and encashed our bank guarantees worth over Rs 900 crore and that is why the account has become an NPA (non-performing asset). There is no fraud and these are all allegations,” he says.
There is also the element of political connection. Cherukuri is associated to Rayapati Sambasiva Rao, formerly with the Congress and later with the Telugu Desam Party. Though Cherukuri maintains “let the investigating authorities do their job and the truth will come out”.
Those who have tracked the banking sector and lending to the infrastructure sector, say this case of Transstroy India (the business apparently derives its name from a Russian technical companion) has once more place into concentrate the current provisions and
the extent to which banks have suitable checks in location and inquiries that now emerge. While, it is incorrect to conclude that all are fraudsters or that each lending to infrastructure business is fraught with dangers, but it is a no brainer that lenders ought to be working out caution. But then, do they? After all, this is not the only business that has come below the CBI or any
regulatory scanner in current years regardless of sufficient and more laws and provisions in location for lenders to safeguard their interests.
Consider this: Following the news of the CBI inquiry into Transstroy India, Canara Bank “in reference to the news item circulating regarding alleged fraud to the tune of Rs 7,926 crore by M/s Transstroy India Ltd,” clarified that “in a consortium with Canara Bank as a leader with 13 other banks formed in 2013 and the total limit sanctioned was Rs 4,765.70 crore, the share of Canara Bank is only Rs 678.28 crore.”
The note also says that “the company was enjoying limits from various banks under Multiple Banking Arrangement from 2001. Subsequently, a consortium with Canara Bank as a leader with 13 other banks was formed in 2013.” The account, it says, was declared as fraud and reported to the Reserve Bank of India (RBI) on February 10, 2020. Canara Bank, it adds: “has made I00
per cent provision for this account as per the prescribed prudential norms.” The business, it says, was “already declared as a wilful defaulter on December 26, 2018 by our Bank.”
Also, “out of Rs 7,926.01 crore fraud amount appearing in the press note, the amount of lending made by all the 14 consortium members is Rs 4,765.70 crore. The remaining amount was lent under Multiple Banking Arrangement.”
Wider Worries
Even as the suitable authorities investigate the matter, the inquiries that now emerge are about due diligence. To what extent was this carried out in a methodical manner at the stage of approving the loan? How was the arrangement on the safety tie-up and the nature of the collaterals sought? If the promoters extend private guarantees, how is the net worth assessment carried out of the promoters? Also, in this context what is the extent to which the tax returns of the promoters have been reviewed and whether or not it is only on the basis of the disclosures produced by the promoters? All of them are vital safeguards, in case a business goes belly up.
Also, was the Trust and Retention Account (TRA) Mechanism set in motion? This is a provision to safeguard the interests of a lender for an infrastructure project and a mechanism to handle the money flow and assure funds are not siphoned off from the operations. Was the program of getting an independent engineer appointed by the bankers to monitor the building and usage of funds and whether or not month-to-month reports have been submitted stating these?
On the point about one hundred per cent provisioning that Canara Bank talks of, it is arguably a very good accounting practice and in tune with the established norms. But then, its note also says: “The case was referred to National Company Law Tribunal (NCLT) and was admitted by NCLT, Hyderabad on October 10, 2018, and that the company is under the process of liquidation.”
This once more begs the query: just before the case was referred to NCLT, what have been the actions taken by the consortium of bankers to recover the cash from the promoters? Apparently, it is answers to these that will assure banks not only keep healthful but are also not caught off-guard.