How a Pune based gearless scooter company looted 22 banks of Rs 250 Crore but exposed by an ex-employee

A Corporate Fraud by an Eminent Industrialist of India Inc.

An ex-employee of a Pune based gearless two-wheeler company with a brand name in India lodges a complaint to the Hon’ble President, Union of India and Chief Vigilance Commissioner Govt. of India. The employee was earlier working with that firm in its sale dept. He was snubbed and kicked out of the firm for his forthright opinion on various issues plaguing the style of management of the firm. The Chairman and the then Joint Managing Director of the firm did not stop here, but went a few steps further to ensure that this guy is not accommodated by any other firm of reputation in the nation. Virtually, the complainant has been ruined by the management of a giant company.

However, the story did not end here. This guy was determined to get himself listened by the authorities and the system, as he was firm in his opinion that his ex-employers were all looting the banking industry in a very systematic and planned way. And ultimately his persistence has been responded by CVC and investigation in the matter initiated, albeit with a low profile.

The CVC office took a decisive step and asked the twenty two banks involved in the matter to investigate the issues raised in the complaint and submit the report to them along with their opinion.

The total amount involved in the looting is more than Rs-200.00 crores and the operation has been executed by the firm in a very long, planned and systematic manner. The plan was spearheaded by a father-daughter duo, which were in the real control of the firm. Hereafter, the father and daughter duo will be referred as Mr. Smart and Lady Smart to understand the entire operation conveniently.

Father - Mr. Smart – Chairman of the Company – Mr Fraudia

Daughter - Lady Smart – JMD of the company – Ms Chorwani*

(* names have been changed to protect the interest of the blogger)

By the beginning of this century, the father-daughter duo was firmly in the saddle, owning a brand that had firmly established its foothold in Indian gearless scooter market and ready to storm it with new gearless scooter models, every year. By this time, this pair of father-daughter duo established themselves as a business tycoon in the Indian Industrial World and their words were enough to arouse interest in their firms. Bankers were found vying with each other to cater to the financial needs of firms owned by this pair, as all of them were unanimous in their view of safety of their asset.

This gearless scooter company of India started producing some class vehicles in collaboration with one of the premier company of Japan. It all started somewhere at the end of eighties of the last century. At one point of their peaks, they were having more than 12% shares in huge Indian two wheeler markets. It was well over a thousand crore company in 2000 itself. At the outset of the Indian economic liberalization decision of our Govt., this TWC was fully operational and ready to grab its market share. A few of their vehicles carved a niche in the Indian market and remained popular among all sections of two wheeler buyers. Every now and then, the firm used to introduce a new variant of vehicle in the market and its buyers enjoyed riding them.

However, the firm was doing quite well with its productions and sales, but its promoters, Mr. Smart and his daughter Lady Smart were not satisfied. They were in a hurry to grab as much market as possible. However, their job was to restrict themselves to production and marketing, but they decided to create buyers for their vehicles, and ultimately floated a few Non Banking Financial Companies (NBFCs) with small capitals. They approached banks to capitalize these NBFCs. They started these NBFCs with sole purpose of financing the buyers of the vehicles produced by their flagship companies Chor Engineering Limited and Chor Motor Company Limited. The business of this hire-purchase of vehicles, financed by these NBFCs, found its foothold in the huge Indian markets and soon they became darlings of the world of financers also. Some of NBFCs floated by other big industrial houses of India around that time, especially to cater the financial needs of the buyers of their products, are in the market for long time and they have their foothold firmly established in the saddle.

Mr. Smart and Lady Smart saw a big opportunity in it and they both encashed it to their full. However, a number of people were on the boards of the flagship two-wheeler companies, but the real control was in the hands of father-daughter duo. They were having a brand in their basket and many NBFCs to finance the buyers of that brand. All the NBFCs were having their own boards. They all were having many board members, but the steering wheel always remained in the hands of the two, Mr. Smart and Lady Smart. All the NBFCs floated by them were having two things in common among them. One Mr. Smart and Lady Smart were keeping the reign of all these companies in their hands and second, the brand name of flagship Scooter Companies was always a part of the nomenclature of all these NBFCs. The brand name of flagship TWC being a part of the names of all these NBFCs was done intentionally to impress the financers of all these NBFCS. They both knew that a brand name sells well and there is no dearth of buyers of brands.

After initial stage of success of their model of business, they decided to move ahead with their grand plan of duping banks and financers of their NBFCs. They both started merging one by one all the NBFCs to a single big entity, fully under their control. As the financials of these small NBFCs were quite healthy in the new booming two wheeler markets of liberalized Indian economy, emergence of one new NBFC after mergers of all these small NBFCs also proved to be a healthy one. This one big NBFC (called New NBFC hereafter) was in the need of huge finance to serve the expanding needs of two-wheeler markets, especially the gearless scooters.

The financial needs of this new big NBFC had been assessed to the tune of Rs-150.00 crores in the year of 1998-1999. A Consortium of 22 different banks of all categories had been constituted at the initiative of a big daddy, a Nationalized Bank,  among us bankers. A limit of Rs-145.00 crores had been approved and distributed among all the 22 banks.

The loans were secured by way of hypothecation of all the assets created out of banks’ finances and personal guarantees of Mr. Smart and Lady Smart. There were almost no collaterals, except mortgage of a property worth about 5 crores. The leader of the Consortium was one of the premiers Public Sector Bank of India. Almost all the big Public Sector Banks of India, some notable co-operative banks, one New Generation Private Bank and one foreign bank were among the 22 members of the Consortium. The rush among members of Consortium for a slice of a pie in the booty of its finance to the New NBFC was so much that every member was scrambling to secure its place firmly and with as large share as possible.  There was a time when all the banks were vying with each other to get a place in the Consortium, as the brand name itself of the two-wheeler firm was enough to attract the financers.

A close look at securities against that big finance of Rs-145.00 crores reveals some serious lapses on the part of the Consortium. Loans were not collaterally secured by way of mortgage, except partially, merely 7 % of the total exposure of 22 banks, and by way of personal guarantees of the duo father and daughter. Certainly, the personal guarantees of the duo Mr. Smart and Lady Smart were enough to provide succor to the minds of the bankers and a definite assurance to them for repayment of the loans in time.

Hypothecation, the primary security, was in my view, of no importance. Since the vehicles supplied by the two wheeler companies to its buyers across the nation through its dealers used to be financed by this New NBFC. Hence, the assets created out of the banks’ finance were scattered all around India and in the hour of need, laying hands over them for confiscation and disposal for realizing banks’ finances was not a workable idea. The security documents signed and executed by hirer of the vehicles were in the possession of New NBFC and enforcing them through courts for realizing banks’ funds, if need arose, also was not a workable idea. Virtually, all these securities were quite small in nature, maximum upto Rs-40000.00 each, i.e. the cost of a vehicle minus margin money paid by its individual buyer, and they were individually, merely a pittance compared to the quantum of loan of Rs-140.00 crores, and enforcing them individually through the courts of law in order to realize the stressed assets of the banks, if needed, was never a good and workable idea.

I do not think that such a business model is safe for banks’ financing, without sufficient collaterals or individual guarantees of the promoter directors of eminence to cover the exposures of the banks. However, in this case personal guarantees of the duo father and daughter was enough to cover the exposures of the banks, as they were a name in the Indian industrial markets and still they are well, a business tycoon, and sufficient to arouse confidence of a banker to go for financing them. In my view, personal guarantees of Ratan Tata or Cyrus Mistry is enough to give sufficient confidence to any banker to go for even big ticket financing rather than hypothecation of assets or other forms of collaterals. There are thousands of such names in India Inc. who attracts very high price on them and any bank would not shrivel in financing any unit on their personal guarantees, as they maintain highest level of corporate governance practices. This Mr. Smart and his daughter the Lady Smart are of the same level, except in ethics, and their personal guarantees were the real coverage to the bank’s finances. Having the personal guarantees of Mr. Smart and Lady Smart, banks of the Consortium were all a bit relaxed.

So, the story moved forward and every party to this arrangement, the New NBFC, Mr. Smart and Lady Smart as also all the members of the Consortium of 22 bankers were all happy and doing well.

However, behind the curtain, the nefarious plan of father-daughter duo was taking its shape. They were both making, slowly but firmly, all the possible moves to strike at the target at the right moment. Theirs was a long plan to succeed and not to fail. Patiently they waited for the right moment. In the meantime, they both did all possible maneuvering to win the confidence of all the big daddies of the Consortium of the 22 banks. In this job they achieved 100% success, as all the bankers believed in their words.

Things were going well at all fronts. Periodical meetings of the Consortium with the representative of New NBFC were all conducted well. Such meetings were always held in star hotels with all fanfare and aplomb. Niceties exchanged, big daddies of the Consortium spoke their minds, Mr. Smart or Lady Smart presented all the bright future of their new baby New NBFC and a sumptuous meal and free ride to a place of choice to all the participants, if any of them desired so, thereafter. These all had become part of the periodical meetings. I went through the minutes of such 30 meetings and what I discovered was all glorious presentation of bright future of New NBFC by the father –daughter duo with no challenge from any corner of the Consortium. New NBFC was all projected as bright star on the horizon, rising day by day. I did not find a trace of anything wrong, at ant point of time, being raised or discussed from any level in all these meetings.

So one day the father-daughter duo, after winning all the confidence of bankers of the Consortium approached the Leader of the Consortium to waive their personal guarantees. This happened some time in 2004-05. The leader of the Consortium obliged them and agreed to waive their personal guarantees. Both, father and daughter were more than happy with this new development. They used this waiver of guarantees from the leader of the Consortium as a tool to seek waiver from others. They approached each of the bankers of the Consortium, one by one, for waiving their personal guarantees and succeeded in clinching the same from all of them. The level of confidence among the bankers in the New NBFC and Mr. Smart & Lady Smart was so high that nobody questioned this unsavory intention of father-daughter duo.

After getting released from their personal guarantees, both of them Mr. Smart and Lady Smart, started avoiding attending the Consortium meetings. The next financial year results of the New NBFC stunned all the bankers. The New NBFC went bust. Its net profit reduced to a pittance. Net profit was merely Rs-6.5 crores against the last year figures of around Rs-56.00 crores. Suddenly, the model of business, which was quite successful for last many years, appeared to be a sham. However, there was no radical shift in any market forces, no upheaval in two-wheeler industry, and no downturn in the Indian economy, but the model of business which was all along considered to be a robust one and was quite successful in other cases, was now declared as quite weak and ineffective by Mr. Smart and Lady Smart. In the next Consortium meeting, they presented before it a new business model, which was to be established in consultation with a subsidiary of well-known global bank. This move was nothing, but to buy some reprieve from the agitated bankers who awakened out of their deep slumber due to the jolt given by Mr. Smart and Lady Smart by declaring abysmally poor performance of New NBFC. They both wanted to keep all the bankers involved by applying different strategies till time, the storm surfaced by the sudden fall of the new baby from the grace, vanished.

The subsidiary of the global bank, proposed to be business partner in the new business model presented by New NBFC, used to deal in some insurance products and they were willing to outsource some of their works to a willing partner for a commission. Mr. Smart and Lady Smart decided to engage their New NBFC to work with this global giant for a commission and presented a blueprint of their new plan wrapped in all a glossy paper work. Their chief argument in favor of changing the business strategy to a new one was that the New NBFC was running short of funds to continue with the present model of business unless bankers come forward and refinance it heavily, and this of the new business model in collaboration with a reputed global brand was to run without any capital. Often, the duo started reneging on their small commitments made to the bankers, now. In the meantime, they submitted a new corporate debt restructuring (CDR) proposal to buy more time. This proposal was also rejected by the appropriate authority.

Bankers were now running helter-skelter to save their accounts from being declared non-performing assets. Now they were all scared of left behind in the rush of getting some left over assets from New NBFC, and started acting as individuals rather than a team. The father-daughter duo took full advantage of this divide among the bankers and kept all of them hooked by offering new proposals every now and then to them, individually.

One fine morning, both father and daughter left all the things in lurch and walked away from this uncertain situation by resigning from the board of this New NBFC. As they were both already free from their personal guarantees, they handed over the reign of the firm to a few unknown persons as directors and left the field. However, on further enquiries I discovered that these new comers on the board were all employees of their flagship firms, who obliged the management for certain other favors done to them. In their next smart move, they changed the name of this New NBFC, of no reason, and successfully removed the brand name of their flagship company from it. Now, both of them successfully walked away from all the liabilities of the New NBFC and freed their brand name also after changing the name of New NBFC without any reason.

This way the father-daughter duo moved away from all their responsibilities in regard to the New NBFC and left all the banks of the Consortium saddled with huge amount of approx. Rs-200 crores of non performing assets without any security worth mentioning.

In the next meeting of the Consortium, bankers decided for a special investigation audit (SIA) of the books of the New NBFC. The SIA report was available with the bankers within 4 months of their decision. They were all stunned to discover the facts behind all this game played by the father-daughter duo. Huge amount of non-performing assets had been discovered hidden in their books of accounts. Non performing assets as old as ten-twelve years had been discovered. Hefty amount had been discovered transferred to their flagship two wheeler company of which the auditors failed to find any plausible reason. Various lies presented before the Consortium in the past about the status of the firm had been exposed. Auditors discovered that the firm went on hiding all their non-performing assets of last more than 12/13 years from the bankers and as a last move the father-daughter duo removed the remaining funds from the books of the firm to their flagship two wheeler company and left the firm with their hands clean, but saddled it with huge liability with no takers. Before leaving the field, they both disposed off, unauthorized, the sole property worth Rs-10.00 crores mortgaged to the banks.

In the next meeting of the Consortium, bankers were all stunned but helpless. However, the representative of our Bank raised the issue of filing FIR against the father-daughter duo, and it was duly recorded in the minutes of that meeting, but unfortunately it could not get enough support from the big daddies of the Consortium. The leader of the Consortium decided not to go for FIR and all big players of the Consortium supported this idea. They preferred to file a civil suit in the court of law. They approached Debt Recovery Tribunal also. All these cases are languishing in the different courts. The leader of the Consortium proposed to go for a joint suit to recover the dues and all other members, willingly or unwillingly, accepted it. Joint money suit was filed and expenses were shared proportionately by all the members.

As all the bankers were divided lot, and were clamoring to save their own interest, the situation was further exploited by the father-daughter duo by pleasing a few of them by promising them to repay their loans, provided they did not support the idea of initiating criminal proceedings against them. Big daddies of the Consortium were however calmed by the father-daughter duo, but the deals struck among them are still unknown to others. However, civil suits were moving with snails pace, but the leader of the Consortium suddenly decided to withdrew from the joint suits, leaving other to contest them individually. In the next move, the leader of the Consortium, during one of its meeting decided to throw its towel in the ring, and left the Consortium to be headed by any other of its members. Unfortunately no taker could come forward to take the gauntlet and the grand Consortium of 22 banks stood dissolved that day. Now the father daughter duo was to face the financers individually and was a less worried lot.

However, a few small banks dared to go for criminal cases against the father-daughter duo, but despite quite favorable decisions from the different courts, upto the highest court of the land, they preferred to go for settlement with them. Details of these cases are with me.

They were altogether five criminal cases initiated by different banks against the promoters’ directors, the father-daughter duo. In all those cases Issuance of Process had been issued by the respective courts, which had been challenged by Mr. Smart and Lady Smart in Hon’ble Mumbai High Court citing the reason of civil suit under process in the same matter and had subsequently been dismissed by the High Court.

Mr. Smart and Lady Smart moved to Hon’ble Supreme Court also, but they did not get any reprieve in this regard.

I have further gathered from some sources that one law firm represented the criminal cases of five banks. I wanted to know from this law firm the reasons of dropping of those cases by those banks despite having favorable decision of the Honorable High Court and Supreme Court, but although they confirmed the reluctance of those banks in pursuing these cases further, as they got their money back, but the firm refused to confirm anything in writing citing the secrecy clause of their contract with their clientele. However, if pursued by an appropriate body/authority in this regard, the necessary testifying documents may be procured from them also.

The present situation is that the father–daughter duo has established a few more companies, more than 30 in number, and they are moving ahead with their grand plan of being a name in the nation. In the meantime, Mr. Smart has also been awarded Padma Shree award by the Govt. of India. Ironically, one of the big daddies of the Consortium, decided to honor this of achievement of Mr. Smart on a grand scale, officially, and they did it with full coverage of media to gain publicity.

It is apparent from the instant case that the plot of siphoning off banks’ funds had been made very meticulously and with all cares and precisions by the father-daughter duo. They both patiently nursed that idea for years and took many people into their confidence or else it would have not succeeded. The two loopholes of the system have been misutilized by them ingeniously.

The first one is that of the freedom of a director of a limited company to walk away from the responsibility if he or she is not bound by personal guarantees, while availing credit facility from banks and these needs to be revisited by the regulators.

The second one that lies with the banking system, where a group of banks form a consortium with a leader chosen by them. Actually, the only advantage of forming a consortium is to spread the risks to a number of entities so that in the event of failure of the project, the risk is soldiered by them all severally and thus avoid collapse of an individual entity. Whereas, the disadvantages are many. The most crucial one is lack of free flow of information in real time among all the members of the Consortium. Stock statements are submitted to only the leader of the Consortium and if the monitoring and supervision of the leader is not up to the mark, the entire group of banks is bound to suffer. The only available platform for exchange of information for members is the meeting of the consortium, usually held on quarterly basis, where very limited information is shared, which are generally not enough to thwart any dishonest intention of the party involved. In a consortium it is also not easy to know as to what is happening in the accounts of other members of the consortium. Siphoning off and diversion of funds become easy for a dishonest borrower in such a scenario. Everybody work is nobody’s work. Larger the consortium, the more risky it is to monitor the situation. It remained an issue of contention among the banking circle for long and RBI is also aware of these loopholes and they are often tweaking with this idea of Consortium to come to a workable solution with minimum risks.

The firm and its promoter directors took advantage of the above loopholes and cheated the entire group of banks involved in the story. 

But "Karma is a bitch". One of the looted banks has recently filed an FIR of fraud and cheating against the father daughter duo and the corrupt officials of SBI and Bank of Maharashtra. It wont be too late when they all shall be behind the bars.