Ever since the 2G telecom scam and the coal scam talked about notional losses and then fell flat in the courts, I have become extremely wary of such claims. The latest to get into the groove is ABG Shipyard.
This one is also about some huge notional losses. And this one too will also go to the courts in its fiercest form.
A serious legal battle would soon unfold in the Indian courts over the case of ABG Shipyard, now caught in a vicious bind of unpaid dues that lenders claim is “wrongful loss” of Rs 22,000 crore as the reality seems completely different.
The Central Bureau of Investigation (CBI), which is probing the case, have started interrogating officers of a number of banks who were a part of a consortium which lent cash to ABG Shipyard. One round of interrogation has happened, claimed CBI sources.
CBI sources told this reporter that some of the officials of the banks interrogated by the premier investigating agencies have also questioned the issue of Rs 22,000 and said they have a different point of view.
In short, the bank officials have said that the notional loss of Rs 22,000 crore needs a serious relook.
The case is also being investigated by the Enforcement Directorate (ED) and Serious Fraud Investigation Office (SFIO). Promoters of ABG Shipyard are also being questioned. Vijay Aggarwal, a lawyer for ABG, said his clients are cooperating with the investigating agencies.
The crucial part in the case, claim those in the know, revolves around the Rs 22,000 crore figure that is being mentioned as a notional loss by the CBI and the SBI, which is not the lead consortium but was the one to lodge a complaint. A copy of the CBI FIR is with this reporter.
And it is the amount that is the bone of contention in the case.
For the records, ABG Shipyard is an Indian company caught in global turbulence and conspiracy theories about notional losses. It is very typical of the Indian markets. Corporate cognoscenti say ABG Shipyard was not a kirana store, not an easy pushover target.
Till 2013, the year when master blaster Sachin Tendulkar retired from cricket and Uttarakhand floods killed thousands, ABG Shipyard was a blue chip company, valued by the Indian government and top lenders from India and abroad. The lenders were sanguine about returns on their investment.
An Indian Shipyard which forged a new image of India
ABG was the first Indian shipyard to build vessels for snooty Scandinavian countries and other European countries which felt Indians could only build boats and not big tonnage vessels.
The company built over 164 vessels, including for some of the top European and Asian countries. Some of the big vessels constructed at the shipyard were for Halul Offshore, Qatar, Lysine, Norway, Zamil Offshore, Saudi Arabia and Wijsmuller, the Netherlands.
Now, the big fight is about the Rs 22,000 crore loss claimed by the lenders. A closer look, however, reveals a different picture.
As per the CDR executed by the lenders on March 29, 2015, the company that was continuously making profit till March 2013, became a defaulter next year due to ‘downturn in global shipping industry and global financial crisis.’ The CDR that had the cut-off date of August 1, 2013, further attributed various reasons for the ‘poor performance’ including ‘cancellation of order and devolvement of letter or credit / bank guarantee’ among others. A copy of the CDR is with this reporter,
Documents accessed by this reporter show as part of the execution of CDR, lenders took over the management control of the company and appointed turnaround expert consultant—Alvarez & Marshal to execute the scheme of restructuring. In addition, lenders also eased out the existing management and appointed key management personnel including CEO, CFO and COO.
A Chronology which helps clear the mist
Some dates of this case are very important to understand the crisis.
All of this in 2014-15. At the beginning of the CDR process, the lenders had valuation consultant Yardi Prabhu, who pegged the fair value of the asset at little over 14,000 crore as on September 30, 2013.
Finance Minister Nirmala Sitharaman stated in the Parliament earlier this month that lenders’ principal exposure of ABG Shipyards at Rs 14,349 crore prior to the corporate debt restructuring (CDR) in 2014-15.
Eventually, Alvarez & Marsal was appointed by the consortium of lenders to oversee the implementation of CDR. As part of this a chief restructuring officer was appointed with the mandate from the lenders to control the company’s cash flow and implement the package properly.
However, as per the cut–off date, total outstanding CDR of all the 22 lenders was pegged at around Rs 10,150 crore. As against this, the total debt exposure of the company was Rs 5,333 crore, comprising Rs 3,350 crore of term loan and about 1,980 crore of the working capital as stated in the annual report of the company. The balance amount was due to cancellation of letter of credits and devolvement of bank guarantee.
Having made net pre-tax profit of Rs 162 crore in the year 2012-13, ABG, which never defaulted in its history, had all the credits and accolades as a high performer. In the subsequent year, the company recorded a first time pre-tax loss of Rs 222 crore.
The CDR commenced after lenders appointed Desai Saksena and Associates (DSA) for a prerequisite special audit, who had pointed out all the issues to the lender. The same issues were flagged as diversion of funds by the forensic audit report by Ernst & Young in January 2019.
The case is sub-judice, the promoters refused to talk. A spokesperson for SBI refused to talk.
Aggarwal said documents show the DSA report was accepted by the lenders and was the basis for CDR approval that has a condition that no company can be put through such a restructure process in case of any financial wrongdoing or misappropriation of funds by the management.
The Parliament was also told during the resumed budget session that no employee of public sector banks was involved in any wrongdoing in handling the ABG Shipyard case.
The SBI complaint to the CBI on the alleged wrongdoing by ABG Shipyard contained an annexure on ‘finding/ observation of the forensic report,’ which cited instances of ‘…indication of payout to the related parties, …investment to overseas subsidiary, and …indication of properties purchased by related parties by fund provided by ABG Shipyard’.
The amount involved under these three heads totalled Rs 1,800 crore besides the report pointing to certain potential violation of CDR arrangement. These issues were also dealt with by DSA.
The DSA report had also attributed the global ship building scenario including cancellation of certain ship orders adversely affecting the performance of the company. In most of the cases the customers didn’t pay the company despite completion of substantial works.
So what happened?
Alvarez & Marsal failed to implement the CDR, which in turn triggered the second round of restructuring under Strategic Debt Restructuring (SDR). And before restructuring under SDR happened, the company had as many as three offers for outright sale from global giants. No one knows why the sale did not happen. Vijay Aggarwal says the lenders decision not to sell the company when it had multiple offers aggravated the crisis.
Under SDR, lenders forcibly converted part of their loan to equities, acquiring majority 51 percent stake in the company where the promoter Rishi Agarwal was left with only 7 percent stake in 2016.
The scheme of SDR was abandoned half way when the Reserve Bank of India put the company in the list of defaulters in 2017. Subsequently, the company was referred for resolution under Insolvency code. The National Company Law Tribunal (NCLT) finally referred the company for liquidation.
It is important to note here – claimed informed sources – that while referring the company for liquidation, NCLT had not made any observation to confirm irregularity in the financial management.
Now, it will up to the courts to decide on the Rs 22,000 crore figure and whether or not a notional amount should be eventually used to resolve the case and find out whether it was a case of corporate fraud or business collapse triggered by a global downturn.
Despite the best efforts by all stakeholders, the company could not withstand the global turmoil. Some of the other Indian companies in the ship building sector – including Bharti Shipyard and Pipavav Shipyard (now Reliance Naval) are in a similar situation.
(Shantanu Guha Ray is a Wharton-trained journalist and award-winning author. He lives in Delhi with his wife and two pets. He won the 2018 Crossword award for his book, Target, which probed the NSEL payment crisis.)
