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Canara Bank Scam – Transstroy Fraud – Everything You Want To Know

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On Saturday, December 19, the Central Bureau of Investigation charged Transstroy India Limited with a Rs. 7,926 crore fraud. The allegation was levied after a thorough investigation into the operations of the company.

According to Sridhar Cherukuri, the Chairman of the company, the matter was something else. As reported by Financial Express, he said, “There is no fraud in the company and we could not pay the money because, in the Polavaram 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.”

What, then, is the truth?

Is the Canara Bank fraud in the history of Indian banking or is it just a misunderstanding?

Let us understand the story behind the Transstroy fraud case.

BACKGROUND OF THE TRANSSTROY FRAUD

Transstroy India Limited was established in 2001. It is primarily an infrastructure company and takes up projects associated with the construction of highways, bridges, irrigation and metro networks. The company is also involved in the oil and gas infrastructure business.

Transstroy India Limited is headquartered in Hyderabad. It also has a presence in Andhra Pradesh, Kerala, Tamil Nadu, Assam and Madhya Pradesh. One of the most famous projects successfully executed by Transstroy is the construction of the Outer Ring Road in Hyderabad.

Transstroy’s star-studded executives are part of the reason why the company has always had first dibs on government projects. In fact, one of the directors of the company is a former Member of Parliament from Andhra Pradesh. Rayapati Sambasiva Rao represented the Telegu Desam Party (TDP) in parliament.

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Currently, the company is involved in the construction of the Polavaram dam across the River Godavari. The project started in 2013 and has been going on ever since. The most recent allegations that have come forth are with regard to the funds raised for the Polavaram project.

THE TRANSSTROY FRAUD EXPLAINED

Performing a scam is the easy bit. Anybody can lie about how the money is going to be used. The tricky bit is how you get away with it.

Many a time, scamsters come up with the most unimaginable plans to siphon the money away from the project and into their personal accounts. These methods are almost always extremely risky, and even though you may not be aware of it at the moment, you end up leaving a trail of breadcrumbs that can be used to unravel the scam later on.

As we all know, most businesses function on credit. This is because most sectors, manufacturing and construction, in particular, require an initial capital outflow to get the ball rolling. That capital is used to carry out the project to fruition. It is only after the project has been completed that capital starts flowing in again.

Now, as far as bank loans are concerned, companies with strong financial statements are given priority. This, of course, is understandable, as banks will always try to protect their assets and will only give loans where there is a high possibility of repayment.

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The Transstroy Fraud case is a two-legged financial scam.

On the first leg, there is the fact that the company falsified its financial statements in order to bolster its accounting books.

On the second leg, the credit, after it was granted by the banks, was diverted for personal use instead of being used in the Polavaram project.

Let us decode this matter further.

When Transstroy India Limited applied for loans, the company’s books showed that it was making a net profit of over Rs. 100 crores. On this basis, Transstroy took credit of over Rs. 5,000 crores. The agreement was that the company would repay the amount in gradual instalments.

However, that never happened.

From 2014-15, Transstroy stopped repaying the loan. In fact, Canara Bank had already marked the loan as a non-performing asset in 2015.

According to a statement from Canara Bank, “The company was enjoying limits from various banks under multiple banking arrangements from 2001. Subsequently, a consortium with Canara Bank as a leader and 13 other banks was formed in 2013 and the total limit sanctioned was Rs. 4,765.70 crores and the share of Canara Bank is only Rs. 678.28 crores. The remaining amount was lent under multiple banking arrangements.”

How did the Transstroy fraud come to be?

After a thorough investigation, CBI found that Transstroy director had formed several shell companies to channel the money. At least nine such companies have been discovered. The smoking gun, in this case, is the fake Tax Information Number (TIN) that was used to register the companies. The company was extremely creative in this regard and often registered the helpers and assistants as executives of the shell companies.

Consider the following example from NewsMeter.

“Rs. 2,172 crores was transferred to Padmavathi Enterprises which turned out to be a ghost company. The investigation found that the enterprises’ TIN number turned out to be invalid and instead belonged to another company, Siva Swathi Constructions Private Limited, and not Transstroy. A ground visit found no entity. Also an employee of Transstroy’s house address was shown as the company’s.”

This is not even the only example of ingenuity in the Transstroy fraud.

In this way, funds were routed through a number of fictitious entities to lend an air of authenticity to the laundering process. It is only by tracking the Tax Information Numbers that these creations were discovered.

Apart from this method, the directors and executives at Transstroy India Limited also used numerous ingenious ideas to hide the money trail. According to NewsMeter, “In connection with one of the documents related to the Polavaram irrigation project, the CBI expressed shock on learning that Transstroy, who is the contractor, had stored stock worth Rs. 1,753 crores at the irrigation site. ‘It is not clear as to how such huge stock can be stored at project premises’, the CBI said.”

THE TRANSSTROY FRAUD CASE EXPOSE

What, then, was the tipping point in this case?

Which daring act drove in the final nail in Transstroy’s coffin?

According to Bloomberg, the consortium of banks officially filed a complaint with the Central Bureau of Investigations in 2019.

“The complaint submitted to the investigative agency in December 2019 explains how Transstroy India and officials of the company diverted funds by transferring money to companies on paper without actually sending the funds and also donated gold to temples using bank loans extended to the company.”

After that, CBI conducted a full-fledged investigation into the operations and the accounting books of Transstroy. It was then that they discovered the myriad scams and diversion methods that were used by the company to perpetrate the Transstroy fraud.

Once the main complaint was filed, all of Transstroy’s crimes started falling over like dominoes. The accounting fraud was discovered, the money trail was decoded and all the myriad loopholes started unravelling.

The lengthy investigation process yielded great results, and finally, on Friday, December 19, CBI filed an FIR against the company and its promoters.

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According to the New Indian Express, “In its FIR, the CBI has named the company, its CMD Cherukuri Sridhar and additional directors Rayapati Sambasiva Rao and Akkineni Satish as accused.”

However, Canara Bank wrote off the loan as an NPA in 2015 and marked Transstroy as a ‘wilful defaulter’ in 2018.

Then, why the delay in filing the complaint with CBI?

Can it be argued that the larger fault is with the Indian banking system on the whole?

CONCLUSION

India is no stranger to scams. From stock market scams to accounting frauds, from banking scams to Ponzi schemes, we have seen it all. Nirav Modi, Mehul Choksi, Harshad Mehta, Vijay Mallya, Lalit Modi, Jatin Mehta, the list continues. One after the other, the number of wilful defaulters keep on increasing.

This begs the question – who is really at fault? Is it the person who is taking advantage of the system or is it the system itself?

After all, as Stephen King so succinctly put, “Fool me once, shame on you. Fool me twice, shame on me. Fool me three times, shame on both of us.”

Maybe the fault is with the system. Maybe the system is what needs to be restructured in order to put an end to the scams. Banks need to develop a stricter screening method before granting credit to companies. If banks feel that the loan is heading towards a non-performing asset, then the retribution methods need to be swift and strict.

The Transstroy fraud has only been brought to the attention of the masses now. It has been germinating for years on end. If due diligence had been done properly before giving credit, or if the complaint had been filed immediately, maybe this scam would have looked very different today.

However, humans are ever-optimistic, and therefore, we will hope and pray that the situation changes and that it is not as easy to defraud the Indian economy.

 

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author

Adrija Das