Specialist in Indian Banking and Economic Research

Hemindra Hazari

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-an-eur44-million-loan-from-stanchart-put-murugappas-cg-power-between-sebi-and-a-hard-place/primearticleshow/83285540.cms" target="_blank" rel="noopener">Standard Chartered Bank</a>, <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-a-usd40-million-loan-to-cg-power-arm-in-gift-city-put-indusind-bank-under-sebi-glare/primearticleshow/83342665.cms" target="_blank" rel="noopener">Indusind Bank</a>  and <a href="https://economictimes.indiatimes.com/prime/corporate-governance/sebi-slaps-show-cause-on-aditya-birla-finance-for-realty-loans-to-a-shell-firm-to-help-thapars/primearticleshow/83518285.cms" target="_blank" rel="noopener">Aditya Birla Finance</a> highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) <a href="https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MDC8CEB9A7BDE64745B9BE1DCEC3293CA1.PDF" target="_blank" rel="noopener">norms</a> for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (<a href="https://hemindrahazari.com/2021/06/16/cg-power-loan-scandal-indusind-bank-pioneers-lending-without-documents-to-a-firm-with-no-assets/" target="_blank" rel="noopener">here</a> and <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">here</a>) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to Standard Chartered Bank, Indusind Bank  and Aditya Birla Finance highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) norms for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (here and here) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.   

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

*Extending The Emergency Funding Plan: The Emergency Credit Line Guarantee Scheme (ECLGS) for Indian SMEs was launched in May 2020 under the Indian government’s ‘Atmanirbhar’ or self-sufficiency package in order to help offset the weakened economic conditions resultant of COVID-19. ECGLS was subsequently expanded in November 2020 to include 26 additional stressed sectors. In its latest attempt at forbearance, the Indian government just expanded its ECLGS from INR 3 tn to INR 4.5 tn; and *Kick That Can: Banks have already on-lent INR 2.7 tn under the ECLGS, and this recent announcement should further allow India to kick the can of stressed loans down the road. We remind the Indian government that if you’re extending, you are pretending.  That said, net new NPL growth should still accelerate through FYE 2022 given what appears to government crisis mismanagement which should extend the duration of the second COVID-19.

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

*New Regulation, New Loopholes: The Reserve Bank of India (RBI) has finalized rules for non-bank financial company (NBFC) dividend payout ratios at a maximum of 50%. The methodology is predicated on the net NPL ratio and CAR. The new proposal is riddled with loopholes, as NBFCs can easily manipulate these ratios; and*Well-Placed NBFCs: Excluding LIC Housing Finance (LICHF.IN) and Shriram Transport (SHTF.IN), most large NBFCs are well placed to meet the proposed dividend cap if the guidelines are made applicable from the previous year.

Reserve Bank of India – Wrong Rule At Wrong Time

In a major scoop, ET Prime on June 9, 2021 <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-a-usd40-million-loan-to-cg-power-arm-in-gift-city-put-indusind-bank-under-sebi-glare/primearticleshow/83342665.cms" target="_blank" rel="noopener">revealed</a> the contents of the Securities and Exchange Board of India (SEBI)’s ongoing investigation into <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> ’s October 2017 US$ 40 mn loan to CG Middle East FZE (CG ME), a step down subsidiary of CG Power and Industrial Solutions (CG Power). SEBI’s investigation highlights how Indusind Bank structured a transaction wherein the loan given to an unlisted company (<a href="http://www.avanthapower.com/bs-jpl-overview.asp?links=jpl" target="_blank" rel="noopener">Jhabua Power</a>) part of the Avantha group (then founders of CG Power) became stressed, and was shifted to CG Power, adversely impacting the minority shareholders of the company. Subsequently, Tube Investments (part of Muruguppa group) in November 2020 <a href="https://www.bseindia.com/xml-data/corpfiling/AttachHis/9df637e2-de97-468e-bc77-182b0bba7ea4.pdf" target="_blank" rel="noopener">acquired</a> the controlling interest in CG Power, thereby providing some relief to the company’s creditors.This episode poses a significant embarrassment for Indusind Bank. If the bank were to accept SEBI’s contention that it facilitated the shifting of liabilities from the unlisted company of the then promoters/founders of CG Power to the listed company, it would incur the severe displeasure of SEBI as well as the Reserve Bank of India (RBI). No doubt such a transaction, of providing a foreign exchange loan to a step-down subsidiary of CG Power, routed to various companies in the Avantha group, ultimately led to Jhabua Power repaying its rupee loan to Indusind Bank, enhancing the quality of the security on paper for the bank. However, the banking regulator will investigate whether in October 2017 it was <a href="https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MDC8CEB9A7BDE64745B9BE1DCEC3293CA1.PDF" target="_blank" rel="noopener">permissible</a> to raise foreign borrowings for working capital, to repay rupee loans, and whether the bank engaged in ‘evergreening’. If, on the other hand, Indusind Bank sticks to the official version that the foreign exchange loan was provided to CG ME, and the bank was unable to monitor how the company deployed the funds, then shareholders of the bank should be extremely concerned about the bank’s poor credit appraisal, abysmal documentation, weak risk management, lack of compliance and complete absence of monitoring end-use of funds. This would indicate that the bank in general has very poor corporate credit lending systems which easily permit it to lend funds to a company which resembles a mere sales office, with negligible assets and income, on the sole basis of a corporate guarantee from its immediate parent. The checks and balances system of risk management, compliance and internal audit, the bedrock of banking had apparently been disabled in Indusind Bank. This analyst was one of the first in <a href="https://hemindrahazari.com/2020/03/30/indusind-bank-fiasco-and-the-sleeping-sentinels/" target="_blank" rel="noopener">April 2017</a> (prior to the CG Power transaction) to raise and continued waving a red flag regarding Indusind Bank’s poor credit and risk management expertise under Ramesh Sobti, the then CEO.  Responding to a query sent by this analyst, Indusind Bank’s spokesperson stated,  <blockquote>The Bank strictly follows all applicable regulatory guidelines, corporate governance norms and Bank’s approved policies and procedures, in conduct of its business including sanction and disbursement of loans. Further, all necessary due diligence is done prior to all sanctions and disbursements.</blockquote>For Indusind Bank shareholders it is revealing how senior officials in the bank appraise, evaluate and monitor loans given to companies. It would be a matter of concern to shareholders that these officials, far from being punished, are instead rewarded through promotions. This conduct indicts the corporate credit and risk management in the bank and betrays extreme incompetence prevailing at the highest levels of corporate banking, risk management, compliance and internal audit. That Indusind Bank’s <a href="https://www.indusind.com/in/en/about-us/board-of-director.html" target="_blank" rel="noopener">board of directors</a> have rewarded such individuals by either promotion or permitting them to retain their positions speaks volumes of the corporate governance culture prevalent in the bank.

In a major scoop, ET Prime on June 9, 2021 revealed the contents of the Securities and Exchange Board of India (SEBI)’s ongoing investigation into Indusind Bank (IIB IN) ’s October 2017 US$ 40 mn loan to CG Middle East FZE (CG ME), a step down subsidiary of CG Power and Industrial Solutions (CG Power). SEBI’s investigation highlights how Indusind Bank structured a transaction wherein the loan given to an unlisted company (Jhabua Power) part of the Avantha group (then founders of CG Power) became stressed, and was shifted to CG Power, adversely impacting the minority shareholders of the company. Subsequently, Tube Investments (part of Muruguppa group) in November 2020 acquired the controlling interest in CG Power, thereby providing some relief to the company’s creditors.This episode poses a significant embarrassment for Indusind Bank. If the bank were to accept SEBI’s contention that it facilitated the shifting of liabilities from the unlisted company of the then promoters/founders of CG Power to the listed company, it would incur the severe displeasure of SEBI as well as the Reserve Bank of India (RBI). No doubt such a transaction, of providing a foreign exchange loan to a step-down subsidiary of CG Power, routed to various companies in the Avantha group, ultimately led to Jhabua Power repaying its rupee loan to Indusind Bank, enhancing the quality of the security on paper for the bank. However, the banking regulator will investigate whether in October 2017 it was permissible to raise foreign borrowings for working capital, to repay rupee loans, and whether the bank engaged in ‘evergreening’. If, on the other hand, Indusind Bank sticks to the official version that the foreign exchange loan was provided to CG ME, and the bank was unable to monitor how the company deployed the funds, then shareholders of the bank should be extremely concerned about the bank’s poor credit appraisal, abysmal documentation, weak risk management, lack of compliance and complete absence of monitoring end-use of funds. This would indicate that the bank in general has very poor corporate credit lending systems which easily permit it to lend funds to a company which resembles a mere sales office, with negligible assets and income, on the sole basis of a corporate guarantee from its immediate parent. The checks and balances system of risk management, compliance and internal audit, the bedrock of banking had apparently been disabled in Indusind Bank. This analyst was one of the first in April 2017 (prior to the CG Power transaction) to raise and continued waving a red flag regarding Indusind Bank’s poor credit and risk management expertise under Ramesh Sobti, the then CEO.  Responding to a query sent by this analyst, Indusind Bank’s spokesperson stated,  The Bank strictly follows all applicable regulatory guidelines, corporate governance norms and Bank’s approved policies and procedures, in conduct of its business including sanction and disbursement of loans. Further, all necessary due diligence is done prior to all sanctions and disbursements.For Indusind Bank shareholders it is revealing how senior officials in the bank appraise, evaluate and monitor loans given to companies. It would be a matter of concern to shareholders that these officials, far from being punished, are instead rewarded through promotions. This conduct indicts the corporate credit and risk management in the bank and betrays extreme incompetence prevailing at the highest levels of corporate banking, risk management, compliance and internal audit. That Indusind Bank’s board of directors have rewarded such individuals by either promotion or permitting them to retain their positions speaks volumes of the corporate governance culture prevalent in the bank.

CG Power Loan Scandal: IndusInd Bank Pioneers Lending Without Documents to a Firm with No Assets

Consumer Analyst / Channel Surveillance Specialist, Trudence Capital Advisors

Pranav Bhavsar

Consumer Analyst / Channel Surveillance Specialist

Trudence Capital Advisors

Trudence Capital Advisors Private Limited is a SEBI-registered Research Analyst, holding SEBI registration number INH000015747. Our firm is dedicated to providing independent and unbiased research on Indian mid to large-cap companies. Trudence Capital is known for its counter-consensus views, with a focus on forensic research and on-ground primary investigations. Our research approach is thorough, involving detailed analysis of accounting practices and governance, alongside extensive channel checks.

Independent & Unbiased Research

Equity Bottom-Up

Cholamandalam Investment and Finance / Equity Bottom-Up

In this Insight, we present our takeaways from interaction with transport operators, recovery agents and collection heads across Bihar, Uttar Pradesh, Maharashtra, Tamil Nadu and Punjab.  Our focus companies are <a href="https://www.smartkarma.com/entities/cholamandalam-investment-and-finance" target="_blank" data-smartkarma-citation="entities:17583:1" rel="noopener">Cholamandalam Investment and Finance (CIFC IN)</a> / <a href="https://www.smartkarma.com/entities/shriram-transport-finance" target="_blank" data-smartkarma-citation="entities:253:1" rel="noopener">Shriram Transport Finance (SHTF IN)</a> / <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> 
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We have also included our notes in this insight, for those who want to have a deeper look at how we go about doing our checks.
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<h2>About India Channel Insight</h2>
</div>
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Our objective with India Channel Insight is to share snippets from our channel interactions that are part of our research process. These snippets can potentially be signals for larger themes/ideas emerging out of these interactions.  
</div>

In this Insight, we present our takeaways from interaction with transport operators, recovery agents and collection heads across Bihar, Uttar Pradesh, Maharashtra, Tamil Nadu and Punjab.  Our focus companies are Cholamandalam Investment and Finance (CIFC IN) / Shriram Transport Finance (SHTF IN) / Indusind Bank (IIB IN) 

We have also included our notes in this insight, for those who want to have a deeper look at how we go about doing our checks.


About India Channel Insight


Our objective with India Channel Insight is to share snippets from our channel interactions that are part of our research process. These snippets can potentially be signals for larger themes/ideas emerging out of these interactions.  


India Channel Insight | Chola, Shriram, Indusind - Borrower Health Update

India

IndusInd Bank Limited is a Mumbai-based Indian new generation bank established in 1994. The Bank provides a range of banking and financial services including  wholesale banking, credit monitoring, risk management, tele-banking, investment banking and commercial lending. IndusInd Bank operates branches throughout India as well as an office in Dubai and London.

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Indusind Bank (IIB IN)

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as,...

Hemindra Hazari

India Financials – Plop Plop Fizz Fizz

INDIA FINANCIALS: ECLGS was launched in May 2020 to offset poor economic conditions. ECGLS has again been expanded from INR 3 tn to INR 4.5 tn....

Thomas J. Monaco

Reserve Bank of India – Wrong Rule At Wrong Time

RESERVE BANK OF INDIA: The RBI has finalized rules for NBFC dividend payout ratios at 50% - predicated on the net NPL ratio and CAR. The new...

Thomas J. Monaco

CG Power Loan Scandal: IndusInd Bank Pioneers Lending Without Documents to a Firm with No Assets

It is revealing how officials undertake dubious corporate loans in Indusind Bank. It is shocking that these officials, far from being punished,...

Hemindra Hazari

India Channel Insight | Chola, Shriram, Indusind - Borrower Health Update

In this Insight, we present our takeaways from interaction with transport operators, recovery agents and collection heads across Bihar, Utter...

Pranav Bhavsar

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