How ABG Shipyard pulled off the BIGGEST Banking Fraud in Indian History?

Hi, everybody on 7th of february 2022 the CBI booked abg shipyard its directors and ABG international pvt ltd for allegedly causing losses of Rs 22842 cr to consortium of 28 banks.

INTRODUCTION

ABG shipyard once considered to be a powerhouse in ship building with an order book of Rs 16600 cr is now under investigation for pulling off the biggest banking fraud in indian history. Now just to give you guys a context of how big a fraud this is if you see neerav modi pulled off a 11356 cr scam and vijay mallya pulled off a scam of Rs 9000 cr both of them together account for Rs 20356 cr of scam but ABG SHIPYARD alone amounts to 22842 cr 

The question is how does the shipping industry function in the first place. What is the story of ABG shipyard and how did they manage to pull off such a big scam right in front of the banks in the country.

Understanding About SHIPPING INDUSTRY

The first thing you need to understand is how does the shipping industry operate to put in simple words the shipping industry has three dominant players- A charter, A shipping company and a shipyard. A charter is the entity that wants to rent a ship for either transporting cargo or passengers.

UNDERSTAND THROUGH EXAMPLE

In our case  let's say maruti is a charterer that rents a ship to export cars now given the fact that the cost of transportation is at least five times cheaper than air, it is by far the most widely used mode of transport all across the world for all kinds of export and import. So in this case let's say maruti suzuki approaches a shipping company that regularly leases container ships or vessels for the export of cars to middle east this shipping company owns the the ship and is responsible for the overall ship maintenance for the staffing for obtaining port clearance and for providing marine fuel so for these kind of services the shipping company charges an amount of money called the freight charges. 

Just like maruti a charterer  There are several other companies involved in export and import of goods like apple, samsung etc and these companies are in constant need of ships and this means that the shipping companies will always need to have sufficient container or vessels that can meet this demand. This is where the shipping companies approach the shipyard or ship manufacturers and these companies are responsible for building and repairing ships but you know what guys building a ship is not an overnight process in fact it does not even get done in a year it takes anywhere between two to three years to make a single ship and cost you between 40 to 100 cr to make each one of them therefore capacity planning is extremely crucial in this line of business because tomorrow  if there's a sudden surge in demand at the charter's end it can't be promptly met by just increasing the production at the shipyard at the same time even if two of your ships remain unsold  your 80 to 200 cr worth of capital will get stuck with your dead inventory itself so to put straight ship building and selling is a time and capital intensive process. 

2000s GOLDEN RUSH

If this is very very clear to you let's have a quick look at how this industry is functioning in the early 2000s. In early 2000s in india it was an amazing time for all shipping companies. Globalaisation was hitting new peaks, volume of trade was increasing at a healthy rate, profits were pouring in hundreds of crores with each passing year. On top  of that during this time developing economies like brazil, russia, india and china were experiencing spectacular growth so the ports were enjoying records revenues because of the crazy demand of all kinds of goods and materials so naturally the shipyards received a large number of orders to build more and more vessels therefore it was practically raining cash for the shipping industry and particularly the companies involved in the container sector as a result investors and banks had pumped in billions of dollars into the global container shipping business because back then it was considered to be an extremely profitable business in fact banks were actually competing with each other to lend money to these shipping yards at the lowest interest rate possible and  it's quite understandable because you see SEA was such an integral part of the global economy that 90% of the global trade volume was executed through sea and this is very clearly evident that between 2002 to 2001demand for containerised trade grew faster than the supply of the container carrying capacity so the industry kept ordering new tonnage, now remember like i told you shipbuilding takes two to three years so the ships that were actually ordered in 2006 were only going to get completed in 2008-9 but guess what this is where the 2008 recession happened as we saw giant companies went bankrupt thousand of jobs were lost and in all the great recession led to a loss of more than two trillion dollars in the global economic growth and in the context of the shipping industry it resulted into two critical things- Number one with trade at large taking a hit the demand supply ratio went for a toss and the global free charges plummeted this meant that the shipping companies were unable to generate revenue from the charters and they could not pay what they owed to the shipyards that were actually manufacturing these ships so what did the shipping companies do they started cancelling the orders with the shipyards and unfortunately these shipyards had been working on these ships for two long years and they started to have giant ships as their dead inventory with no buyer at all and not just that along with no business crores of rupees worth of capital that went to making these ships also got locked into the dead inventories. 

ABG SHIPYARD STORY

Now with these points in mind let us try to understand what happened in the context of ABG SHIPYARD which was established in 1985, one of the largest private ship building companies which shipyards in tahej and sugrat in india it had a capacity to manufacture vessels upto 200 tones in weight the company had built over 165 container vessels and was doing very very well financially like most shipyards ABG also enjoyed the golden run of the early 2000s with ton of cash pouring into their balance sheet but with 80 of the oreders coming from international clients after 2008 they started to loose all these orders now, although they had picked up defensecontracts and had some stellar clients like the indian navy, the indian coast guard and the shipping corporation of india when it comes to defense contracts the government entities like cochin shipyard were always preferred over other playersand this is where the tricky part of the story came in now the owners of the company knew that they had to borrow money so ABG shipyard reached out to banks for loans asking for a few thousand crores of loans now typically when the amount is this high a PSU bank leads the consortium but in this case of ABG it was private bank that led the consortium so a total of 28 banks participated in the loan disposal that was led by ICICI bank.5 participating banks with the largest exposure to fraud here we have ICICI @ 7089 cr, IDBI @ 3639, SBI @ 2925 cr followed by BOB and EXIM bank.

BANKS DOING THEIR DUE DILLIGENCE

Now you see guys if this lending activity took place before 2008 the optimism is quite understandable because of the gold rush but you know what ,this money was lent between 2012 to 2017. Now considering how much of these banks make people like you and me run for something as small as a car loan or a student loan you would assume that they would do a lot of due diligence before giving out thousands of crores of loans right, but somehow this doesn't seem to have happened. 

If you look at this table during this time the profits averaged just around 185 crores and yet it almost appears as if banks were willing to lend them thousands and thousands of crores of loans knowing very well that it was impossible for them to even service the interest let alone the principal and it appears as though a major part of these loans were given against the assets of ABG SHIPYARD and the remaining was given on the guarantee given by the promoters but guess what guys even this does not seem to be reasonable at all why? If you look at the total current asset (TCA)  of the company as reported in the annual report in 2012 it amounted to be five thousand five forty crores and during the same time they had current liabilities ( CL) of 5695 crores. This means they had 5540 crores worth of assets that could be sold within a year to pay back the 5695 crore liability so these figures look pretty fair, right, but you know what this amount of 5540 cr also includes the huge inventory of ships that accounted for 3260 cr of the current assets. And like we discussed before since there were very less buyers for these ships if you take this value out this amount of current assets excluding the inventory was just 2280 cr and their liabilities stood at 5695 cr in 2012. So if you removed the ship's valu from the current assets ABG literally needed double the assets than what it had just to pay off the existing liabilities back then. This is one of the basic elements that we believe is quite stange and guess what even with these kind of figures they still got the huge loan from the banks and this was probably because by 2012 ABG had won orders from the indian navy and the shipping corporation of india taking its order book to 2.7 billion us dollars, however even with these big orders they could not pull of a profit.

TCA=5540 CR, CL= 5695, INVENTORY= 2280

So From CA-INVENTORY= 5540-2280= 3260 Cr

Until 2012, ABG was profitable but after that the losses began coming in 2013, it went to 199 cr of loss then to 897 cr in loss in 2014-15, by march 2016 its net loss amounted to 3704 cr and the revenues had fallen from 401 cr to just 37 cr so in 2014 we saw something called loan restructuring happen wherein the interest is reduced or the duration of the loan is extended so that the recovery could be made easier but even that failed and the account was classified as NPA in july 2016.

GAME OF PROMOTERS

This is where the promoters and owners of the company seem to realise that ABG was doomed and this is where scam like operation started and now comes the most interesting question of all and this is how does this money laundering happen, this is where we have something called shell companies if someone has 100 cr that they do not want to pay taxes or if it's a shady income that they want to hide this is how they do it, they go places like panama or british virgin islands and set up a company just for the name shake these places have very tough laws and will keep the details of the company extremely secretive apart from that they have all kinds of provisions over there for anonymity like you can have fake directors you could hide the name of the owners and your company does not even have to have any  building or office, it could just exist on paper then once the money is moved to this account, this company starts buying assets like real estate, painting and other expensive properties which can eventually be used by the owner to live a lavish life, in fact can even invest and buy other companies and even collect royalties. In this case ABG shipyard had 16 shell companies based out of its mumbai office, the money raised through these loans were diverted through 98 sister concerned companies and were mainly used to create personal assets.

INVESTIGATION

So when EY was appointed by the lenders in april 2018 to conduct a forensic investigation, they clearly revealed the evidence of fund diversion, Then as usual just like any other fishy thing, this was spotted by banks and filed a complain in 2019. CBI sought clarification in 2020. CBI filed a FIR on 7th february 2022 and the news finally broke out to the world.

As a banker, Learning from the saga is very clear that Do proper due diligence before lending public money. The procedures need to be adopted. In consortium finance, if you are comfortable and understand the facts then only be a part of the consortium. It is very important to have a proper understanding of the balance sheet and industry functioning.