Tuesday, December 11, 2018

MallyaGate – a tip of ice berg

Vijay Mallya, Nirav Modi & Mehul Choksi

Vijay Mallya has been projected as an epitome of NPA and money laundering. What he has done could not have been possible without the support from the system.

The diversion of funds and money laundering that Vijay Mallya has committed would not have come to the knowledge of the public but for detailed judgment given by the Westminster Magistrate in an extradition petition filed by the Government of India.

The extradition judgment has brought to the fore the rot in the Banking sector in India. Even though the observations are against IDBI officials, the same would hold true against others in various other large NPAs if properly investigated.

The conclusions drawn by the learned Westminster Magistrate about conspiracy involving IDBI Bank officials are reproduced hereinbelow so as not to lose the finer points.

The abbreviations used are as follows:

RS is Requesting State
GOI is Government of India.
RP is Requested Person, i.e. Vijay Mallya.

The learned Magistrate has stated: [the emphasis is supplied]

339.    This is the most difficult decision of the ones I have to take in the case. On the one hand there is no doubt as can be seen from the chronology set out above that there has been a catalogue of failures of the bank at different levels.  The failings were before the loans were sanctioned and afterwards. On the other hand, there is not a great deal of evidence from which I could draw inferences that various bank executives were involved in a fraud to defraud their own bank and that when they sanctioned the loans they intended KFA not to repay the loans as agreed and required.

340.    It is either a case that the various continuing failures were by design and with a motive (possibly financial) which is not clear from the evidence that has been put in front of me, or it is a case of a bank who were in the thrall of this glamorous, flashy, famous, bejewelled, bodyguarded, ostensibly billionaire playboy who charmed and cajoled these bankers into losing their common sense and persuading them to put their own rules and regulations to one side.

341.    The bank’s failings include, as set out above, the failure to abide by their own rules when it came to a new client and an example of this was that despite the low rating the loan was waved through.  In fact the first loan was granted even before the risk rating had been carried out.  There was a failure to ensure that the guarantees were formally taken when they should have been and a failure to investigate the representations that KFA made at various stages to obtain the loans.  With a bit of care the worthless negative lien on the hire purchase aircraft would have been exposed.  There was a failure to obtain credit reports from other banks involved with KFA.  There was a failure to give proper consideration to the past failures involving loans granted to associated companies. Mrs Sinha said the funds were dispersed without complying with the sanction terms and conditions.  IDBI if it had looked more carefully at the loan account would have been able to see where the money was going.

342.    The test to apply is to be found in R v G & F [2012] EWCA Crim 1756. This is quoted in the GOI’s Closing Submissions at paragraph 20, “the question is whether a reasonable jury, not all reasonable juries, could, on one possible view of the evidence, be entitled to reach that adverse inference”.  Lord Justice Aikens applied the same approach in the extradition case of Devani again I quote from paragraph 21 of the GOI Closing Submissions: “The DJ who has to decide there is a case to answer for the purposes of section 84(1) must determine whether, on one possible view of the facts, he is satisfied that there is evidence upon which the requested person could be convicted at a summary trial of an information against him”.

343.    Having applied the test set out above and considered what inferences could properly be drawn from “the evidence as a whole”, I find that there is a case to answer on which a jury properly directed could convict.  The catalogue of failures set out above are so numerous and so fundamental, not just prior to the sanctioning of the loans, but also after the loans had been granted, that I consider a reasonable jury, on one possible view of the evidence, could reach a decision that particular co-conspirators such as Mr Agarwal, Mr Batra and Mr Sridhar in particular were involved in a conspiracy to defraud.

344.    If the criteria for lending to KFA had been applied, if the background checks had been carried out, the loans should not have been granted.  If the end use certificates and all the other post sanction conditions applied, the loans would not have been misapplied in the way they were.  The evidence as currently before me is not as strong as the evidence in relation to the other allegations being made, nevertheless I find a prima facie case of a conspiracy to defraud which involves not just the KFA executives but also the named bankers in IDBI.

These observations also point to the utter failures of the Internal Auditors, Concurrent Auditors and the Statutory Auditors. Not to speak of the gross negligence and/or failure of the RBI inspection staff.

The observations on the money laundering aspect are as follows:

Money Laundering

345.    I have found above a prima facie case of fraud.  I turn to consider what happened after the default.  The paragraphs on what the loans were in fact used for are also helpful when considering this allegation (see Paragraph 207 onwards above). The GOI argues that this sheds light on the RP’s approach to the loans in the first place.  I have found that on the face of it, the RP was doing everything he could by using honest or dishonest means to keep the company going, possibly, and this is conjecture, until he could get a foreign company to invest in the business.  He had been teetering on the edge of being grounded for a number of months before the loans were granted and once he had obtained them, was not above playing “round robin” as he himself described, to keep the company afloat. At the same time, he was using the KFA loans to fund anything that became due to be paid.

346.    These payments included what some might say were two vanity projects, the formula 1 racing team and a corporate jet for his own use.  In the case of Force India formula 1, IDBI’s loan proceeds were used to clear a bill discounting facility with the Bank of Baroda and to release credit facilities which were later used to fund sponsorship payments to Dr Mallya’s motor racing team in July 2010. The timing of the payments were significant, in 2009 and 2010, payments were made by KFA to Force India at a time it was struggling to remain in business.  Money from the loans was transferred to Axis Bank then went to HSBC in London, they were said to be payments for operating expenses in relation to flights but the funds were transferred to the racing team. Essentially it appears as if KFA was funding Dr. Mallya’s team. I have already referred to Margaret Sweeney’s evidence that formula 1 is valuable sponsorship to have and that in 2011 they voluntarily refunded KFA.

347.    After the defaults, the banks turned to put into effect the guarantees.  The evidence relied upon by the GOI is the statement of Mr Joseph whose statement is to be found at Volume B Page 504.  He is a partner in a law firm and represents the State Bank of India and others of the Consortium banks in legal proceedings taken in various courts in relation to the default of KFA. He is also involved in the proceedings arising from the Diageo deal between USL (United Spirits Ltd) and UBHL and Diageo. Mr Joseph outlines the many failures of the guarantors, UBHL and Dr Mallya.

348.    To give but one example, the GOI relies on the email sent by Dr Mallya where he says: “I have been receiving mails from IDBI regarding the KFA a/c becoming NPA. They may suddenly do something. Take the 10 crd out of my account into USL tomorrow itself. VJM”. He is trying to avoid his responsibilities under the guarantee.

349.    Mr Joseph explained that when the lenders were considering selling the shares then subject to the guarantee for the MDRA, the RP went to the High Court in Mumbai and claimed for the first time that he had been forced by duress to give his personal guarantee for the loan.  It was said he had been coerced into providing it (Volume B Page 507). The Debt Recovery Tribunal (“DRT”) rejected his assertions.

350.    He also claimed that the corporate guarantee was invalid.

351.    Mr Vittal (Volume B Page 329 at Page 343) is now the Deputy General Manager of the Commercial Branch of the State Bank of India at Tamilnadu but before this he was in the Stressed Assets Management Branch in Bangalore and was a Relationship Manager in the same branch of the SBI.  He had dealt with the KFA account which was categorized as NPA (non-performing asset) as of 20.12.2011 before the date was of NPA was revised to 30.4.09 because of failed restructuring.

352.    In terms of the personal guarantee and the asset and liability statement of 9th April 2009 that had been included in the first guarantee which had to be re-taken in the case of IDBI, it included shares in two South African companies valued at US$150 million and US$10 million respectively.  Mr Vittal of SBI (Volume B Page 343) said that those assets were not declared in later asset and liability statements dated 31.3.2010, 31.3.2011 and 31.3.2012 sent SBI nor to the Supreme Court on 26th April 2016. The investments were alienated at some point between 2009 and 2015.

353.    Mr Vittal goes on to say that a clause in the personal guarantee of 21.12.2010 executed by VJM says that he “shall not convey, sell, lease, let or otherwise dispose of or create any sort of encumbrance on … all or any part of his property or assets without the prior written approval of the Lender’s Agent and the lenders”. Mr Vittal explains that having given that undertaking and without seeking prior approval, Dr Mallya entered into a deed of disengagement dated 25th February 2016, with Diageo PLC and others by which he resigned as Chairman and from the board of USL in exchange for a payment of US$75 million.  US$40million was paid at the date of the agreement, 25th February 2016 and US$35 million was to be paid at the rate of US$7 million every year. The Deed of Disengagement showed that between 2nd April 2015 and 28th May 2015, Dr Mallya had divested of at least a 50% stake in the company and sold it to Diageo PLC. Mr Vittal makes the point that this breaches not just the conditions of the guarantee but also violated injunction orders made by the High Court of Karnataka.

354.    The evidence is confirmed in the statement of Mr Joseph who says the contention that the US$40million deal constituted an asset subject to the personal guarantee was confirmed by the Supreme Court.  It is clear that the RP hid this asset and divested it on to his three children in trust for their benefit. The Supreme Court held that the diversion of funds was in flagrant breach of injunction orders which prevented him from alienating, disposing or creating third party rights in respect of this.  Dr Mallya was held in contempt by the Supreme Court.

355.    There is clear evidence of dispersal and misapplication of the loan funds and I find a prima facie case the Dr Mallya was involved in a conspiracy to launder money.

These are the damning observations by the Magistrate’s Court in Westminster regarding Mallya and the Bankers.

All NPAs of these magnitudes have involvement of corrupt Bankers across various banks – whether nationalized, private or co-operative. A detailed probe of the personal assets of the members of the senior management, Directors of these Banks would bring these conspirators/fraudsters within the Bank out in the open.

Even though the learned Westminster Magistrate has not made any observations against the auditors, their lapses are too glaring in the light of these observations as they were found to be sleeping all the while this fraud was taking place.

The question is - is it only a Vijay Mallya doing such fraud in India or there are many? Obviously, there are many and money has been laundered. Else how would one account for NPA of Rs.10 lac odd crore?

If the cases are investigated against all other defaulters over Rs. 50 crore as mandated by Finance Minister some time ago, I am sure the CBI would end up arriving at the similar conclusions in each and every case. But this will never happen in India in foreseeable future. On the contrary, CBI is busy fighting its own case CBI v/s. CBI.

Vijay Mallya is definitely a fall guy, presumably because of his flashy page 3 life style as observed by the learned Westminster Magistrate and that he ran away. Had he not run away, he would have perhaps continued to print his famous Calendars with pint of beer in one hand and calendar girls on the other. This fall guy accounts for only Rs.9,000 crore out of stated NPA of Rs.10 lac odd crore. No one knows or talks about the other scamsters.

The story will end with deportation of Vijay Mallya and his temporary landing at Arthur Road Jail.

Chances are that the entire saga of Vijay Mallya or for that matter Nirav Modi/Mehul Choksi who amongst them account for about 3.00% of reported NPAs would end up like Abdul Karim Telgi. The bigger fish will never be touched.

Vijay Mallya, Nirav Modi, Mehul Choksi together with handful of Bank officials exposed so far are only a tip of the ice berg of ‘diversion of funds and money laundering’. What is required is to break the entire ice berg. Vijay Mallya, Nirav Modi, Mehul Choksi could not have been successful without the active participation of Bank officials and their sympathizers in the Government and tacit support from auditors and RBI inspection staff who looked other way.

Even though not all 97% NPAs would be fraud, the quick NPAs and NPAs because of diversion of funds and money laundering are certainly the fraud played by the scamsters on the nation.

The Government can not to take any action against the remaining 97.00% fraudsters because of the involvement of entire corrupt eco-system built over last 70 years or so and would be forced to remain content by infusing tax payers’ money in these Banks to ostensibly boost the economy, to save the banking sector and to safeguard the interest of depositors.

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