Transstroy India denies fraud allegations: Do banks have proper checks in place?

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 crore. (Reuters Image)

Transstroy India, the Hyderabad-based infrastructure company has come under the Central Bureau of Investigation (CBI) scanner over allegations of fraud and involving lending by a consortium of banks. The sums are huge.

According to a statement by Canara Bank, the leader in a consortium with 13 other banks “though the total limit sanctioned was Rs 4,765.70 crore, the share of Canara Bank is only Rs 678.28 crore.” But other than state its extent of involvement, it also says that “the account was declared as fraud and reported to the Reserve Bank of India (RBI) on February 10, 2020.”

However, Sridhar Cherukuri, the chairman and managing director, and the CEO of Transstroy India, denies any wrongdoing by the company. “There is no fraud in the company and we could not pay the money because in the Polavarum 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,” he says.

There is also the component of political connection. Cherukuri is related to Rayapati Sambasiva Rao, formerly with the Congress and later with the Telugu Desam Party. Though Cherukuri maintains “let the investigating authorities do their job and the truth will come out”.

Those who have tracked the banking sector and lending to the infrastructure sector, say this case of Transstroy India (the company apparently derives its name from a Russian technical partner) has again put into focus the existing provisions and
the extent to which banks have appropriate checks in place and questions that now emerge. While, it is wrong to conclude that all are fraudsters or that every lending to infrastructure company is fraught with dangers, but it is a no brainer that lenders ought to be exercising caution. But then, do they? After all, this is not the only company that has come under the CBI or any
regulatory scanner in recent years despite enough and more laws and provisions in place for lenders to safeguard their interests.

Consider this: Following the news of the CBI inquiry into Transstroy India, Canara Bank “in reference to the news item circulating regarding alleged fraud to the tune of Rs 7,926 crore by M/s Transstroy India Ltd,” clarified that “in a consortium with Canara Bank as a leader with 13 other banks formed in 2013 and the total limit sanctioned was Rs 4,765.70 crore, the share of Canara Bank is only Rs 678.28 crore.”

The note also says that “the company was enjoying limits from various banks under Multiple Banking Arrangement from 2001. Subsequently, a consortium with Canara Bank as a leader with 13 other banks was formed in 2013.” The account, it says, was declared as fraud and reported to the Reserve Bank of India (RBI) on February 10, 2020. Canara Bank, it adds: “has made I00
per cent provision for this account as per the prescribed prudential norms.” The company, it says, was “already declared as a wilful defaulter on December 26, 2018 by our Bank.”

Also, “out of Rs 7,926.01 crore fraud amount appearing in the press note, the amount of lending made by all the 14 consortium members is Rs 4,765.70 crore. The remaining amount was lent under Multiple Banking Arrangement.”

Wider Worries

Even as the appropriate authorities investigate the matter, the questions that now emerge are around due diligence. To what extent was this done in a methodical manner at the stage of approving the loan? How was the arrangement on the security tie-up and the nature of the collaterals sought? If the promoters extend personal guarantees, how is the net worth assessment done of the promoters? Also, in this context what is the extent to which the tax returns of the promoters were reviewed and whether it is only on the basis of the disclosures made by the promoters? All of them are crucial safeguards, in case a company goes belly up.

Also, was the Trust and Retention Account (TRA) Mechanism set in motion? This is a provision to safeguard the interests of a lender for an infrastructure project and a mechanism to control the cash flow and ensure funds are not siphoned off from the operations. Was the system of having an independent engineer appointed by the bankers to monitor the construction and usage of funds and whether monthly reports were submitted stating these?

On the point about 100 per cent provisioning that Canara Bank talks of, it is arguably a good accounting practice and in tune with the established norms. But then, its note also says: “The case was referred to National Company Law Tribunal (NCLT) and was admitted by NCLT, Hyderabad on October 10, 2018, and that the company is under the process of liquidation.”

This again begs the question: before the case was referred to NCLT, what were the steps taken by the consortium of bankers to recover the money from the promoters? Apparently, it is answers to these that will ensure banks not only stay healthy but are also not caught off-guard.