Sterling Biotech: NCLT Slams Andhra Bank for Submitting OTS Proposal
The National Company Law Tribunal (NCLT) has not accepted the attempt of bankers to let of the Sandesara group of Sterling Biotech by accepting a sharp haircut and a one time settlement (OTS). Instead, the Mumbai division bench of the NCLT  slammed Andhra Bank and other lenders for not sharing details of the proposal with the resolution professional (RP), or the source of funds, time frame for payment to each lender, compliance with Reserve Bank norms and whether interests of all stakeholders /creditors had been provided for.
 
Further, it has issued notices to the government and all regulators in case they would like to make any representations in the matter, which has now been posted for hearing on 26 March 2019. 
 
In a strongly-worded order, the Mumbai bench of VP Singh and Ravikumar Duraisamy says, "...OTS proposal is from Mr Farhad Daruwalla, who has signed on behalf of Sandesara group. It is not mentioned in the OTS proposal whether Farhad Daruwalla has been authorised by the corporate debtor to submit OTS proposal. It is also important to point out that the corporate debtor is Sterling Biotech and no proceedings under Insolvency and Bankruptcy Code (IBC) has been initiated against Sandesara group. How the proposal submitted by Sandesara group is accepted by the financial creditors creates suspicion when the promoter and director is absconder and Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) is searching them."
 
"In this background, before passing any further order, we would like to issue notice to the central government through regional director of ministry of corporate affairs (MCA), Enforcement Directorate, Income Tax Department, CBI, Securities & Exchange Board of India and RBI, so that if they want to make any representation, they can make the same before passing any further order on the miscellaneous application for withdrawal," it added.
 
The OTS proposal was widely publicised in newspapers with Business Standard stating that lenders have agreed for a 65% haircut. Quoting bankers, the report said, “The promoters, bankers said, have made an offer that entails a haircut of close to 65% for the lenders. The promoter has already deposited 5 per cent of the OTS offer to banks”
 
In a regulatory filing, Sterling Biotech had stated, “The committee of creditors has approved the withdrawal of the Corporate Insolvency Resolution Process- CIRP of the company with requisite majority.” 
 
According to the order, the resolution professional (RP) appointed in this matter, put up a resolution before the committee of creditors (CoC) for liquidation of Sterling Biotech after resolutions for withdrawal of corporate insolvency resolution process (CIRP) and approval of resolution plan from ACG Associated Capsules Pvt Ltd (ACG) failed. However, the CoC rejected the resolution submitted by the RP.
 
When the RP asked the CoC for further directions, during the 14th meeting, it was revealed that Andhra Bank on 5 March 2019 had submitted a fresh proposal for withdrawal of CIRP of Sterling Biotech. When asked to share details of its proposal, a representative of Andhra Bank asked the RP to refer to the documents submitted to NCLT on 26 February 2019.
 
"A representative of Andhra Bank further informed the RP that should the NCLT seek information pertaining to the OTS offer including sources of funds, timeframe for payments to each lender, compliance with RBI norms and whether the interest of all stakeholders and CoC members have been provided for under the OTS offer, the applicant Andhra Bank and CoC will address all such queries posed by the NCLT directly and not with the RP," the NCLT bench observed. 
 
NCLT said, "It is pertinent to mention that the promoters of Sterling Biotech are absconder and we often get the news from the newspaper that various government agencies like ED, CBI and other agencies are unable to trach the promoters of Sterling Biotech."
 
The next hearing in this case is scheduled on 26 March 2019.
 
Last year in October, the ED had filed a charge sheet under the anti-money laundering law against Sandesara brothers and their Gujarat-based pharmaceuticals company Sterling Biotech in the fraudulent Rs8,100-crore loan from domestic as well as offshore branches of Indian banks during 2004-2012.
 
The ED had named 191 accused and 184 companies of the Sterling Biotech group in the charge sheet filed in a special court. The group includes Sterling Biotech, PMT Machines Ltd, Sterling SEZ and Infra Ltd, Sterling Port Ltd, Sterling Oil Resources Ltd and 179 shell companies. 
 
Some individuals named in the charge sheet include the main promoters of Sterling Biotech group—Chetan Jayantilal Sandesara and Nitin Jayantilal Sandesara—Dipti Sandesara, Rajbhushan Dixit, Hitesh Patel, their chartered accountant Hemant Hathi and middleman Gagan Dhawan. 
 
The agency had stated that the investigation in this case is still on as Sandesara brothers are learnt to be abroad. 
 
Investigations by ED revealed that Sandesara brothers and others hatched a criminal conspiracy for cheating banks by manipulating figures in the balance sheets of their flagship companies and induced banks to sanction higher loans. 
 
"After obtaining loans, the accused diverted the loan funds to non-mandated purposes through a web of shell companies. Thus, the loan funds were diverted, layered and laundered by the promoters for their personal purposes. Total amount of loan fraud as on date is Rs 8,100 crore. The loan fraud pertains to domestic as well as offshore branches of Indian banks," the ED had said in statement.
 
Loans worth Rs5,700 crore was disbursed by various banks during the years 2004-2012 and look out circulars were issued against the accused in August 2017, said the statement. 
 
"To fulfil their criminal motive of defrauding banks, the promoters devised a multi layered strategy of cheating. They not only cheated banks but also revenue department as well as the share-holders. Their strategy included incorporation of shell companies, conducting circular transactions to artificially inflate turnover of flagship companies, claiming higher depreciations on non-existing machinery, artificial share trading with the use shell companies, layering and laundering of proceeds of crime within India and abroad through the web of shell companies."
 
The promoters used their employees' names and got incorporated 249 shell companies, said the ED, adding the ill gotten money was knowingly rotated, layered and finally integrated into the financial system and projected as untainted.
 
"The amount was further invested in the form of immovable properties. The loan funds were diverted for non-mandated purposes to shell companies and were withdrawn as cash. An amount of Rs140 crore was withdrawn from shell companies and were used for the personal purposes of the promoters which also includes bribing of public officials," said the statement.
 
The ED said the promoters created a web of corporate and accounting structure abroad and they incorporated more than 100 entities in various countries including United Arab Emirates, the US, the UK, British Virgin Island, Mauritius, Barbados and Nigeria. 
 
"Their main entities outside India includes Richmond Overseas, Sunshine Trust Corporation, SEEPCO BVI, SEEPCO Nigeria and Atlantic Blue Water Services Pvt Ltd. It is revealed during investigation that the funds were rotated through various structures and ultimately carried to Nigeria to finance their oil business," said the ED.
 
The banks have also found that the sanctioned loans were not used for the laid down purposes but were diverted for non-mandated purposes. 
 
The ED said the banks have also declared the loans to the tune of Rs8,100 crore as fraud, including domestic loans of Rs3,675 crore and foreign loans of Rs4,425 crore.
 
Last month, according to reports, promoters of Sterling Biotech—Chetan, Chetan’s wife and Nitin Sandesara as well as Hiteshkumar Patel moved a Delhi court seeking cancellation of open-ended non-bailable warrants issued against them. The matter will be heard on 2 April 2019.
 
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COMMENTS

Kirit Arvind Dave

2 months ago

I know many ways how they have used this money out of India in oil exploration business. Even group of bankers have visited places in Africa as far back as 20010 and 2011. That means this is a collective fraud plan of public sector banks to give loans and that too without proper security and later on to declare it as bad, NPAs. We can help ED and SFO to get more details.

RAMANI N .V.

2 months ago

Loot of Public money by fugitive promoters.(IN) CREDIBLE INDIA?

Meenal Mamdani

2 months ago

This is confusing to me.
Is Andhra Bank hand-in-glove with the promoters? Is that why it is taking a very large haircut? Which official of the Andhra Bank has OKd this? Has this been approved by the entire Andhra Bank board?

Ramesh Bajaj

2 months ago

Is it so easy to loot? Whether it be a bank, public or private sector,?
This definitely seems to be Criminal and law enforcement departments must take action.

REPLY

AAR

In Reply to Ramesh Bajaj 2 months ago

In India, Yes.

Ramesh Poapt

2 months ago

one of the above promoters is chartard accountant!

REPLY

AAR

In Reply to Ramesh Poapt 2 months ago

They are one who usually layout the ways and means to swindle.
Don't confuse accounting skills with ethical character.

R Balakrishnan

2 months ago

A fit case for the entire family to be sent to jail for life. Our legal system, however, will let them enjoy the fruits of theft.

REPLY

Madhukar

In Reply to R Balakrishnan 2 months ago

Banking is a cruel joke on the honest tax payers who sweat, work and keep their hard earned income as fixed and savings deposits in them. CoC or the Committee of Creditors are to be condemned severely for accepting the proposal to revive a Company under investigation back to its old ways.

Ordinance Bans Unregulated Deposit Schemes Offered by Builders, Jewellers
With an aim to further fortify the deposits-taking activities, the President, on 21 February 2019, promulgated the Banning of Unregulated Deposit Scheme Ordinance, 2019 (BUDs Ordinance), which will interdict the illicit schemes that are used to dupe the financially illiterate and poor people. On the regulatory front, various steps have been taken by the Reserve Bank of India (RBI) in the past to protect the interests of depositors dealing with deposit-taking non-banking financial companies (NBFCs). Also, acceptance of deposits by unincorporated bodies is prohibited under the RBI Act, 1934. The move will not only prohibit ill-gotten deposit schemes offered by builders and jewellers but will also protect the interests of small businesses and individuals of both regulated and unregulated deposit schemes.
 
When it comes to borrowing money for meeting various financial commitments, small businesses like partnership firms or proprietorship concerns raise fund from sources which are largely informal.
 
With the enforcement of the Ordinance, the question arises whether money can be borrowed from either of the regulated and unregulated means and, if yes, can the raised funds be used for business purpose or for other purposes as well? The answers to these questions and the applicability of proposed prohibition as stated under the Ordinance have been discussed in this article.
 
Deposits for Partnership Firms and Proprietorship Concerns 
To avoid compliance obligations under the formal credit sector, the firms and individuals generally approach money-lenders, relatives, friends, etc, for availing loans and credits which are not regulated by any regulatory body like the RBI. This unorganised credit sector lacks proper lending practices and administration, failing which it leads the borrower into a debt-trap and fraudulent schemes. This concern has now been addressed with the enforcement of the BUDs Ordinance. 
 
Applicability of the BUDs Ordinance
Whether a transaction will be prohibited under BUDs Ordinance shall be ascertained by applying the following criteria:
 
1. Deposit 
a. The amount received shall be a ‘deposit’ in terms of Section 2(4) of the Ordinance, i.e., amount received is ‘by way of an advance or loan or in any other form’ and with a ‘promise of return’. Therefore, not every receipt of money is prohibited but one must apply these factors to check the applicability.  
 
b. Where the amount received is a deposit but falls under the exemption list, the BUDs Ordinance shall not apply. The said list also exempts the amount received for the purpose of 'business' and bearing a 'genuine connection to such business' implying that the scope of exemption shall be expanded by taking a liberal interpretation. Also, the onus to prove genuine connection to business shall be on the person requesting it. 
 
2. Unregulated Deposit Scheme 
To qualify the acceptance of a deposit by any deposit taker as an Unregulated Deposit Scheme:
a. Firstly, it should be in the form of 'scheme or arrangement', which is generally characterised by repetition or a pattern.
 
b. The deposits shall be taken 'by way of business' which indicates that the scheme/arrangement has the business of accepting such deposits. This requirement depicts the very intent of the Ordinance, so that the amount received in the normal course without any commercial intent is not unnecessary prohibited. 
 
c. The scheme is not a Regulated Deposit Scheme prescribed under column (3) of the first schedule of the Ordinance.
 
The ‘3-Yes-No Test’
 
For a better understanding, one may refer to the table below:
 
 
Banning Bonafide Borrowers!
By and large, these entrepreneurs are dependent on informal financial sectors where it is easier to obtain loans with nil documentation and compliances. Given this, any amount in the course of, or for the purpose of, business can be raised irrespective of the fact that it is obtained under an unregulated scheme defined u/s 2(17). The term ‘scheme or arrangement’ and ‘by way of business’ clearly excludes the bonafide borrowers. Therefore, when it comes to borrowing money to meet other financial obligations, whether for business or personal commitments, no prohibition has been provided subject to the conditions discussed above. A similar approach is adopted under UK law wherein deposit-taking activities are prohibited only when it is carried on by way of business by an unregulated entity.
 
Case Studies and Analysis
 
 
In all the aforementioned prohibited cases, it is assumed that the amount is accepted under Unregulated Deposit Scheme; further, any amount received for, or in the course of business, is allowed to be accepted as deposits.
 
Analysis and Conclusion
While government’s attempt to prohibit the exploitation of unregulated financial sector is appreciable, the real test will be successful execution of the above proposal. Seemingly, the list of exemptions is narrow which is making the acceptance of deposit from the public more stringent. The government should come up with a clear set of exclusions to avoid the confusion of when a receipt of money is prohibited.
 
Furthermore, it can be concluded that the 'Aam Admi' including small businessmen are not prohibited from approaching either the regulated or unregulated sector to meet their financial requirements; however, the prohibition is only on the exploitation of unregulated deposit schemes whereby the deposits are accepted by way of business and the said funds are rotated in the market to gain undue financial benefits out of it. The intention of the government seems only to prohibit those transactions that lure the public into illicit schemes and transactions which lead to drowning of investments in most of the cases. 
 
(Shaifali Sharma is an executive at Vinod Kothari & Co
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COMMENTS

R shah

2 months ago

From point 4 is inter corporate deposits banned?
and does this mean all illegal laundering stops X lends to Y - Same money goes to Z - Z transferred to A?

Prakash K Pandya

2 months ago

The analysis in the table as to from whom it can be accepted in not correct interpretation of law. The definition of 'deposit' under the BUDs Ordinance u/s.2(4) excludes may things. One important exemption is under clause (l) which says 'an amount reeived in the course of or for the purpose of business and bearing a genuine connection to such business' is permitted. Then it gives a list of items which are only illustrations and such illustrated items are permitted category of receipt of money.

AAR

2 months ago

Will this be applicable for already in progress deposit schemes?

Banks in No Hurry To Link Repo with Interest Rates
Public sector banks (PSBs) are in no hurry to follow big brother State Bank of India (SBI) in linking their deposit and lending rates to the repo rate of the Reserve Bank of India (RBI) , which may further irk RBI for not transmitting the lower interest rates to the customers.
 
While some of them do admit that, ultimately, linking to repo rate might happen but they are not firm on the time of such commitment. 
 
Also, several PSBs have not responded when asked if they planned to go for the external benchmark linking with repo rate.
 
A Punjab National Bank source told IANS: "No decision has been taken, but bank will take a call soon. Other banks have to follow suit sooner or later."
 
A Bank of India source said no such decision has been taken.
 
Bank of Baroda did not respond to the queries sent on the same.
 
These banks, along with SBI, corner majority of the lendings and deposits. The IDBI Bank which has LIC (Life Insurance Corporation of India) as promoter, too, did not respond to queries.
 
The SBI had caused a raised eyebrow when it linked deposit, loan interest to RBI's repo rates voluntarily.
 
While the RBI guidance was to pass on the benefit of falling interest rates to borrowers by linking lending rate to an external benchmark, SBI also linked its savings bank rates (over a limit of Rs1 lakh) to the external benchmark.
 
By doing this SBI became the first bank to announce linking its interest rates on deposits and loans to an external benchmark from 1 May, 2019. This was expected to be followed by peers.
 
RBI governor, Shaktikanta Das, in February, met the top lenders asking them to pass on the benefit of repo rate cut to the customers after it had reduced its repo rate by 25 basis points to 6.25%. 
 
Many bankers said the mismatch between deposits and credit growth, and competition from the government for small-savings offering over 8% returns in many schemes, raise their cost of capital, restraining them to transmit monetary policy easing. 
 
The 25 basis-point cut in repo rate is too small to have any impact on lending rates just yet, they had said. The lending rate offered by commercial banks is in the range of 8.15% to 8.55%. 
 
Anil Gupta, vice-president and sector head of financial sector ratings ICRA, said: "All PSU banks will follow it. There was a diktat from the RBI to banks to link lending rates from April 1 onwards. 
 
"For them earning a stable spread is more important. For them it is important if their lending rates are going down, then their liabilities (deposit rates) should also go down and vice versa to maintain the stable margin to cover operating costs and earn profits."
 
"There was need for regulatory requirement here to transmit the lower rates to the small borrowers. 
 
"Linking the savings deposit rate with policy rate will help faster re-pricing of liabilities for banks and help in protecting their profit margins", Mr Gupta said.
 
PSBs are cautious and "are not in favour of cutting rates as deposits and household financial savings are at low-level even while policy rates are down; the rates paid by the government on small savings are significantly higher than bank deposit rates. 
 
"Savings schemes of the government through post offices return between 7% and 9% annually along with tax benefits, while over a two year term deposit with banks, give them a return of 6.8%.
 
"Bank deposits are also growing at a much slower pace than credit forcing lenders to offer higher rates to get depositors. While bank lending has been growing at more than 14% year-on-year as of February, deposit growth has been at 9%," as per RBI data.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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