ABG Shipyard Exposes Bankruptcy Law: Write-off Wonderland or Debt Recovery Disaster
Exactly a year ago, I wrote (Bankruptcy Law Changes: Without Extensive Public Consultation, a Hurried Amendment Will Be Full of New Loopholes and Issues) that the bankruptcy law badly needs fixing. At that time, the government appeared to be serious about overhauling the legislation in the 2023 Budget. It was already clear that the ‘game-changing’ legislation was being gamed with impunity. Corporate defaulters colluding with resolution professionals, bankers and, sometimes, even judges, meant endless rounds of litigation. The rating agency CRISIL points out that recovery under the Act has dropped to 32%.
The picture is worse. Many companies are liquidated because there are no bidders and the recovery is in single digits. Large defaulters, like Anil Ambani’s Reliance Capital and the Videocon group, have received bids below the liquidation value and many defaulters have been liquidated with pathetic recovery because there were no takers under the resolution process. (Read: Defaulter Bailouts and Broken Trust: RBI’s Views Swing like a Pendulum).
A stunning Rs10.09 lakh crore has already been written off between 2018 and 2022. And the finance minister (FM) has herself admitted to Parliament that only 13% of the loans under ‘technical write-offs’ have been recovered. Well, 2023 has come to an end without any amendment to the law or even a white paper on the subject, as demanded by the Congress Party (Congress Demands White Paper on Bankruptcy Process; Accuses Government of Sheltering Defaulters). On the contrary, the fresh raids on ABG Shipyard Ltd, by the enforcement directorate (ED) on 29th November seem to take us back to 2017, when the resolution process was set in motion under the bankruptcy law.
Let us understand why the recent ED raids on ABG Shipyard are important. For starters, ABG Shipyard was one of the 12 large defaulters that were first referred to bankruptcy proceedings, ostensibly at the instance of the prime minister's office (PMO). These included: Essar Steel, Bhushan Steel, Electrosteels Steel, Jyoti Structures and Alok Industries, which were the early successes under the brand new Insolvency and Bankruptcy Code (IBC), 2016. Of the 12, Amtek Auto and ABG Shipyard, with massive outstanding loans, have been undergoing a tortuous process of litigation and conflicting orders without clear resolution and pitiful recovery.
Rishi Agarwal, founder of ABG Shipyard, owes Indian banks a massive Rs22,800 crore. Although the company was not very well known to the general public, industry circles were aware of Mr Agarwal's powerful connections across the political spectrum. Remember, every large loan default in India is the result of behest lending and collusion with bankers (derisively described as phone banking by the PM) and the ABG Shipyard enjoyed benevolent treatment long before the BJP-led government came to power in 2014.
And yet, when Rishi Agarwal was arrested in September 2022 by the central bureau of investigation (CBI) for having cheated banks, it sent shock waves among Indian industrialists who believed that he enjoyed some special protection. He has been out on bail since December 2022; all was quiet almost for a year until 29th November when ED conducted searches at his home and offices under provisions of the Prevention of Money Laundering Act (PMLA). ED claimed to have recovered cash, bullion and jewellery to the tune of Rs5 crore—a pathetic amount, given that the group’s liabilities are over Rs22,842 crore.
To be fair, piecemeal investigation and enforcement actions have been on for a few years including an eviction notice to company directors to vacate personal properties (it was stayed by a court). This case, too, follows the standard but dubious process adopted in every large default—a meaningless forensic audit is ordered long after it is clear there are no meaningful assets to recover or enforceable personal guarantees. The audit exposes fraud and diversion of funds, while carefully avoiding any hint of collusion by bankers who pay for the audit. A CBI complaint is filed leading to raids and arrests and an illusion of action but very little recovery.
A Decade of Indulgence
Gujarat-based ABG Shipyard, the flagship company of the ABG group, was set up in 1985. It received generous funding from 28 banks, financial institutions and finance companies until 2010, and they also took advantage of lax supervision to paper over the group’s problems right until 2013. A banker recently shared internal documents dating back to 2013, which indicate that all banks that lent to ABG Shipyard were aware that it was diverting funds when its total borrowing was significantly smaller. By then, it had already set up numerous subsidiary companies, mainly based in Singapore, and related-party dealings and transactions with these entities were already causing concern.
By 2014-15, it was making losses; revenues had dropped to one-sixth from the peak. Despite all the red flags thrown up by the detailed assessment that preceded the corporate debt restructuring (CDR), banks went ahead and restructured loans in March 2014 which included a moratorium on payment of interest and principal. Despite this generosity, the restructuring failed from the very start and the company continued to default.
By 2016, it was impossible not to declare it a non-performing asset (NPA) and ICICI Bank, finally, filed for resolution under the bankruptcy law, claiming total liabilities of Rs27,400 crore. A forensic audit by Ernst & Young LLP (E&Y) was ordered only in 2019 after which the State Bank of India (SBI) claims to have obtained evidence of fraud, misappropriation, diversion of funds and criminal breach of trust. Remember, as many as 28 entities had lent to ABG Shipyard enabling it to divert funds through 98 subsidiaries and related concerns and enriching the founder. Although SBI filed a complaint in 2019, CBI registered a case only in February 2022.
The detailed assessment, running into several hundred pages, prior to the CDR, threw up many red flags. For starters, ABG Shipyard had exhausted its borrowing capacity in 2011 itself. The total loans outstanding in 2013 were Rs7,403 crore to 28 banks, institutional lenders and finance companies. ICICI Bank, it turns out, was ABG Shipyard’s biggest backer with an exposure of Rs2,076 crore, followed by IDBI Bank with Rs1,075 crore, SBI with Rs 686 crore and EXIM Bank with Rs413 crore.
The 2013 documents show that funds had already been diverted to set up ABG Shipyard Singapore Pte and Varada Global Pte Ltd (VGPL). VGPL was entirely held by Rishi Agarwal and had, in turn, spawned layers of subsidiaries and inter-connected companies as shown in the table below. 
For instance, as part of the CDR, the company was to liquidate Rs187.8 crore diverted to set up ABG Shipyard Pte in three months. It had claimed that this money was fully recoverable; but that did not happen. It had also accepted that it overstated purchases to the tune of Rs100 crore in a proceeding before the income-tax (I-T) settlement commission. While these red flags were duly noted, the lenders’ consortium went ahead and allowed the CDR.
This attitude was not limited to ABG Shipyard but was true of all large NPAs of that time. An academic study has noted that the Reserve Bank of India’s  (RBI) ‘lax regulatory policy’ between 2008 and 2015 allowed bad loans to be hidden, led to the emergence of what are called ‘zombie firms’ to avoid proper classification of bad loans and, consequently, poor provisioning by banks (https://indianeconomy.columbia.edu/sites/ default/files/content/201903-Chari%20et%20al-Bank%20Reg.pdf).
The consequence of hiding the rot (even accounting for exaggerated interest claims by banks) is that ICICI Bank approached the bankruptcy court as the lead bank, with a claim of Rs27,400 crore as dues to banks, the government, employees and operational creditors.
Please note that the forensic audit by E&Y was ordered only two years later, in 2019. Meanwhile, with CBI and ED filing separate complaints and charges in connection with each group entity and challenging the resolution process with claims of money laundering, all that we have is endless litigation and no solution. The workers continue to agitate for their dues and are not paid. The Welspun group, which paid Rs790 crore to acquire assets as part of the resolution process, has the ED challenging the sale as recently as in February 2023. CBI has filed a case against a subsidiary company, PFS Shipping, for causing a wrongful loss of Rs163.8 crore. Meanwhile, ED also claims to have attached Rs2,748 crore of assets which will remain in limbo.
Wasn’t the ‘game-changer’ bankruptcy legislation supposed to address all of this? Unless there is an urgent amendment that fixes issues, we may continue to see fresh raids and newer complaints for tiny recoveries, followed by a rash of litigation and conflicting claims from defaulters, potential buyers, enforcement agencies and creditors, that will continue for the next decade or so, with negligible recoveries but massive litigation bills for all.
Everybody expected the new bankruptcy law to address issues related to bank loans. Instead, the resolution process has thrown up its own set of complex and long-term issues. Any root-cause analysis of the gigantic bad loans will take us straight to the corrupt nexus between borrowers and banks, mainly public sector banks (arm-twisted by politicians), which has left them with no collateral against the lakhs of crores of public money given out which had to be substantially written off.
4 months ago
I agree with you in many respects, excepting dissatisfaction against the IBC. It is well known that the IBC came into effect from Dec 2016. What were the weapons used against corporate default? The first one was Sick Industrial Companies Act, 1985, which was a joke. It provided for restructuring facility under Board for Industrial and Financial Restructuring (BIFR), a quasi-judicial body. Once a company was admitted to BIFR no legal action was possible. So the hearings continued endlessly and the process was marred with prolonged indecision. Then came Debt Recovery Tribunals, which also didn’t provide grounds for expeditious recovery as the judicial process was also time consuming. In the first decade of the current century, Corporate Debt Restructuring (CDR) and SARFAESI were introduced, which afforded some improvement. However, these also involved temptation to prolong restructuring just continue standard asset status in CDR system and in the latter, SARFAESI, Banks had no means and expertise to manage assets and business of the defaulting compan, taken over by them. In 2004 itself the NDA government visualised setting up of NCLT and IBC. But they lost power and the successor UPA government, for the reasons best known to them, continued with totally inefficient BIFR system.

Now look at the data revealed in the quarterly newsletters of Insolvency and Bankruptcy Board of India((IBBI). In the newsletter for the quarter ended Sept 2023, the position was as under:
Total cases (CIRP) admitted: 7058
Withdrawn : 947
Closed : 1053
Resolution Plans Approved: 808
Liquidation orders passed : 2249
Ongoing CIRP cases : 2001

In respect of 808 cases where resolution plans were approved, total claims were Rs9.91 trillion, recovery was Rs. 3.16 trillion, which was 31.85% of total claims, 168% of total liquidation value and. 86% of total fair value. Significantly 38% of these cases were earlier with BIFR and/or were defunct. Next comes very depressing and most significant segment of liquidated cases. The total claims are to tune of Rs.11.96 trillion and recovery was measly Rs. 5251 crore.. Most importantly, here 77% of the cases were earlier with BIFR and/or defunct.
Similar dat in respect of pending CIRPs is not available. But in respect of two segments of resolved and liquidated CIRPs, the total claims are mind boggling Rs. 21.87 trillion. This reflects decades of indecision, indifference and inane tolerance of immoral practices, deception and fraudulent practices followed by a section of the corporate entities. As compared to this sickening past, the IBC has fared far better, though here too unacceptable delay is taking place.
The final point. The criticism against write offs of loans is misplaced. It is only a cosmetic accounting gimmick which changes nothing. Data in respect of all such written off corporate accounts is contained in IBBI data, presumably in the data about liquidated accounts. Whether the loan is written off or otherwise, it doesn’t alter its recovery prospects, it depends on the recovery value of the defaulting company. Accepted that valuation methods may vary from case to case. The most useful is the discounted valuation of future cash flows. But needless to add that no matter the recovery process, the recovery cannot exceed the fair value of the assets belongings to corporate debtors. You can put promoters of defaulting companies in jail, but that doesn’t add the recovery. The solution is expeditious resorting to IBC, quick resolution, change in ownership and management of defaulting companies and preventing erosion in security value of assets belonging to these entities. Forensic Audit should be made mandatory and diversion of funds should be punished as a criminal offense.. Needless temptation of futile restructuring of stressed assets should be avoided. Better way is hand over the baton to a new ownership and management or just sell the assets. The depressing statistics tells us that the financial integrity of our business community is far from desirable. So more than ordinary care should be taken while sanctioning loans of large amounts. ABG Shipyard is just a case to validate this point.
4 months ago
I am fighting the very same matter through a PIL filed at Gujarat High court, except that my complaint is against the Resolution Professional / Liquidator, the Committee of Creditors and the successful bidders who in collusion seems to have sold away assets worth 6700 crores (as per balance sheet prepared and signed by the resolution professional himself) for a mere sum of 1200 crores through liquidation to Welspun and Arcelor Mittal mainly, despite them having an offer of 5500 crores during the Resolution process but they declined the resolution plan from the UK based company and decided to go for liquidation instead.

Even this is a big scam ongoing in the Insolvency processes whereby the professionals smartly navigate the process and eventually end up disposing the assets at throw away prices to a selected few and surely would be receiving kickbacks for the same.
4 months ago
Big applause for such a revealing and incisive article. The print media so far did just perfunctory reporting without substance. Words in fail to describe this. It is pure loot of taxpayers money. Unfortunately, such scandals are very common due to the PSB structure. The result is we have globally highest NPAs and lowest recovery from NPAs. I hope your exposes will catalyse cleansing of system. Nothing can be expected from print media.
4 months ago
It is sprinkling water after the fire dozed off.
4 months ago
It is very evident the govt want to showcase the default as the fault of the previous govt rather than bring logical conclusion. Only when some other new formation takes over the present cases will be out in public domain and this is a vicious circle of calling kettle black.
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