Was Jet Airways a Bankruptcy or a Fraud Enabled by Bankers and Auditors?
The Bombay High Court has refused to squash the arrest and remand of Naresh Goyal, founder of Jet Airways, by the enforcement directorate (ED) on 1st September on charges of money laundering. On 7th November, the Court dismissed his plea challenging his arrest as being ‘illegal’, noting there was ‘sufficient material’ to link him and his wife Anita Goyal to the Rs538-crore ‘fraud’ at the Canara Bank.
This is only the beginning. If the first information report (FIR) submitted by the ED is to be believed, Canara Bank is just the first of several public sector banks (PSBs) in the lenders’ consortium and more cases will follow. The total amount siphoned out from loans sanctioned to Jet Airways is estimated by the agencies at a massive Rs5,716.34 crore.
The question then is: Why is Mr Goyal and family alone in the dock? Such fraud and fund diversion cannot happen without the active collusion from statutory auditors and banks. Indeed, the statutory auditors have also been raided and will be investigated; but is it good enough? What about bankers who looked the other way?
The Jet Airways case followed a standard template evident in almost all the large bankruptcy cases. The largest lenders in the consortium with massive loan defaults in their books are mainly PSBs. They order a forensic audit after the default; in this case Ernst & Young (E&Y) was commissioned in 2019, when Jet Airways began to default in 2018. Predictably, it revealed large-scale diversion of funds and fraud that had gone unnoticed and unchecked for at least seven years.
This is usually when the PSBs also discover that have no worthwhile security to back their lending or personal guarantees provided by the founders or company. Often, assets provided against the guarantee have already been sold because banks never bothered to secure them legally. Yet, after the default, banks play victim, and file a complaint with the central bureau of investigation (CBI), claiming there was no wrongdoing on their part. After the Insolvency and Bankruptcy law was passed in 2016, CBI usually relies on the forensic audit for further investigations, raids and arrests, followed by a formal FIR.  It has rarely investigated bankers for failing to monitor the use of funds. Here’s the sequence of events in the Canara Bank-Jet Airways case.
The Jet Airways FIR
CBI filed an FIR on 3rd May against Naresh Goyal, his wife Anita, Jet Airways India Limited, Jet Air Private Limited, Jet Enterprises Private Limited and Jet Airways LLC (Dubai) in connection with a Rs538-crore fraud that occurred between 2011 and 2019. Jet Airways had filed for bankruptcy in June 2019, while E&Y submitted its forensic audit in February 2021, after which Canara Bank filed a complaint with CBI in November 2022.
In summary, the forensic audit showed that money was siphoned out in three major ways:
Firstly, irrational and inflated commissions of over Rs1,410 crore paid to various general sales agents (GSAs) and related parties controlled by the Goyal family. It is pointed out that only Jet Airways is the only airline that continues to use GSAs for sale of tickets and travel related issues and the quantum and basis of commissions had also been questioned. The forensic audit found a Rs403.27-crore payment to agents who were not even formal GSAs. Private entities owned by Mr Goyal and those in other countries used the ‘Jet Airways’ name—for instance, Jet Airways of India LLC for USA, Jet Airways UK Limited and Jet Air LLC Dubai as related parties. ED has dubbed these payments as proceeds of crime and alleged that this money was used by the Goyal family to acquires immovable properties in Mumbai and Delhi, luxury cars and payment to personal staff. Properties and assets worth several hundred crore rupees have been impounded.
Secondly, inflated payouts of over Rs1,152 crore were made to professionals and consultants. Some of these were found to have businesses that were vastly different from the description on invoices. For instance, a dealer in botanical products, mosquito coils and chemicals was paid for payroll processing of senior management, while a firm called HD Pathak & Associates was paid Rs279.51 crore for payroll processing of employees above general manager category. In many cases, the entire turnover of these companies was found to have come from payments made by Jet Airways, suggesting they were only fronts. 
Thirdly, massive loans and advances of Rs2,547.83 crore (in 2017-18, just before it went bankrupt) were granted to Jet LITE Limited (a wholly-owned subsidiary that was formerly Air Sahara). This money was allegedly siphoned by writing off the loans.
Among other things, the ED charge-sheet also alleges that Naresh Goyal rejected a structured plan to salvage the airline by refusing to dilute his holding to make way for a strategic investor who was willing infuse funds. Instead, the company continued to incur large expenses on GSAs and consultants even as it ran out of cash.  ED says it is preparing a money trail with respect to Rs4,057 crore diverted to two Jet Airways subsidiaries, in contravention of loan agreements, which was entirely written off. 
The FIR indicates that the downfall of Jet Airways was not merely the result of wrong commercial decisions (such as the Rs1,450-crore acquisition of Air Sahara in 2007 or purchase, rather than lease of aircraft) or profligacy, but due to systematic diversion and leakage of funds to promoter entities through fraud.
Bankers’ Collusion
Such brazen diversion of loans, as alleged by the FIR, raises basic questions about the quality of monitoring and collateral accepted by banks. Were bankers incentivised or induced to look the other way for at least five years before the planes stopped flying?
Remember, Jet Airways has long been controversial enough to have warranted special scrutiny. As far back as in August 2001, the then minster for disinvestment, Arun Shourie, had created a stir when he told the Rajya Sabha that Jet Airways, was not an Indian owned company, but was owned by Tailwinds, an entity registered in the Isle of Man, a tax haven. He had also exposed how Naresh Goyal, despite Jet Airway’s hidden foreign ownership, had lobbied industry bodies to restrict the entry of foreign airlines in aviation, mainly to prevent the Tata-Singapore Airlines deal. (Read: A minister who dares to take on business cabals).
A banker, who closely watches bankruptcy resolution, says, “It is stunning to see systematic diversion of bank loans apart from operating cash flow which banks refused to see. This is a fit case where banks must be made accountable for having failed to detect and cure fund diversion.” Instead, banks are able to hide all but the most egregious cases by steadily offloading bad loans to asset reconstruction companies, which are usually headed by their former colleagues (Read: Do ARCs help resolve NPAs or just bail out banks? and RBI May Cancel Licence of 4 ARCS after I-T Audit: Reports).
Banks may argue in their defence that they relied on the reports of statutory auditors. In this case, Chaturvedi & Shah (CAS), statutory auditor for Jet Airways, indeed, has the dubious distinction having as their clients a whole roster of bankrupt companies facing fraud charges. These include: Dewan Housing Finance Ltd (DHFL), Eros International and Crompton Greaves Power and Industrial Solutions. In each case, the extent of fraud or manipulation would not have been possible without their active collusion.
Remember, banks have reportedly written off a staggering Rs14.56 lakh crore since 2014-15, according to a reply to a question in Parliament in August 2023. In Jet Airways, banks have written off 95% of their admitted claim of Rs7,800 crore under the resolution process. They have also got a 9.5% stake in the airline and another 7.5% stake in the company that will run a loyalty programme; but that will yield returns only if the airline is actually revived. Jet Airways was sold to the Jalan-Kalrok Consortium in June 2021, but it got around to infusing some money only at the end of September 2023.
Whether the airline ever gets off the ground, or when, remains in question due to another development. In September this year, Liechtenstein launched an investigation against Florian Fritch, who own Kalrok Capital Partners for suspected fraud and money laundering, raising new questions by Indian creditors about the consortium’s source of funds which is unknown. (Jet Airways Investor Florian Fritsch Being Probed for Suspected Fraud)
Like other cases, Jet Airways too will head into a long legal battle that will drag on for years and end up with a verdict that is of little interest to anyone. The only constant will be that PSBs will continue to collude with large corporates in large-scale diversion of funds because there is no attempt to make bankers accountable by government that promised to root out corruption.
4 months ago
What a super idea to remain safe, selling degree for money and yet remain safe C&S auditor created 650 cr properties in last 12 years
4 months ago
What a joke, 57000Cr auditors scandle and nothing happens to the firm C & S except two poor employees are sacrificed of their life......
5 months ago
Any and all loans with Rs.500 cr and above should be entrusted to a General Manager to do the monitoring and supervision and he would then be accountable to the institution. The present way of group lending made everyone in the group escape the responsibility for the asset. Further, too much emphasis on systemic monitoring and not actual asset monitoring also did enough damage and put lakhs of crores of assets under perpetual risk.
5 months ago
Excellent article. What was the RBI doing all these years ? Sleeping heavily ? RBI is the controller and regulator of banks .
5 months ago
If what has been written is treated as a fraud due to bankers or auditors then every business house can be booked by ED. To stop these frauds, we need to amend the Income-tax Act to create circumstances in the country to make companies debt free. Any debt free company or business or an individual should be taxed @ 20%. A debt free enterprise means where there is no interest paid or payable in the profit and loss a/c or Balance sheet without loans or investment in other companies.
Kamal Garg
Replied to villagepoverty comment 5 months ago
I think a real good suggestion worth considering. A differential tax treatment for non-interest-paying companies would drastically reduce such kind of frauds. But, then, what will happen to the banking/NBFC industry. This huge industry globally will go bankrupt. Banks would cease to exist if they cannot lend the deposited money onwards.
Replied to Kamal Garg comment 5 months ago
Kamal Ji, I assure you that there will be no dearth of companies seeking interest bearing loans from Banks. Bankers will lend money with no fear in their minds. Industry will flourish without depending upon non existing capital of friends, relatives or arranged investors.
5 months ago
It will be worth noting that JET Airways mentioned in the IPO details that they will be flying to USA where as they did not have permission to land at US destinations. USA denied permission couple of times before accepting the request.
5 months ago
The Goyal's, the Lenders, Auditors and everyone has and have a say but the bearers of all this wrong doings were and still are the one's who struggled and worked for this airline, the staff and their dependent families who are still suffering and bearing the loss of greed and selfish desires of the rich.
5 months ago
Can the government strongly contain corruption in banks and make banks accountable in the event of banks' collusion with corporate fraudsters?
5 months ago
Government companies frauds are much greater and bigger but we are all afraid of the government and so do not write about it. The mantra seems to be that as long as you are paying the second creditors, you are fine but the moment you stop, then its fraud. No one asks the unsecured creditors and for the government to reduce the tax burden as they are the biggest business person in India and become rich by their authority, feudalism revisited
Kamal Garg
5 months ago
Every body colludes with every body to loot public money and to subvert the elgal system.
5 months ago
All along it was showcased that Jet Airways was one more victim of the price war between the airlines, high ATF costs, low passenger load during the 2008-09 recession etc. Inspite of several red flags on the holding pattern of the Company and rumours of his connection with certain dangerous groups, banks have lent left, right and centre and it has taken almost 14 years after the Company started reporting loss for a agency to catch the promoter. Further if the forensic audit was done in 2019 why it has taken 4 long years to bring this person to justice. As rightly pointed out by the author in the concluding paragraph of her article, one more case of long legal battle and a verdict of little interest to anyone as the monies are ever going to be recovered as by now the foreign assets would have moved many jurisdictions and making it difficult to recover anything inspite of growing global partnership between the countries to exchange information.
5 months ago
But nobody knows who really was or were the beneficiary owner or owners of Jet Airways. That is the deeper question as the persons who were the fronts get arrested.
5 months ago
5 months ago
Stunning! Incisive! Shocking but not surprising!
Our PSBs clock global highs and global lows periodically. Global highs are NPA levels and global lows are recovery from NPAs. Every 7-8 years, the NPAs peak, the banks clock massive losses by writing off huge loans, get recapitalized, and clock "bumper" yearly profits initially aided also by remaining recovery from written off loans, fund the likes of Jet Airways, clock peak NPAs, and the cycle goes on and on. This happens due to employee moral hazard created by implicit guarantee of recapitalization tap and adverse selection due to lack of stake like ESOPs, aided by leaky business process and archaic HR processes.
Jet Airways is a matter of deep concern because it bares a clear conflict of interest and abetment of crime by people who have fiduciary duty to the depositors whose money has been looted. Here the statutory auditors and related parties are partners in crime. Strangely, the banks rely on auditors’ certificates for end-use of loan funds. This is incongruous since the auditor can only certify end-use based on vouchers and accounts and cannot match accounting figure with real assets. In this case, most likely the banks merrily disbursed the amounts based on certification from auditors who were accomplices along with their related parties, with the venal promoter! The fact that same audit firm was involved in a number of similar cases with Yes Bank as a lender is worrisome, simply because this points to a systematic rot in our credit market which has distinction of dubious highs and lows!
A professional lender cannot miss big red flags in the account, much less for such a long time, except for a quid pro quo. There are too many such banditries and if the government doesn’t revamp the system we will repeat expensive boom & bust cycles at the cost of taxpayers’ money!
I appeal to Hon’ble FM revisit Dr. PJ Nayak Committee report, amend it in a way that the system does not catalyse deadly duo of employee moral hazard and adverse selection, and implement its substantive part fast. If properly done, PSB would be match the private sector peers such as HDFC Bank, Kotak Mahindra Bank etc. and their employees will have high earnings aided by ESOPs with good vesting periods, not through adverse selection!
5 months ago
All their flights were full & it was giving good service Even I thought there is definite diversion as I used to travel regularly in gulf flights & it was always full with 100% occupancy
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