Mohan Lavi

Why the charges against GVK group are worrying

Mohan R Lavi | Updated on July 10, 2020

The alleged scam shows that movement of funds between a Group and its subsidiary warrants greater scrutiny

During the lifetime of a corporate entity, a single event could end up being the sword of Damocles. For Satyam, it was its infatuation with land and Maytas, for Kingfisher it was the needless acquisition of Air Deccan and for HDIL, it could have been an unholy alliance with Dewan Housing and Finance Ltd (DHFL). Many people could be asking whether Mumbai International Airport Ltd (MIAL) could be the sword that takes down the GVK Group? Almost out of the blue, a Central Bureau of Investigation (CBI) report has charged the Group with siphoning off funds adding up to ₹705 crore.

CBI charges

The charges made by the CBI are numerous. The primary charge is of perpetrating a loss of ₹310 crore to the exchequer by entering into fake work contracts on land given by the government to MIAL. The remaining amount of ₹395 crore was kept as reserve in Hyderabad, not Mumbai, as stated — in effect, the funds were diverted to group companies.

These days, it is common to hear reports of input tax credit under the GST being claimed on the basis of fake invoices. What is unusual is that an entity such as the GVK Group (which gained a lot of brownie points for writing a Constitution on its succession plans) has also resorted to the art of fake invoicing. It has also been alleged that many employees of the GVK Group were transferred to MIAL with the sole objective of getting their salaries paid from MIAL, though they did not render any services to the entity.

The charges are serious in nature and could turn out to be a defining moment in the history of the Group. Though there appears to be a bit of corporate rivalry involved, in that the Group has got a notice from the CBI almost out of nowhere, it does need to do a lot of explaining about the diversion of funds and fake invoices.

There is a background to the corporate rivalry — to pare debt, the Group decided to sell its stake in MIAL. The Adani group were very keen for a stake in the Group, and submitted a bid, but GVK exercised its right of first refusal and rejected it. In addition, it identified two other parties to which it will sell shares — Abu Dhabi Investment Authority and National Investment and Infrastructure Fund. The Adani group approached the Bombay High Court for an interim stay, but was denied.

To tie up all the loose ends, the GVK Group approached the Delhi High Court requesting for an order stating that the present investors should sell their investments only to the GVK Group. The Delhi High Court refused and suggested international arbitration, since most investors are not from India. The rest of the story, culminating in the CBI raid and notice falls into place quite easily.

Group company loans

If there is one matter of grave concern in the CBI allegations, it would be the diversion of funds to related parties. Due to the nature of their business, infrastructure companies are capital-intensive, incur losses initially and quickly get themselves entangled in litigation.

However, capital is available to them because of the importance given to the sector by the government. So, capital is avalied, but can’t be utilised because of the litigation. At the same time, a subsidiary company pleads for some oxygen to resuscitate its bank account. Hence, the infrastructure company may soon give a loan to its subsidiary. In many cases, the loan is never repaid. Soon, the cycle repeats with another subsidiary.

Accounting Standards and regulators mandate disclosures about transactions with subsidiary companies. It is assumed that these transactions are made at an arm’s length. As the GVK episode shows, there is no such thing .

The writer is a chartered accountant

Published on July 09, 2020

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