How ABG Shipyard pulled off the BIGGEST Banking Fraud in Indian History? : Business Case Study thumbnail

How ABG Shipyard pulled off the BIGGEST Banking Fraud in Indian History? : Business Case Study

Hi everybody on 7th of february 2022 the cbi booked abg shipyard its directors and abc international private limited for allegedly causing losses of 22842 crores to consortium of 28 banks abg shipyard which was once considered to be a powerhouse in shipbuilding with an order book of 16 600 crores is now under pro for pulling off the biggest.

Banking fraud in indian history now just to give you guys a context of how big a fraud this is if you see neerav modi pulled off a 11 356 crore scam vj malya pulled off a scam of 9 000 crews both of them together account for 20 356 crore of scam but abg shipyard alone amounts to 22 0842 crores the question is how does the shipping.

Industry function in the first place what is the story of abg shipyard and how did they manage to pull off such a big scam right in front of the biggest banks in the country before we dive into this lengthy episode i want to thank our sponsors skillshare for supporting our content skillshare is an online learning community where millions of curious.

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Terrible time managing my workload i took my second class from ali abdal about being productive i understood about the productivity equation and then figuring out which bits we need to optimize in order to apply in our lives the best part about skillshare is that it's an ad free platform and works on a subscription model this means just like.

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Free trial if you use the link in the description this is applicable only for the first thousand people so go ahead click the link in the description and explore all the amazing classes that skillshare has to offer the first thing you need to understand is how does the shipping industry operate to put it in simple words the.

Shipping industry has three dominant players a charterer a shipping company and a shipyard a charterer is the entity that wants to rent a ship for either transporting cargo or passengers in our case let's say maruti is a charterer that rents a ship to export cars now given the fact that the cost of transportation yrc is at least five.

Times cheaper than air it is by far the most widely used mode of transport all across the world for all kinds of import and export so in this case let's say maruti suzuki approaches a shipping company that regularly leases container ships or vessels for the export of cars to middle east this shipping company owns the ship and is responsible for the.

Overall ship maintenance for the staffing for obtaining port clearances and for providing marine fuel so for these kind of services the shipping company charges an amount of money called the freed charges now maruti is just once a charter just like maruti there are several companies involved in the export and import of goods like.

Apple samsung etc and these companies are in constant need of ships and this means that the shipping companies will always need to have sufficient containers or vessels that can meet this demand and this is where the shipping companies approach the shipyards or ship manufacturers and these companies are.

Responsible for building and repairing ships but you know what guys building a ship is not an overnight process in fact it doesn't even get done in a year it takes anywhere between two to three years to make a single ship and cost you between 40 to 100 crores to make each one of them therefore capacity planning is extremely crucial in this line of.

Business because tomorrow if there's a sudden surge in demand at the charter's end it cannot be promptly met by just increasing the production at the shipyard at the same time even if two of your ships remain unsold your 80 to 200 crore worth of capital will get stuck with your dead inventory itself so to put that straight ship building and.

Selling is a time and capital intensive process if this is very very clear to you let's have a quick look at how this industry was functioning in the early 2000s people the early 2000s in india was an amazing time for all shipping companies globalization was hitting new peaks.

Volume of trade was increasing at a healthy rate profits were pouring in hundreds of crores with each passing gear on top of that during this time that is during the early 2000s developing economies like brazil russia india and china were experiencing spectacular growth so the ports were enjoying record revenues because of the.

Crazy demand of all kinds of goods and materials so naturally the shipyards received a large number of orders to build more and more vessels therefore it was practically raining cash for the shipping industry and particularly the companies involved in the container sector as a result investors and banks had pumped in billions of dollars into.

The global container shipping business because back then it was considered to be an extremely profitable business in fact the banks were actually competing with each other to lend money to these shipping companies at the lowest interest rate possible and it's quite understandable because you see c freeze was such an integral.

Part of the global economy that 90 percent of the global trade volume was executed through c and this is very clearly evident in this chart between 2002 to 2004 the demand for containerized trade grew faster than the supply of the container carrying capacity so the industry kept ordering new tonnage now remember like i told you.

Shipbuilding takes two to three years so the ships that were actually ordered in 2006 were only going to get completed in 2008-9 but guess what this is where the 2008 recession happened as we saw giant companies went bankrupt thousands of jobs were lost and in all the great recession led to a loss of more than two trillion dollars in the global economic.

Growth and in the context of the shipping industry it resulted into two critical things number one with trade at large taking a hit the demand supply ratio went for a toss and the global free charges plummeted this meant that the shipping companies were unable to generate revenue from the charters and they could.

Not pay what they owed to the shipyards that were actually manufacturing these ships so what did the shipping companies do they started cancelling the orders with the shipyards and unfortunately these shipyards had been working on these ships for two long years and they started to have giant ships as their dead in entry with no buyer at all.

And not just that along with no business crows or rupees or worth of capital that went into making those ships also got locked into the dead inventory now with these points in mind let us try to understand what happened in the context of abg established in 1985 abg shipyard limited was one of the largest private.

Shipbuilding companies which shipyards in tahej and sugrat in india it had a capacity to manufacture vessels up to 20 tons in weight the company had built over 165 container vessels and was doing very very well financially like most shipyards abg also enjoyed the golden run of the early 2000s with ton of cash pouring into their balance sheet.

But with 80 of the orders coming from international clients after 2008 they started to lose all these orders now although they had picked up defense contracts and had some stellar clients like the indian navy the indian coast guard and the shipping corporation of india when it comes to defense contracts the government entities like cochin.

Shipyard were always preferred over other players and this is where the tricky part of the story came in now the owners of the company knew that they had to borrow money so abg reached out to banks for loans asking for a few thousand crores of loans now typically when the ask is this high a psu bank leads the consortium but in this case of.

Abg it was a private bank that led the consortium so a total of 28 banks participated in the loan disposal that was led by icici bank and this graph will show you the five participating banks with the largest exposure to fraud here we have icaci at 7089 crores idbi bank at 3639 crores sbi at 2925 crores followed by bank of baroda and exim bank.

Of india now you see guys if this lending activity took place before 2008 the optimism is quite understandable because of the gold rush but you know what this money was lent between 2012 to 2017. now considering how much these banks make people like you and me run for something as small as a car loan or a.

Student loan you would assume that they would do a lot of due diligence before giving out thousands of crores of loans right but somehow this doesn't seem to have happened if you look at this table during this time the profits averaged just around 185 crores and yet it almost appears as if the banks were willing to.

Lend them thousands and thousands of crores of loans knowing very well that it was impossible for them to even service the interest let alone the principal and it appears as though a major part of these loans were given against the assets of abg shipyard and the remaining was given on the guarantee given by the.

Promoters but guess what guys even this does not seem to be reasonable at all why if you look at the total current assets of the company as reported in the annual report in 2012 it amounted to five thousand five forty crores and during the same time they had current.

Liabilities of 5695 crores this means they had 5540 crores worth of assets that could be sold within a year to pay back the 5695 crore liability so these figures look pretty fair right but you know what this amount of five thousand five forty crore also included the huge inventory of ships that accounted for three.

Thousand two sixty crores of the current assets and like we discussed before since there were very less buyers for these ships if you take this value out this amount of current assets excluding the inventory was just 2280 crores and their liabilities stood at.

5695 crores in 2012. so if you removed the ship's value from the current assets abg literally needed double the assets than what it had just to pay off the existing liabilities back then this is one of the basic elements that we believe is quite strange and guess what.

Even with these kind of figures they still got the huge loan from the banks and this was probably because by 2012 abj had won orders from the indian navy and the shipping corporation of india taking its order book to 2.7 billion us dollars however even with these big orders they couldn't pull off a profit so until 2012 abg was profitable but.

After that the losses began coming in in 2013 it went to 199 crores of loss then to 897 crores in loss in 2014-15 by march 2016 its net loss it amounted to 3704 crores and the revenues had fallen from 401 crores to just 37 crews so in 2014 we saw something called loan restructuring happen wherein the interest is reduced or the duration of.

The loan is extended so that the recovery could be made easier but even that failed and the account was classified as a non-performing asset in july 2016 and this is where the promoters and owners of the company seem to realize that abg was doomed and this is where a scam-like operation started.

And now comes the most interesting question of all and that is how does this money laundering happen this is where we have something called shell companies if someone has 100 crores that they do not want to pay taxes for or if it's a shady income that they want to hide this is how they do it they go to attacks in place like panama.

Or british virgin islands and set up a company just for the namesake these places have very tough laws and will keep the details of the company extremely secretive apart from that they have all kinds of provisions over there for anonymity like you can have fake directors you could hide the name of the owners and your company doesn't even.

Have to have any building or office it could just exist on paper then once the money is moved to this account this company starts buying assets like real estate painting and other expensive properties which can eventually be used by the owner to live a lavish life in fact these companies can even invest and buy other companies and even collect.

Royalties in this case abg shipyard had 16 shell companies based out of its mumbai office the money raised through these loans were diverted through 98 sister concerned companies and were mainly used to create personal assets so when eva was appointed by the lenders in april 2018 to conduct a forensic investigation they clearly revealed the.

Evidence of fund diversion then as usual just like any other fishy thing this was spotted banks filed a complaint in 2019 cbi sought clarification in 2020 cbi filed an fire on 7th of february 2022 and the news finally broke out to the world so now the question is how does this affect the banks well one good thing that happened is.

That the banks had already classified the account as bad and provisioned for this loan which means any further impact on the balance sheet is unlikely in fact a senior banker who led the consortium said and i quote the damage is done and is already factored in i do not expect any further shocks on this episode for banks what this means is that the.

Profitability of the banks in the coming quarter is not going to be impacted by this episode and the share price of the banks that dropped were purely because of the sentiment among the investors now banks are expected to forgo about 92 of the loan amount of the fraud meaning there is very little to recover this is the story of the abg shipyard.

Scam and this brings me to the most important part of the episode and that are the lessons from the case study lesson number one do read a lot about these scams because they'll teach you about the intricacies of those industries that you might otherwise never take interest in and secondly.

Don't do scams that's all from my staff today guys if you learned something valuable please make sure to the like button in order to make youtuber happy and for more such insightful business and political case studies please subscribe to our channel thank you so much for watching i will see you in the next one bye bye.

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