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Failure of regulatory mechanism behind rising fraud cases: CBI

Commercial banks have reported 1.69 lakh cases of frauds involving an amount of Rs 29,910 crore as on March 31, 2013, said Sinha.

By: Press Trust of India | New Delhi | Updated: May 13, 2014 2:58:04 pm
CBI director Ranjit Sinha. (PTI) CBI director Ranjit Sinha. ( Source: PTI )

CBI on Tuesday blamed “collective failure” of regulatory oversight mechanism, including statutory auditors, for the rise in corporate frauds in recent years involving a sum of Rs 29,000 crore.

India has witnessed a marked increase in the number of scams that have surfaced both in public and private sectors, said Ranjit Sinha, Director, Central Bureau of Investigation (CBI). “The scale and size of corporate frauds in India has zoomed in the last 15 years with majority of the cases of fraud involving siphoning off funds by promoters, top management and defrauding the lenders or investors,” he said. He said commercial banks have reported 1.69 lakh cases of frauds involving an amount of Rs 29,910 crore as on March 31, 2013.

“The public sector banks have commutatively lost a massive sum of Rs 22,743 crore due to cheating and forgery in the three years ending March 2013,” said Sinha, addressing 8th annual summit on corporate frauds organised by industries body Assocham here.

He said a short term objective of good results instead of long term sustainability and failure of corporate governance mechanism are leading to growing fraudulent practices. “These frauds are also occurring due to collective failure of the regulatory oversight mechanisms like statutory auditors, the independent directors, the board, the shareholders and other regulators. This is, where a lot of correction, is required,” said Sinha.

The CBI Director also highlighted “sharp rise” in Non-Performing Assets (NPAs) of commercial banks. “The gross NPAs of the public sector banks was Rs 1,64,462 crore in March 2013 comprising 3.6 per cent of gross advances and are estimated to have grown further as on March 2014,” he said.

Sinha cautioned against the trend of referring NPAs for Corporate Debt Restructuring (CDR). “Though, all the NPAs cannot be classified as frauds, the rise in gross NPAs and volume of cases being increasingly referred to CDR mechanism indicates increasing incidents of siphoning or diversion of funds by corporates or promoters,” he said.

Supporting a finding by Reserve Bank of India (RBI) on corporate frauds, Sinha said CBI investigation in fraud related cases has revealed that fraudulent documentation, multiple funding, over-valuation, non-existence of collateral and siphoning off funds are some of the areas in which banks have witnessed major incidents of fraud.

“A related issue in this context is the considerable delay in identification, classification and reporting of frauds by the financial sector. “Delay in reporting helps the corporates or borrowers to defraud the banking system and also leads to loss of time enabling the fraudster to dispose the available assets making the task of investigative agencies difficult,” he said.

Sinha said the growing number of scams involving thousands of crores highlight a nexus, which if not checked, could have a far reaching impact. “Part of this could be attributed to the willingness of the private sector to pay bribes to get their work done. On one hand we have profit-seeking companies trying to influence policy makers, regulators, etc. and on the other the companies that evade taxes or indulge in irregularities adversely affecting shareholders, customers and the public at large,” the CBI chief said.

Sinha sought close liaison among regulators and investigating agencies to ensure timely completion of investigations.

“The regulatory bodies and investigating agencies like Serious Fraud Investigation Office (SFIO), Securities and Exchange Board of India (SEBI), CBI and Enforcement Directorate (ED), along the Registrar of Companies and the Ministry of Corporate Affairs need to interact more frequently at various levels to share the intelligence and the outcome of the respective investigations,” he said.

The CBI Director also supported an institutional mechanism for information sharing and use of common database by all the regulatory as well as investigating agencies in the country to achieve better results.

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