Robber in disguise: how promoters siphon off funds

Directors and executives of a company have a fiduciary duty towards the company, shareholders and employees. They must act in good faith to promote their interests. However, in corporate India, there have been many instances when the promoters/ managements forgot about their fiduciary duty and used fraudulent means to line their own pockets.

The Companies Act, 2013, did try to restrain this practice by mandating several committees. Such committees are to have a majority of independent directors so as to keep a check on the management and the promoters. Auditors too are supposed to raise red flags on any inappropriate accounting. But despite such measures, there have been many corporate-governance crises lately.

One of the recent cases where the promoters tried to rob their company is that of CG Power. Its chairman Gautam Thapar, who has now been ousted, has been accused of using clever means to siphon off money from his own company. Here are some of the popular methods that promoters employ to rob their companies, along with specific examples from the CG Power case.

Fake accounting transactions
This is by far the most common route that promoters use to rob their companies. It's also the easiest for promoters as they are the ones responsible for preparing financial statements.

Promoters and employees at CG Power have caused the company a loss of about `1,000 crore through their fake transactions that included:

• Sales or purchase of goods to/from related or known vendors. The promoter siphoned off the money that was paid to questionable vendors. The receivables were written off.
• Inappropriate write-offs such as borrowing against receivables.
• Recognising impairment of subsidiaries, i.e., writing off the money loaned to them.

Sale of property
Through this route, promoters/management either buy property that belongs to the company at throwaway prices or use more complicated ways requiring absolutely no money to be spent at their end.

At CG Power, agreements of sale of land and buildings were made with companies in which its employees and promoters had a stake. These companies advanced a certain amount to the promoters against the sale price at an interest receivable of 15 per cent till the property was transferred. The related parties were able to siphon off money in the form of interest payments.

Keeping company's assets as collateral
The promoter can also get the company to issue comfort letters, post-dated cheques or simply use the company's assets as collateral to take loans from banks and refuse to repay the loan, which leaves the bank with no choice but to take charge of the company's assets or hold the company responsible to repay the loan. CG Power suffered a loss of approximately Rs 400 crore due to promoters using the company's assets as collateral.

Use of foreign/domestic subsidiaries
Money is routed to foreign subsidiaries by giving loans to them and then writing off such loans as non-recoverable. Such subsidiaries lack independent directors and may mostly be in the control of the promoters. In many instances, loans are also taken by subsidiaries, with their holding company giving a guarantee and thus becoming liable in case of a default. The promoters then siphon off the loans received by the subsidiary and leave the holding company to pay off the debt. This route was used by the promoters of CG Power to siphon off approximately Rs 800 crore.

Royalties
Promoters take credit for the brand name the company has built and sign agreements with the company for royalty payments. The promoters can use these payments as a collateral to take additional loans and then they don't need to repay the loan as the bank can recover the loan from the royalty payments. This is exactly what the promoters at CG Power did.