Bhuvana group of Companies, is a very famous conglomerate engaged in exporting cotton bales, cotton and synthetic yarn, etc. Over last few years, Bhu Ltd, the flagship company of the group has been very active in acquisi

Bhuvana group of Companies, is a very famous conglomerate engaged in exporting cotton bales, cotton and synthetic yarn, etc. Over last few years, Bhu Ltd, the flagship company of the group has been very active in acquisition of businesses. Also, the Company has many subsidiaries and associates which are into export of agro based products, engineering goods and readymade garments to China, Dubai, Singapore and other countries. For this kind of expansion, the Company was in requirement of credit and banking facilities, which were provided by a consortium of banks, led by ESBA Bank. The group had a Chief Finance Officer, Riyo who had been with the group for more than a decade. He was managing the treasury operations and was very close to the Management. As part of expansion plan, the group was looking for PE investment. Ariyanka PI Fund, was keen in investing in the group looking at their growth prospects. As a part of the deal, the Fund appointed Chanakya Consultants for the financial and other due diligence. The Consultants carried on a detailed evaluation as per the terms of engagement and submitted a report to the Fund. Yanky, the Chief Investment Officer of the Fund was startled when he looked at the report submitted by Consultants. He and his team, were reviewing this report when his subordinate Myank, was highlighting certain points from the report: Bill discounting: The Bank was discounting the export bills of the Company against the Letters of Credit (LCs) from Prime Banks of the Buyer and credited the proceeds of the bills to the Current Account of the Company on the same day. However, the payment and acceptance of the Bills was delayed. Further, on Company's request the Bank had extended the due dates of these bills. False Exports: As per the information gathered from Customs Authorities, the exports had actually not taken place against most of the bills. Goods produced for exports against Packing Credit (PC) were also not available. It appeared that either goods were not produced against the Packing Credit or disposed off locally and funds were siphoned off. The Customs Authorities had informed that exports did not take place in 2000 cases out of pending 2100 bills, as these consignments do not relate to any exports. Fabricated Certificates: Completion of exports was confirmed to respective banks/financial institutions by submitting false/fabricated certificates from the Auditors/Accountants and false status reports were filed. Cash Flow: The cash flows reflected and dealt with in the audited Balance Sheets for the respective years were found to be incorrect and did not report the true picture. Multiple availments: One of the group companies had filed the same export orders to various banks in the consortium and availed packing credit facilities from the banks. The company did not submit the export documents to the same bank from whom the packing credit was availed. Hedging of receivables/payables: The Company used these non-existing export orders to book hedges for forex receivable and payable to show a different picture to the banks. Receivables: The list of receivables indicated that most of the parties were foreign buyers. In the context of payment received from third parties and bills getting returned, the goods were likely to be sold to alternate buyers as the original buyers were renegotiating the price after the consignments were dispatched. Also, the borrower companies cheated the banks by submitting fake and forged export bills for purchase/discount which were drawn in non-existent overseas buyers. Inflated payables: In respect of creditors for suppliers, full details of such suppliers were not available. Creditors for supply were fabricated in order to artificially boost the purchases and payables. Looking at the above facts, Yanky immediately flagged off the report to Management team of the Fund and they decided not to go ahead with the deal. Further, Yanky personally thought that it's his responsibility to inform the same to the Consortium Banks about the fraudulent activities in the group. He wrote an anonymous letter to the ESBA Bank mentioning the facts they got to know. ESBA Bank immediately called for Consortium Banks meeting and appointed, Minda, as 'Forensic Auditor' to investigate all the issues. Banks as financial institutions are required to monitor with caution the foreign bills discounting as per Regulatory/Bank guidelines. Explain the follow-up mechanism and controls missed by the banks relating to foreign bills discounting.