/Facing liquidity crunch due to Covid, promoters and businesses will attempt frauds, round tripping and evergreening of loans: PwC report

Facing liquidity crunch due to Covid, promoters and businesses will attempt frauds, round tripping and evergreening of loans: PwC report

Mumbai: Tight liquidity could see scenarios of fund diversion, round tripping and evergreening of loans in a desperate bid by some companies to beat the economic headwinds from the Covid-19 crisis, a PwC report said.

Unstable cashflows and low reserves, coupled with a restricted ability to seek additional debt or equity financing, can create immense pressure on businesses and companies will see increased risk of fund diversion between entities for non-permissible or surreptitious purposes, said the PwC report titled ‘Rethinking Fraud and Economic Crime.’

Already several banks, investors and even regulators have started monitoring companies for fraud or corporate governance lapses.

“While the risk of round tripping is agnostic to the size of a company, there is generally a higher risk among the listed entities including their associates due to additional pressures of being public or companies or groups having high debt burden. Lenders have put in monitoring mechanisms to check end use of funds apart from including more stringent conditions on utilisation of the funds and reporting,” said Gaganpreet Singh Puri, leader, forensic services, PwC India.

Many banks are roping in investigators to monitor stressed accounts to check end use of funds fearing some promoters and companies may be “creating illusions” to show false business activity.

In the past, some Indian promoters and companies have managed to beat the law by creating conduits or shell companies to siphon off or divert money that technically cannot be defined as related entities.

The report adds that the liquidity pressure on companies could lead to not only ‘evergreening’ of loans or showing loans as ‘current’ to secure additional funding from lenders but a few promoters could also indulge in personal profiteering or siphoning off funds.

Many lenders suspect that some companies and promoters may move funds using undisclosed bank accounts and banking channels and then route collections or business receipts to the undisclosed bank accounts.

“In recent times there has also been an increase in instances of mandating forensic or special audits on a pro-active basis around governance and usage of these funds,” said Puri.

ET had on May 20 written that Bank of Baroda is looking to rope in an external agency to monitor 33 NBFCs it has lent money.

Monitoring agencies would be assessing the asset quality, cash holdings, likely siphoning off of funds if any, flag non-business transactions among a host of others requirements.

As per the PwC report even bribery and corruption could increase in the coming months. Due to the changed contours of business interactions, the modus operandi for bribery and corruption would change, mandating an update to policies and procedures, the report said.

Going ahead some of the regulators could also initiate investigations in cases where they observe red flags. Regulators may direct companies to provide independent investigation reports or drive their own investigations into corporate failures, alleged misadventures and ethical shortfalls of people in charge of governance. It will also not be unreasonable to expect heightened cooperation between various regulatory agencies, both domestic and international (owing to travel restrictions), on matters related to enforcement or investigation of cases that get picked up for inquiry,” the PwC report added.

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