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Covid 19 has changed the context of our world in more ways than we can currently assess. While on one hand, large companies and Financial Institutions that run the Indian economy, were already dealing with large debts and defaults, on the other hand, medium and small enterprises were struggling with the impact of GST.
The Global pandemic has complicated the situation further by throwing a spanner in the works. While we look at the government to bail out the financial industry and double up efforts to get the gears of the economy running at twice the pace, the Industry must swing into action itself to relook at the way they have been doing business and make some radical shifts.
Unnat Sharma, managing Partner, AIM Corporate Services LLP, a risk advisory firm, believes that companies and investors must also be extremely watchful of a silent rising threat of willful defaults and rise in fraud. While we are already seeing a surge in online cyber crime, not much is being spoken and done on the rising corporate fraud in the shadows as we speak. Here is an excerpt of the conversation with Unnat Sharma.
Q: The business environment is more uncertain at the moment than ever. Our Financial institutions were already grappling with an enormous number of NPA’s. What challenges and risks do you foresee given the Pandemic and the further economic downturn?
A: You are right, the economy was already impacted with the massive NPA’s even before the pandemic hit, the resolutions were slow but hope was alive and the wheels of the economy were turning. However, now with the impact of Covid 19, while on one hand several businesses are struggling and have gone down further under, some new businesses are also emerging.
1.In view of the situation, with the intent of giving relief to the Industry, the Insolvency board has made some provisions which if utilised by well-meaning companies, will definitely help them:1. The threshold limit for default by corporate debtors is affixed at INR 1,00,000. However, in view of the COVID 19 outbreak and subsequent lockdown, the above threshold has been extended to INR 1,00,00,000. The said amendment has been made through Notification no. S.O. 1205 (E), dated March 24, 2020 as issued by the government.
While this is meant to provide relief to the MSME sector during the lockdown, a handful of companies with ill intent might use this relief to indulge in financial irregularities since the claws of governance are a bit loosened at the moment.
2. The Insolvency and Bankruptcy Board of India has issued the Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020 to insert Rule 47A in the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. The newly inserted Regulation has exempted the period of lockdown imposed by the Central government in light of the COVID 19 outbreak, from the timelines of CIRP activities.
Again, while this amendment is meant to give relief to promoters. While, well intended promoters would utilise this time to look for ways to restart the business in a new form, on the other hand, some ill intentional promoters, might use this time to restructure and alienate their assets and tighten their books to hide irregularities. This effectively means that the Investors must keep a tighter watch on the business of their borrowers and look out for any potential irregularities well in time.
Q: Historically, Epidemics have resulted in a recession and a subsequent rise in crime. Are you concerned about this in India and what can the industry do to safeguard itself?
A: Epidemics bring with it, not only loss of life but also loss of jobs, businesses and livelihoods. When people are put under severe constraints, desperation can sometimes set in, which may lead to an increase in financial crime. Therefore, both Financial Institutions and Corporates must be watchful of corruption, financial irregularities etc. At this point we are helping Financial Institutions to increase their vigil on companies with bad credit history and relook at their portfolios with a scanner. The Ones who can effectively do this and take corrective action now, are likely to come out stronger and make windfall gains.
As for the Industry, depending on the nature of the Industry, we are seeing a rise in irregularities ranging from fraud, stock misappropriation, procurement related irregularities and a general lapse in adhering to all processes prone to irregularities. This is sometimes due to lack of resources on ground, remote management, or pay cuts. We are also seeing an increase in corruption related irregularities in procurement. While Procurement has slowed down but remote working has posed challenges of breakage in processes. Therefore, it is important that Management teams implement processes to ensure these issues are addressed appropriately.
Q: What type of crimes in Business world do you see rising?
A: We see a rise in fund siphoning within companies in various forms such as, employee and vendor related irregularities, Borrower wilful default, Asset reshuffling with malafied intent etc. and this is likely to only go up till the economy stabilises. Companies must therefore use this opportunity to streamline transparency in processes and increase monitoring from their end. Business models that depend on real estate, physical valuation of assets, entertainment, restaurants, apparel, equipment, car/ bike rentals and scooter sharing are already getting effected. All sectors under stress may witness irregularities of some kind to include possible fraud or wilful misreporting. As the companies and business owners make efforts to boost customer interest and confidence, they may also want to consider tightening their processes to not only optimise costs but reduce irregularities.
Q: Are you seeing an increase in whistle blower allegations?
A: Yes, there is a slight uptrend, and we expect it to rise. Economic constraints and pay cuts / job losses can also affect the company’s biggest assets, its employees. While some whistleblowers give information out of concern for their company’s goodwill while some others may do it out of spite. Whatever may be the reasons, companies must create an environment of safety around whistleblowers so they come forward, more so since people are working remotely, staff on site is thin etc. Frauds can happen due to constraints, opportunity, poor value system of a person etc. Occupational fraudsters live beyond their means while some may do it due to temporary financial constraints. Whatever the case maybe, it is better for companies to be aware of the possibilities of such incidents to go up and put corrective measures in place before it is too late.
Q: Considering courts were already overwhelmed with cases, wouldn’t the rise in such incidents delay resolutions further.
A: While some resolutions would depend on the court, we do our best to advise our clients on peaceful out of court resolutions strategies. We have seen enormous success in this approach. It not only saves the investors tons of money, but also precious time and effort.
In keeping with the need for all of us to help each other out through these tough times, we at AIM Corporate Services LLP, welcome anyone to connect with us for free consultations on measures that Companies and Investors can put in place to not only prevent but also mitigate such situations. Please feel free to This email address is being protected from spambots. You need JavaScript enabled to view it.