Overinvoicing Scams

Circle members - kindly learn about how overinvoicing works and let us do some discussions and poll on this important subject. I think it is currently leading to loss of taxpayers money.

Overinvoicing is a big problem in India and is also the main cause of bank scams and wilful loan defaults by busineses. Many promoters greatly inflate project costs against which they access bigger bank loans. A good part of this money is used to build the personal wealth of promoters and to fund political parties.

Promoters inflate project costs in a manner that provides not only their debt component but also paid for the promoter’s equity.

If the actual cost of a power project is Rs 100, it would be shown as Rs 150 to the banks. A consortium of banks then would lend Rs 100 to the company based on a normal debt to equity ratio of 2:1. So on an inflated project cost of Rs 150, the promoter manages to get a loan of Rs 100 which actually pays for both the debt and the promoter’s equity in the actual project cost of Rs 100.

The political class is very much part of this game as inflated and over-invoiced imports by big businesses are used to launder money to political parties.

There are other leading business houses too against whom the Directorate of Revenue Intelligence (DRI) has fully investigated reports of over-invoicing. There are two public interest litigations in the Delhi high court pertaining to the same cases of over-invoicing. These companies are also among the top borrowers from Indian banks and if a default by them occurs in the future it cannot be categorised as natural defaults owing to business risk until they are cleared in the cases of over-invoicing of imports. If these cases are proved, then their loan defaults will have to be categorised as ‘wilful’ and regulators must put a lien on their personal wealth.

Over-invoicing of imports, if proven, is tantamount to illegal diversion of borrowed bank funds. Therefore, it must be treated as wilful default. So far all cases of wilful default listed by the RBI are largely medium-sized businesses such as Rotomac Pens, Kingfisher Airlines and so on.

It is a surprise that there are no wilful defaulters yet among the top 20 big business houses that owe money to banks and have also defaulted in many instances. It is evident that the big business groups somehow manage to keep themselves out of the wilful defaulters’ list and avoid a situation where a claim is made on their personal assets. This clout comes from their proximity to the political class and not regulators. more