Ethical Issues in Management

2020-2021

Individual Assignment

“Frauds & Scams- Rotomac Pens Scam”

Course Facilitator: Submitted by:

Dr. Sujata Mukherjee Akshay Arora (G045)
SAP ID: 80511020627

Date of Submission: 6th October, 2020

Page | 1
Case facts:
Frauds and scams refer to the act of deceiving individuals to obtain financial benefits.
Banking fraud is one of the most common types of fraudulent activity that is prevalent
today. It is a criminal act in which a person or an entity uses illegal means from a bank or
a financial institution to acquire money or properties. Bank fraud includes various illegal
and immoral practices such as bank impersonation, falsification, fraudulent loans, etc.
Generally, in such offences, the sum misappropriated runs into lakhs and crores of rupees.
Bank industry related frauds often have a major effect on a country's economy. In this
report, we will discuss about one of these cases which happened in 2018 by the company
Rotomac Global Private Ltd which took the country into the shock.

In connation with the alleged swindling of Rs 3,695 crore of loan funds in advanced by a
consortium of seven banks to his company, the CBI booked Kanpur-based businessman
Vikram Kothari, his wife and son.

Rotomac Global Pvt Limited was sanctioned with bank loans worth Rs 2,919 crore from
2008 onwards by a consortium of banks led by Bank of India which have swelled to Rs
3,695, including the accrued interest on loans, due to repeated defaults on payment, said
by one of the officials.

The total principal of the banks with regards to the loan which Rotomac took is:

• Bank of India Rs 754.77 crore

• Bank of Baroda Rs 456.63 crore
• Overseas Bank of India Rs 771.07 crore
• Union Bank of India Rs 458.95 crore
• Allahabad Bank Rs 330.68 crore
• Bank of Maharashtra 49.82 crore
• Oriental Bank of Commerce Rs 97.47 crore

As the Bank of Baroda has alleged, the loans were advanced to the business from 2008
onwards. Three places in Kanpur were searched by the department, including Kothari's
residence and office premises. CBI spokesman Abhishek Dayal has categorically said that
there have been no arrests in the case yet. He said Kothari, the CBI, examined his wife &
his son.

Page | 2
Dayal said in a statement," The cumulative outstanding sum of bank consortium members
amounted to Rs 3,695 crore of bank loan that was syphoned off by the said company".
He said that the defendant's residential apartment and office premises in Delhi were
sealed. By diverting them from the reason for which they were taken, it is alleged that
loans were syphoned off.

Two different methods of diverting funds were implemented by the company:

1. Export loans were rounded off from abroad.
2. Loans taken for the procurement of export goods were used domestically without
any export orders being performed.

In one instance, the company was granted a loan to export wheat to Singapore but it is
alleged that Kothari transferred the money to the Bargadia brothers, a Singapore based
company, which sent remittances back to Rotomac Global's account without any export
on the field.
In several other examples, the money disbursed by banks for the purchase of goods for
export was not used and the company did not conduct an export order.

There are breaches of the Foreign Exchange Management Act, misappropriation of funds
and criminal breach of confidence because the funds issued by banks can be used for the
same purposes for particular purposes. The banks alleged that the bulk of the company's
transactions were with a small number of buyers, sellers, sister companies and the
company's subsidiary without any legitimate business activities.
It is also alleged that to carry out this alleged round tripping activity, the company used
shell companies and also submitted false and forged documents to 'induce' banks to
advance money to it.
The firm was betting on the foreign exchange rate, according to reports. The firm worked
in local and foreign currency for 'interest rate differential.' In fact, no real business
transaction was performed,' said a source.
The complaint comes just days after a Rs 11,300 crore scam was discovered by Punjab
National Bank, in which businessman Nirav Modi and his uncle Mehul Choksi received
letters of undertaking from a Mumbai branch to obtain credit from overseas banks.

Page | 3
Critical Perspective:-

Poverty and under-development have been shown to lead to corruption: the poorer the
country, the higher the corruption. In terms of performance, enforcement, pay scales and
business goals, an effort should be made to put PSU banks on par with private sector
banks.
The Rotomac pens scam is not the first instance of a bank taken for a ride in the public
sector; it will not be the last either. Given the pace at which public sector banks (PSBs)
are found embroiled in one or the other scam, one may even wonder if scams might be a
service provided by government-controlled banks. When it comes to ordinary clients, at
any chance, banks charge individuals. But the rule book does not exist for affluent
consumers, nor do cheques and balances run.
Many who have perfected the art of swindling banks appear to be the government-
controlled banks' favourite customers. That is the view that prevails. There is nothing new
in not being held responsible for using tax payers' money to support unviable or
questionable corporations and dodgy businessmen. Given the availability of technologies
to track such activities and the inability of audit and regulatory authorities to identify
them, what is fresh is the brazenness with which laws have been flouted.
The truth is that in India, corruption and scams are deeply rooted. If corruption runs deep
in India, PSU banks are the worst offenders in the banking space; cooperative banks are
another. It is not that private sector banks are not unethical, but the presence of checks
and balances makes it impossible to escape the scheme.
The major ethical issues involved in the Rotomac pens scam were are:

1) Bad Business Practices:

In order to make more or save money, sometimes executives falls for the
temptation to do things which are less ethical. While this might help in gaining
short term profits, this might have huge negative consequences in the long term. In
this case, siphoning of the loans from the banks for the purposes sanctioned for
different trade practices was unethical by making shell companies as a proof of
evidence in legal terms which were nothing but a way of money laundering for
other purposes than what it was recorded for.
2) Violation of Corporate Governance Norms:
Corporate Governance is a collection of legal principles enforced by the
management and activity of companies by parties. It seeks to build a balance
between all of an organization's stakeholders. A big factor behind the fiasco is the
Page | 4
 lack of ethical foundations of corporate governance. We can easily identified the
loopholes in the systems of corporate control. The accountability and the
responsibility of the senior officials is the foundation for risk mitigation and
prevention in any corporation.
3) Misleading the bank and the government:
By siphoning off the loans granted from the PSU banks, individuals took the
advantage of the negligence from the government officials. A valid banking
instrument is a LoU (letter of undertaking). Problems arise when LoUs are released
repeatedly without any marginal capital, rules are flouted and the execution of
large financial transactions bypasses technology (CBS). The LoUs were issued by
the bank officials without any approved credit line. If they had strict rules, norms
& timely checks, they would have avoided this scam at the earliest & money of the
taxpayer's could have been saved since all were from the PSU sectors. The effects
on the economy due to lack of regulation were adverse.

4) Self-interest:
Often individuals promote their self-interest without considering the consequences
that it can have on all the major stakeholders of the organization. By getting
involved in malpractices just like in Rotomac case, individuals could led to
degrading the organization eventually getting caught up & defaulted for their
actions. It is the duty of senior officials and corporate directors to ensure that the
needs of all the individuals involved with the company are placed first and that
major business decisions are consistent with it.

Alternate Actions:
We have discussed the various ethical issues involved in the case, now will discuss what I
as one of the major protagonists in this case could have done to avoid the situation:

PSU Bank officials (Managing Director/ CEO):

 Compliance of stricter norms, standards & policies will be restructured in a way
that misuse of the taxpayer's money is negligible. The effect of this would be any
individual or organization will not be able to play around with the system & rules
while staying unnoticed in the eyes of the government. By implementing this, the
situation would have been avoided at the earlier stage.

Page | 5
 Regulated checks on the financial statements for which the money was involved
will be done so as to verify what did the real transactions involved for. In this case,
since the activity started from 2008, regular checks in timely intervals would have
identified the real purpose for which loans were taken for, the misuse of which lead
to default.

 Sanctioning of loans to individuals or organization will be stricter especially in

PSU sectors as if we see, all the defaults have been done by the loans sanctioned
from public banks. Private sector banks not being involved illustrates about the fact
that they have stringent rules which could not be easily manipulated for self-
interest.

 Proper monitoring & auditing systems will be implemented. Setting up the team of
external auditors officials who will work specifically for auditing the loans
sanctioned on a quarterly/yearly basis. In this way, we will insure that the debtors
are identified at the earliest while also in a way reassuring the taxpayers of the
country that their money & resources are safe with us.

Page | 6
Appendix

Plagiarism report

References:
https://www.freepressjournal.in/analysis/why-scams-npas-abound-in-psu-banks

https://www.business-standard.com/article/finance/rotomac-pens-fraud-how-vikram-kothari-conned-7-banks-fir-
details-revealed-118022000300_1.html

Page | 7