Unstable cash flows and low reserves coupled with a limited ability to seek additional debt or capital financing can create enormous pressure on companies to divert funds between entities for non-permissible or excruciating purposes, said the PwC report titled ‘Rethinking Fraud and financial crime. ‘
Several banks, investors and even regulators have begun to monitor companies for fraud or corporate governance lapses.
“While the risk of round escalation is agnostic for the size of a company, there is generally a higher risk among listed entities, including their associates, due to additional pressure to be public or companies or groups that have a high debt burden. Lenders have put in place monitoring mechanisms to control the end use of funds apart from including stricter conditions for the use of funds and reporting, ”said Gaganpreet Singh Puri, Director of Forensic Services, PwC India.
Many banks are roping in with investigators to monitor stressed accounts to control the end use of funds, fearing that some promoters and companies may “create illusions” for displaying false business activities.
In the past, some Indian promoters have been able to break the law by setting up wires or shell companies to seep or divert money, which technically cannot be defined as related entities.
The report adds that liquidity pressure on companies can lead to not only ‘evergreen’ of loans or displaying loans as ‘current’ to secure additional financing from lenders, but a few promoters can also pamper you with personal profit or siphoning of funds.
Many lenders suspect that some companies and promoters may be able to move money using undisclosed bank accounts and bank channels and then route collections or business revenue to the unpublished bank accounts.
“In the recent past, there has also been an increase in cases requiring forensic or special audits on a proactive basis around the management and use of these funds,” Puri said.
It had ET written on May 20 Bank of Baroda looking for ropes in an outside agency to monitor 33 NBFCs it has borrowed money.
Supervisory bodies assess asset quality, cash holdings, probably the abolition of funds, if any, mark non-business transactions among a number of other requirements.
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