How a web of shell companies helped Bhushan Steel promoters siphon off funds

The Serious Fraud Investigation Office (SFIO) has alleged in its charge sheet against Bhushan Steel promoters that the latter used a web of companies to siphon off money from the company and defraud banks.

The investigation by SFIO revealed that ex-promoters of Bhushan Steel - Brij Bhushan Singal and Neeraj Singal - used a web of 155 companies, which were directly or indirectly controlled by the Singals, to siphon off money from Bhushan Steel and Bhushan Energy.

The investigation agency has divided these companies in three categories - B, C and D. There are 62 companies in category B, which were directly controlled by Brij Bhushan and Neeraj Singal. These companies were incorporated by the two ex-promoters.  They are also the shareholders of and authorised signatories in these companies.

Category C has 85 companies in which employees of Bhushan Steel were made directors from time to time. Some of these companies were used for supplying manpower and the remaining were used for fund diversion.

The affairs of the eigth category D companies were managed by entry operators, who were also providing services of dummy directors and authorised signatories.

Bhushan Steel and Bhushan Energy are categorised as A category companies.

The SFIO's investigation found that the category B companies were used as conduit for siphoning or rotation and layering of funds and holding of immovable and movable properties acquired in India and abroad through such funds. The category C companies were further used to rotate and layer the funds back to the promoters.

For example, between 2009-10 and 2010-11, Bhushan Steel and Bhushan Energy transferred Rs 1,770 crore to 32 B category companies. Out of this, Rs 1150 crore was transferred through 19 C category companies into the bank account of Uma Singal, wife of Brij Bhushan Singal. This fund was then transferred as investment in Bhushan Steel against issuance of preference shares to the promoters.

While the money was transferred to the associated companies as capital advance from 2009-10 to 2010-11, Bhushan Steel and Bhushan Energy transferred amount from the head Capital Advances to the head Capital Work In Progress in 2013-14 and 2014-15 in their books of account thus 'adjusting' the receivables from 32 associated companies. From 2009-10 to 2014-15, these companies showed no expenditure or revenue or any execution of work in their financial statement.

Except for 17 C category firms, which had some operations, none of the other ones were involved in any business activities. All 155 companies were used as a conduit for siphoning off funds from Bhushan Steel and Bhushan Energy. The SFIO investigation found that C category company directors, who had signed the balance sheet of the companies, were unaware of their business activities.

The investigation points at non-performance of duties by auditors of the category B and C companies. It says that auditors have not followed the audit standards while auditing the books of account of these companies.

The investigation reveals that Brij Bhushan Singal and Neeraj Singal are the ultimate beneficial owners of all the 93 C and D category companies. However, these companies failed to disclose the beneficial owners thus breaching Section 89 of the Companies Act, 2013.

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