In another case of lack of due diligence, India’s second-largest lender has gone to the British High Court against five Indians and an American who made off with Rs 271 crore in unpaid loans

By Sajeda Momin in London

Punjab National Bank (PNB) seems to be making a habit of giving out large loans to businessmen who are not inclined to repaying their debts. First, it was jeweller Nirav Modi and his uncle Mehul Choksi who ran away with Rs 13,000 crore ($2 billion) of the national bank’s money, and now, it is a group of five Indians and an American who have made off with Rs 271 crore ($37 million) in unpaid loans. Considering that PNB is the country’s second-largest lender, it should know better and certainly should be doing its due diligence properly.

The UK subsidiary of PNB has filed a case in the British High Court against five Indians, one American and three companies for fraudulently misleading the Bank into lending them millions of dollars. PNB (International) Ltd, which has seven branches in the UK, claimed in the suit that the individuals and companies “duped it” into lending them money with “fraudulent misrepresentation in respect of numerous loans” and eventually breached the contract too.

PNB claimed in the UK High Court that it advanced loans in dollars from London to four companies registered in the US between 2011 and 2014. The companies—South Eastern Petroleum LLC (SEPL), Pesco Beam USA, Trishe Wind and Trishe Resources—were all operating in the renewable energy sector and the loans were given “to assist in the financing of the construction of a lube oil re-refining unit in South Carolina, and the development and sale of wind energy projects”.

PNB (International) Ltd, whose parent bank is PNB, claims that the companies gave “false and exaggerated projections and balance sheets and false representations about the status of the projects” in order to get the loans. The Bank adds that the “money was siphoned off by directors and guarantors of the borrowers” in a “scheme that was fraudulent from the outset”.

In March 2011, the SEPL, which operates an oil recycling plant in South Carolina, received $17m (Rs 124cr) in loans—$10m (Rs 73cr) from PNB and $7m (Rs 51cr) from the Bank of Baroda. In October, PNB gave another $1.5 million (Rs 11cr) to SEPL and in June 2012, both banks advanced a further $3m (Rs 22cr). None of these loans have been repaid and in fact, SEPL has now gone into liquidation.

The other company being sued is Pesco Beam Environmental Solutions which specialises in engineered and manufactured systems in oil re-refining. Pesco Beam India is based in Chennai where its managing director, A Subramaniam, and his brother, Anantharam Shankar, the executive director, reside. They have a factory in Sriperumbudur. Pesco Beam has a US subsidiary based in Virginia which also received loans of $13m and has not paid them back. PNB is suing Pesco Beam India, Pesco Bean USA, Subramaniam, Shankar and the CEO of Pesco Beam USA, Luke Staengl.

Staengl, who is the only person being sued who has made a comment so far, claims there was no fraud and it was a “legitimate loan”. He argued that “the project failed for a number of reasons – chief among them was that product being produced, Base Lube Oil, dropped from $4.50 per gallon to $2 per gallon”. In his defence, Staengl says: “We have built many operating plants worldwide over the past 25 years which are still operating and the owners are extremely satisfied with them. I have never defrauded anyone nor have I made a fraudulent claim.”

PNB is also suing Trishe Resources, a wind energy company in the US, and its owners Vathsala Ranganathan, Ramkhumar Narasimhan and Ravi Srini­vasan, who all also live in Chennai. PNB alleges that Trishe Wind borrowed $10m (Rs 73cr) and Trishe Resources $3m (Rs 22cr) and these loans remain unpaid, too. In 2014, Trishe Wind in the US was declared bankrupt and its assets and liabilities transferred to Trishe Resources.

The Bank claims that all the parties had fraudulently misrepresented that Indian conglomerate Shriram Group was backing their projects. “The claimants would not have advanced such large sums of money to the defendants had it been informed that these individuals were operating on their own and had no connection with or prospective financial backing from Shriram Group,” PNB’s claim stated. It added: “The defendants acted jointly and in concert in making the fraudulent misrepresentations and all the defendants are interconnected and all have benefited from the claim that the Shriram Group was financially supporting SEPL and Trishe Wind.”

The Bank alleged that Pesco Beam is a 100 percent beneficial owner of SEPL which has gone into liquidation. However, Staengl denied that. “Pesco was never the sole owner of SEPL, Trishe was and is a 60 percent owner,” said Staengl. He argued that Trishe borrowed the funds for SEPL and Pesco Beam was asked by Trishe and PNB to provide a comfort signature, which they did.

Nicholas Vineall QC, the barrister for eight of the defendents, claimed that the loans to SEPL and the initial $10 m to Pesco Beam were given to “support the completion of an oil re-refining plant”. The subsequent “$2 million loan was made in an attempt to rescue the re-refinery project which was by then in difficulties,” said Vineall in his written submissions.

He further added: “The business of the borrowers failed as a result of economic pressure on renewable energy businesses in the US created by the massive rise in shale gas extraction and the falling oil price and/or poor management. Given that the claimant bank is out of pocket, it is not surprising that the claimant has commenced proceedings.”

Interestingly, in defense of his clients using the Shriram Group’s name, Vineall said: “Shriram is a common business name in India because it refers to the Indian god Lord Ram.” He argued that his clients never claimed they were being backed by the “Shriram Group” but by “Shriram Auto Finance”.

The defendants are all contesting the jurisdiction of the English courts over the case. PNB has already brought a case against some of the defendants in the US over the SEPL loans and in a Chennai debt recovery tribunal over the Trishe loans. Vineall has argued that owing to some of the guarantees on the loans being governed by US and Indian law, and that as none of the defendants were residents or have any assets in England, the case should not be tried in the UK. Judgment on this has been reserved.