Infrastructure firms come under finance ministry scanner for over-invoicing equipment; extra money shown as fresh equity

NEW DELHI: The finance ministry is looking into loans to infrastructure firms after it found out that some companies were over-invoicing on plant and machinery to get higher value loans from public sector banks and using the extra amount secured through fake invoices as fresh equity to raise more loans.

The Financial Intelligence Unit (FIU) first brought the matter to the ministry’s notice, a senior official told ET."We are at looking at it from all legal standpoints including tax avoidance and fraud," the official said, adding that, if needed, the government would file an FIR against such firms on charges of deliberate distortion, criminal avoidance of tax and submission of false documents.

Such firms usually purchase their plant and machinery from abroad and, at the time of obtaining the letter of credit (LC) from banks, submit falsified documents in which the cost is much higher than the actual rates. "In some cases, there is arrangement with the company from where the equipment is being purchased. These companies then show the amount saved as their own fresh equity and raise loans on the same," said the official, requesting anonymity. The ministry also plans to take strict action against the chartered accountants who aid such firms to falsify their accounts, the official added.

Bankers, however, say that it is difficult to prove these allegations. "If the promoter and the seller are hand in glove then there is very little we can do,"said a chief financial officer of a state-run bank, adding that in cases where banks feel there is over-invoicing they do take the opinion of independent valuation agencies.

An executive director with a staterun bank said it is not the job of the bank to question the promoter on the source of fresh equity. "Instead, if a promoter is bringing fresh equity, it is considered a good sign that he is invested in the business,"he added. Experts agree that banks are not in a position to verify such cases. "Banks have a limited role, but the Customs authorities will have more reliable data as other firms may have also purchased the same equipment. This can be corroborated and accordingly action can be taken," said Amit Jain, partner with BMR Advisors.