BOB Case –Indian businesses going global must focus on compliance

Recently, Bank of Baroda decided to pay $600 million (₹5,700 crore) to settle an overseas legal battle with the creditors of NMC Health, a UAE based healthcare company that went bust with $4 billion of undisclosed debt. This case has a larger message.

What happened in the Bank of Baroda case?

Bank of Baroda had been closely linked as a banker to NMC Healthcare, floated by BR Shetty. The company floundered after Muddy Waters put out a note in 2020 claiming that NMC Healthcare had hidden debt from its books. A forensic audit later revealed that NMC Healthcare had concealed debt to the tune of $4 billion and was practically insolvent. Eventually, the company folded up. Creditors filed lawsuits against the defunct company, its promoter BR Shetty, its top management, and senior officials of BOB for colluding in the entire obfuscation. The $600 million caps BOB’s liability in this particular case.

Obviously, it is not as simple as that

BOB has claimed that it is innocent and this payment was only to cap their liability across all courts. However, there is no smoke without fire, and this is not a small amount. ₹5,700 crore was paid just before the judgement was delivered, and it is more than 25% of BOB’s annual profits. The allegations against BOB and its top officials are serious. They are accused of having knowledge and colluding with NMC on these lapses. As a bank, BOB had allegedly used products like structured deposits and overdrafts to evergreen these loans to NMC Healthcare. There were clear lapses by BOB in know-your-customer (KYC) compliance and anti-money laundering compliance; grave offenses in the Middle East.

Indian compliance has to seriously improve

This comes in the aftermath of the recent mis-selling allegations against HDFC Bank on sale of AT-1 bonds in the Middle East. The reason BOB has hurriedly paid $600 million in this case is that the bank is fully aware that global compliance standards are tough. In the Middle East and the West, mis-selling of financial products, improper KYC, money laundering etc are grave offences. In India offenders often get away with a rap on the knuckles. Leading auditors admit that in UAE and Bahrain, issues like lock not functioning in the trading room or use of mobile phones are treated as very serious offences. If Indian companies need to expand globally, they need to change how they handle compliance.

Learning from previous cases of embarrassments

Take the case of the Singh brothers who pulled off a coup selling Ranbaxy to Daiichi Sankyo of Japan. However, it later emerged they had misrepresented to the Japanese company about US FDA approvals and DOJ investigations. Eventually, the Singh brothers had to sell all their assets to make good the loss of $550 million to the Japanese buyer. A more recent embarrassment was withholding dividend payments to Cairn Energy UK, which led to the threat of Indian state assets being attached by foreign governments. India had to quickly release the dividends. Clearly, Indian compliance standards have to substantially improve if companies have to do meaningful business globally.