How Madhucon Group siphoned off Rs. 1,030 crs through its subsidiary

Hyderabad: The Directorate of Enforcement (ED) has provisionally attached 105 immovable properties and other assets worth Rs. 96.21 crores belonging to Madhucon Group of Companies and its directors and promoters in a money laundering case against Ranchi Expressway Ltd.

The PMLA investigation was initiated in this case on the basis of an FIR registered by the CBI ACB Ranchi against Ranchi Expressways Limited (a Madhucon Group company) and its directors on 12 March 2019. Subsequently, the CBI filed a charge sheet on 30 December 2020 against Ranchi Expressways and others.

The fraud explained

The case is regarding the National Highways Authority of India's (NHAI) project to four-lane approximately 163.50 km of NH-33 of the Ranchi-Rargaon-Jameshdpur section that was awarded to Madhucon Project Limited on 18 March 2011.

A special purpose vehicle (SPV) or a subsidiary under the name Ranchi Expressway Limited was incorporated by Madhucon Group to execute this project. Kamma Srinivasa Rao, Nama Seethaiah, and Nama Prithvi Teja were the founder directors of the new company and Madhucon Project Limited was the engineering procurement construction (EPC) contractor of the project.

However, Madhucon couldn't complete the project despite availing the full loan amount, and subsequently, their contract was terminated and an FIR was booked based on the directions of the High Court that were in turn based on the reports of SFIO and NHAI.

The ED conducted searches and recorded the statements of multiple bankers, forensic auditors, engineers, sub-contractors, and promoters of Madhucon Group and conducted a fund trail investigation. In June 2021, ED seized incriminating evidences and unaccounted cash of Rs. 34 lakhs from the residence of Madhucon Group chairman Nama Nageshwar Rao.

The investigation revealed that Ranchi Expressways, represented by its directors and promoters, obtained loans of Rs. 1,030 crores from a consortium of banks led by Canara Bank. Madhucon Group did not use the entire loan amount for its stated purposes and diverted it to its associated entities and used it for other works. It also directly siphoned off the loans by giving bogus works to its related shell entities.

The work on the ground suffered and they could not complete the work despite drawing the entire loan amount. They also managed the maintenance reports and work progress reports to falsely claim higher expenses. The financials of the Group were not doing well for many years and after winning the tender for Ranchi-Jamshedpur Project, the Madhucon Group created an SPV – Ranchi Expressways – and did round-tripping of loan funds to show bogus promoter's investment for obtaining the very first drawdown of the loan from the bank.

ED's findings

ED found that from the very beginning, Madhucon Group was involved in creative drawings of the accounts to cheat the banks/NHAI. Ultimately, the Group could not repay the loans and the account turned into a non-performing asset (NPA).

Another key finding of the ED probe is that the LIE (Lender's Independent Engineer) chosen for this project was a completely related party of Madhucon Group and thus it was not independent and it consistently issued wrong reports favourable to the Madhucon Group. Multiple inspections by the forensic auditors and NHAI revealed that the on-ground progress of the work achieved by Madhucon Group was only 50.24%, whereas they had already drawn 90% of the loan amount.

The ED investigation revealed that Madhucon Group promoters siphoned off the loan funds by taking the entire EPC contract from its SPV, and then taking huge mobilisation and material advances. But instead of using those advances for the work, they used it in their other projects. Also, direct cash of Rs. 75.50 crores were generated by paying money and then receiving back the amount through six shell entities (Usha Projects, Shree BR Visions, Sri Dharma Saastha Constructions, Sree Nagendra Constructions, Ragini Infrastructure, and Varalakshmi Constructions) that were completely under the control of their chairman Nama Nageshwara Rao and Nama Seethaiah. These sub-contractors did no work, had no sufficient expertise, were based in AP/Telangana whereas the project was in north India, and they took large advances from MPL from the loan funds and then paid back huge amounts to Madhucon Group on the pretext of using the equipment and labour of Madhucon Group. So, the funds came back to the Madhucon Group.

ED has identified a direct diversion of Rs. 361.29 crores from the loan funds. It identified landed assets of Rs. 88.85 crores in Hyderabad, West Bengal, and Vishakhapatnam, Prakasham, and Krishna districts and movable assets of Rs. 7.36 crore, including shareholding of the promoters in Madhucon Projects Ltd. The total assets came to a total of Rs. 96.21 crores. ED issued a provisional attachment order on 1 July 2022 to preserve the proceeds of the crime.

Further investigation is underway.