These ARCs are being investigated because they allegedly passed only about 20% of that amount on as recoveries from the distressed assets they acquired from banks, people said.

The department had searched up to 60 premises connected to the four companies on December 8th. The department did not name the companies. The people ET spoke to said they were CFM Asset Reconstruction Pvt Ltd, Omkara Assets Reconstruction Pvt Ltd, Rare Asset Reconstruction Pvt Ltd, and Invent ARC Pvt Ltd.

Emails and text messages sent to the four ARCs generated no response by Thursday’s editorial deadline.

The department is still investigating and reviewing the electronic evidence gathered during the search. In the Omkara case, the department claims it has recovered Rs 850 billion in cash, the quoted people said.

“Cash transactions from these ARCs themselves will run into several thousand million euros as the evidence from the diary, USB stick, and other electronic devices on which the logs were kept is still under investigation. Many of these entries are encrypted, ”said one official, asking for anonymity. “… the unrecorded cash is a clear case of tax evasion, which has become the central focus of the department. However, there is a bigger scam at play with a thriving ecosystem of defaulting borrowers, ARCs, a maze of mailbox companies and hawala operators who prefer to overlay the bogus transactions to defraud regulators, “the official added.

Officials said the department will share the information with the Central Economic Intelligence Bureau, the hub business intelligence agency. The office shares data with all member agencies including the Reserve Bank of India.

“Usually information is exchanged after the assessment report has been drawn up and accurate information is available. Members meet quarterly and discuss matters with cross-agency implications. On the other hand, if information is requested from the RBI or the investigative authorities, it will be passed on, ”said a second official.

Modus operandi

A senior tax officer said in several cases the defaulting borrowers had reached out to these ARCs themselves to purchase the bad loans along with the assets pledged as collateral by the bank.

“Banks use the ‘Swiss Challenge’ method, a two-step process to sell non-performing loans. Bankers first hold an auction by the NPA, in which the highest bidder is identified as the anchor bidder. The lenders then run another auction that places bids at better prices, but gives the anchor bidder the opportunity to compose the best bid. The method is opaque and once the NPA is no longer on the lender’s books, the lenders rarely keep a proper account of the actual value of the collateral and the amount paid by the ARCs, ”the official said.

“This was taken advantage of by the defaulting party, who then turned to an ARC to regain control of their assets and get their assets back,” the official added.

Since banks receive full payment from the ARCs under the deal, they don’t participate in what the ARCs do with the assets, one banker pointed out. These securities are often real estate.

The ministry has taken statements from borrowers who have “admitted” to using unfair means, the insiders said.

“Once the ARC is on board, the required 15% of the cash that the ARC must prepay to the bank will be provided by the borrower either through hawala channels or through its sister companies. The ARC will use the proceeds to purchase the loan and related collateral, ”said the senior official. “Often times, the same group of borrowers repurchased the underlying assets, albeit at a fraction of their real value. Another group of bogus companies is used by the ARCs to collect the bribes. ”

The department recorded statements made by directors of some of the “dummy companies” allegedly issued by borrowers and ARCs, the official said. “… the borrowers paid the kickbacks either in the form of consulting fees or unsecured loans. When interviewed, the directors of these companies stated that they were merely signatories. The department also found that none of these companies were doing legitimate business that required credit or advisory services. They were only levitated to cover up the setbacks, ”the official added.