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ED probe into Anil Ambani linked companies: What turns bad loan into fraud
While the probe continues, it brings to light a key regulatory distinction: when does a loan stop being a business risk and start being a criminal fraud?
Default, wilful default, fraud: What RBI says
India's financial system sees loan issues on a scale: default, wilful default, and fraud.
Fraud: According to RBI's Master Directions on Frauds Classification and Reporting by Commercial Banks and Select FIs, a fraud involves deliberate deception using false documents, shell firms, and accounting manipulation. Classification as fraud follows a forensic audit and internal bank committee approval.
When does PMLA come in?
Fraud under PMLA is triggered when the activity generates 'proceeds of crime'. The sequence is:
A default occurs
The bank detects anomalies and initiates a forensic audit
The audit confirms diversion or misreporting
The bank files an FIR and classifies the loan as fraud
ED or CBI steps in if criminality is apparent
According to Section 3 of the PMLA, anyone knowingly involved in activities connected to proceeds of crime is guilty of money laundering.
Where the Anil Ambani-linked case fits in
The ED is investigating loans worth ₹3,000 crore taken by entities allegedly tied to the Reliance ADAG group. The funds were reportedly routed through shell companies to avoid repayment, triggering PMLA charges.
The arrested individual, a director of a Mumbai firm, allegedly played a key role in the laundering process. While Anil Ambani has not been named in the arrest note, the ED has reportedly issued a lookout notice against him. He has also been summoned for questioning by the agency on Tuesday, August 5.
Loan fraud vs bad loan: What's the difference?
In India, many large defaults stem from business failure, not fraud. Some of the common causes include:
Market downturns
Failed business models
External shocks (like Covid-19 or raw material inflation)
In such cases, the resolution is civil and typically handled under the Insolvency and Bankruptcy Code (IBC). Fraud, however, requires evidence of intent—such as fake documentation or shell entities—and often results in criminal proceedings.
What past loan frauds reveal
Several high-profile frauds have followed similar playbooks:
DHFL–Wadhawan (₹34,000 crore): Fake housing loans and fund diversion to shell entities
ABG Shipyard (₹22,842 crore): Inflated assets and overseas fund routing
Rotomac Pens (₹3,695 crore): Misuse of export credits for unrelated firms
IL&FS: Inter-company lending inflated asset books and masked real exposure
What happens after a fraud label?
Once a loan is declared fraudulent:
Borrowers are barred from bank finance for five years
Lenders can initiate asset recovery via SARFAESI or IBC
ED/CBI may seize assets and press charges
Criminal convictions can lead to jail terms and financial penalties
Borrowers often contest the fraud tag in courts, delaying outcomes
Both civil and criminal paths proceed in parallel, making resolution complex and time-consuming.
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