Mumbai: Promoters of debt-ridden Housing Development and Infrastructure Ltd (HDIL) Rakesh and Sarang Wadhawan were arrested on Thursday by the economic offences wing (EOW) of the Mumbai Police on charges of financial fraud for their role in the Punjab and Maharashtra Co-operative (PMC) Bank scam.

Rakesh Wadhawan is executive chairman, while his son, Sarang, is managing director of the Mumbai-based real estate developer.

The arrest of the two promoters comes on the back of their alleged involvement in financial irregularities at PMC Bank, which prompted the Reserve Bank of India (RBI) to impose regulatory restrictions on the lender for six months. It imposed the restrictions due to concerns over large sums of loans being given to HDIL.

PMC’s suspended managing director, Joy Thomas, recently said the bank’s exposure to bankrupt HDIL is over 6,500 crore—four times the regulatory cap, or 73% of its entire assets of 8,880 crore.

Ties between PMC Bank and HDIL promoters, the Wadhawan family, date back to 1986. The bank, which started with a single branch and a capital of 10 lakh, saw its network erode in 1984 within two years of operations. To rescue it from financial collapse, the late Rajesh Kumar Wadhawan, then director of Land Development Corp. and many other firms run by the Wadhawan family, infused 13 lakh into the bank during 1986-87. The family also kept a “huge quantum of deposits for the revival of the bank".

In addition to arresting the duo, the EOW has attached properties worth around 3,500 crore. These include HDIL’s commercial and residential properties.

“Both of them were summoned for questioning in connection with the PMC bank fraud on Thursday morning. However, they were arrested in the afternoon as they were not able to give satisfactory replies to the alleged charges of financial irregularities in the company," an EOW official said on condition of anonymity.

The father and son duo would be presented before EOW’s special court on Friday, said the official cited above.

On 30 September, EOW filed a first information report (FIR) against HDIL and PMC Bank officials, including Thomas. EOW has also formed a special investigation team to probe the matter.

(Graphic; Sarvesh Kumar Sharma/Mint)
(Graphic; Sarvesh Kumar Sharma/Mint)

The FIR has been filed under Sections 409 (criminal breach of trust by a public servant or banker), 420 (cheating), and 465, 466 and 471 (related to forgery) of the Indian Penal Code, along with 120 (b) (criminal conspiracy).

The FIR had alleged possible fraud and wrongful loss of 4,355 crore and charges of cheating against HDIL.

According to the EOW official, around 44 suspicious bank accounts linked to HDIL and its associate companies were found at PMC Bank. However, the accounts were masked and hidden from the core banking system. “Some of the money has also gone into the personal bank accounts of both the father and son," the official said.

Despite non-payment, bank officials did not declare HDIL’s exposure as bad loans and intentionally hid the information from RBI by creating fake records of smaller loan accounts, the police said in a statement previously.

On 23 September, RBI imposed regulatory restrictions on PMC Bank for six months. It set a withdrawal limit for account holders that was initially kept at 1,000 per account for six months and later raised to 10,000. On Thursday, RBI increased the withdrawal limit to 25,000.

The regulator had also banned the cooperative bank from extending fresh loans or accepting deposits.

HDIL is in bankruptcy court after failing to repay its debt. The National Company Law Tribunal had admitted insolvency proceedings against HDIL following a plea filed by Bank of India under Section 7 of the Insolvency and Bankruptcy Code.

Close