A working capital facility of Rs 5 crore is sanctioned for the purchase of raw materials and the financing of trade receivables. The utilisation certificate, submitted quarterly, states that the funds were applied to the sanctioned purpose. The stock statement supports the utilisation by showing corresponding inventory.
End-use verification tests whether this is true. Not whether the documents say it is true, but whether the underlying evidence, the bank trails, the GST invoices, the goods receipts, the physical inventory, confirms that the sanctioned funds were applied to the sanctioned purpose.
In Ashish Chaudhary’s forensic experience across PSU-bank-directed mandates, diversion in manufacturing and trading borrowers is rarely a single dramatic transfer to an unrelated account. It is a sustained pattern of application to purposes outside the sanction, disguised inside legitimate procurement volume. The company genuinely buys raw materials. It also uses Rs 80 lakh of the facility to fund a real-estate investment by the promoter, routed through a vendor payment that has all the supporting documentation of a genuine purchase but that, when traced beyond the first recipient, ends at a property registration in the promoter’s family member’s name.
How diversion works in practice
Pattern 1: Genuine vendor, inflated invoice. The company purchases Rs 50 lakh of raw material from a genuine vendor. The invoice says Rs 65 lakh. The excess Rs 15 lakh is returned to the company (or to a connected party) through a separate channel. The procurement is real. The inflation is the diversion.
Pattern 2: Shell vendor, complete documentation. The company pays Rs 30 lakh to a vendor that was incorporated three months ago, has no employees, shares an address with the promoter and has no other customers. The purchase order exists. The invoice exists. The goods receipt note exists. The goods do not exist. The documentation was created to justify the payment. The payment was the purpose; the documentation was the cover.
Pattern 3: Fund routing through group entities. The company pays Rs 1 crore to a group entity as an “advance for procurement.” The group entity does not procure. It transfers the funds to a third entity, which transfers to a fourth, which applies the funds to a purpose unrelated to the sanctioned facility: a real-estate acquisition, a personal investment, a loan to the promoter. Each individual transfer has documentation. The chain, reconstructed end to end, shows that the facility was used to fund the promoter’s personal investment.
The verification methodology
Step 1: Trace every significant disbursement. Pratham extracts every material payment from the facility account and traces it to its immediate recipient. The bank statement, not the ledger, is the primary source.
Step 2: Test the recipient. Rishabh verifies the recipient’s substance: does the vendor operate from the address on the invoice? Does it have premises, employees, equipment, other customers? Ashish tests the recipient against MCA filings, GST data and directorship records to identify connections to the borrower.
Step 3: Follow the money past the first hop. For flagged recipients (those that fail substance tests or show connections to the borrower), the funds are traced further: where did the money go after it reached the vendor? Was it transferred onward? To whom? For what stated purpose? Does the stated purpose have evidence?
Step 4: Compare to the sanctioned purpose. Each traced disbursement is assessed: does the final application of funds match the sanctioned purpose? Procurement of raw materials is sanctioned. Investment in real estate is not. Advance to a group entity that uses the funds for the promoter’s personal purpose is not.
Step 5: Quantify the diversion. The total amount applied outside the sanctioned purpose is calculated. The diversion is categorised by type (inflated invoicing, shell vendor payments, fund routing) and by destination (group entities, promoter, promoter’s family, unrelated investments).
In one manufacturing borrower engagement, the verification traced Rs 1.8 crore of a Rs 5 crore facility to applications outside the sanctioned purpose. The diversion was distributed across 14 transactions over 18 months, each individually below the threshold that would trigger internal review. The aggregate, identified only through systematic tracing across the full review period, represented 36% of the facility.
Who does the work
Ashish Chaudhary leads the verification and determines the evidentiary standard: what constitutes diversion, what constitutes legitimate application outside the primary purpose but within the facility terms, and what is ambiguous and requires management explanation.
Pratham Sharma conducts the fund flow tracing from the facility account through every subsequent hop, building the referenced chain that connects each disbursement to its ultimate application.
Rishabh Koli conducts the field-level counterparty verification: visiting vendor premises, confirming operational activity, photographing facilities and corroborating (or contradicting) the substance claimed on the documents.
Gopal Banka is engaged where the findings trigger a facility review, a restructuring requirement or a pre-IBC assessment.
What the lender receives
An end-use verification report for each tested facility, showing: every material disbursement traced from the facility account to its application, counterparty substance assessment for every significant recipient, fund flow schedules for flagged transactions showing the complete chain from disbursement to final destination, diversion quantification by type and destination, comparison of actual application to sanctioned purpose and a red flag matrix graded by evidentiary strength.
Mobilisation within 48 hours. Preliminary findings within 14 days. Complete report within 21 to 28 days.