How the CBI’s flawed prosecution sank the decades-old Lakshadweep diesel scam

Kochi: A diesel subsidy scam dating back to 1997 and pursued by the CBI for 16 years against Lakshadweep's two-time MP Mohammed Faizal P P collapsed on Saturday, not entirely for want of evidence, but due to a fundamental flaw in prosecution.

The CBI had accused Faizal, national general secretary of the NCP (Sharad Pawar faction), and his business partners of illegally procuring high-speed diesel (HSD) between 1997 and 2009 at a concessional tax rate of 4%, instead of Kerala's standard 24%, meant exclusively for Lakshadweep, and diverting it for sale on the mainland for profit. The investigating agency also charge-sheeted government employees for facilitating the fraud.

However, the special court in Ernakulam acquitted the accused because the CBI built its case around a tax loss of ₹1.04 crore and wrongly concluded that Bharat Petroleum Corporation Limited (BPCL) suffered the loss. But the reality was the tax loss, if any, was suffered by the government of Kerala, and it was not even made a party to the case, said Faizal's counsel, Adv M J Santhosh. "When I raised this point, the CBI's counsel had nothing to say," he told Onmanorama.

The case collapsed despite extensive allegations and a paper trail against BPCL employees and Shebna Enterprises, the trading firm run by Faizal and his associates, because the CBI's focus remained on sales tax evasion.

On Saturday, CBI Special Judge Seshadrinathan N acquitted Faizal (Accused No. 9), his business partner and first accused P P Hussain Thangal, and fifth accused Abdul Manaf, who was then the head clerk at the Beypore Port Office.

Two BPCL officials originally named in the case were later dropped from the charge sheet at the direction of the high court. BPCL had twice refused the CBI permission to prosecute them. When the agency approached it the third time, BPCL granted the sanction. But the officials approached the high court, saying the sanction was flawed because the CBI did not cite any fresh grounds the third time. The high court agreed with them.

The judgment effectively toppled the CBI's indictment, which was once seen as a watertight case of subsidy misuse, forged licences, and collusion with public officials.

At the heart of the case was Shebna Enterprises, the Lakshadweep-based trading firm helmed by Faizal and P P Hussain Thangal (A1).

Between 1997 and 2009, the firm was authorised to import essential goods into the islands. However, according to the CBI Special Court's indictment order, the group misused this licence to procure high-speed diesel (HSD) — primarily used in fishing boats, passenger ferries, and cargo vessels — at subsidised rates under a Kerala government scheme aimed at easing costs in Lakshadweep.

Instead of shipping the diesel to the islands, Shebna allegedly sold the fuel on the Kerala mainland, reaping profits while evading 16% to 20% sales tax, CBI said. To be sure, the tax cut is available only to dealers approved by the administrator of Lakshadweep, and Shebna was not one, said CBI.

The diesel was sold to private vessels and Kozhikode-based Lakshadweep Cooperative Marketing Federation at market prices.

Over eight years, Shebna procured 2,806 kilolitres of subsidised diesel. Of this, 2,320 kilolitres, or more than 82%, was allegedly diverted for unauthorised sale, causing an estimated Beypore Port Office ₹1.05 crore in tax loss to the Kerala government. But the CBI listed BPCL as the victim of the tax fraud, a blunder that the defence seized upon.

Fraud built on paper
The CBI alleged Shebna Enterprises created an elaborate paper trail. Forged letters from fictitious boat owners and transport contractors falsely claimed that diesel was needed for 123 fishing vessels and 27 cargo ships. But Shebna owned only one vessel.

Fake charter agreements were submitted to back these claims.

Tampered trade licences falsely included HSD as a permitted commodity -- despite the firm lacking an explosives licence.

The CBI also alleged collusion within Bharat Petroleum Corporation Ltd (BPCL). Two key officers, K Jayaraman (Senior Divisional Manager) and K Govind (Deputy Manager, Kochi), were accused of willfully approving the firm's forged authorisation to deal in HSD. But BPCL refused to sanction the prosecution of its employees twice.