Published Jun 29, 2026 | 9:25 AM ⚊ Updated Jun 29, 2026 | 9:25 AM
Liquor. Representative image. (iStock)
Synopsis: What began as the interception of two spirit tankers in 2021 ultimately uncovered a much bigger story of regulatory failure, with a CAG report tabled in the Assembly on 23 June estimating that Kerala lost ₹51.88 crore because huge quantities of ENA went unaccounted for. The audit said weak stock verification, questionable regularisation of shortages and the absence of recovery proceedings allowed the losses to remain largely unresolved.
Five years ago, on the morning of 30 June, 2021, officials of the Kerala Excise Department intercepted two tanker lorries carrying Extra Neutral Alcohol (ENA) to Travancore Sugars and Chemicals Ltd. (TSCL) at Thiruvalla in the Pathanamthitta district.
Each vehicle had left for Kerala carrying 40,000 bulk litres of spirit, the essential raw material used to manufacture Indian Made Foreign Liquor (IMFL).
What officials found stunned them.
Instead of the expected 80,000 bulk litres, more than 20,000 litres had disappeared before the tankers reached the distillery. The shortage was not marginal, nor could it be explained away as evaporation or leakage during transport. According to departmental records, one tanker was short by 12,687 bulk litres and the other by 7,699 bulk litres.
The drivers reportedly confessed that the spirit had been illicitly sold in Madhya Pradesh with the alleged involvement of employees connected to the distillery.
Ordinarily, such a discovery should have triggered an aggressive recovery process and a deeper investigation into the destination of the missing spirit.
Instead, what followed has now become one of the most striking findings in the Comptroller and Auditor General’s (CAG) latest audit on the manufacture and sale of foreign liquor in Kerala.
The theft was dramatic. The report suggests that the theft was effectively treated as routine transit wastage.
More remarkably, the audit said an even larger shortage discovered inside the distillery itself was later regularised by granting nearly nine years’ worth of storage wastage allowance — despite mandatory quarterly stock verification requirements and despite records showing that no discrepancy had been detected just months earlier.
Together, these episodes resulted in an estimated unrecovered loss of ₹51.88 crore to the state exchequer.
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The manufacture of IMFL in Kerala is subject to one of the country’s most heavily regulated excise regimes.
Distilleries and Compounding, Blending and Bottling (CB&B) units do not produce spirit or ENA within the state. Instead, ENA is imported from distilleries in other states under permits issued by the Excise Department.
Once the consignments arrive, Excise officials are required to jointly measure the quantity with the licensee before unloading the spirit into gauged storage tanks. Actual stock must be recorded, and quarterly physical verification of all spirit stocks is mandatory under the Kerala Distillery and Warehouse Rules.
Transit losses are permitted only within tightly prescribed limits.
Similarly, storage wastage exceeding the permissible level attracts penalties.
The rules also require periodic verification of storage tanks, regular stock certification and oversight by senior Excise officers to ensure that every litre of imported spirit is eventually accounted for in the manufacture of liquor supplied to the Kerala State Beverages Corporation.
According to the CAG, which examined the records maintained at the Excise unit office at the distillery, these safeguards failed at multiple levels.
The interception of the two tanker lorries on 30 June 2021 exposed the first layer of the problem. Officials confirmed that 20,386 bulk litres of ENA had vanished while in transit.
Yet, instead of initiating recovery proceedings corresponding to the commercial and revenue implications of the missing spirit, the department imposed only a penalty of ₹6.76 lakh, calculated at ₹20 per proof litre by treating the shortage as transit wastage.
The remaining quantity of spirit was allowed to enter the distillery.
Audit noted that the ENA had been imported exclusively for manufacturing liquor in Kerala and was transported under permits issued to the distillery.
Since the consignment never reached its intended destination in full, the overall responsibility remained with the licensee.
Based on the quantity diverted, auditors estimated that approximately 44,735 bulk litres of liquor could have been manufactured.
The consequent revenue loss to the state was estimated at ₹2.20 crore.
Despite registration of a police case, the audit found no evidence that the Excise Department attempted to recover this loss either from the distillery or from the individuals allegedly involved in diverting the spirit.
The theft triggered closer scrutiny of spirit stocks stored inside TSCL. When senior Excise officials conducted stock verification on 7 September 2021, they uncovered a shortage far exceeding the quantity stolen from the tankers.
According to the audit, the physical verification revealed that 4,60,659.1 bulk litres of ENA were missing from storage tanks.
Converted into proof litres, the shortage amounted to 7,72,064.6516 proof litres. Based on the prescribed rate of ₹20 per proof litre, the department initially issued a demand notice for ₹1.54 crore.
The explanation offered by the licensee changed the course of events.
The company argued that quarterly stock verification had not been conducted for years, and therefore, it had never received the benefit of the permissible storage wastage of 0.5 percent allowed every quarter under the rules.
The department accepted this argument.
It retrospectively allowed storage wastage amounting to 3,12,608.626 bulk litres covering the period from 2013-14 to the first quarter of 2021-22.
After deducting this enormous quantity from the detected shortage, the department recalculated the missing stock at only 1,48,050.384 bulk litres and reduced the penalty demand to ₹48.70 lakh.
The revised amount was paid by the licensee.
For the auditors, however, the issue went beyond the reduced penalty.
The CAG questioned the very basis on which the shortage was regularised. The rules require quarterly physical verification of spirit stocks.
Each verification is expected to establish the actual quantity available in storage, detect shortages promptly and prevent prolonged accumulation of discrepancies.
However, records examined during the audit showed that a joint physical verification had indeed been carried out on 31 March 2021 — barely months before the larger shortage was detected.
The stock certificate issued after that verification reportedly recorded no discrepancy whatsoever.
This raised a critical question.
If the stock position was certified as correct in March 2021, on what basis could the department later grant maximum permissible storage wastage retrospectively over nearly nine years?
The audit concluded that granting such a benefit without supporting records of actual quarterly physical verification was irregular.
Equally significant, the report pointed out that the earlier stock verifications jointly conducted by Excise officials and company personnel had failed to detect any shortage whatsoever.
Only after the theft incident did inspections by higher authorities reveal massive discrepancies in the ENA stock.
According to the auditors, this pointed to serious deficiencies in supervision, monitoring and stock verification within the distillery.
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The audit also examined the financial consequences from the state’s perspective.
ENA is not an end product. Its sole purpose is to manufacture liquor that subsequently generates substantial revenue through Excise Duty, Sales Tax and Turnover Tax.
Any quantity of ENA that disappears before production directly affects the state’s revenue.
Using the department’s own production norms, auditors estimated that the unaccounted 4,60,659 bulk litres of ENA could have produced around 10,26,435 bulk litres of IMFL, equivalent to approximately 1.14 lakh cases of liquor.
The resulting revenue foregone was estimated at ₹49.68 crore.
When combined with the ₹2.20 crore revenue loss arising from the diverted tanker consignment, the total unrecovered loss worked out to ₹51.88 crore.
The audit noted that while penalties were imposed under the Excise Rules, the department did not initiate action to recover the revenue actually lost because the missing ENA never translated into liquor production.
Nor was recovery pursued against those allegedly responsible for diverting the spirit.
Responding to the audit observations, the state government informed the CAG in July 2025 that strict instructions had been issued for surprise and independent stock verification at the distillery.
It also stated that the department would propose the implementation of a real-time tracking system for ENA during transit.
In addition, technology-based monitoring systems, including automated measurement of spirit consumption and bottling losses, would be proposed for implementation.
The CAG welcomed these measures but pointed out that the state government’s reply remained silent on the central issue.
It did not specify any action already taken, or proposed, to recover the ₹51.88 crore estimated to have been lost to the state exchequer because of unaccounted ENA.
The audit recommended that the government institutionalise surprise and independent stock verification through departmental teams separate from those stationed at distilleries, reducing the possibility of routine oversight failures.
It also recommends early implementation of end-to-end real-time tracking of ENA from source to destination, ensuring that every consignment can be monitored throughout transit.
Further, the report advocates continuous technology-enabled monitoring within distilleries using automated meters and sensors capable of recording spirit consumption and wastage for every production batch.
Such systems, the audit argued, would significantly reduce dependence on manual recording and make unexplained shortages immediately detectable.
Although the audit findings relate specifically to Travancore Sugars and Chemicals Limited, they raise broader questions about regulatory oversight in Kerala’s liquor sector.
The state operates 10 distilleries, seven compounding, blending and bottling units and two breweries under Excise supervision.
All depend on imported ENA, making accurate accounting at every stage — from transportation to storage and production — critical for safeguarding public revenue.
The theft detected in June 2021 may have exposed only one criminal act.
But the CAG’s findings suggest something more troubling: a regulatory system that failed to detect massive stock discrepancies through routine inspections, later regularised substantial shortages by extending retrospective wastage allowances, and ultimately stopped short of pursuing recovery of the much larger revenue loss.
(Edited by Muhammed Fazil.)
