K. S. Raju and P. K. Mahadevan, original promoter and director respectively of Nagarjuna Finance Limited were arrested by the Hyderabad police for allegedly defaulting on the payments to depositors of Nagarjuna Finance (NFL), a non-banking financial institution (NBFI) promoted by the group. Along with Raju, another director, Pundi Krishna Swamy Mahadevan, was also arrested.

Hyderabad Detective Department DCP R. S. Praveen Kumar said they were arrested under Section 5 of the Andhra Pradesh Protection of Depositors of Financial Establishments Act while nearly 700 warrants issued by the courts across the country were pending against them. According to the police, NFL, incorporated as an NBFI in
1982, collected deposits of Rs 98.3 crore from 85,160 depositors in Andhra Pradesh during 1997-98. Out of them, deposits of 16,122 depositors amounting to Rs 23.02 crore matured on December 31, 1999 which were not paid. Hundreds of depositors lodged complaint with the police across the State while the company management secured order from the High Court, staying proceedings against them by the police. The depositors in their complaint have alleged that the group company evaded paying dues of about Rs 98 crore to them.

In 2000, NFL announced that it was acquired by Mumbai-based Mahalakshmi Factoring Services Limited (MFSL) and hence was absolved of repaying the depositors. The tribunal has not accepted this and ordered that the arrangement made between NFL and MFSL shall not be of any consequence in relation to the repayment approved by CLB. State home minister K Jana Reddy had earlier informed the assembly that a total of 91 cases had been registered against NFL.