Pl DON'T get me wrong on this, BUT I think your hiring process was defective, or rather upto mark--else this situation wouldn't have cropped-up at all. Let me explain.
I am sure your company would have interviewed the students before the Trainee was selected--BTW how many did you hire?
It's a BASIC prerequisite that you ask the students during the Interviews whether they had any queries & CONFIRM if what you had intended to convey to them thru the placement coordinator was INDEED: (1) conveyed at all AND more importantly (2) conveyed correctly.
As HR, I am sure you must have come across situations when what is conveyed MAY NOT have been understood properly and/or misinterpreted even WITHIN THE ORGANIZATION. Then you ought to have doubly ensured that this factor is taken into account BEFORE the Offers were released in this case.
In case, you had waited for the students to COME OUT & ASK, then you were WRONG again--being immature & inexperienced students, do you think it would even OCCUR TO THEM that they have to: (1) ask AND (2) know what to ask?
Coming to what-to-do, suggest the following:
1] Pl ensure the students ARE NOT penalized for what is essentially is a judgement error @ your end & a communication gap between your company & the Institute. What goes out into the world thru them is THEIR version--which, in the long-run, contributes to the Brand Image of your company.
2] IF you have written records [e-mails, etc] of what you conveyed to the placement coordinator, pl halt any further hiring from that Institute & write to the Principal of the Institute giving your decision along with the evidences [I am not sure IF using words like 'blacklisting', etc would be appropriate]. I am sure you can find many other Institutes to hire from next year.
All the Best.
Prudently, you should have put the terms and conditions in black and white, and both yourself and the placement officer should have signed it mutually.
Summer training projects are for b.schools a part of curriculum, please note.
- what did you convey to the summer trainees when they joined. What instructions did you give them. What was the training ? I have not heard of many companies giving 3 days training to summer trainees who are coming for less than a month.
- what was the conflict that you tried to resolve over the specified 7 days. What was the final result
- how confident are you that the reports are fake ?
- you said you suffered a major loss on account of failure of the trainees to deliver. What were you asking them to do ? To my knowledge, companies do not give important or critical work to summer trainees. It is more of an exposure to them of the corporate world they will get into one day.
- it seems you had planned for 1 or 2 months work but decided to end it after 3 weeks.
In all of the above, the only thing I can see that justifies holding back the internship payments is if the reports are fake. You can't do it for bad quality as they are students and are not expected to give reports of the levels which a trained employee would have done. But falsifying a report for the sake of having to submit it is a serious matter and should not be condoned.
Also, I would Like to know who the placement coordinator is. Is he a faculty or student (many colleges ask students to coordinate as a part of their own training).