Round-tripping – Its time to stop illicit financial flows

Mauritius - Biggest Source of FDI in the past

In a 15-year period from 2000-2015, the highest amount (34%) of total Foreign Direct Investment into India was from Mauritius, valued at US$ 93.6 billion. In Reality, this cannot be true as one can understand by the scale and size of Mauritius Economy. In India there is a common saying that Western and Northern Indian Traders and Politicians use Mauritius, BVI, Cayman whereas the in the South its often Singapore, Hongkong and UAE!

Some Examples of Round Tripping

Sterlite-Twinstar-Volcan

According to the show cause notices issued to Sterlite, investigations by the income tax department revealed that the company was engaged in business of copper, telephone cables, aluminium and nonferrous items. It was alleged that out of the total equity of 4.25 crores, shares of face value of Rs. 10/- each, worth Rs. 12.5 crores were held by promoter directors and that one Twinstar Holding Ltd, an offshore company registered in Mauritius, held about 30 lakh shares. It was alleged that the three promoter directors were engaged in the business of investments and Twinstar Holding held hundred percent capital investment in three other companies to the extent of Rs 73 crores; Twinstar Holding was incorporated in Mauritius, on 12-01-1993, with issued capital and paid up capital of US $ 100, as a subsidiary of M/s Volcan Investments Ltd; the latter was incorporated in Bahamas on 25-11-1992. M/s Volcan Investments had a share capital of US$ 2. It was alleged that Shri D.P. Agarwal, the respondent in WP 17483/2006, was a director of Twinstar Holding Ltd. During the search and seizure operations, it was discovered that Twinstar Holdings was actually operating from Middlesex, UK; the documents indicated remittance of Rs.34,50,25,280/- to the company, M/s Sterlite for subscribing to certain debentures, immediately after incorporation of the company on 12-01-1993.

The Enforcement Directorate alleged that the total investments of the DP Agarwal group, who are individual respondents, apart from the company, much exceeded the funds invested by the Mauritian company, Twinstar; a large proportion of shares were partly paid-up {WP(C) No.17467/2006 and connected matters} so that a large number of shares could be acquired with lesser funds.

In the process of voluntary liquidation of the investment companies of Sterlite, alleged the petitioners, the overseas corporate body i.e. Twinstar became the holding company with controlling interest in Indian companies. In this process the promoters of Sterlite effected book adjustments which amounted to write off of Rs. 23 crores. The book adjustments by Sterlite and its group companies effectuate it a gift of Rs.33.82 crores to Twinstar this was besides family members of the promoters of Sterlite gifting shares worth Rs. 7.22 crores to the Mauritius company.

Chartered Accountants: Owners or Fronting the Investors

KSK Energy, is incorporated and registered in Mauritius, and is a wholly-owned subsidiary of KSK Power Ventur plc, an Isle of Man incorporated entity that is currently listed on the London Stock Exchange. We are a listed subsidiary of KSK Power Ventur plc. Our individual Promoters, Mr. S.Kishore and Mr. K.A. Sastry, prior to setting up the Company, have been involved in the development of power projects in various advisory and consultant roles. The company is on trial at the National Company Law Tribunal as a non-performing asset. It is very difficult to trace the actual beneficial owners.

Case of a Current State Chief Minister

The investigation relating to M/s Sandur Power Company Ltd., it is stated by the CBI that Y.S. Jagan Mohan Reddy was the Director of this Company from 16.06.2001 to 11.01.2010 and the prime accused. M/s Sandur Power Company Ltd. was incorporated on 23.10.1998 by M.B. Ghorpade and subsequently, Y.S. Jagan Mohan Reddy joined the company during June 2001 along with the Board of Directors, viz., Harish C. Kamarthy and JJ. Reddy. It is alleged by the CBI that the Company is closely held by Y.S. Jagan Mohan Reddy. The CBI also highlighted various share transactions amounting to Rs. 124.60 crores with two Mauritius based companies, viz., M/s 2i Capital and M/s Pluri Emerging Company by M/s Sandur Power Company Ltd. It is projected by the CBI that the above said amount is of Y.S.Jagan Mohan Reddy, which was routed through the Mauritius based companies. It is also highlighted that the role of Nimmagadda Prasad who is currently under judicial custody is also being investigated for the same. Vijay Sai Reddy, along with Y.S. Jagan Mohan Reddy, was the brain behind this conspiracy inasmuch as Vijay Sai Reddy had floated fictitious companies in Chennai so as to enable round tripping or routing monies into M/s Sandur Power Company Ltd. from India and foreign countries through companies falsely created in Chennai as well as in certain foreign countries.

Key Observations in the Case by the Supreme Court

The Supreme Court observed, “Economic offences constitute a class apart and need to be visited with a different approach in the matter of bail. The economic offence having deep rooted conspiracies and involving huge loss of public funds needs to be viewed seriously and considered as grave offences affecting the economy of the country as a whole and thereby posing serious threat to the financial health of the country.” The court went on to state “While granting bail, the court has to keep in mind the nature of accusations, the nature of evidence in support thereof, the severity of the punishment which conviction will entail, the character of the accused, circumstances which are peculiar to the accused, reasonable possibility of securing the presence of the accused at the trial, reasonable apprehension of the witnesses being tampered with, the larger interests of the public/State and other similar considerations.”

What is POEM?

POEM is the place where the ‘key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. The Finance Bill, 2015 introduced the concept of POEM for determination of residence of companies by way of amending Section 6 of the Act replacing the words ‘control and management’ by “place of effective management, at any time” 

Using POEM rules, the government amended the tax treaty with Mauritius in 2016, removing the tax arbitrage on capital gains. Under POEM rules, overseas subsidiaries are treated as domestic entities for tax purposes if they are controlled and managed from India.

The key principle is that while determining the POEM, the concept of substance over form should be used. Further. even though an entity has more than one place of management, it can have only one place of effective management at a given point of time and should be determined in light of the guidelines as prescribed by CBDT.

Using FAQ as a means to Fix

The Government also surreptitiously used the FAQs of its website to monitor round-tripping practices by such Indian Parties. The FAQ (Q64) contemplates a twofold ban on Indian Party seeking to use automatic route for investments under the ODI Regulations viz., (i) Indian Party is not permitted to set up a subsidiary in India through its overseas JV and/or WOS, and (ii) Indian Party is barred from acquiring a WOS or invest in a JV that already has investment in India (“Restricted Activities”).

Shifting from Mauritius? The recent case of Nirav Modi

It is alleged that Nirav Modi used 13 companies in UAE to round trip millions according to the ongoing prosecution in United Kingdom. The diamantaire with a surname of the Prime Minister, who fled from the country to escape legal action and potential imprisonment is said to have used 13 companies in UAE, 6 in Hong Kong for purpose of round tripping money. He was arrested by Scotland Yard in March 2019 on an extradition warrant by India over charges of fraud and money laundering. Though lodged at the Wandsworth Prison in London and denied bail five times, he has been valiantly trying for asylum in Britain, while the Indian Agencies have been seeking extradition. The lawyer representing the Crown Prosecution Service recently made a statement in the court that he had in connivance with some of the PNB officials, embezzled around $2 billion and bribed a Punjab National Bank official that Nirav had also threatened to kill a witness if he gave any statements against him.

Ultimately People Pay Out

Such instances of fiscal frauds lead to siphoning off funds from the projects, despite many of them inflating their capital costs and fleecing the banks. Some years ago, the RBI governor remarked that the in India the projects or companies become “sick” but not the promoters. Thirty four power projects with were identified as stressed by the finance ministry and it has now become a state and public burden and various schemes Pariwartan or Samadhan have been evolved by the Government to save them using public money or the bankruptcy code. The same is the case with the losses of banks like the Punjab National Bank, for which the ordinary citizen ends up paying in the form of bank charges.

Need Complete Rethinking

 

There are atleast three aspects we need to seriously rethink domestically

·         Do we need FDI? Covid-19 has made it clear, that this kind of FDI based large capital, large infrastructure and distant supply chains are vulnerable and small farming communities with biodiversity and indigenous communities have sustained better. While this is what Gandhiji broadly advocated even before independence are we even ready?

·         How do we reform our Political Systems and Elections as they have become extremely Capital Intensive and significant corruption and convoluted systems are necessary for political funding? We have been witnessing to the bonds and other devious ways in recent times.

·         Most Products produced by MNCs have local, small scale or state sector alternatives with better use of domestic resources which require faith in our own abilities and fiscal responsibility. How can we move the communities to this direction?

And further unless strong collaboration between countries, civil societies, journalists, and legal experts across the globe to push for punishing and penalising the perpetrators, the illicit money will find many ways!