Some financial transactions attract attention because of the scale and nature of the irregularities being brought to light. Others may warrant scrutiny because of the profile of the people involved. The case in this article deserves close examination on both counts. The protagonist of this tale is India’s richest man, Mukesh Ambani, the chairman and managing director of Reliance Industries Limited (RIL), India’s biggest private corporate conglomerate. The supporting character is a former Indian National Congress member of parliament associated with the Reliance Group, Annu Tandon.
On the sidelines are unnamed executives from the overseas wing of one of India’s biggest private sector banks, ICICI (formerly the Industrial Credit and Investment Corporation of India) Bank. The plot also includes officials from two regulatory authorities, the Reserve Bank of India (RBI), the country’s central bank and apex monetary authority, and the Enforcement Directorate (ED) in the Ministry of Finance, which is responsible for enforcing the Foreign Exchange Management Act (FEMA) of 1999.
It was on 19 July 2013, about a year and a half ago, that the ED wrote to the RBI, seeking its advice on the legality of a loan of Rs 6,530.36 crore that was granted by an overseas branch of ICICI bank to a now-defunct firm called Biometrix Marketing Pte Ltd that was based in Singapore and associated with the Reliance Group. Curiously, this money, given in the form of a loan, later returned to India—as alleged by First Secretary (Economic) GT Venkateswara Rao of the Indian High Commision in Singapore in the investigation he conducted on investments made by Biometrix in Reliance Group companies—as foreign direct investment (FDI) through the issuance of certain financial instruments called compulsorily convertible preferential shares (CCPS) by Biometrix in four Reliance Group companies—Reliance Gas Transportation Infrastructure, Relogistics Infrastructure, Reliance Ports and Reliance Utilities. This investment was the highest inflow of FDI into India during 2007–08 from a single corporate entity based in Singapore.
Senior officials of the ED have said that, since the letter was written, Annu Tandon and other senior figures connected with RIL have been questioned about the transactions relating to Biometrix and their statements have been recorded.
Rao's investigation into Biometrix's investments was first suggested in July 2011 by the Department of Industrial Policy and Promotion (DIPP) in the Union Ministry of Industry and Commerce, which is responsible for formulating and enforcing policies on FDI. The investigation was thereafter conducted by the High Commission of India in Singapore, which resulted in the preparation of a “commercial intelligence report” dated 31 August 2011.
The report pointed out that the records of Singapore’s Accounting and Corporate Regulatory Authority (ACRA) indicated that Biometrix was a holding company registered in Singapore. A company called Strasbourg Holdings Private Limited held 91 percent of Biometrix. Strasbourg is incorporated in Singapore and is owned by Atul Shantikumar Dayal, a legal expert with AS Dayal & Associates, Mumbai, who has been of particular assistance to the Reliance Group in some ofits recent arbitration cases against agencies of the Indian government, and who is also a director of a few Reliance Group companies.
The remaining 9 percent of Biometrix’s shares were held by Reliance GeneMedix Plc, a company registered in London and a subsidiary of Reliance Life Sciences Private Limited (RLSPL). Biometrix was earlier called Orna Pte Ltd, and its principal activities are described as “acting as a holding company and consultancy.”
Many India-based corporate conglomerates, in particular the Reliance Group, maintain a complex structure of cross-holdings of shares among subsidiary and associate companies. Theoretically, these cross-holdings are perfectly legal. However, the patterns of shareholdings of these companies are often made deliberately complex to make it difficult for regulatory authorities to lift the corporate veil and establish the identities of the beneficiaries. If their identities are obfuscated, it makes it cumbersome to establish an audit trail to track the flow of funds. This case, in particular, appears to use a set of such complex control structures.
Right now, the dispute is stuck at a preliminary stage. Two formal letters that were sent by the joint director of the ED on 21 and 22 May 2013, elicited only a single reply, dated 19 July 2013, from Divya P, a manager in the foreign exchange department in the central office of the overseas investment division of the RBI in Mumbai. In its reply, the RBI stated that borrowings by an “overseas WOS (wholly owned subsidiary) / JV (joint-venture), (a) first level step down subsidiary or subsidiaries beyond first level, with support from the Indian party for purposes of investment back into India” was not a “bona fide business activity as per FEMA guidelines framed in 2004.” The country’s central bank added that the case was being examined by officials in the RBI’s Department of Banking Operations and Development and that the apex bank would respond to the ED in due course.
Representatives of the Reliance Group have claimed to the ED that the investments should not be treated as FDI but as an external commercial borrowing (ECB). If the investment is indeed an ECB, this would put Reliance in the clear and in compliance with the RBI and provisions of FEMA. This is the crux of the dispute. Did the money return from Singapore to India as FDI or as an ECB?
If the money did indeed return from Singapore as an FDI, then there is reason to pay attention to the possible source of these funds. Prashant Bhushan, a lawyer and founding member of the Aam Aadmi Party(AAP) offered an interesting explanation to this question at a press conference, which we will come to later in this article. In June 2011, the Comptroller and Auditor General of India, had made note of anomalies in the capital cost of the RIL natural gas project in the D6 block in the Krishna-Godavari (KG). The CAG’s report stated that Reliance had over-invoiced their imports of capital equipment during the project. Taking off from this report, Bhushan alleged that the funds transferred from Biometrix had been illegally obtained through RIL’s fudging of its imports.
To begin with, the mammoth investments, amounting to Rs 6,530.36 crore came from companies—Biometrix and Strasbourg—which had relatively small equity capital bases. Biometrix was set up with an equity capital of 110,000 Singapore dollars—or approximately Rs 29 lakh—and operated out of “just one room, which was closed most of the time.” Rao’s report added that the premises where Strasbourg was registered was occupied by another firm named Rikvin (about which, too, more interesting information will follow). Filings with ACRA, reviewed by the Business Standard indicated that between May 2007 and September 2008, Biometrix made a loss of Rs 400 crore on a revenue of 121,433 Singapore dollars (approximately Rs 32 lakh). Its total liabilities to equity ratio was an improbable 4,637 because it had obtained a $1.7 billion Singapore-dollar loan with a capital of 110,000 Singapore dollars (approximately Rs 29 lakh). ACRA’s records show that Biometrix has been dissolved and that its members voluntarily wound up the company. Business Standard also reported that the loan obtained by Biometrix had been paid off.
Rao’s investigations through the High Commission of India in Singapore point to several suspicious facts that deem this case worthy of close scrutiny.
He also stated that it was highly probable that the funds shown as loans from Singapore or other “tax heavens” [sic] returned through a “circuitous route” to companies whose owners were in India. Therefore, he argued, the source of the money needed to be ascertained.
On 22 June 2012, M Furquan, a Delhi-based journalist, wrote to the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI) asking the two agencies to investigate whether or not the transactions were legal. His allegation was based on certain documents—including first secretary Rao’s report from August 2011—that he claimed to have received from a reliable source through registered post. After he received no response from either the CVC or the CBI, he filed a writ petition in the Delhi High Court on 17 November 2012.
Furquan pointed out that during the period between March 2007 and October 2008, RIL's warrants worth Rs 16,500 crore were converted into equity shares by Reliance Utilities Private Limited, Reliance Ports & Terminals Limited, Relogistics Infrastructure Limited and Reliance Gas Transportation Limited as per the records of the Bombay Stock Exchange and the National Stock Exchange. The holder of a warrant can purchase securities, usually equity shares, from the issuer at a specific price within a certain time frame. Furquan’s petition alleges that the money required for converting RIL’s warrants into shares by the four RIL subsidiaries came from none other than RIL itself as none of the four subsidiaries had shown a commensurate amount of external or bank borrowing and neither did they have any influx of income of such magnitude.
He alleged that part of this money came into RIL in the form of a loan of $1.7 billion Singapore dollars—approximately Rs 6,500 crore at the time—from Biometrix, which was “shown as subscription money for preference shares (CCPS) [compulsorily convertible preferential shares] issued by Reliance Utilities Private Limited, Reliance Ports & Terminals Limited, Relogistics Infrastructure Limited & Reliance Gas Transportation Limited.” This means that Biometrix raised the money from ICICI on the ground that it sought to buy CCPS shares issued by the four subsidiaries.
Furquan subsequently claimed that, after his petition was filed in court, Swatantra Kumar, Director General, Income Tax (Investigation), who was based in Mumbai, had commenced a probe into the transactions relating to Biometrix and companies in the Reliance Group. However, Kumar was suddenly transferred to Chandigarh in December 2012. The case itself is still pending in the Delhi High Court.
We were able to gain access to the documents submitted by Furquan in court. Among these is a letter written by LV Merchant, Director, RLSPL, to MG Attri, Assistant Director, ED, on 14 August 2012 which makes the holding structure of Biometrix and its relationship with RIL extremely clear.
The letter states that 49 percent of the shares of Reliance Holding Netherlands BV (RHBV), Netherlands, were held by Reliance Clinical Research Services Pvt Ltd (RCRS), which is a subsidiary of Reliance Life Sciences Pvt Ltd (RLSPL). The remaining 51 percent was held by RLSPL. In 2006, RHBV acquired 79.58 percent of GeneMedix Plc—a company listed on a stock exchange in London—with the balance being held by public shareholders. GeneMedix acquired Biometrix in 2007, thus making it an “indirect subsidiary” of RLSPL.
Biometrix’s loan from ICICI Bank was taken under a “Put and Call Option Agreement” with Ekansha Enterprises Private Limited, a group company of RLSPL. An option agreement between two companies—in this case between Biometrix and Ekansha—provides either of the two firms with the right, but not the obligation, to buy, sell or obtain a specific asset at an agreed upon price at some time in the future.
Between 2006 and 2008, when the transactions involving Biometrix took place, Atul Shantikumar Dayal was a director of thirty-two companies, quite a few of which were part of the Reliance Group, including Reliance Power Ventures Ltd, Reliance Enterprises Ltd, Reliance Petroleum Ltd, Ekansha Enterprises Pvt Ltd and Strasbourg Holdings. As mentioned earlier, Dayal is reportedly a close adviser to the Reliance Group on corporate law, indirect taxation and, notably, international commercial contracts. According to the ED report, Strasbourg Holdings was acquired from Dayal by the late Sandeep Tandon, husband to Annu Tandon. The acquisition was made through a remittance of US$100,000 (approximately Rs 48 lakh) to Singapore under the liberalised remittance scheme (LRS) of the RBI that was announced in February 2004. Under the LRS at that time, resident Indians were allowed to remit up to $125,000 (approximately Rs 60 lakh) in each financial year for any permitted capital and/or current account transaction or a combination of both.
Sandeep Tandon was a former officer of the Indian Revenue Service (IRS) who used to work in the ED. He had conducted an investigation into foreign companies floated by Reliance while he was in the Directorate. He had raided the residence of Tina Ambani (nee Munim) before her marriage in February 1992 to Anil Ambani, the younger and now estranged brother of Mukesh Ambani. Soon thereafter, Sandeep Tandon joined RIL in 1994 as a consultant. His wife, Annu Tandon, was elected as the Lok Sabha MP from Unnao, Uttar Pradesh, in the 2009 elections. An unlikely candidate with no previous political experience, she claimed a surprise victory and won by a large margin of 32,092 votes, defeating her rivals from the Samajwadi Party (SP) and the Bahujan Samaj Party (BSP).
Annu was managing director of MoTech Software Ltd., which had been promoted by Mukesh Ambani. In 2007, MoTech was one of twelve entities that came under the scrutiny of the Securities and Exchange Board of India (SEBI) over charges of insider trading in the shares of Reliance Petroleum Ltd (RPL). On 3 January 2008, two months after the RPL transactions, she resigned from her position, citing her decision to contest elections from Uttar Pradesh as the reason.
At the time, there was speculation in the media that seat-sharing talks between the Congress and SP in Uttar Pradesh fell through because of the Congress’s insistence on Annu Tandon’s candidature. The Hindu on 30 April 2009 hinted that her husband’s allegiance to Mukesh Ambani was a reason for the SP to walk away from the alliance. The SP, as was widely known, was closer to the younger Ambani sibling, Anil, when the brothers crossed swords over the division of the Reliance empire. In the 2014 Lok Sabha elections, Annu Tandon stood for election again, but came fourth, barely retaining her deposit with 16 percent of the votes.
In his commercial intelligence report, First Secretary Rao of the Indian High Commission in Singapore pointed out that another company called Rikvin was located at the same Cecil Street address as Strasbourg Holdings. This company had an equity capital of 110,000 Singapore dollars (approximately Rs 29 lakh), and its only shareholder was Dayal who held the entire 125,000 Singapore dollars (approximately Rs 33 lakh) paid-up share capital of the company. Rikvin had another director—Shalin Narain Tandon—who, however, did not own any shares in the company. Shalin is, incidentally, the son of Annu and the late Sandeep Tandon.
Shalin is also the vice president of the group’s flagship company RIL. Additionally, he is on the board of Ekansha Enterprises Pvt. Ltd, which in turn, is associated with two companies linked to RIL—Reliance Consolidated Holdings Pvt. Ltd and Relcom Venture Capital Pvt. Ltd.
The senior officials in the ED have said that both Shalin and Annu Tandon, as well as Dayal have been questioned. The RBI is yet to respond to the ED’s query on whether certain transactions by RIL violate the provisions of FEMA.
Both the Reliance Group companies—Strasbourg and Ekansha—applied to the RBI for compounding for their violation of the FEMA act as noted by the RBI. Ekansha paid Rs 19.59 crore to the RBI as the fee for compounding. An application on behalf of the late Sandeep Tandon, for Strasbourg, is still pending with the RBI.
We contacted RIL, Dayal and Tandon for comment, but our questions went unanswered.
If the RBI confirms that the transaction was illegal, the ED can proceed against the Reliance Group companies either through a process of adjudication through the special directorate of the ED, or through the RBI by compounding the offence. The RBI incidentally has the power to lower the compounding award given by the ED.
Information about this unusual transfer of funds was brought into the public domain for the first time by Prashant Bhushan at a media conference on 27 February 2014. Bhushan pointed out that the Indian High Commission in Singapore had made enquiries about Biometrix following a request by the DIPP in 2011, but the government had failed to act on the information provided, even after three years.
After Bhushan’s conference, RIL released a press statement in which it denied that its legal adviser, Dayal, was either the owner or the director of Biometrix. With reference to the loan given by the Singapore company, RIL stated:
The investments by Biometrix were open, transparent and perfectly legitimate transactions in full compliance with the extant regulations. These investments in the Indian companies were made by Biometrix out of loans raised from ICICI Bank, Singapore branch. ICICI Bank has confirmed this fact to the regulators. Regulatory authorities have fully investigated the matter and found no substance in the allegations of money laundering. The insinuation that this money was from “gold plating” from KG-D6 is completely irresponsible and false.
Bhushan, in a letter dated 8 July 2014, to the Special Investigation Team on black money—formed by the government on the orders of the Supreme Court—alleged that the government “has just sat over these facts [relating to Biometrix] for … three years now,” and that the government “has not bothered to investigate this case of money laundering, perhaps because powerful entities like Reliance are involved.”
On 23 July 2014, Bhushan wrote to Prime Minister Narendra Modi asking, “why would a bank give such a large loan to a post box company with no known assets and source of income? Given the fact that the CAG [Comptroller and Auditor General] report has already indicted Reliance for over-invoicing and siphoning out money from the KG-D6 contract, isn’t it highly likely that the Rs 6,500 crore was in fact money siphoned out of the country by Reliance from the KG-D6 contract, or dealing with the government, and which was being brought back by way of an investment by a shell company?”
Bhushan enclosed with his letter Rao’s commercial intelligence report, which stated: “The equity of both the investing companies—Biometrix and Strasbourg—from Singapore is very small compared to the amount invested; both the companies have claimed exemption from filing annual accounts to the Singapore regulator stating that the income is small. If the income was small, the question arises about the source of such huge amounts were [sic] raised.”
Why is the RBI dragging its feet in answering the ED as to whether the complicated maze of transactions relating to these companies violated the provisions of the law? Is this is a case of money laundering? How can the foreign associate of an Indian bank lend money to a firm that uses the funds to purchase financial instruments of companies that are associated with the parent company in India? These questions remain unanswered. The last is yet to be heard on this subject.