MAC: Mines and Communities

London Calling asks if Vedanta's guilty of a massive money laundering racket

Published by MAC on 2009-06-02

Two months ago, at the end of March 2009, a judgment was delivered in Delhi's High Court against some leading directors of UK-listed Vedanta Resources plc.

The case received very little publicity even within India, let alone in Britain.

But it cut to the heart of a persistent puzzle: How did Vedanta's founders, Anil Agarwal and family, amass a relative fortune (by domestic standards) even before his clan scored the triumph of being accepted onto the world's leading mining-related stock exchange? *

Thanks to research by prominent Indian journalist, Paranjoy Guha Thakurta, we may now be closer to finding out.

As Agarwal's flagship company, Sterlite Industries is controlled by Vedanta. A statement of Sterlite’s assets was presented to the UK's Financial Services Authority in 2003 before it got approval to list on the London Stock Exchange (LSE); these were certainly impressive.

However in 2002, following an investigation of Sterlite's earlier foreign transactions, the Enforcement Directorate (ED) for India's Foreign Exchange Management Act (FEMA - formerly FERA) concluded that the Agarwals and their cronies illegally acquired and transferred foreign currency amounting to 208 crore rupees [around US$420 million at today's rates] without permission from the Reserve Bank of India.

According to FEMA's ED, cited by Parnjoy Guha Thakurta, the Agarwal clique then "effected book adjustments that were tantamount to writing off Rs23 crore [around US$46 million]." Furthermore, it "gifted" more than Rs23.8 crore [just under US$47 million] to its own holding company, Twinstar.

In August 2004, nearly nine months after Sterlite re-invented itself as Vedanta on the LSE, the ED went on to find the company and its three Agarwal directors (Anil, Naveen and DP) guilty of having contravened FERA/FEMA. It imposed a total penalty equivalent to some US$70 million.

The Agarwal trio then appealed against the penalty, seeking to avoid having to "pre-deposit" this amount until an appeal against the judgment is heard. For reasons of its own, the appellate authority upheld the appeal - Vedanta could sit upon this seventy million greenbacks for a while (perhaps a great while) longer.

The jury is (literally) still out so far as the key accusation of money laundering is concerned.

But what the March High Court ruling did decide was that the Agarwals must now deposit these funds while awaiting an outcome of the underlying case.

Justice S. Ravindra Bhat stressed that the company was hardly short of funds (in fact, it's one of the most "cashed up" mining companies around today). More important, he ruled that Sterlite/Vedanta could not argue that there was no prima facie case against it.

UK citizens outraged - alas, not over Vedanta

The British public is currently up in arms over the extent to which many of their members of parliament have manipulated expenses' claims. The chorus of anger and disgust has reached such a pitch that it could bring down the incumbent New Labour government - or at any rate, force it into declaring a general election earlier than it wishes.

The absence of a rigorous and independent authority to vet such claims is widely recognised as a fundamental flaw in what, over the past three weeks, has figured as the biggest scandal in British politics since the Bliar regime's bloody illegal invasion of Iraq.

Yet, that same government set up the Financial Services Authority (FSA) in 1997, purportedly to regulate transactions among companies and funders. The FSA was tasked with carrying out a thorough due diligence review of Sterlite's finances and balance sheets at all its enterprises, before welcoming it onto the London Stock Exchange in late 2003.

Moreover, it was incumbent on the Authority to continue investigating such matters, especially when the company proposed substantial bond and rights issues over the succeeding four years.

But did it?

Let's briefly recap the sequence of events exposed by Mr Thakurta in his article below :

- 2002: India's state Enforcement Directorate of foreign investment rules alleges that Sterlite is guilty of massive violations of the regulations. The allegation is made more than a year before the company is listed on the London Stock Exchange.

The company argues (according to Justice Bhat this is the "most crucial" aspect of its case) that "there is no provision in (Indian) law which contemplates disclosure of (the source of) funds by a foreign company which invests in India, nor the nature of transactions it is involved in, while making such investments".

Whether or not that "defence" will soon be found derelict in India, it should have been investigated by the UK's FSA. After all, by the beginning of 2004, Sterlite was was to all intents and purpose the British company Vedanta.

However, the FSA appaently doesn't investigate - and certainly does nothing

- Mid-2004: Having profited from the second largest British IPO (Initial Public share Offering) of the previous year, Vedanta's prime movers are found guilty of money laundering and tax evasion, and fined no less than US$70 million, by India's Enforcement Directorate.

Again, the FSA seems oblivious to the fact - as does all the UK media.

- March 2009: Delhi's High Court orders Vedanta's directors and its biggest subsidiary, Sterlite, to hand over that US$70 million in anticipation of a trial of the substantive issues in the case.

But - like the three wise monkeys - the FSA sees no evil, hears no evil, and speaks no evil against Vedanta

The burning question

Did the key directors of one of the world's twenty biggest resource extraction companies lie and cheat their way over a period of years, in order to help fulfil its architect's boast of becoming "the biggest mining company in the world"?

Hopefully there's sufficient determination (among the Indian judiciary, if not politicians) to answer that vital question in the Agarwals' country of birth.

But, left to the British FSA, we'll doubtless still be awaiting the answer after Vedanta has, indeed, "taken over the world."

* Note: This "puzzle" was outlined in the 2005 report on Vedanta, "Ravages through India", published by Nostromo Research in collaboration with Indian and UK researchers, and accessible at:

[London Calling is published by Nostromo Research, London. Views expressed in this columnn do not necessarily reflect those of any other author, including the editors of the MAC website. Reproduction is welcomed, provided all sources, including that of Nostromo Research, are acknowledged.]

Was Sterlite involved in a money laundering racket?

by Paranjoy Guha Thakurta

28th May 2009

Lal Krishna Advani has said that if a Bharatiya Janata Party-led coalition comes to power, his government would bring back the huge amounts of money that have been illegally stashed away by Indians in Swiss banks. Leaders of the Group of 20 countries recently passed a resolution seeking closer scrutiny of tax havens and have claimed that the era of banking secrecy is over.

The Supreme Court will in late-July be commencing hearings on a public interest litigation urging the government to ensure that foreign assets of resident Indians illegally held abroad return to the country. The apex court was unhappy that the government had not evoked the provisions of the Money Laundering Act against those whose names figured in the government's investigations into those who had illegally taken money out of India.

The problem of clandestine outflows of funds and money laundering through tax havens is hardly new. The rhetoric on the topic, however, is, especially in view of the urgency to score political points during the election campaign. But wait. What's happening at a much more mundane level reveals the nature of the beast and the possible potential of the problem to damage the integrity of international financial transactions.

A recent judgement of the Delhi High Court has revealed that one of India's best known mining magnates, his relatives and his associates used two shell companies in two tax havens to bring in a substantial amount of money into a group company in the country seven years ago. So what? One of the company's directors has steadfastly ducked explaining the source of his funds when he was sought to be summoned questioned by government officials who unearthed the unusual transactions.

That the concerned corporate conglomerate is influential is without any doubt. A former Finance Minister used to serve on the board of directors of an important flagship company of the group. Besides, he and his wife have in the past both represented the corporate group in court as practicing lawyers.

The group is Vedanta Resources, earlier better known as Sterlite Industries. The group is currently India's largest non-ferrous metals and mining conglomerate in terms of revenues. It is also currently setting up a power plant. While most of its businesses are located in India, the group also operates in Zambia and Australia. Primarily engaged in mining and manufacturing copper, zinc and aluminium, the group entered the iron ore business in April 2007 by acquiring Sesa Goa resulting in Vedanta's revenues jumping by nearly 50 per cent between fiscal 2006 and 2008, from US $ 3.7 billion to $ 8.2 billion or over Rs 41,000 crore.

The group has around 50,000 employees. In court, it was pointed out that Vedanta/Sterlite is one of India's largest taxpayers contributing more that Rs 10,000 crore a year to the exchequer by way of income tax, sales tax, value added tax, excise duty, customs duty and so on.

In the recent past, the Vedanta/Sterlite group has been embroiled in a series of controversies relating to industrial relations and labour disputes, alleged insider trading and share price manipulation, environmental pollution, arousing the ire of indigenous communities, tax evasion and political donations. In a contentious decision taken in 2001, the BJP-led NDA government had divested the Indian government's 51 per cent stake in the erstwhile public sector Bharat Aluminium Company and relinquished management control to Sterlite Industries (India) Limited.

An entire book entitled Vedanta's Billions has been written by Rohit Poddar highlighting various controversies involving the group. In August 2006, members of the Samajwadi Party, the Telugu Desam Party and the All Indian Anna Dravida Munnetra Kazhagam (AIADMK) in the Rajya Sabha demanded the resignation of then Finance Minister Palaniappan Chidambaram on the basis of certain disclosures that were made in the book. The House had to be adjourned during zero hour as the MPs created a commotion over Chidambaram's links with the Vedanta/Sterlite group.

It was pointed out in Poddar's book that Chidambaram drew an amount of $ 70,000 a year as a non-executive director of the flagship company in the Vedanta/Sterlite group during 2003, a year during which the market value of the company's shares rose by a stupendous 1,000 per cent. It has been reported that between 2003 and 2007, the group had through a trust -- called the Public and Political Awareness Trust -- contributed funds to both the BJP and the Congress.

The former Finance Minister and his wife had acted as lawyers on behalf of the group in a case relating to alleged evasion of taxes. It had been alleged that the government dragged its feet in recovering excise and customs duty dues worth more than Rs 200 crore from group company, Sterlite Optical Technologies, based in Aurangabad.

In 2003, the Bombay High Court had severely criticized the management of the Vedanta/Sterlite group for the manner in which shares of two investment companies were transferred to Twinstar Holdings, a Mauritius based subsidiary of the London-headquartered Vedanta Resources, with the alleged aim of evading payment of tax liabilities.

The latest revelations about the questionable financial activities of the Sterlite group are contained in a judgment of March 31, 2009, made by Justice S. Ravindra Bhat of the Delhi High Court. The judgement relates to a case that had pitted the Special Director of Enforcement of the Foreign Exchange Regulation Act (FERA), 1973 - that was replaced in 1999 by the Foreign Exchange Management Act (FEMA) - against Anil Agarwal, managing director, Sterlite Industries, two other company directors Naveen Agarwal and D.P. Agarwal and the Appellate Tribunal for Foreign Exchange.

On May 26, 2002, the Enforcement Directorate (ED) alleged that Sterlite Industries had contravened section 8(1) of FERA by acquiring and transferring foreign currency equivalent to Rs 208 crore without the permission of the Reserve Bank of India. Out of Sterlite's total equity capital of Rs 42.5 crore, shares worth Rs 12.5 crore were held by the company's promoter directors while Twinstar Holdings, a Mauritius company, held shares worth Rs 3 crore.

Now comes the unusual part of the story. What follows are a series of complex and convoluted financial transactions that have been detailed in the court judgement.

The ED alleged that the three promoter directors of Twinstar had invested Rs 73 crore in three other group companies. Twinstar had been incorporated in Mauritius in January 1993 with an issued and paid-up capital of S 100 as a subsidiary of Volcan Investments, which in turn was incorporate at Nassau, Bahamas, in November 1992. Volcan Investments had a share capital of $ 2. The low capital bases of these two firms make it amply evident that these "shell" companies in tax havens were used to route substantially larger investments.

Search and seizure operations were undertaken by ED officials on D.P. Agarwal and documents seized indicated that Twinstar was "actually" operating from an address in Middlesex, United Kingdom. The documents further indicated remittances of funds to the tune of Rs 34.5 crore to Sterlite for subscribing to debentures immediately after Twinstar had been incorporated on January 12, 1993. The ED, in its show cause notices, alleged that D.P. Agarwal and his associates invested much more in Sterlite than the funds invested in Twinstar.

Thereafter, while voluntarily liquidating the investment companies controlled by Sterlite, Twinstar became the holding company with controlling interest in the Indian companies. In this process, the promoters of Sterlite effected book adjustments that were tantamount to writing off an amount of Rs 23 crore. Further, the ED alleged that Sterlite and its group companies "gifted" Rs 23.8 crore to Twinstar while family members of Sterlite's promoters gifted shares worth an additional Rs 7.2 crore to the Mauritius firm.

On August 3, 2004, the Special Director, ED, held Sterlite as well as its three directors guilty of having contravened FERA and imposed a penalty of Rs 20 crore on the company, that is, Sterlite Industries, and Rs 5 crore on each of the company's three promoter directors, Anil Agarwal, Naveen Agarwal and D.P. Agarwal. The three appealed against the Special Director's order before the AppellateTribunal for Foreign Exchange and while their appeals were pending, they sought permission from the Tribunal not to pre-deposit the amounts that had been imposed as penalty.

The Tribunal agreed with Sterlite and the Agarwals and they did not have to together deposit a sum of Rs 35 while their appeal was pending. This led to the Special Director, ED, filing a petition in the Delhi High Court against the Tribunal's decision. The Special Director contended that "non-disclosure of source of funds amounting to over Rs 208 crore" was a prima facie case of violating of FERA and that the Tribunal "palpably exceeded its jurisdiction in granting complete waiver of pre-deposit".

Without going into the merits of the case against Sterlite and its directors, Justice Ravindra Bhat upheld the view of the ED that the Tribunal should not have dispended with the requirement of Sterlite and its three directors depositing the penalty of Rs 35 crore while their appeals are heard. What clinched the case for the ED in the Delhi High Court was that despite being given opportunities to be heard, Sterlite's directors, notably D.P. Agarwal, "chose to stay away and not answer when called upon and summoned". Thus, it "was legitimately concluded that they had no explanation to offer" and that "the penalty amount was therefore perfectly justified".

What is significant about the judgement is that the court was not convinced by the argument "that the source of funding of Twinstar could not have been disclosed by Sterlite or its directors, since Twinstar was not subject to the jurisdiction and the laws of India, being incorporated overseas".

The company's lawyers contended that the documents that were relied on by the ED mainly pertained to Twinstar's investments and three private companies "to which neither Sterlite nor its directors were privy", besides documents relating to purchase of mines in Australia, including Tasmania, and Canada by Twinstar, management agreements between Sterlite and companies in the UK and Canada and expansion of the group's copper smelter (in Tuticorin). It was also claimed that the company had obtained the "necessary permissions" and "requisite approvals" for its transactions from various government bodies, including the RBI.

According to the judgement, the "most crucial" aspect of the company's argument was its submission that "there is no provision in (Indian) law which contemplates disclosure of (the source of) funds by a foreign company which invests in India, nor the nature of the transactions it is involved in, while making such investments".

The Delhi High Court, however, did not go into the merits or otherwise of such contentions but confined its judgement to the "correctness and propriety" of the decision of the Appellate Tribunal for Foreign Exchange to exercise its discretion in granting "complete exemption" to Sterlite and its directors from pre-depositing the penalty amount of Rs 35 crore since the company was neither short of funds nor could it claim that there no prima facie case against it and its directors.

The point to note is that neither the judge nor this correspondent is jumping to a conclusion that Sterlite and its directors (specifically D.P. Agarwal) violated FERA or its successor legislation FEMA. [But D P Agarwal] was in fact on the board of directors of a company incorporated outside India that invested in an Indian company on whose board he is also represented. Can and should legal action be taken against such a person, particularly after he deliberately refuses to avail of the opportunity to explain the source of his funds?

It should also be noted that the provisions of FERA and FEMA apply to all persons who are resident in India even if they are not in the country. The FEMA applies to "all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention (of the law)... committed outside India by any person to whom this Act applies".

Many believe the Sterlite case could have important implications on other pending cases against Indians and Indian companies wherein they have been accused of hawala or money-laundering operations, namely, legalizing illegal funds that have been into the country via complicated financial transactions through dummy firms in tax havens like Mauritius.

* Am earlier version of this article was published in May 2009 by the Indian weekly newspaper, Current. Paranjoy Guha Thakurta is a journalist, film maker and broadcaster, who has worked, inter alia, for the BBC and many Indian newspapers.

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