MAC: Mines and Communities

Sixteen years of fraud?

Published by MAC on 2009-11-30
Source: Current Weekly (2009-11-02)

Vedanta on Trial (1)

Vedanta Resources' launch on London's stock exchange in late 2003 was the second biggest UK floatation of that year - and the largest-ever by an Indian company.

It had taken several months for the UK's Financial Services Agency (FSA) to supposedly check the company's credentials, specifically its financial provenance.

Just how did Vedanta's key subsidiary, Sterlite Industries India Ltd, obtain the money to build itself into India's most influential private mining conglomerate - with other important related ventures in Australia, Canada, and Armenia?

There was no doubt that two overseas holding companies, Volcan and Twinstar, had been Sterlite's major funding conduit.  But these were essentially "shells", set up with virtually no start-up capital.  By using them to effect some vital and lucrative  acquisitions, followed by some stupendous profit-taking, had Sterlite's directors - notably the Agarwal family - been guilty of tax evasion?

The FSA dismissed such allegations - if indeed it had conscientiously examined them in the first place.  

However, in 2002, the year before the FSA allowed Sterlite to reconsitute itself as Vedanta Resources plc, India's Enforcement Directorate (ED) - the regulatory body for foreign exchange transactions - served a "show cause" notice on three of the Agarwal family.

The notice was a demand that the Sterlite directors answer allegations of using their holding companies to avoid paying domestic taxes on foreign exchange transactions. It was a polite way of saying there was  prima facie evidence, dating back to 1993, that the Agarwals had been guilty of  money laundering on a vast scale.

The case meandered through the Indian judicial system over the next seven years, while the Agarwals employed some of the country's best-paid lawyers, to stall a final judgment.

Among these lawyers was Mr P Chidambaram, who pleaded for Sterlite in a 2003 Bombay High Court case related to the ED's allegations. The following year, Chidambaram became a director of Vedanta's London board, and immediately afterwards was elevated to the powerful position of India's Finance Minister. See http://www.minesandcommunities.org/article.php?a=9686.

In March 2009 -  with the money laundering allegations still unresolved - a Delhi judge ruled that the Agarwals should pre-deposit a sum equivalent to what they would have to forfeit, should the case finally go against them. See: http://www.minesandcommunities.org/article.php?a=9278

The Agarwals appealed the verdict - and the litigation continues rumbling on.

Meanwhile, recent changes in the membership of the court entertaining the appeals   raise strong suspicions that India's judiciary won't be truly independent, if and when it resolves the whole affair.

Paranjoy Guha Thakurta is the only major Indian journalist to have delved into this veritable hornets' nest of accusations. His latest article on the cases (reproduced here) relies primarily on court documents. It was published earlier this month in "Current" - a Delhi English-language magazine calling itself India's "boldest weekly". A shorter version also appeared in the country's leading Anglophone "expose" newpaper, Tehelkar.

Many questions still remain to be answered.

One of these is whether the ED's judgment against Sterlite in 2002 was a major factor in prompting the Agarwals to re-locate their company in London the following year. 

By claiming they no longer operated  a domestic Indian outfit, and were now Non Indian Residents (NRIs) -  might they have hoped to avoid being answerable to India's foreign exchange laws? Indeed, this appears to be a key argument, now employed by their lawyers before Delhi's High Court.

In any event, the allegations are not only very serious, requiring urgent further investigations.

They also strike to the heart of what appears to have been a deplorable lack of proper governance of one the world's most successful mining companies, on the part of two different national jurisdictions.

[Comment by Nostromo Research, 25 November 2009]

Vedanta's Questionable Resources

by Paranjoy Guha Thakurta, Current Weekly, Delhi

2 November 2009

Is an important individual trying to influence the outcome of a Rs 208-crore money laundering case against the promoters of the mining conglomerate?

Is the government dragging its feet about pursuing a major money-laundering case against three influential individuals at the helms of the Vedanta Resources/Sterlite mining empire of the Agarwal family?

Current has learnt that an important person outside the Ministry of Finance - which administratively controls the Enforcement Directorate (ED) responsible for prosecuting offenders under the Foreign Exchange Management Act (FEMA), 1999, and its earlier avatar, the Foreign Exchange Regulation Act (FERA), 1973 - is trying to influence the outcome of the case against the promoters of one of the largest privately-owned mining conglomerates in the world.

In recent months, important politicians in the country - from leader of the Opposition in the Lok Sabha, Lal Kishen Advani, to Finance Minister Pranab Mukherjee - have been making a lot of noise about the need to bring back into the country money that has been illegally stashed in Swiss bank accounts. BJP boss Advani had sought to make this into a major election issue in March and April. However, the Rs 208-crore money laundering case against the Vedanta/Sterlite group and its promoters has received relatively little attention in the news media. Current was the only publication to highlight this case in its May 11-17, 2009, issue.

The ED has alleged that Anil Agarwal, head of the Vedanta Resources/Sterlite group, together with his father Dwarka Prasad Agarwal and his brother Navin Agarwal, created shell companies in tax havens to launder black money generated in India and bring the funds back into the country for investment in group companies in order to evade payment of local taxes.

The Vedanta/Sterlite group of companies, promoted by the Agarwal family, is India's largest privately-owned mining conglomerate and one which has been embroiled in a vast number of controversies in recent years (see box).

Money laundering allegations

Coming to the money laundering allegations, the scam can be traced back to January 1993 when family patriarch D. P. Agarwal founded a company under the name of Twinstar Holdings Limited registered in Mauritius with a negligible capital base of US$ 100 or less than Rs 5,000 at current exchange rates.

Twinstar was started as a subsidiary of a company incorporated in Nassau, Bahamas, in November 1992, by the name of Volcan Investments Limited that had a capital base which was even lower, namely, only US$ 2 or not even Rs 50. In other words, these two firms promoted by the senior Agarwal could justifiably be described as "shell companies" or "shelf companies" or even "nameplate" companies set up in tax havens.

The show cause notice served by the ED on the Agarwal family members and their flagship company, Sterlite Industries (India) Limited, on May 26, 2002, relate to the six year period between 1993 and 1999 when Twinstar acquired the shares of Sterlite and various investment companies - such as Dwarka Prasad Anil Kumar Investments Private Limited, Pravin Navin Investment & Trading Private Limited and Sterlite Copper Rolling Mills Private Limited - which, in turn, had made substantial investments in Sterlite and another group company, Madras Aluminium Company Limited (MALCO) after obtaining permission from the Reserve Bank of India (RBI).

On April 29, 1999, the investment companies were liquidated and all the shares of Sterlite came under Twinstar's possession. Twinstar thus became the 100 per cent owner of shares in the investment companies and received government approvals from the RBI as well as the Foreign Investment Promotion Board (FIPB). So far, so good and no allegations of hanky-panky are raised against the group.

The problems for the group began on December 8, 1999, after officials of the Income Tax department raided the offices of Sterlite located at Dhanraj Mahal, Apollo Bunder and Tulsian Chambers, both in Mumbai, and seized many documents. After perusing the documents, the Income Tax department decided to engage the services of ED officials because it appeared that there could have violation of the country's foreign exchange laws. After analyzing the documents, the ED inferred that Twinstar was incorporated with the sole intention of acquiring an interest in Sterlite.

The Directorate alleged that the Agarwals, before liquidating the shares of the investment companies mentioned, wrote off loans worth 23 crore and made an agreement to gift the overseas corporate body, Twinstar, a sum of Rs 33.82 crore including shares of Sterlite worth Rs 7.22 crore. Further, between 1993 and 1999, Sterlite and its investment companies allegedly brought in Rs 208 crore to India through Twinstar to subscribe to the shares of Sterlite and make investments in the company.

Documents Seized

Twinstar not only made investments in the Indian companies that are a part of the Vedanta/Sterlite group but also acquired a clutch of foreign firms in the United Kingdom and elsewhere with names like Duratube Limited, Meryl Lynch, Oasis International Corporation. In addition, Twinstar became a shareholder of Montecello Corporation of Netherlands and First Dynasty Mines of Canada. Further, the ED alleged that Twinstar had been used by Sterlite to acquire two copper mines in Australia.

Vedanta/Sterlite group head Anil Agarwal claimed that the late A.L.
Jindal (who was the father-in-law of his brother Navin) had a textile business in the UK and had invested in Twinstar but was not a director of the company. He could not, however, produce balance sheets of Twinstar. Yet the documents seized apparently indicated that Twinstar held more than 50 per cent of the shares of Sterlite (after it went public) and 49 per cent of the shares of MALCO.

The ED found documents exchanged between executives of First Dynasty Mines and Anil Agarwal, Chairman and Managing Director, Sterlite, and Tarun Jain, a director and chief financial officer of the company in the latter's office in Dhanraj Mahal in Mumbai, though both these individuals were not directors of Twinstar.

Among other documents seized in Sterlite's offices are letters exchanged between Jain and representatives of Jardine Fleming India marked "confidential" in which the latter had warned the former that its transactions would be construed as "related party" transactions that would be viewed "suspiciously" by stock exchange authorities, regulatory bodies, analysts and the media and could be construed as being unfair to the interests of minority shareholders in Sterlite.

The Directorate alleged in its show-cause notice to Sterlite that it had contravened section 8(1) of FERA by acquiring and transferring foreign currency equivalent to Rs 208 crore to Twinstar without the permission of the RBI and that the money was subsequently used as an investment from Twinstar in Sterlite without the requisite legal permission from the RBI. The ED claims it arrived at this conclusion since the source of funds was ostensibly unknown.

Section 8(1) of FERA states that "except with the previous general or special permission of the Reserve Bank (of India), no person other than an authorized dealer shall in India, other than an authorized dealer shall outside India, purchase or otherwise acquire or borrow from, or sell, or otherwise transfer or lend to or exchange with, any person not being an authorized dealer, any foreign exchange."

The ED alleged that on the basis of documents seized, it appeared as of Twinstar Holdings Limited or Twinstar was "actually" operating from an address in Middlesex, UK and not in Mauritius where it had been incorporated. 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.

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 (India) Limited, 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.

In their appeal, the Agarwals and Sterlite claimed that under section
19(1) of FEMA (or the Foreign Exchange Management Act that replaced the FERA in 1999), the penalties imposed on the company and its directors would cause "undue hardship" to them and their company. The Tribunal agreed with Sterlite and the Agarwals and they did not have to together deposit a sum of Rs 35 crore 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".

On March 31, 2009, Justice S. Ravindra Bhat of the Delhi High Court ruled against the Agarwals and their company, Sterlite, in favour of the ED. Without going into the merits of the case against Sterlite and its directors, Justice Bhat upheld the view of the ED that the Appellate 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.

High Court clincher: Sterlite directors "stay away"

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 and Canada by Twinstar, management agreements between Sterlite and companies in the UK and Canada. 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 whether legal action could be initiated against Sterlite and its directors (specifically D.P. Agarwal) since he 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?

D.P. Agarwal is at present a director of various group companies that include, Volcan Investments, Twin Star Investments Limited, Twin Star Infrastructure Limited, Twin Star Overseas Limited, Sterlite Industries (India) Limited, Sterlite Paper Limited, Sterlite Iron & Steel Company Limited and Nagreeka Exports Limited. Anil and Navin Agarwal's father resigned as a full-time director of Sterlite Industries (India) with effect from March 31, 2009, but he remains an executive officer of the company in the capacity of Director, Finance.

It may 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".

According to the judgment by Justice Bhat, 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 funds by a foreign company which invests in India, nor the nature of the transactions it is involved in, while making such investments'. But what must be noted is that the provisions of FERA and FEMA apply to all the persons who are resident in India even if they are not in the country. The FEMA states that the act 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."

Incredible story

Now come the twists in the tail of this incredible story of the convoluted manner in which funds were allegedly laundered by the Agarwals and their company, Sterlite.

Aggrieved by Justice Bhat's March 31 order, the promoter-directors of the Sterlite group moved a division bench of the Delhi High Court. On July 20, the case was heard by the bench comprising Chief Justice Ajit Prakash Shah and Justice Manmohan (one name) and adjourned till August 10.

Sterlite was represented by a high-profile senior advocate, Debi Prasad Pal, former Member of Parliament who had served as Union Minister of State for Finance in P.V. Narasimha Rao's government (1991-96) and worked directly under Dr Manmohan Singh who was then Finance Minister and is currently the country's Prime Minister.
Incidentally, Pal, who joined the Trinamool Congress briefly before returning to the Congress on the request of Sonia Gandhi and the PM, is one of India's highest income tax payers.

Hearing on the Sterlite case had to be adjourned from August 10 to August 17 as the division bench of the Delhi High Court did not assemble on that day. On August 17, the bench heard the case in which the ED was represented by Additional Solicitor General A.S. Chadhiok and advocate-on-record Sanjay Katyal. The ASG sought and was granted time to produce original records of the case and provide a compilation of the documents to the counsel of the appellants, that is, the Agarwals and Sterlite. Hearing was adjourned to September 7, but the bench did not assemble on that day as well.

On October 13, the division bench hearing the case was reconstituted and Justice Manmohan was replaced by Justice Dr S. Muralidhar. Another important development took place on that day. Advocate-on-record Sanjay Katyal, a lawyer with a reputation for integrity, honesty and diligence, was replaced by Sachin Datta.

Who is Sachin Datta? He happens to have been a briefing counsel for P.
Chidambaram, Home Minister, at a time when he was practicing as a lawyer and was also serving on the board of directors of Sterlite, that is, before he became Union Finance Minister in May 2004. That's not all. Sachin Datta also happens to be the son of B. Datta, former Additional Solicitor General who had gone to London on December 22, 2005, with an official request from the government of India to the UK Crown Prosecution Service to de-freeze the accounts of Italian businessman Ottavio Quattrochhi to release a sum of around $ 4.6 million (approximately Rs 21 crore) that was allegedly a part of the bribes paid by Swedish armaments manufacturer Bofors.

Two important questions remain unanswered. Is pressure being exerted on officials of the Enforcement Directorate by an invisible hand outside the Ministry of Finance? Is the Prime Minister and Finance Minister Pranab Mukherjee aware of the circumstances under which lawyers have been replaced in this money-laundering case at a time when prominent political leaders (including the FM) are waxing eloquent on the need to bring back the illegal funds that have stashed away by Indians outside the country?

Your guess could be as good as mine.


Box: A controversial conglomerate

The London-based Vedanta Resources, better known in India as the Sterlite group, is currently the country's largest non-ferrous metals and mining conglomerate in terms of revenues. It is also setting up a power plant. The group also operates in Zambia and Australia. The group has around 50,000 employees and 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 and customs duty.

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. Vedanata acquired a 51 per cent controlling stake in Sesa Goa from Japan's Mitsui & Company for $ 981 million (or roughly Rs 4,900 crore).

On October 29, the company acknowledged to the stock exchange at Mumbai that the government is probing allegations of financial irregularities, malpractices and mismanagement against a subsidiary of Sesa Goa, Sesa Industries Limited (SIL). Sesa Goa received intimation from the Serious Frauds Investigation Office (SFIO) of the Ministry of Corporate Affairs on October 28 following a probe that had earlier been conducted by the Registrar of Companies relating to the 2001-2009 period.

The RoC probe has been going on since 2003 and the SFIO is meant to complete its investigation in six months. The company stated that it believed "the investigation originates from the complaints filed by one of the shareholders of SIL against SIL, the company and (its) directors in 2003, prior to acquisition of the company by Vedanta" and added that it would cooperate fully with the investigators.

In the first major case of privatization of its kind, in a controversial move in early-2001, the Bharatiya Janata Party (BJP) led National Democratic Alliance coalition headed by Atal Behari Vajpayee sold 51 per cent of the Union government's stake in Bharat Aluminium Company (BALCO) to Sterlite for Rs 551 crore.

In the more recent past, the Vedanta/Sterlite group has been accused of a variety of contentious decisions from fomenting industrial unrest, insider trading, share price manipulation, environmental pollution, arousing the ire of indigenous communities, tax evasion and political donations.

The contents of a book entitled "Vedanta's Billions" by Rohit Poddar on the group had raised a ruckus in the Rajya Sabha in August 2006 when MPs belonging to 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 (nearly Rs 35 lakh) a year as a non-executive director of the flagship company in the Vedanata/Sterlite group during 2003, a year during which the market value of the company's shares rose by a massive 1,000 per cent!

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 Limited (SOTL), based in Aurangabad.

Chidambaram and his wife (also a lawyer) represented SOTL to seek a stay on recovery of allegedly unpaid customs and excise duties in the Bombay High Court. The tax probe was initiated as SOTL allegedly diverted products from its 100 per cent export-oriented plant for sale in the domestic market. The company had been exempt from payment of import duties on the condition that all products manufactured using imported raw material would be exported and not sold domestically.

Sterlite's tax dues totalled almost Rs 250 crore, Rs 240.4 crore by way of central excise duty and Rs 9.26 crore as customs duty. The court dismissed the petition against the company after an appeal and the quantum of central excise duties that was payable by SOTL was brought to Rs 199 crore.

It was also 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. An MLA from Orissa had raised a controversy when he publicly claimed that Vedanta had donated the equivalent of $ 2.5 million (Rs 7.5 crore) to various political parties in India and alleged that among the recipients of the money was Orissa Chief Minister Naveen Patnaik and other leaders of his party, the Biju Janata Dal (BJD).

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 (see main story).

In another tax-evasion case against the Vedanta group, the UK-based company at present faces a situation wherein it may have to pay a sum equivalent to Rs 900 crore for failing to deduct taxes while purchasing a controlling equity stake in Sesa Goa, a company that mines iron ore in three Indian states in India. Vedanta had purchased
51 per cent of Sesa Goa's shares in 2007 beating competitive bids from Arcelor Mittal and a company in the Kumaramangalam Birla group.

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