Essar’s Rs 2600 crore headache: The Directorate of Revenue Intelligence alleges that the Group siphoned off funds from India

28 July, 2015

Last week, The Caravan released, in part, a list that had been circulated among senior officials at Essar—an Indian conglomerate that has investments in sectors such as steel, infrastructure and energy. The list, which will be released in full this week, revealed that the company had sent out close to 195 iPads as Diwali gifts to several journalists, politicians and bureaucrats in the country. This document was the latest in a long string of revelations often termed the Essar Leaks. Some of these disclosures also suggested that Essar had granted favours to senior politicians such as Nitin Gadkari, the union minister for road transport and highways, and Pranab Mukherjee, the president of India. It now appears that the company may have more than just these allegations to worry about.

A show-cause notice issued by the Directorate of Revenue Intelligence (DRI), Mumbai, against the company in March this year indicates that Essar may have been siphoning off money from India through its network of companies abroad. The group has allegedly creamed off foreign exchange of over Rs 2,600 crore. It has done this through imports of equipment for its power companies. A copy of the 247-page notice is in the Caravan’s possession.

The notice—signed by P K Dash, the additional director general of the DRI—contains diagrams that illustrate the maze of companies that the group invested in, formed, or bought in Dubai, Mauritius, Cyprus, the United Kingdom and Cayman Islands. It also includes tabulated information on the import consignments that were used to siphon the money, their values and the invoices.

According to the notice, the alleged inflation of values of imported goods by Essar Power Gujarat Limited (EPGL) is Rs 637.71 crore; that of Essar Power MP Limited (EPMPL) is Rs 556.93 crore; that of Essar Oil Limited (EOL) is Rs 655.67 crore and; that of Essar Projects India Limited (EPIL) is Rs 750.54 crore. This makes the total value of the alleged inflation Rs 2600.87 crore. The notice stated that Essar inflated the import values by about 40 per cent.

Between 2008 and 2014, the goods imported by the four Essar companies—EOL, EPGL, EPMPL and EPIL— were received directly from the suppliers abroad. The companies that were supplying the equipment are in China, South Korea and Europe. EPGL and EPMPL were importing Boiler-Turbine-Generator (BTG) goods for their coal-based plants at Salaya in Gujarat and Mahan in Madhya Pradesh respectively. EOL imported equipment for its crude oil refinery at Vadinar in Jamnagar, Gujarat. EPIL was the Engineering, Procurement and Construction (EPC) contractor for a urea fertiliser plant that belonged to Matix Fertilisers and Chemicals at Durgapur in West Bengal.

However, the import documents for all of these 890 consignments were routed through an intermediary company in the United Arab Emirates. This company was Global Supplies (GSF), a free zone establishment. In the UAE, free zones have been set up to encourage international business and provide incentives such as 100 percent ownership to expatriates and single-window administration. According to the show-cause notice, GSF was owned and controlled by the Essar group.

For every invoice that was sent by the original equipment manufacturer (OEM) to GSF, the latter raised back-to-back invoices on the Indian importers. Through these invoices, GSF was portrayed as the supplier of the equipment that was imported. However, the show-cause notice unearthed evidence illustrating that Essar group officials had visited, for instance, China for discussions and negotiations with the main supplier—Harbin Power Engineering Company—for the procurement of BTG equipment. The payment invoice for this equipment was made by GSF to the Essar companies at inflated import values, although GSF paid the OEMs at the real value of imports.

According to the notice, GSF did not appear to be adding any incremental value to the product that could justify the increase in the value of the BTG equipment after it had been contracted by the Essar companies for import. In fact as the notice revealed, it would have been impossible for GSF to add any value to the equipment, as it was directly being shipped from the manufacturers to the importers. Furthermore, the notice also stated that, “From the statements of the concerned official, it is also appears that apart from design, engineering, manufacture and supply of the equipment which the OEMs actually did, they also supervised the performance tests, reliability run, etc. in their capacity as manufacturer of the BTG and its auxiliaries.”

The DRI had previously detected this method of sending money abroad to evade taxes, in the imports of three companies that belonged to the Adani group—a multi-national conglomerate that is based in Ahmedabad and deals in resources, logistics, energy and agribusiness. However the extent of layering in the Essar case was far greater.

On 17 June 2015, I contacted a spokesperson from Essar for the company’s response to this notice. He responded to me on 20 June 2015:

“We strongly refute the allegations in the show cause notice. We state that the project cost compares favourably with similar projects built in India.

The notice apparently is based on incomplete facts and extrapolation of convenient data points.

Essar wishes to point out that all the procurements are from overseas suppliers and were made at arm’s length price which were not only at the lower quadrant compared to peer projects built in India but also certified to be reasonable by reputed technical consultants. The so called margins or the excess payments as the case may be, worked out by the DRI, do not take into account all the costs incurred by the overseas supplier thereby resulting in highly inflated margins as against the normative net margins made by the supplier, thus leading to erroneous conclusions. As the supplies are in the nature of project imports, suppliers had provided substantial services to the importing companies by expediting services, ensuring quality standards, timely monitoring and inspection/ testing, providing the performance guarantee to the Indian importing companies, and would have incurred substantial financial and other costs in providing these services. The net margin earned by the supplier are reasonable and in line with similar supplier margins.

This is only a Show Cause Notice and the company’s are confident that during the proceedings, the explanations provided will be considered satisfactory by the adjudicating authorities.’’

The DRI investigation that was launched in 2013, first led to V Ashok, the chief financial officer of the Essar group. Ashok claimed that GSF was an erstwhile subsidiary of Essar Projects Limited (EPL) —a global EPC contracter—in UAE. EPL had been formed in the UAE in April 2006, and was owned by Essar Global Limited (EGFL) that had been established in Cayman Islands in September 2005. Essar Global Limited (EGL) was the holding company for all the companies that belong to the Essar group across the world. Its name was changed to Essar Global Funds Limited (EGFL) in March 2013 and it is registered in the Cayman Islands. Following this revelation, senior officials from Essar such as Tapas Bhattacharya, the chief financial officer of EPIL, were drawn into the investigation.

As the enquiry progressed, the notice states, a web page that had the details of Pradeep Chokhany, the director of Essar Projects, disappeared from the group’s website on 13 June 2014. On 2 June 2014, the DRI had sent Chokhany summons regarding his appearance for the ongoing investiagation. Chokhany had been asked to join the investigation on 9 June 2014. On 13 June 2014, Alwyn Keither Bowden, the chief executive officer and director of EPIL, sent the DRI a mail to inform them that “Chokhany had never been a Director nor was he in employment with Essar Projects India Limited.” On 20 June, 2014, the DRI sent Bowden a letter and asked for clarification on Chokhany’s employment with Essar. In his response, Bowden stated that Chokhany was not working with the EPIL in any capacity whatsoever at that time. Bowden also said that Chokhany had been employed with Essar Construction (India)—that later became EPIL—from 1 August 2006 to 31 March 2007. According to Bowden, Chokhany subsequently joined Essar Projects Middle East on 14 January 2013 and resigned from the company on 6 June 2014. He did not volunteer any information on Chokhany’s whereabouts between 31 March 2007 and 14 January 2013. The notice observed that it was during this period that, “it appears Shri Pradeep Chokhany, inter-alia, actively managed, controlled 85 supervised activities of GSF, in addition to being a Director in EPL [Essar Projects Limited], the parent-holding company of GSF.”. Chokhany was the signatory for GSF in contracts that were signed by GSF with EPGL, EPMPL, EOL and EPIL on behalf of Matix.

Through an investigation that lasted nearly two years, the DRI in its show-cause notice concluded that, “the efforts to severe the link on paper through sham transactions notwithstanding,” at least during the period from December 2006 to May 2014, GSF was a subsidiary of EPL.

EGFL, the company that had set up EPL, was owned by both Copper Canyon Holdings (CCHL) and Kettle River Holdings (KRHL) to the extent of 50 percent each. In the notice, these two are traced back to The Triton Trust and the Virgo Trust, both of which are owned by the Standard Chartered Trust based in Cayman Islands. The two trusts have as their beneficiaries, several companies that are owned by the families of Ravikant Ruia—the vice-chariman of the Essar group—and Shashikant Ruia—the chairman of the Essar group—respectively.

The beneficiary companies of both the Ravi Ruia group and the Shashikant Ruia group are registered in two separate addresses in the British Virgin Islands, a well-known tax haven. The show-cause noticed also noted that Greenpeace International—a Non-governmental Organisation (NGO) that has been running a high-decibel campaign against Essar’s Mahan Power project in Madhya Pradesh—was one of the beneficiaries of the Triton trust.

The noticed quoted a certificate dated 16 October 2008, that was issued by Standard Chartered Trust (Cayman) Limited as a Trustee of The Triton Trust. This certificate names Greenpeace International as one of the beneficiaries of the trust. Quoted here are two paragraphs from the show cause notice:

The show-cause notice states that CCHL owned 50 percent of the issued and paid-up share capital of EGL/EGFL. CCHL was in turn wholly owned by Standard Chartered Trust (Cayman) Limited and later by the Appleby Trust (Cayman) Limited as trustees of the Triton Trust, whose beneficiaries were certain companies, five—later four—five which were fully owned by Mr. Ravikant Ruia, his wife, son and daughter. All the beneficiary companies were shown having their offices at one common address: Trident Chambers, P.O.Box 146, Road Town, Tortolla, British Virgin Islands.

The notice also said that KRHL owned 50 percent of the issued and paid-up share capital of EGL/EGFL and it was in turn, wholly owned by Standard Chartered Trust (Cayman) Limited and later by The R & H Trust Co Limited as trustees of the Virgo Trust, whose beneficiaries were certain companies, five—later four—of which were fully owned by Mr. Shashikant Ruia, his wife and two sons. All the beneficiary companies were shown having their offices at a common address: Woodbourne Hall, P.O. Box 3162, Road Town, Tortolla, British Virgin Islands (BVI).

I was unable to ascertain whether Greenpeace continued to be a beneficiary of the Triton Trust, even as the Essar family trusts emerged as beneficiaries. However, a spokesperson from the organisation sent me the following response to my queries, “Greenpeace International has made a thorough check of its financial records and has found no mention of a donation from Triton Trust from 2006 onwards. Greenpeace has a strict policy that it does not accept donations from governments, corporations or political parties to maintain its independence. We actively screen for and send back receipts that are drawn from corporate accounts,” Greenpeace International’s Global Finance Director Chris Fyfe said.
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The DRI’s show-cause notice indicates deliberate malpractice by the Essar group. The agency’s findings deserve an extended investigation by the Enforcement Directorate and tax authorities of India.

Note: This story has been updated to include the response from Greenpeace.