THE Reserve Bank of India has asked Anil Ambani group firm Reliance Infrastructure (erstwhile Reliance Energy) to pay just under Rs 125 crore as compounding fees for parking foreign loan proceeds worth $300 million with its mutual fund in India for 315 days and then repatriating the money abroad to a joint venture company. These actions, according to an RBI order passed on August 27 this year, violated various provisions of the Foreign Exchange Management Act (Fema).

An official spokesperson of Reliance Energy said it has not paid the compounding fees to RBI “as it was the company’s option either to pay the fees and complete the process of compounding or not to pay the fees and prove the correctness of the company’s claim on merit, if the occasion arises. The company chose the second option.” The order came after the company made an application dated April 17 this year for compounding of contravention of offences under Fema, an act of Parliament which governs foreign exchange transactions. The company also denied violation of any ECB guidelines.

In its order, the RBI said Reliance Energy raised a $360-million ECB on July 25, 2006, for investment in infrastructure projects in India. The ECB proceeds were drawn down on November 15, 2006 and temporarily parked overseas in liquid assets. On April 26, 2007, Reliance Energy repatriated the ECB proceeds worth $300 million to India while the balance remained abroad in liquid assets.

It then invested these funds in Reliance Mutual Fund Growth Option and Reliance Floating Rate Fund—Growth Option and next day (April 27), the entire money was withdrawn and invested in Reliance Fixed Horizon Fund III Annual Plan Series V. On March 5 this year, Reliance Energy repatriated $500 million (which included the ECB proceeds repatriated on April 26, 2007, and invested in capital market instruments) for investment in an overseas joint venture called Gourock Ventures based in the British Virgin Islands.

The RBI said,under the Fema guidelines issued in 2000, a borrower is required to keep ECB funds parked abroad till actual requirement in India. Further, a borrower cannot utilise the funds for any other purpose.

“The conduct of the applicant was in contravention of the ECB guidelines and the same are sought to be compounded,” the RBI order signed by chief general manager Salim Gangadharan said.

During the personal hearing on June 16, 2008, Reliance Energy, represented by group managing director Gautam Doshi and PricewaterhouseCoopers executive director Sanjay Kapadia, admitted the contravention. The company said due to unforeseen circumstances, its Dadri power project was delayed. Therefore, the company said, the ECB proceeds of $300 million was bought to India and was parked in liquid debt mutual fund schemes.

Reliance also contended that they invested the ECB proceeds in debt mutual fund schemes to ensure immediate availability of funds for utilisation in India.

Rejecting Reliance Energy’s contention, the RBI said it took the company 315 days to realise the ECB proceeds are not required for its intended purpose and to repatriate the same for alternate use in an overseas joint venture (on March 5, 2008).

“I do not find any merit in this contention also as the applicant has not approached the RBI either for utilising the proceeds not provided for in the ECB guidelines or its repatriation abroad for investment in the capital of the JV,” the RBI official said in the order.

In its defence, the company said the exchange rate gain on account of remittance on March 5, 2008, would be a notional interim rate gain as such exchange rate gain is not crystallised.

But RBI does not think so. “They have also stated that in terms of accounting standard 11 (AS 11), all foreign exchange loans have to be restated and the difference between current exchange rate and the rate at which the same were remitted to India has to be shown as foreign exchange loss/gain in profit and loss accounts. However, in a scenario where the proceeds of the ECB are parked overseas, the exchange rate gains or losses are neutralised as the gains or losses restating of the liability side are offset with corresponding exchange losses or gains in the asset.

In this case, the exchange gain had indeed been realised and the additional exchange gain had accrued to the company through an unlawful act under Fema,” the order said.

It said as the company has made additional income of 124 crore, it is liable to pay a fine of Rs 124.68 crore.
 
On August this year, the company submitted another fresh application for compounding and requested for withdrawal of the present application dated April 17, 2008, to include contravention committed in respect of an another transaction of ECB worth $150 million. But the RBI said the company will have to make separate application for every transaction and two transactions are different and independent and cannot be clubbed together.