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entire money was withdrawn and invested in Reliance Fixed Horizon Fund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.
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