Mumbai: India’s foreign investment regulator has denied approval for a stake sale by JSW Infrastructure Ltd, the ports-to-urban development subsidiary of the JSW group, to a Mauritius-based firm more than two years back, citing lack of information on the investor’s source of funds.
The Foreign Investment Promotion Board, or FIPB, which regulates foreign investments into India, also rejected JSW Infrastructure’s request for the so-called operating-cum-holding company status. Foreign direct investment, or FDI, up to 100% is allowed in a holding company with FIPB approval.
FIPB said JSW Infrastructure “does not appear to be cooperating to furnish information” on the investor. The rejection puts at risk the foreign investor’s 23.38% holding in JSW Infrastructure as well as the Mumbai-based company’s own investment in a port development subsidiary.
But a senior group executive said the company expects to resolve the issue soon. “We have been given three weeks’ time to respond,” said M.V.S. Seshagiri Rao, director of finance at JSW Steel Ltd and group spokesman, while admitting “the rejection of our proposal for now”.
“We will share whatever additional information we have in our possession (with FIPB),” he said, but added the foreign investor’s source of funds is not available with the company either.
JSW Infrastructure, a closely held company formed in April 2006 with a paid-up capital of about Rs40 crore by the O.P. Jindal Group, had in August that year sold nearly 9.4 million shares to Mauritius-based Steel Traders Ltd for Rs9.35 crore without FIPB approval.
Soon, JSW Infrastructure made a 100% investment in JSW Jaigarh Port, which was incorporated in January 2007 to develop a port at Jaigarh, near Maharashtra’s Ratnagiri district.
The company also did not have the holding company status to be able to invest in another firm or subsidiary.
The company subsequently approached FIPB seeking approval for the stake sale, and for continuation of the aggregate foreign holding by Steel Traders, as per minutes of an FIPB meeting on 12 September. It also sought to be classified as an operating-cum-holding company.
FIPB rejected its proposal after the department of revenue, or DoR, said it was “unable to get meaningful information on the source of funding of the foreign investor”.
An India-Mauritius tax treaty allows investments from Mauritius to be exempt from capital gains tax in India. DoR probes the source of funds because it fears revenue losses to the government if companies route money originated from outside Mauritius through the island nation to avoid paying tax in India.
According to the minutes of the FIPB meeting, which has been reviewed by Mint, JSW Infrastructure’s proposal was first discussed in a meeting held in May, where the revenue department sought information on the foreign investor. In subsequent meetings, the department raised objections to the funding of the Mauritius-based entity and decided to “examine the actual source of funding and the structure of the ownership of the investor company so that the revenue implications could be understood”.
The board said Steel Traders also refused to cooperate in furnishing information about its funding sources.
“The foreign investor is apparently getting a loan from Minerals Euro Asia Ltd which is a...Mauritius company. The promoter of this company is also an investor in the Jindal group,” FIPB said in its rejection note.
“But information on this investment is not forthcoming, as it is not supposed to be required as per law in Mauritius. In the absence of this vital information, DoR has not supported the proposal,” it added.
JSW Steel, the group’s flagship company, had borrowed Rs27.2 crore from Minerals Euro in September 2005, as recorded in the company’s 2006 draft letter ahead of its initial public offer. The current status of that loan was not immediately known.
Minerals Euro also has a 0.93% stake in JSW Steel.
For the steel-to-energy conglomerate JSW group, this is the second run-in with the foreign investments regulator in less than a year.
Last December, FIPB had pulled up JSW Energy Ltd for an 8% stake sale to a foreign investor without its approval, as first reported by The Financial Express. The board had also raised objections on JSW Energy’s investment mechanism and source of funding.