Mumbai: Standard Chartered Plc, (StanChart) which is set to hit the market with the first ever issue of Indian depository receipts (IDRs) on 25 May, has not disclosed many pending cases against it for alleged violation of foreign exchange remittance norms in the draft red herring prospectus submitted to the capital markets regulator.
The alleged violations—17 transactions of drafts, one telex transfer and two cash transactions—go back to 1991-92, when the Enforcement Directorate (ED) found a series of forex violations made through the bank’s Mumbai branches to the UK.
ED is a government agency that looks into foreign exchange transactions.
The violations were discovered after ED investigated a number of banks, including Standard Chartered, in the aftermath of the Harshad Mehta scam that rocked the stock markets in 1991-92.
The ED complaint was filed in the court of chief metropolitan magistrate in Mumbai by enforcement officer S. Parvez in May 2002.
These complaints, which are still pending, charge the bank and its then chairman Rodney Galpin of “total violation” of the exchange control manual and provisions of then prevailing foreign exchange regulation norms.
Mint has reviewed copies of some of these case files.
The Issue of Capital and Disclosure Requirements (ICDR) norms, laid down by the Securities and Exchange Board of India (Sebi), require any firm floating a public issue to disclose all pending proceedings initiated for economic offences against the issuer or its directors, as well as the present status of such cases.
StanChart said that it has no “material litigation” to disclose. The bank’s spokesman Arijit De said the lender has applied the relevant materiality standard in arriving at the disclosures.
In response to an email questionnaire, he said the bank would comply with the applicable laws, regulations and international practice with regard to material information disclosure and uniformity of disclosures.
“Accordingly, in relation to disclosure on litigation, as provided under the provisions of the Sebi (ICDR) regulations, 2009, as amended, Standard Chartered Plc, as an issuer of IDRs, is required to disclose ‘material litigation’. In considering whether disclosures are necessary in relation to litigation, Standard Chartered Plc has applied the relevant materiality standard. On this basis, no litigation is required to be disclosed,” the email said.
Under Sebi rules, the so-called materiality of a case must be judged on three broad parameters: qualitative nature, litigation or defaults that may not be material at present but might have a material impact later, and litigations that may not be material individually, but may be found material collectively.
A questionnaire to Sebi on whether it has granted any special exemption to StanChart for the IDR remained unanswered.
A senior lawyer at a national law firm said: “All pending litigations that have a bearing on the issue should be disclosed in the prospectus as per ICDR regulations. Moreover, the issue of materiality varies from case to case and is subjective. If I were an underwriter, I would have disclosed the status of the cases and justified if the cases have any material impact on the company’s businesses or not, in the prospectus.” The lawyer did not want to be identified.
Market analysts say there is no definitive yardstick for deciding the importance of a case.
“Materiality is subjective and judgemental,” said Prithvi Haldea, chairman and managing director of Prime Database, a primary market tracker. “The merchant banker, issuer and lawyer can collectively take a call on whether a matter is material or not.”
However, if these matters are decided in court and proven to be material, the issuers, bankers and lawyers can be taken to court for substantial damages, he added.
The amount involved in the 17 transactions listed by ED and facilitated by the bank between February 1991 and September 1992 is Rs4 crore. The bank also allegedly facilitated a telegraphic transfer of Rs1.5 crore. ANZ Grindlays Bank, which was acquired by StanChart in 2000, allegedly helped the same entities transfer around Rs55 crore. Separate cases are pending against both banks in the matter.
According to the case files, Irish rugby player Keith Fairbrother was the key beneficiary of the transfers. He owned a company, Indo International, earlier known as Eastern Suburbs, based in the UK, but with bank accounts in both names in India as well as the UK.
Fairbrother is said to have facilitated a few import-export deals between some Indian firms and their counterparts in the erstwhile Union of Soviet Socialist Republics (USSR). Since India and USSR had bilateral trade pacts, any payment to entities there needed to be routed through the Reserve Bank of India (RBI) with appropriate approvals and sanctions. Fairbrother, the files claim, broke these rules using various foreign banks, including StanChart.
Through his associate Kuldip Singh Sood in India, Fairbrother would collect Indian rupee drafts drawn by an Indian bank on its domestic branch. Allegedly with the connivance of StanChart, he would get them cleared without making any declarations or taking any approvals and credit the amount to a vostro account of StanChart London and Manchester. These banks would, in turn, transfer the amount to a beneficiary of the same name in the UK.
A vostro account is the local currency account held by a local bank for a foreign one. Such accounts are used for inter-bank transfers, and money transfers to non-residents need RBI’s nod. ED has charged that the bank and its then CEO violated these rules.
A senior broker, on condition of anonymity, said that as a matter of principle, the company should publish all pending legislation and leave the question of materiality to investors’ judgement.
“By choosing to ignore pending legislations, they are setting a bad example for the companies coming to list such instruments in future,” he said.