Mumbai: The Enforcement Directorate (ED) is investigating a case against Welspun Gujarat Stahl Rohren Ltd for possible violations of India’s foreign exchange laws.
The flagship company of the Welspun Group makes steel pipes to ferry oil and gas.
An ED official said the Reserve Bank of India (RBI) had forwarded the case to the agency last year for further investigation after it found that the company had violated overseas direct investment norms pertaining to investment in its joint venture firm Red Lebondal Ltd in Cyprus.
The directorate is now looking into the implications of this under Foreign Exchange Management Act, or Fema.
“The matter is still pending and the approximate amount of money involved is Rs40 million (Rs4 crore),” said the ED official, who did not want to be named as he is not authorized to speak to media. “The department is in the process of issuing a show-cause notice to the company.” A show-cause notice is not an indictment. It only requires the firm and related entities in the case to explain their side of the story.
Welspun Gujarat had raised corporate guarantee for subscription of equity shares in Red Lebondal but did not remit the money to its joint venture firm, the ED official said.
He added that the firm did not report the corporate guarantee to RBI.
Under the central bank’s norms, all corporate guarantees offered by firms for overseas investments on behalf of their wholly owned subsidiaries or joint ventures should be reported to RBI. RBI spokeswoman Alpana Kilawala declined comment for the story.
“We do not discuss individual cases,” she said in an email.
A spokesman for Welspun Gujarat said in an email that the firm had not violated Fema norms. “The Indian company is allowed to make investments in the overseas entity(s) to the extent of 4 times of the net-worth of the Indian company,” he wrote. “The investments made by us are in conformity of the relevant Fema regulations and as per the legal advice/opinion sought by us. We have explained the above situation to the ED and are hopeful that they will appreciate that there is no violation.”
The spokesman added: “We would like to state that this matter is very minuscule (pertaining to investment for 450 shares of €1 each).”
Another Welspun Gujarat executive familiar with the development said over phone that the company had routed the investment through a lawyer who had helped it set up the joint venture in Cyprus for subscription of shares of Red Lebondal. “This is a common business practice and the company has not violated any norms,” he said on condition of anonymity.
Welspun Group, which started with a small polyester texturizing mill in 1985, diversified into home textiles and steel pipes in 1997. It is the largest exporter of steel pipes in the country and has accreditation from Chevron Corp. and Exxon Mobil Corp.