Mumbai: The Enforcement Directorate (ED) has sent a show-cause notice to healthcare and hospital chain Apollo Hospitals Enterprise Ltd for allegedly violating foreign exchange laws by using the proceeds of a sale of global depository receipts (GDRs) in Indian equity markets.
The ED, an agency that deals with violations of the Foreign Exchange Management Act (Fema), in its 20 May notice gave Apollo Hospitals 30 days to explain why it shouldn’t be penalized for the alleged violation.
A show-cause notice is not an indictment. It only requires the company, Apollo Hospitals in this case, to explain its side of the story.
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According to the show-cause notice reviewed by Mint, Apollo Hospitals in 2005 raised about Rs300 crore through a sale of GDRs. The firm used a part of the funds raised for purchasing shares in an Indian company, which it took over, the notice alleged.
Apollo Hospitals confirmed receiving the notice.
“We have received a show-cause notice from Directorate of Enforcement, wherein we have been asked to explain the end uses of GDR issue,” said Suneeta Reddy, executive director (finance) of Apollo Hospitals Enterprise, in an email.
After Mint sent a questionnaire to the firm on Wednesday evening, seeking comment on the show-cause notice, Apollo Hospitals informed the Bombay Stock Exchange (BSE) in a statement on Thursday that it had received such a notice.
GDRs are certificates issued by a depository bank that purchases shares of foreign firms, and represent ownership of an underlying number of shares. Prices of GDRs are often close to values of related shares, but they are traded and settled independently of the underlying stock. They facilitate trading of shares, and are commonly used to invest in firms abroad.
“Out of the funds raised by Apollo Hospitals through GDR, the company had used about Rs60 crore to purchase shares of an Indian company for the purpose of takeover,” said a senior ED official, who did not want to be identified because the case has not yet been resolved.
The ED official, however, refused to disclose the name of the firm that Apollo took over, identifying it only as a healthcare provider. “Fema regulations do not allow companies to use funds raised through GDRs, FCCBs (foreign currency convertible bonds), ECBs (external commercial borrowings) and ADRs (American depository receipts) for share market operations within the country.”
Reddy, however, said the company had used the proceeds for expansion of hospital projects, including “investments in Bangalore and Kakinada (in Andhra Pradesh) primarily and are going into the merits of the case and will be acting as per legal advice”.
“As far as our understanding goes, we are not in contravention of any provision of law and we feel that the issue may have been a subject matter of interpretation, which we will be addressing in due course,” she added.
Apollo shares rose 15.76% to Rs546.20 on BSE on Thursday, on a day the Sensex shed 2.31% to close at 13,736.54 points.
Mint had reported in October that the ED was probing alleged foreign exchange rule violations by 28 Indian companies that raised funds overseas through FCCBs, ECBs and GDRs in 2005. The directorate was asked by the Reserve Bank of India (RBI) to investigate these companies.
In 2005, 34 companies had raised $3.3 billion (Rs15,642 crore today) through sale of FCCBs and $1.9 billion through 19 GDR issues, according to data from Thomson Reuters. And 434 firms raised $8.6 billion through ECBs, according to RBI data.
FCCBs are debt instruments typically issued in dollars, with an option to convert the bonds to equity at a pre-determined price. Such instruments, which help firms raise foreign currency funds at attractive rates, are largely zero-coupon bonds where the interest payment is due on maturity.
Indian firms can also borrow from lenders abroad for expansion of existing capacity or fresh investment, under ECBs. These include commercial bank loans, buyers’ and suppliers’ credit, securitized instruments such as floating rate notes and fixed rate bonds, loans from official export credit agencies and commercial borrowings from the private sector window of multilateral financial institutions.