Mumbai: The Enforcement Directorate (ED), an agency that deals with violations of India’s foreign exchange laws, issued a show-cause notice to Adani Enterprises Ltd (AEL), the flagship company of the Adani Group, on 24 April, for alleged violations of the country’s foreign exchange laws to the tune $228.7 million (Rs1,132 crore today), through a government scheme introduced in September 2004 to increase growth in exports.
The show-cause notice, which has been reviewed by Mint, has been sent to AEL, five related entities and some key officials of the group.
A show-cause notice is not an indictment. It only requires the company, AEL and a few related entities in this case, to explain their side of the story.
The government scheme, known as Target Plus, was introduced with the objective of pushing export growth by rewarding recognized export houses. It provided that exporters who have achieved a certain level of growth would be entitled to duty credit, based on the extent to which they exceeded the fixed annual export target.
According to the scheme, any export house with an incremental growth of 20-25% in a year was entitled to a duty credit of 5%. Similarly, export houses with growth above 25% and up to 100% were given 10% of duty credit. For export houses achieving more than 100% growth, the duty credit was 15%.
The scheme was discontinued in April 2006, possibly because of large-scale misuse by some exporters.
The show-cause notice, signed by ED’s special director K. Nageshwar Rao, has asked AEL and others to file their reply within 30 days “as to why adjudication proceedings as contemplated under section 16 of the Foreign Exchange Management Act (Fema), 1999, should not be” taken against them.
Under section 16, the government can appoint officers to hold an inquiry into the alleged irregularities and if found guilty, the company could be penalized. The Act does not specify the quantum of penalty.
While AEL has allegedly violated Fema norms for foreign exchange transactions worth $228.7 million, a related entity Aditya Corpex Pvt. Ltd has allegedly done so on transactions worth $106.27 million, and Hinduja Export Pvt. Ltd, $59 million.
Other related entities that have been served show-cause notices are Jayant Agro Organics Ltd, Bagadiya Brothers Pvt. Ltd and Midex Overseas Ltd.
Rao has directed the key officials of these firms to “appear either in person” or through lawyers with documents “relevant to the subject matter of enquiry” and said that in case they do not do so, the “adjudication proceedings will be initiated...ex parte”.
In an email response to Mint’s queries, Devendra Amin, senior vice-president (corporate communication) at Adani Group, said: “A formal communiqué has been received by the company. The same is being studied by us for response. As a policy, we do provide information and cooperate with (the) authority whenever called for.”
“AEL has inflated its turnover in 2004-05 and 2005-06 through circular trading of cut and polished diamonds to avail of benefit of at least Rs1,000 crore under the Target Plus scheme,” said an ED official who didn’t want to be identified, as the case is yet to be resolved.
The directorate, which started its investigation in early 2008, has alleged that AEL has violated certain sections of Fema that deal with illegal acquisition of foreign exchange.
According to Amin, the company’s business is conducted within the framework of laws and there is no instance of the turnover being inflated. Amin also said: “The communiqué is being scrutinized in detail at present. However, we would like to mention that the communiqué does not reflect the true state of affairs; we disagree and deny observations and allegations made therein.”
ED plans to issue more than one show-cause notices to AEL as the directorate has found several other violations by the company.
According to the ED official quoted earlier in the story, AEL along with a few other small entities, was importing diamonds and exporting them at a higher value, increasing its export turnover, but without doing any value addition.
“The first show-cause notice only deals with violations in respect of value addition. There are many more violations by the firm and the department plans to issue separate notices,” said this official.
The directorate has alleged that AEL has violated rules related to external commercial borrowings (ECBs) as well.
ECB norms are formulated by the Reserve Bank of India, but any violation of these norms are looked into by ED.
The total export declared by the company during 2004-06, when the Target Plus scheme was in vogue, was Rs14,000 crore. The department has alleged that the amount declared by AEL was inflated by at least Rs2,000 crore.
According to its website, AEL has over the years transformed itself into a diversified, asset-backed commodities trader, sourcing, producing, marketing and transporting nearly 70 commodities across at least 60 countries.
The company operates through 30 offices, including eight overseas ones in the US, the United Arab Emirates, China, Singapore, Indonesia, Mauritius and Myanmar.
On the Bombay Stock Exchange, AEL shares rose 1.03% on Thursday to close at Rs450.05 a piece even as the exchange’s benchmark index, the Sensex, rose 1.37%. At this price, AEL’s market capitalization is Rs11,098.65 crore.
The Directorate of Revenue Intelligence (DRI), an agency that functions under the Central Board of Excise and Customs in the ministry of finance and deals primarily with violations of import law, first detected this case in 2007.
The department launched a probe into custom duty violations under the Target Plus scheme. Later in January 2008, DRI issued a show-cause notice to the company. At the same time, ED started its investigation into AEL’s alleged foreign exchange norm violations.
In 2008, the Comptroller and Auditor General of India (CAG) found that the Target Plus scheme had caused a revenue loss of Rs4,136 crore to the government between 2004-05 and 2006-07.
According to CAG, the revenue loss was mainly because of misuse of the scheme where exporters had purchased the export turnover of others to achieve higher incremental growth in exports. It also said that duty credits were issued to ineligible exporters.