Mumbai: The enforcement directorate, or ED, responsible for investigating economic crimes, has served a notice to Himachal Futuristic Communications Ltd (HFCL) for alleged foreign exchange violations in a private placement of shares worth at least Rs800 crore.
The directorate has given HFCL 15 days to reply to its show-cause notice dated 1 October asking why the company should not be penalized.
“We are surprised to receive the above show-cause notice, as the company has not violated any applicable law or rule in force at that time,” HFCL managing director Mahendra Nahata said in an email response. “The company is in the process of replying to the said show-cause notice to the directorate of enforcement.” The notice was regarding “certain minor technical and procedural grounds relating to mode of receipt of share application money through the Indian solicitors Thakker and Thakker on behalf of the non-resident Ecom.com”.
HFCL, which makes optical fibre cable and terminal equipment, had, in 2000, raised Rs228 crore by selling 1.57 million shares to Ecom.com Ltd, a subsidiary of the Australia-based Kerry Packer Group. It later sold another 5.58 million shares to Packer’s Consolidated Press Holding Ltd.
Revenues from the share sale were routed to HFCL through the Mumbai-based law firm Thakker and Thakker, and was in violation of the foreign direct investment (FDI) norms set by the Reserve Bank of India (RBI), said a directorate official familiar with the issue who didn’t want to be named.
Under RBI norms, funds raised through sale of equities to foreign firms should be transferred directly to the company, he added.
“If a company wants to route the money through different channels they have to take RBI’s permission. In this case, neither HFCL nor the law firm sought RBI’s permission for such an arrangement,” the official said, adding that the case was a first of its kind for the agency. He didn’t want to be named as he’s not authorized to speak on the case with the media.
A show-cause notice in itself is not evidence of any wrongdoing. However, if the company is eventually found to have violated the Foreign Exchange Management Act, or Fema, the maximum penalty could be as much as 300% of the transaction amount, said one directorate official close to the development.
Thakker and Thakker said the arrangement was not against the law.
“To hold money in a trust is a safety mechanism to safeguard the interest of both the parties and there is nothing in law that prohibits this kind of arrangement,” said a representative of Thakker and Thakker who didn’t want his name used. “We just acted for the client. We held the money in trust and paid it at the time of transaction.”
Experts unrelated to the situation note there is ambiguity.
“The FDI regulations seem to contemplate the funds to come directly into the investing company and to that extent there appears to be a grey area in a situation of this type,” said Ketan Dalal, executive director at management consultancy PricewaterhouseCoopers.
HFCL’s Nahata said the company had received the money “through normal banking channel, in client’s trust account” maintained by Thakker and Thakker and was for “specific purpose of payment for allotment of shares of HFCL”.
“HFCL had complied with all applicable provisions of Fema and RBI was duly informed about the receipt of money and consequent allotment of shares to Ecom.com and submitted all required documents including the said FIRCs (foreign inward remittance certificate) received from the banks,” he added.
This isn’t the first time Himachal Futuristic has had a run-in with Indian authorities. It is already under investigation as part of the Ketan Parekh stock market scam.
Parekh, a stockbroker and main accused in India’s biggest stock market scam dating back to 1999-2001, had rigged share prices of 10 firms, including HFCL, in collusion with promoters through circular trading.
“We came across this case while investigating the Ketan Parekh scam reported by the joint parliamentary committee,” the directorate official said.
Shares of Himachal closed Friday on the Bombay Stock Exchange at Rs8.17, down 3.77%. Their 52-week high was Rs62.60 on 8 January.