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ED probing 28 firms for Fema violations

ED probing 28 firms for Fema violations

Mumbai: The Enforcement Directorate (ED) is probing alleged foreign exchange rule violations by 28 Indian firms that raised funds overseas through quasi-equity instruments such as foreign currency convertible bonds, or FCCBs, in 2005.

The directorate was asked by the Reserve Bank of India (RBI) to investigate these firms for possible violations of the Foreign Exchange Management Act (Fema) in raising funds through such instruments, said an ED official familiar with the case.

“RBI sent us a list of 28 companies that had raised money through FCCBs, ECBs (external commercial borrowings) and GDRs (global depositary receipts) in 2005 as it suspects manipulation in raising funds," this official said.

ED, which deals with Fema violations, has now asked these firms to submit all information related to the sale of such instruments. The ED official, who didn’t want to be named as he’s not authorized to speak on the case with the media, declined to identify the companies or give additional details, but said several reputed firms were being probed.

Also See List of firms that raised money through ECBs, FCCBs and GDRs (PDF)

At least 430 firms raised money through FCCBs, ECBs and GDRs in 2005. The 28 represent around 6.5% of the total number.

A probe by ED isn’t by itself an indication of any wrongdoing by the companies. Mint has ascertained the names of three of the 28 firms so far. They are Indiabulls Financial Services Ltd, Hotel Leela Venture Ltd and Aarti Drugs Ltd.

“Since it is a matter related to a quasi-judicial body, I would not like to comment on the issue," said Gagan Banga, chief executive of Indiabulls Financial.

A senior official of Hotel Leela, who did not want to be named, said: “It is an old matter. We had received certain communication from the department (ED). We have submitted all the documents and letters of approval from RBI and ED has not got back to us on the matter. We think the agency is satisfied with our response."

Also See India FCCBs (PDF)

Harshit Savla, joint managing director of Aarti Drugs, said: “A general investigation was carried out. They (ED) wanted to know details of the FCCB raised in 2005. We informed them that the company had already repaid the FCCB with RBI permission. Now, there is no issue."

In 2005, 34 companies had issued $3.3 billion worth of FCCBs and 19 GDRs worth $1.9 billion, according to data from Thomson Reuters. And 434 firms raised $8.6 billion through ECBs, according to RBI data. Some of the firms that raised money through these routes include Reliance Industries Ltd, HDFC Bank Ltd, Tata Power Co. Ltd, Ranbaxy Laboratories Ltd, Indiabulls Financial and Bharat Forge Ltd.

Firms such as Tata Chemicals Ltd, Uttam Galva Steel Ltd, Jubilant Organosys Ltd and Motherson Sumi Systems Ltd had borrowed both through ECBs and issued FCCBs.

The promoters of HT Media Ltd, which publishes Mint, and those of Jubilant Organosys are closely related. The firms have no promoter cross-holdings.

Bharat Forge, Bajaj Hindusthan Ltd and Orchid Chemicals and Pharmaceuticals Ltd were among firms that had issued FCCBs and GDRs in 2005.

FCCBs are debt instruments typically issued in US dollars, with an option to convert the bonds to equity at a pre-determined price. Such papers, which help firms raise foreign currency funds at attractive rates, are largely zero-coupon bonds where the interest payment is due on maturity. As a result, there is no cash outflow from the issuing company either towards interest payments or for repayment of principal.

FCCBs are usually priced at 30-70% above the prevailing market price of the share, and the holder converts the bonds to equity if the stock price exceeds the conversion price. If the market price does not exceed the option price, the holders do not opt for equity conversion and the issuer will have to redeem the debt.

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.

Indian firms can also borrow from lenders abroad for expansion of existing capacity or as fresh investments under ECBs. These include commercial bank loans, buyers’ and suppliers’ credit, securitized instruments such as floating rate notes and fixed rate bonds, credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial institutions.

Anita Bhoir and Ashwin Ramarathinam contributed to this story.

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