First, the context. In the first week of October 2013 several media reports pointed to certain serious irregularities in the financial statements of Gujarat NRE Coke Limited – a listed company in India. The amount involved in this “corporate fraud” according to these Press reports runs into several thousand crores.
If true, parallels with Satyam accounting fraud are inevitable and would further diminish the already shaky investor confidence on India. But that is at the corporate level. And the issue is not one relating to corporates and their shenanigans but something that concerns the finances of the country, more specifically the foreign exchange management of the country.
Central to the issue of Gujarat NRE Coke is the refusal by the auditors of the overseas Australian subsidiaries to certify them as ‘Going Concern’ – technically implying that these subsidiaries are gone hook, line and sinker. Damningly, an audit opinion was impossible from their side for lack of “appropriate and sufficient audit evidence.” Surely something is terribly wrong with this company.
What is galling for an average investor is that approximately 91 per cent of the consolidated assets and 65 per cent of the combined revenues of this Rs 10,000 crores conglomerate are owned/derived by its Australian subsidiaries – the very subsidiaries that the auditors refused to certify as ‘Going Concern’.
In short, there is a gaping hole in the balance sheet of Gujarat NRE Coke that would shame Satyam. Thanks to the 2G Spectrum scam and the subsequent Coalgate scam, a Rs 10,000 crore scam no longer titillates an average Indian. Six weeks after the scam broke out, the moot question remains unanswered – where did the money go? What happened to the money?
Whatever be the answer, all these are part of larger scam involving India’s outbound Foreign Direct Investment program. The example cited above is perhaps the proverbial tip of the iceberg – and one that probably has the tacit blessings of the policy framers in RBI, Ministry of Corporate Affairs and Finance Ministry.
Shocked? Read on.
Now for the text. Barring exceptions and sector-specific restrictions, since 1991 outbound Indian FDI was successively liberalised over a period as part of our new economic policies. Under the UPA regime the outbound FDI was gradually increased to 400 per cent of the net-worth of the Indian company.
Consequently, till 2004-05 India’s annual outbound FDI was negligible – a mere US$ 2 billion of outbound debt and equity was reported in that year. However, since 2005-06 the position turns dramatically when US$ 7.8 billion as debt and equity was invested by Indian businesses outside India through this route.
Subsequently US$ 13.30 billion was invested in 2006-07, US$ 18.50 billion in 2007-08, US$ 18.60 billion in 2008-09, US$ 13.60 billion in 2009-10, US$ 16.8 billion in 2010-11, and US$ 8.9 billion in 2011-12 for which data is available as on date.
In short, in the seven year between 2005-06 and 2011-12 India’s outbound FDI has been approximately a whopping US$ 100 billion! This is scandalous for a country that struggles to get US$ 10-15 billion as inward FDI into India.
Rule of thumb indicates that at least India must be in a position to earn a minimum US$ 4-6 billion annually as returns on these investments. The details pertaining to the returns from such investments are not available in the aggregate in public domain. Nor could these be gathered through RTI as the Reserve Band of India refused to part with the information citing confidentiality provisions. Consequently, on this point your guess is as good as mine.
Nevertheless questions remain: How much of the US$ 100 billion are genuine investments yielding reasonable returns and how much are sunk, just like what has happened to the investment involving Gujarat NRE Coke is a billion dollar question.
But there are larger unresolved questions. For the four years beginning 2008-09 to 2011-12 US$ 23.31 billion was invested in manufacturing abroad, US$ 17.03 billion in financial insurance, real estate and business services, US$ 5.19 in wholesale and retail trade and US$ 4.94 billion in agriculture and allied activities.
It may be fascinating to note that the most liberal estimates made by UPA spokesperson in the context of liberalising inward FDI in Indian retail is US$ 5 billion in the next five years. And contrast it with the fact that Indian business in the four years between 2007-08 and 2011-12 has invested US$ 5.19 billion in wholesale and retail trade outside India!
Are Indian businesses are so competent and competitive to invest in retail abroad?
Why give away in excess of US$ 5 billion first to outbound investments and then mortgage the interest of the country by opening up retail trade to foreign players? Equally, it is hilarious to note that our businesses have invested US$ 4.94 billion in agriculture and allied activities – yes agriculture – all in a span of mere four years outside India!
If the sectors invested surprise you, destination countries for such outbound FDI will shock you. In the four years between 2008-09 and 2011-12 we have allowed US$ 14.11 billion into Singapore and US$ 11.57 into Mauritius.
That is not all. Over the years we have allowed investments into several tax havens like British Virginia Islands, Cyprus, Netherlands and of course Panama amongst others. And in several of these tax havens we have allowed investments in manufacturing, agriculture and retail trade through the ‘subsidiary’ or ‘joint venture’ route.
Significantly, in 2011, the Ministry of Corporate Affairs diluted the provisions of S-211 of the Companies Act which originally mandated appending Balance Sheet of subsidiaries along with that of the Holding companies. Consequently, this allows a corporate like Gujarat NRE Coke limited to get away with daylight robbery.
The great Indian rope trick?
Obviously, the modern version of the great Indian rope trick is India’s outbound FDI. The investment of US$ 100 billion in a span of a mere seven years of which several billions have been invested into tax havens across continents is surely worrying.
Consequently, sums invested in such tax havens could vanish – especially if they are routed to other numbered accounts that define these very tax havens. Remember, this route is especially convenient to any Indian corporate that wants to pay kickbacks to powers that be in tax havens, where there are no audits, KYC norms and oversights.
Is there a sinister motive behind liberalisation of India’s outbound FDI? Let us not forget India’s outbound FDI allows significant sums to be invested into tax havens without any let or fear.
That is not all. Several of Indian banks are reported to have given loans to overseas subsidiaries of Indian corporate through their off-shore branches. Significant portion of these are reported to have been routed to India through the inbound FDI route or to the Indian Stock markets through the Participatory Notes route.
In short, significant portion of India’s in-bound and out-bound foreign investment policy is under a cloud. Some of these could be used to fund pay-offs and kickbacks to the high and mighty in the Government. Some of these could be the well-planned loot of our corporate czars themselves. Some of these could be routed back into India and rig stock markets or for that matter, any other markets.
Let me make it clear: Gujarat NRE Coke is not an exception. Rather it is the rule. It is the rule where overseas subsidiaries of Indian corporates are increasingly becoming vehicles to launder wealth. In the alternative they are pass-through mechanisms to facilitate illegal transactions.
All these cumulatively have an impact on India’s fragile foreign exchange reserve management. It must be noted that India’s foreign exchange as on date is approximately US$ 280 billion. And outbound FDI into two tax havens – Singapore and Mauritius for the four year period mentioned above, exceeds US$ 25 billion. And that in my opinion puts things into proper perspective.
What must agitate the collective conscience of the nation is that the word ‘reserve’ in the English language implies a sense of excess. Unfortunately, when it comes to foreign exchange reserves, it is not so. What we have is foreign exchange of approximately US$ 280 billion that is begged, borrowed or stolen, not one arising out of our trade surplus like that of China.
Surely, we have reached a threshold where we no longer can be silent spectators to this loot of India’s precious foreign exchange. Nor is it merely a question of being self-righteously pretentious on liberal economic ideas. The time for action is now.
For starters will RBI conduct an audit on the amount invested abroad? Will Ministry of Corporate Affairs look into the balance sheet of overseas subsidiaries of Indian corporate, especially in tax havens? Will the Serious Fraud Office look in to the matter of subsidiaries as conduits? Will the Enforcement Directorate conduct an investigation under the Prevention of Money Laundering Act?
Will the Parliament discuss this issue in all seriousness? Surely not. Will the Finance Ministry take action on all those who have facilitated this loot? Unlikely. Will the Opposition question the Government in the forthcoming winter session? Doubtful.