Paradise Papers Revive Cayman Link to Charge of Over-Invoicing by Essar Group

The country may have been surprised by the names of the various Indian individuals and companies who came tumbling out of the Paradise Papers last week but not the Narendra Modi government, which has been sitting on information about the offshore entities of at least one big corporate – the Essar group – for two and a half years without taking the “immediate appropriate action” it is now promising in the face of ongoing disclosures by the Indian Express.

Given the mounting evidence about the overseas financial activities of dozens of Indians, the finance ministry issued a press release last week saying that “investigations in cases of Paradise Papers will be monitored through a reconstituted Multi Agency Group (MAG), headed by the chairman, CBDT (Central Board of Direct Taxes), having representatives from CBDT, ED (Enforcement Directorate), RBI (Reserve Bank of India) and the FIU (Financial Intelligence Unit)”.

One agency is missing from this list – the Directorate of Revenue Intelligence – and its omission is curious given the fact that it had already unearthed details about the offshore entities floated by Essar – now figuring in the Paradise Papers – as part of its investigations into alleged acts of over-invoicing of imports and money laundering by the group more than two-and-a-half years ago.

What does the exclusion of the DRI – the investigative wing of the Department of Revenue in the Ministry of Finance, Government of India – from the multi-agency group tell us about the government’s willingness to act on these allegations? Or will the DRI’s probe into the questionable activities of Essar – headed by the influential Shashikant Ruia and Ravikant Ruia – meet a fate similar to the allegations that the agency had levelled against companies in the Adani group?

The Paradise Papers is a set of over 13 million confidential documents on offshore investments that were leaked to the German newspaper Süddeutsche Zeitung, which shared these with the International Consortium of Investigative Journalists (ICIJ). Many of these documents, revealed on November 5, relate to Appleby, a law firm which operates out of a number of tax havens such as Bermuda, the British Virgin Islands, the Cayman Islands, the Isle of Man, Guernsey and Mauritius.

ICIJ’s partner in India, the Indian Express, reported that Appleby’s records indicated that for a period of five years since 2006, through intricate and multiple layers of transactions, Ishwari Prasad Khaitan, promoter of Loop Telecom, managed two offshore family trusts of his brothers-in-law Shashikant and Ravikant Ruia of the Essar Group. These two trusts in the Cayman Islands – the Virgo Trust and the Trinitron Trust – owned Essar Global Limited, the holding company of Essar Group, and a bunch of other offshore companies.

Incidentally, the Essar group derives its name from the first two letters of the siblings, S and R. Moreover, the name of Loop Telecom promoted by Khaitan figures prominently in the scandal relating to the allocation and pricing of second-generation (2G) telecommunications spectrum, which is already the subject of a case stemming from the 2G scam.

The Virgo Trust and the Trinitron Trust are both well known to the DRI and they figure in the 290-page show-cause notice issued by the DRI on March 11, 2015 to various entities in the Essar group.

DRI Essar Show Cause 11 March 2015 by The Wire on Scribd

The notice alleged that these entities in the Essar group over-valued equipment to generate electricity and indulged in trade based money laundering. The amount involved was approximately Rs 2,900 crore. The inflated costs of power plant machinery indirectly increased electricity tariffs, which were paid by consumers.

The notice, which was issued against four Essar group entities – Essar Power Gujarat Limited, Essar Power MP Limited, Essar Oil Limited and Essar Projects (India) Limited – alleged over-valuation of imports to the tune of Rs 2,600 crore and proposed confiscation of the imported goods and imposition of penalties on the firms.

The DRI also conducted investigations into the activities of other entities in the Essar group – including Vadinar Power Company Limited, on its import of a captive power plant under the export promotion capital goods (EPCG) scheme. Moreover, a probe took place on the import of equipment for a marine material handling facility, including a jetty, at Salaya in Jamnagar district in Gujarat. The DRI alleged that over-valuation of an additional Rs 300 crore had taken place while undertaking these imports, bringing the total amount allegedly over-invoiced by the Essar group to around Rs 2,900 crore.

The goods were sourced from original equipment manufacturers and sent directly to India. However, the DRI claimed that documents were routed through an intermediary entity created by the group in Dubai. This entity raised inflated invoices on the Indian entities in the Essar group against which funds were remitted to Dubai. The DRI alleged that because of over-valuation of power plant machinery, consumers had to pay extra amounts varying between one rupee and two rupees per unit (or kilowatt hour) of electricity consumed.

This writer had documented this aspect of the impact of over-valuation of important coal and power plant equipment on electricity tariffs in an article published on May 14, 2016 in the Economic and Political Weekly.

The DRI show-cause notice alleged that the Essar group firms remitted money to a “related” entity called Global Supplies (UAE) FZE (GSF) based in the United Arab Emirates. This entity, from where the actual invoice values were remitted to the respective original equipment manufacturers as well as the extra amounts, were routed to the accounts of different entities of the Essar Group located overseas, the DRI has claimed. The chart below based on the show cause notice provides the details.

Essar Projects Limited (EPL), UAE, that controlled GSF, transferred its stake in GSF to another subsidiary of the company named Professional Equipment Suppliers Limited and then sold the entire stake in GSF to a Cyprus-based company named Seppest Holdings Limited. The majority shareholder in Seppest Holdings is a senior official of a Dubai-based firm called Khaitan Holdings Limited which is run by Ishwari Prasad Khaitan, brother-in-law of the Ruia brothers, Shashikant and Ravikant.

EPL, in turn, is controlled by two firms based in the Cayman Islands, Copper Canyon Holdings and Kettle River Holdings. These belong to the family trust of the Ruias in the Cayman Islands, the Triton Trust and the Virgo Trust. Copper Canyon and Kettle River own 50 per cent shares each in Essar Global. What has been stated in the Paradise Papers has been categorically mentioned in the DRI notice as well: “… the ultimate share-holders of EGL/EGFL were ‘the Virgo Trust and the Triton Trust’, whose beneficiaries include, among others, companies entirely owned by Shri Shashikant Ruia & Shri Ravikant Ruia and their immediate family members.”

The notice further states that the Ruia brothers were directors in EGL/EGFL. The name of Essar Global Limited was later changed to Essar Global Fund Limited in Cayman Islands (in short, EGL/EGFL) which served as the “single ultimate holding company” or “parent company” of all the business activities of the Essar group in India and abroad.

On page 50 of the DRI notice, the following is stated:

“Dhanpat Nahata, Executive Director, Essar Services India Limited, submitted documents said to have been received by them from EPL relating to acquisition of 75% stake in ESSL/PESL by SHL. One of the documents submitted was a copy of Addendum No. 1 dated 23-03-2009 to Memorandum 86 Articles of Association of ESSL. The said Addendum, which related to the acquisition of 75% of stake in ESSL by the company named SHL, was signed on behalf of the majority share-holder SHL by Ms. Vandana Roque D’souza. Open source information revealed that she worked as an Executive-Corporate Affairs with a firm named M/s Khaitan Holdings Limited, Dubai, UAE as available on website under the link ‘Senior Management’ (RUD-79). The web-site further stated that the company had been established by Shri I.P.Khaitan. Enquiries revealed that I.P.Khaitan is married to Ms. Kiran Khaitan, sister of the Shri Ravikant Ruia and Shri Shashikant Ruia.”

The complicated holding structure of the group is given in a diagram reproduced from the DRI notice.

The two show cause notices issued against companies in the Essar group are at present pending adjudication before K.V.S. Singh, additional director general, DRI, Mumbai. Singh recently dropped charges contained in two DRI notices alleging over-valuation in the import of power plant equipment Rs 5,500 crore by firms in the Adani group. Singh had, however, confirmed the allegations in an almost identical case against Knowledge Infrastructure Private Limited pertaining to overvaluation of coal imported from Indonesia.

Now that the Paradise Papers have shined a spotlight on the DRI’s earlier findings, there are certain very important and intriguing questions that need to be raised about the government’s handling of the Essar case.

  • Why has the DRI has been kept out of this multi agency group (MAG)?
  • Is it by deliberate design?
  • What is the point in constituting a MAG without the DRI when the directorate is apparently under pressure to go slow on adjudication proceedings more than two and a half years after it completed its investigations into the activities of the Essar group?

The answers to these questions will no doubt have a bearing on the outcome of the adjudication proceedings, which may then go the way they did in the cases relating to the Adani group.


Essar’s response Firstly, we strongly and categorically deny the allegations mentioned in the show cause notice in respect of import of power plant equipment and wish to re-iterate that all the procurements are from overseas suppliers and were made at arm’s length price which were not only at the lower quadrant compared to peer projects built in India but also certified to be reasonable by reputed technical consultants. The so called margins or the excess payments as the case may be, worked out by the DRI do not take into account all the costs incurred by the overseas supplier thereby resulting in highly inflated margins as against the normative net margins made by the supplier, thus leading to erroneous conclusions. As the supplies are in the nature of project imports, suppliers had provided substantial services to the importing companies by expediting services, ensuring quality standards, timely monitoring and inspection/ testing, providing the performance guarantee to the Indian importing companies, and would have incurred substantial financial and other costs in providing these services.. The companies are confident that during the proceedings, the explanations provided will be considered satisfactory by the adjudicating authorities.

We further wish to advise you that the adjudication process is not yet completed.. In the circumstances, your attempt to pre-judge the matter by publishing allegations is not in good taste. We would humbly urge you to exercise restraint and revisit the story after the adjudicating authorities have made a final finding.

Paranjoy Guha Thakurta’s response to Essar
The allegations against the Essar group have not been levelled by the writer or The Wire but by the Directorate of Revenue Intelligence in the Ministry of Finance in a show cause notice which has been made public.

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