Why Welspun Group Asked to pay a fine of Rs 55.25 Crores under FEMA ?

What is Compounding of Offence under FEMA?

Compounding refers to the process of voluntarily admitting to a breach, pleading guilty and seeking redressal.

Why Welspun Group Asked to pay a fine of Rs 55.25 Crores?

The $3.5 billion Welspun Group may have to pay a fine of Rs.55.25 crore to the Enforcement Directorate (ED) for breaking foreign exchange rules after the group failed to comply with a compounding order from the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (Fema).

The ED, the agency that investigates cases of forex violations, imposed a penalty of Rs.55.25 crore on Welspun Corp. Ltd in August 2013 for violating overseas direct investment norms pertaining to an investment in its joint venture firm Red Lebondal Ltd in Cyprus in 2008.

What is the offence committed by Welspun Group?

The group acquired shares in Red Lebondal but did not remit the money to the Cyprus firm, according to the ED.

The agency also said three Welspun Group companies in India later gave corporate guarantees to help Red Lebondal raise loans abroad for its business. However, the ED found that Red Lebondal did not have a bona fide business as the loan raised by it was sent back to India as investment in one of the Welspun group firms.

The agency has also found that Welspun Group indulged in round tripping—a form of money laundering.

Under Fema norms, Indian companies can give guarantees to foreign subsidiaries only for the business of that subsidiary.

SUE MOTTO APPROACH BY WELSPUN GROUP FOR COMPOUNDING

In October, Welspun Group approached the RBI for compounding of its contraventions under Fema. The central bank in April passed a compounding order directing Welspun Corp. to pay up Rs.40 crore within 15 days of the date of its order. However, the company has not complied with the RBI order.

The group however, is planning to appeal the ED order in an appellate tribunal.

Welspun Group Total Loan Obligations

Welspun Group has a presence in the pipes, plates, coils, steel, infrastructure, energy and home textiles sectors.

The total debt of the four listed companies of the Welspun Group was at Rs.6, 500 crore on 31 March. These companies include Welspun Corp. Ltd, Welspun India Ltd, Welspun Syntex India Ltd and Welspun Projects Ltd. The debt of Welspun Corp. is at Rs.3, 220 crore.

Whether Welspun Group will succeed in its Appeal?

There are chances for the Welspun Group to minimize its fine if the appeal is still pending. Under current scenario, Welspun group has to pay a minimum of fine under compounding of minimum of Rs 10000 + Rs 1, 00,000 per annum instead 45 Crores slapped on it for Overseas Direct Investment Violations.

However, for the alleged money –laundering or round-tripping offences, It has to substantiate that it has not contravened the provisions of the FEMA to escape prosecution and fines.

Courtesy: http://www.livemint.com/ 2014