Issues surrounding FEMA, 1999 and Prevention of Money Laundering Act, 2002

Practice Areas

The twin objectives of Foreign Exchange Management Act, 1999 (“FEMA, 1999”) are (i) promotion and regulation of foreign trade; and (ii) prevention of volatility and undue fluctuations in the value of Indian currency along with the orderly maintenance and development of the foreign exchange market.

With the removal of restrictions on free trade in various sectors in the spirit of liberalization over the years, a sizeable number of money laundering cases have been unearthed. This has resulted in insertion of suitable hacks in the legislation so that routing and parking of wealth in other countries is nipped in the ‘bud’ stage. The recent allegations against Advantage Strategic Consultancy Private Limited (“Advantage India”) and its subsidiary in Singapore (“Advantage Singapore”) have been eye-openers on the areas where regulation of transactions under FEMA, 1999 could be improved.

How was it played out?

 Mentioned below are the facts as presented by various news reports and the facts of the matter are still under investigation:

  • INX Media Private Limited (“INX”), an Indian company, obtained FIPB approval to receive 46.2 % (Forty Six point Two percent) amounting to Rs. 4.6 crores from entities based in Mauritius, which was allowed on May 18, 2007.
  • Additionally, INX had also applied for downstream investment in its subsidiary, which was categorically rejected by FIPB stating that the said proposal was to be made separately. However INX has been alleged to have received hundreds of crores of rupees and made the downstream investment in violation of the approval.
  • Upon getting a trigger from Tax authorities, FIPB issued notice to INX. INX was alleged to have conspired with one Mr. A, son of a renowned politician, to obtain an undue favour from FIPB to not proceed with the allegations, and a huge sum was reported to have been paid to Advantage India which is allegedly owned by Mr. A through his benamis in consideration. The allegations will materialise on proving that Advantage India and Advantage Singapore are indirectly owned and controlled by Mr. A, which is sought to be made by CBI based on the facts mentioned below.
  •  Advantage India, a private company in Chennai incorporated in the year 2005, incorporated a wholly owned subsidiary in Singapore which owns huge global wealth. From March 2006 to May 2011, Mr. A, held two-thirds of Advantage India through Ausbridge Holdings and Investments Private Limited (Ausbridge) which he owned almost entirely. In 2011, as the media turned the limelight on Mr. A’s business interests, he transferred the ownership of Ausbridge to his close friend. Since 2011, the ultimate shareholders and directors of Advantage India have been Mr. A’s close friends and associates.
  • Presently, 60% of the ownership of Advantage India is held by Mr. A’s four close friends, who have executed wills giving entire 60% ownership of Advantage India to Mr. A’s daughter (“Personal Wills”) which implies that the gift includes the global wealth of hundreds of crores of rupees held by Advantage Singapore. All these Personal Wills were identical in language and content and were uniformly executed on the same day, 19th June, 2013. All Personal Wills divide the properties into two parts – (i) the writer’s own properties which are worth very little were bequeathed to their spouse and children and (ii) shares of Advantage India which are worth hundreds of crores of rupees were willed away to Mr. A’s daughter.
  • The CBI is probing into the issue further in order to prove the benami holdings and hoarding of questionable wealth outside India, influencing public servants, among other charges.

How does FEMA, 1999 affect these transactions? Keeping in mind, the transactions mentioned above, let us dwell into the regulations under FEMA, 1999.

  • The ownership of shares of a wholly owned subsidiary being transmitted from one person to another is not required to be reported to the RBI as the extant regulations under FEMA, 1999 do not require the same in case of transmission of shares. This implies that huge amount of wealth could be moved from one hand to another without it being reported to the RBI.
  • In the given instance also, the allegations were triggered by tax authorities and not by RBI as the extant regulations do not deal with the transmission of shares.
  • Additionally, this could enable change in ownership of shares without any consideration between residents and non-residents which could adversely affect the value of Indian currency. 

Way ahead: With ninety percent of sectors opened up for foreign direct investment, another instance of laundering of funds on a large scale through benamis has taken the floor. Although the Wills serve as open and shut evidence in the current instance of indirect ownership and money laundering, FEMA, 1999 should be amended to curb such transactions at the initial stage.

 

Bibliography:

*Article published in ‘The Indian Express – Chennai edition’ dated May 25, 2017.

*Note: The information mentioned in respect of INX, Advantage India and Advantage Singapore are based on the articles published in newspapers as mentioned above and are yet to be proved in a Court of Law.

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