The Ministry of Corporate Affairs (MCA) has ordered an inspection of the books of Edelweiss Asset Reconstruction Co (EARC) after a whistleblower wrote to the Prime Minister’s Office (PMO) and the Reserve Bank of India (RBI) alleging fraud at the firm.
The whistleblower—Paras Kuhad, a former additional solicitor general of India—has alleged that Edelweiss Group, the controlling shareholder of the asset reconstruction company along with its partner Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ), diverted at least Rs 1,800 crore from EARC. Kuhad and his family own about 14 percent in EARC, which manages Rs 45,000 crore in assets.
Edelweiss ARC strongly denied all wrongdoing and said it was compliant with all laws in letter and spirit. CDPQ did not respond to mails seeking comment.
To be sure, an inspection of books does not automatically mean a firm is guilty of violating the law. It is only the first step of a process in which an investigating officer then records statements of company officials. Based on the findings, the ministry can recommend that the investigation be concluded or pressed for further examination by itself or the Serious Fraud Investigation Office.
Section 206 (5) of the Companies Act empowers the central government to inspect the books of a company if “circumstances so warrant”. The MCA is tasked with framing rules on how companies can operate in India.
Moneycontrol has reviewed a copy of the letter from the MCA to its Mumbai branch ordering the inspection citing the whistleblower complaint received through the PMO.
“This is one of the cases having larger magnitude and may have a cascading effect on the financials of many other entities and public money and thus, a larger public interest is involved due to possibility of its adverse effects if the allegations raised are found true," said the letter dated January 28.
The MCA did not comment for this article.
Asset reconstruction companies are financial institutions that help banks clean up balance sheets by buying bad assets and then look to rebuild those assets through a raft of measures, including finding buyers.
The allegations in detail
In his letter to the Prime Minister’s Office, Kuhad has alleged that Edelweiss diverted money from EARC through four ways.
Moneycontrol has reviewed a copy of Kuhad's letter but has not been able to independently verify these allegations.
One, according to Kuhad, Edelweiss Group allotted 20 percent equity shares in EARC to CDPQ for less than the fair value. This was done by allowing CDPQ to convert its compulsorily convertible preference shares (CCPS) to equity at no additional cost other than the Rs 500 crore it paid at the time of allotment.
The fair value of EARC’s 20 percent equity is at least Rs 800 crore, wrote Kuhad. He also alleged that a registered valuer has not determined the price for the CCPS conversion as required by law.
In a reply to Moneycontrol’s request for comment, Girish Parmar, head of EARC’s legal department, wrote that CDPQ has not converted its CCPS and is not an equity shareholder of the company.
“Note that the issuance and allotment of compulsorily convertible preference shares (“CCPS”) to CDPQ was undertaken in full compliance with the applicable laws, including receipt of independent valuation report and with the prior approval of the Reserve Bank of India (“RBI”). Further, CDPQ continues to hold the CCPS and is not an equity shareholder of the company, and the conversion of such CCPS into equity shares is subject to receipt of another prior approval of the RBI,” wrote Parmar.
RBI did not comment on a set of questions that Moneycontrol sent seeking comment.
Two, Kuhad alleged that EARC exclusively sold certain non-convertible debentures (NCDs) to Edelweiss Group and CDPQ, whose terms were loaded in favour of the latter entities. According to Kuhad, the NCDs were structured in such a way that the subscribers’ capital was protected while the entire risk of under-realisation or non-realisation of assets was borne by EARC. He also said RBI's supervisory report raised concerns about these instruments in FY17 and FY18, while the terms of the NCD were not disclosed to the EARC board.
Three, Kuhad alleged that certain transactions between EARC and other Edelweiss Group firms did not happen at arm’s length. He said EARC bought some assets from group companies at 95 percent value (5 percent haircut), despite these assets having very poor credit ratings, compared with the usual 50 percent rate from non-related parties.
Four, Kuhad alleged that in November 2019 EARC took a Rs 1,250-crore loan from Farallon Capital, an American investment firm, at a rate of 17 percent to help its parent company through a liquidity crunch. He said EARC used Rs 700 crore from the Farallon loan to pay back a loan taken from Edelweiss Group at 14 percent—one which was not due to be repaid at that time.
Edelweiss denies wrongdoing
When contacted, Edelweiss ARC strongly denied the allegations that Kuhad levelled.
“We deny each and every allegation, contention, statement and/or assertion against us, as contained in your… email. [The] allegations grossly misrepresent facts and appear to be based on selective and inaccurate information,” wrote Parmar in his response.
Parmar said Edelweiss was unable to answer specific queries “given its confidentiality obligations”. He said he was able to “confirm that all transactions undertaken by the company are compliant with law in letter and in spirit. We would like to remind you that the company is an RBI- regulated entity and is subject to regular oversight and inspections by the regulators”.
In Kuhad’s letter to the PMO, he revealed that he had written at least thrice to the RBI between July and August 2020 but did not receive a reply. He also wrote that he pointed out the “omissions” to EARC’s board of directors, but did not receive any response.
“I have full faith in the regulators’ and the government’s ability to enforce the law,” he told Moneycontrol.
Sonam Chandwani, Managing Partner - KS Legal and Associates, said the MCA’s recent inclination towards treating complaints of whistleblowers with seriousness and initiating inspection is a step in the right direction. “For inspections to be truly effective at the grassroots level, we require a mature whistleblower regime that is responsibly utilised by companies and employees alike.”
Chandwani was not commenting specifically on this case.
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