Spectrum Money Trail: Money-laundering at its very best?

It is the most outlandish corruption story one has ever heard in India – bribes for the 2G Spectrum deal were routed through cheques to a media company owned by the first family in Tamil Nadu.

Even by our remarkably abysmal standards that must be a new low; and in terms of sheer brazenness, a new high. A chartered accountant friend, tongue firmly in cheek, remarked: "What about Service Tax?” Service Tax is not applicable to bribes; I pointed out dryly.

Even as the range of allegations are difficult to absorb, some serious questions emanate from a plain reading of the Balance Sheet of DB Realty Limited for the financial year 2009-10. It may be noted that the company in question came out with a public issue for 3.21 crores shares of Rupees 10/- each at a price of Rs 468 (including a premium of Rs 458) aggregating approximately Rs 1500 crores in February 2010.

A perusal of the Annual Report of the company for the said year brings out some interesting details:

The income of the company for the said year is Rs 226.61 crores. But this income is not out of operations, but is merely the share of profit from a firm called Dynamix Realty in which the Company is a partner.

More is to follow. The Notes to the Consolidated Accounts of the company for the year 2009-10 tells an interesting story. The said partnership firm, according to the Annual Account, has a project by which it is entitled for two components - viz. land component and construction component. Since the partners and their share of profits are different in each component, the said project is further divided into two projects viz.

Project I - Land component is a partnership between Eversmile Construction Company Private Limited (Profit share of 99%) and Conwood Construction and Developers Private Limited – (Profit share of 1%).
For Project II involving construction component, DB Realty holds a 99% share and Conwood Construction and Developers Private Limited, the balance. Since, DB Realty has share only in Project II, the profit has been considered in the books of DB Realty on the basis of project wise break-up of audited accounts.

But the facts get more interesting here. The said firm has a turnover of Rs 479.43 crores and expenses of Rs 248.21 crores. The profit before tax obviously works out to Rs 231.22 crores. As far as I understand the tax rate for firms aggregates to 30% in India. In the current context that would work out to approximately Rs 70 crores. Net of taxes, the profit available for distribution should be approximately Rs 160 crores, of which 99% could accrue to DB Realty Limited. But what has been accrued is Rs 226.61 crores! Has DB Realty accounted for profits before taxes rather than profits after taxes?

This is where things get murkier. The auditors of DB Realty have stated very clearly that they have relied on the financial statements audited by “other auditors.” Further, DB Realty has not provided the details of subsidiary companies as required by Law as it has got an exemption by the Central Government to provide the necessary details under S 212 of the Companies Act. The moot point is – when the entire Income of the company arises from such firms, whose interest is being protected by not furnishing such details? It may be noted that in case of partnership firms – it does not even have to disclose any detail to anyone excepting some tax authorities, to whom it can submit a totally different set of accounts. Needless to emphasize, all these are manageable in the Government for an “unofficial price” in India.

Further, the auditors in their report have pointed out that DB Realty has lent money aggregating to Rs 745 crores to 17 parties, of which loans aggregating to Rs 465.01 crores (and these were interest free loans!) were made to parties which had negative net-worth, meaning that the money was lent interest free to parties whose Balance Sheet was not sound! Well would you do it? The company has not written off these sums nor have they provided for the same merely on the representations of the management that these loans are good and recoverable.

Naturally, all these raise several questions. After all, DB Realty was a high profile company and is listed in the stock exchanges in India. It had a very successful Public Issue in early 2010. Yet, it escaped the scrutiny of all financial sentinels. That its entire income from operations for 2010 is dependent on the share income (as explained above where the sums do not match) makes it a peculiar case, if not downright an unlawful one.

Obviously, all these loans are unsecured, and could possibly be written off over the years as irrecoverable. And for all those who are beneficiaries (i.e. those who took loans in the first place) of such write-offs, it would be tax free white money! Welcome to the Socialist, Democratic, Secular Republic of India. And such planning happens day in and out in this world of corporates that are invariably linked to political parties. And that is plain and simple Money Laundering.

The Money Laundering Dimension
Money laundering, it needs to be understood, is the culmination of several predicate crimes that necessitate money laundering in the first place. It is often remarked that it is the saint that removes the taint from money. Yet some others term it as the mother of all crimes. Bringing back laundered wealth into mainstream economies as good clean money is crucial to ensure that such money is put to profitable use.

Obviously, the end game of a money laundering exercise is to ensure that money is cleansed of its criminality. Therefore the Prevention of Money Laundering Act states that “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds and projecting it as untainted property shall be guilty of offence of money-laundering.”

According to the Balance Sheet of DB Realty Limited, it loaned a sum of Rs 504.22 crores to Dynamix Realty, which in turn loaned a sum of Rs 209.25 crores to Kusegoan Realty Private Limited. Then, Kusegoan Realty Private Limited loaned 200 crores to Cineyug Films Private Limited, and Cineyug in turn loaned 214.24 crores to Kalaignar TV. These have been repeatedly substantiated by various press reports.

Interestingly, Kusegoan Realty Private Limited explains the loans from Dynamix Realty: “The Company has taken Unsecured Loans from Firms. In the Opinion of the Company, keeping in view that all members of the said firm are companies, the said loan in “substance” represents inter-corporate deposits and consequently outside the purview of the term deposit as defined under the Companies (Acceptance of Deposit Rules) 1975.”

That in effect is a tacit admission from Kusegoan Realty Private limited that it was not the money of Dynamix but that of Realty which eventually made its way to Kalaignar TV. Why should DB Realty limited provide unsecured loans through Dynamix Realty, and then Kusegoan Realty, and subsequently Cineyug, to fund Kalaignar TV? Why should Kalaignar TV, a company with a paid-up share capital of a mere Rs 100 lakhs need a loan in excess of Rs 200 crores? What did it do with the money? According to the press reports, Kalaignar TV is reported to have returned the loan taken along with interest. Well that is interesting! Nevertheless all these questions remain unanswered to this date.

Further, it may be noted that India is a member of the Financial Action Task Force (FATF) on Money Laundering. This is an inter-Governmental body whose purpose is to develop an international response to combat money laundering. FATF has adopted a set of forty recommendations (thoroughly reviewed in 2003 to take into account changes in money laundering and anticipate future potential trends) titled “The Forty Recommendations on Money Laundering.” These constitute a comprehensive anti-money laundering framework. Although not binding as law upon a country, these recommendations have been widely endorsed by the international community as the applicable international standards for combating money laundering.

While admitting India as a full-fledged member into the FATF, it sought to improve monitoring of transactions with Politically Exposed Persons (PEPs). Surely Kalaignar TV is a politically exposed party. It is therefore expected that every single financial sentinel in this country will be technically and legally equipped to monitor transactions with such PEPs by having greater monitoring, evaluation and surveillance. It is surprising that all these happened right under the noses of every single financial sentinel of this country.

Naturally when watchdogs go to sleep, one need not be a seer to state who would be the ultimate beneficiary. Hundreds of crores seem to have been moved from a publicly listed company into some partnership firms to be routed to a company with a significant political profile. Yet not one of them blew the whistle. And all these came out simply because of the intervention of the Hon’ble Supreme Court, CBI and other investigating agencies working under its supervision. And that to me reflects the comprehensive failure of our financial sentinels. In this scenario, why blame the politicians or corporates?