Ruia brothers (Essar Group) accused of money laundering internationally

The Ruia brothers are in the hot seat once again in international news.

Shashi and Ravi Ruia control the $15 billion (revenue) Essar Group, with interests in steel, shipping and oil refining. And Essar, as we know, currently owes the city over $30-million in taxes among many other amounts owing to local companies.

Their Essar Steel, with debt of nearly $7 billion, is among a dozen companies that face liquidation under India’s new Insolvency and Bankruptcy Code.

Well they are in the news again.

The Cayman Islands, home to two family trusts of the Ruias who run Essar were in the Paradise Papers (a set of 13.4 million confidential electronic documents relating to offshore investments that were leaked to the German newspaper Süddeutsche Zeitung) recently about the offshore entities of the Essar group.

Many of these documents, revealed on November 5, relate to Appleby, a law firm which operates out of Bermuda, the British Virgin Islands, the Cayman Islands, the Isle of Man, Guernsey and Mauritius.

The Indian Express, reported that Appleby’s records indicated that from 2006 to 2011, through intricate and multiple layers of transactions, Ishwari Prasad Khaitan, managed two offshore family trusts of his brothers-in-law Shashi and Ravi 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.

The Virgo Trust and the Trinitron Trust are both well known to the Indian Director of Revenue Intelligence (DRI) and were noted in a 290-page notice issued on March 11, 2015 to various entities in the Essar group.

The notice alleged that these entities in the Essar group over-valued equipment to generate electricity and indulged in trade based money laundering. The inflated costs of power plant machinery indirectly increased electricity tariffs, which meant that the average person had to pay more.

The notice, which was issued against four Essar group companies – Essar Power Gujarat Limited, Essar Power MP Limited, Essar Oil Limited and Essar Projects (India) Limited – alleged over-valuation of imports, and in turn 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.

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 used.

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

The DRI notice alleged that the Essar group firms gained money from a “related” entity called Global Supplies (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 provides the group’s breakdown.

Essar Projects Limited (EPL), 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, Shashi and Ravi.

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 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 Shashi Ruia & Ravi 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.

The matter is still in the adjudication process.

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.”