Enforcement Directorate suspects serious violations of FEMA provisions
Bangalore: The Enforcement Directorate, which is investigating the Rs. 1,250-crore scrap metal scam involving the public sector trading company, the Spices Trading Corporation Ltd. (STCL), and two Bangalore-based private trading firms, is focusing attention on violations of the Foreign Exchange Management Act (FEMA).
Sources close to the investigation told The Hindu that the Directorate’s probe was initiated even before STCL’s top management filed a complaint with the Bangalore police in June.
Sources said the Directorate believed that “serious violations” of anti-money laundering provisions of FEMA, as well as violations of the Reserve Bank of India rules and guidelines might have been committed in the transactions that the STCL funded through eight Indian banks between May and September 2008.
The scam first came to light when The Hindu Business Line broke the story on July 4, 2009. The STCL, a subsidiary of the State Trading Corporation of India since 1999, had acted as a “facilitator” in an international transaction in nickel and copper scrap for two Bangalore-based companies, Future Metals Pvt. Ltd. (FMPL) and Future Exim India Pvt. Ltd (FEIPL). The two companies acted as “broking agents” by mediating the deal between three selling companies and three purchasers of the scrap metal — all located overseas. While the sellers were based in Singapore, Dubai and the U.S., the buyers were all based in Hong Kong.
The STCL financed the deal by getting five public sector and three private banks to issue letters of credit for the transaction, valued at $ 249.57 million. This was based on a valuation of nickel scrap at $16,804 (about Rs. 8.14 lakh) a tonne and copper at $ 6,614 (about Rs. 3.20 lakh) a tonne. The STCL found itself in trouble when it came to light that the consignments, delivered at Busan (South Korea) and Vietnam, were not nickel or copper scrap but in fact, scrap iron, whose price was only $ 4.58 million. Sources close to the investigations termed STCL’s arrangement with the private parties as “highly irregular”. They said the STCL ought to have ensured delivery of the intended consignment before releasing the LC. Investigations revealed that some directors of the two
Bangalore-based companies, as well as another associate located in the city, are also directors in the six buyer and seller companies.
A top official of a public sector finance company that specialises in international trade finance, told The Hindu that the Bangalore-based companies “appear to have acted like brokers or intermediaries.” He said the STCL should have obtained “insurance cover for the transaction from an international credit insurance corporation which would have “protected it from losses,” he said. “Elementary know-your-client (KYC) norms appear to have been ignored,” he said. “What was the need to get involved in a transaction when not a single gram of the metal was to land on Indian shores?,” he asked.
Sources confirmed that the investigations are now centred around the possibility of “collusion” among the parties in the transactions. “This will establish the extant of culpability of the different players,” said the source. “The case will take a definite shape in about a month,” he said.
The STCL, whose core business was initially confined to the spice trade, entered the metal scrap market in 2007.