Probe into metal scrap scam reveals ‘deep conspiracy’

V. Sridhar and M. Raghava

Sources say important documents were ‘manipulated’

‘Merchandise transactions violate provisions of FEMA and exchange control rules’

Enforcement Directorate began investigations in February 2009

Bangalore: The ongoing probe by the Enforcement Directorate into the $250 million metal scrap scam involving Spices Trading Corporation Ltd. has unearthed a “deep-rooted conspiracy” according to sources close to the investigation. Sources told The Hindu that “important documents” relating to the merchandise transaction involving two Bangalore-based companies, the public sector trading company Spices Trading Corporation Ltd. (STCL) and six companies located overseas “appear to have been manipulated”.

The officials said the transactions violate the provisions of the Foreign Exchange Management Act (FEMA) and exchange control rules prescribed by the Reserve Bank of India. Sources said the directorate commenced investigations in February 2009, well before top STCL officials filed a complaint “of cheating against the eight companies involved in the transactions” with the Bangalore police.

The sources said the directorate’s investigations suggest that the STCL complaint has focused on lesser violations rather than “gross violations” of FEMA and its anti-money laundering provisions.

Letters of credit

Sources in the trade finance industry told The Hindu that a consortium of eight banks — five public sector and three private — had issued letters of credit (LCs) for the transactions. The total value of the LCs amounted to about Rs. 1,320 crore — Rs. 980 crore by the public sector banks and Rs. 340 crore by private banks. The five public sector banks were Vijaya Bank (Rs. 290 crore), State Bank of India (Rs. 200 crore), United Commercial Bank (Rs. 150 crore), Canara Bank (Rs. 170 crore) and Union Bank of India (Rs. 170 crore). The private banks that issued the LCs were IDBI (Rs. 200 crore), Axis Bank (Rs. 125 crore) and Yes Bank (Rs. 15 crore).

The investigation into the dealings now appears to be centred on the manner in which documents relating to an “irregular transaction” were made to appear convincing to the banks so that they could be persuaded to issue the LCs. Sources close to the investigation also said the focus was now on the “manipulation” of the transaction that did not result in the scrap ever landing in India.

STCL’s travails

STCL had suffered a loss because the metal scrap consignment was actually iron scrap instead of nickel and copper as per the contract on which basis the LCs were issued. Matters were complicated further for STCL in a legal tangle

over the right to possession of the consignment.

The directorate is at present questioning Sudheer Sriram, who is one of the directors of Future Metals Pvt. Ltd. and Future Exim India Pvt. Ltd., the two Bangalore-based companies that initiated the transaction with STCL.

Sources said he was not in the city when officials of the directorate raided the companies and his residence on June 30.

The directorate has already taken the statements of Navin Sriram, another director in both the companies. Officials are also questioning STCL officials.

A source in the company told The Hindu that K.C. Ponnana, Managing Director of STCL, was away in the U.S., along with his family members. The source said Mr. Ponnanna had obtained “permission” from authorities in the State Trading Corporation of India, STCL’s parent company headquartered in New Delhi.

The STCL, which was initially confined to the spice trade, entered the metal scrap market in 2006-07. That year, its scrap metal exports accounted for almost 70 per cent of total exports. Its imports of scrap metal accounted for nearly one-third of its overall imports.

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