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Madras HC dismisses H&M petition challenging Rs5 lakh fine by ED

H&M gave a personal guarantee to an NRI for a $13.5 million loan without taking permission from the RBI

The Madras High Court has dismissed a writ petition by Helios and Matheson (H&M) challenging the Rs5 lakh penalty imposed by the Enforcement Directorate (ED) on the company for violation of the Foreign Exchange Management (FEMA) Act. The company had offered a personal guarantee for a loan of $13.5 million to a non-resident Indian (NRI) without obtaining the mandatory prior permission from the Reserve Bank of India (RBI).

Chennai-based H&M has been involved in a battle with vMoksha Technologies (VMT) over the fraudulent acquisition of subsidiaries of VMT. In May, the Bombay High Court had ordered the resumption of proceedings against H&M in the same case. (Read, 'Bombay HC allows proceedings against Helios & Matheson')

Madras High Court judge T Raja observed that, "In the light of the foregoing discussion, I hold that the present writ petition is not maintainable and accordingly, the same is dismissed."

The ED raided H&M's Chennai office after it received a complaint from the RBI about the fraud and violation of FEMA by H&M in its acquisition of vMoksha Technology's subsidiary companies. Some incriminating documents were seized in the raid.

The matter dates back to 2005, when H&M entered into a share purchase agreement (SPA) with VMT's unit in Mauritius to acquire 100% of its equity for $13.5 million. H&M announced a $19 million buyout of vMoksha, that was co-founded by Rajeev Sawhney and Pawan Kumar (former CEO of the controversial DSQ Software), with Mr Sawhney investing the money and Mr Kumar running the operations. Mr Sawhney soon realised that he had been kept in the dark about many aspects of the deal.

He found that instead of receiving $19 million, a bank account had been opened fraudulently with State Bank of Mauritius in the name of vMoksha and this was used to borrow $13.5 million using a fake board sanction and false entries. That money was remitted to H&M ostensibly for subscription of redeemable preference shares on 28 June 2005.

The regional director of the Ministry of Corporate Affairs conducted a technical scrutiny of H&M and found that the loan was, indeed, obtained by falsifying the board minutes and making false entries. Worse, the H&M chairman provided a personal guarantee for this borrowing by vMoksha, even before acquisition of the subsidiaries or the transfer of funds for the acquisition.

The State Bank of Mauritius allegedly approved the loan, although the loan documents were unsigned and on plain sheets of paper instead of the company's letterhead. Indian authorities gave the approval for the deal on the condition that investment in VMT Mauritius should be paid out of the inward remittance of foreign exchange, through normal banking channels, and to invest with H&M it has to follow the prescribed norms.

As per the norms, a foreign company will have to bring the requisite funds from abroad and not leverage from the domestic market. VMT, Mauritius after availing the credit for remittance from the State Bank of Mauritius on 29 June 2005, remitted the entire amount of Rs58.37 crore to H&M's at the Chennai branch of the bank on 29 July 2005.

After the investigation by the ED, a show-cause notice was served to H&M for contravening FEMA rules for $13.5 million, equivalent to Rs.58.37 crore, in having stood as guarantors for obtaining the loan from State Bank of Mauritius.

H&M submitted a detailed explanation along with a letter stating that the authority had no jurisdiction to proceed against it, and that there was no need for an inquiry at all. It also challenged the proceedings and filed a writ petition in the high court.

The HC found that the company has not been denied the principle of natural justice as it did not bring on record to substantiate the claim and refused to interfere with the show-cause notice. The Court considered the company's plea that their grievance would stand redressed if a direction is issued to the ED for deciding the case of the petitioners on the basis of the explanation offered. It disposed off the writ petition and directed the ED to consider the company's objections within a period of four weeks of the receipt of a copy of the order.

After disposal of the petitions, H&M through a letter to the ED stated that there was no need for them to attend the scheduled personal hearing. The company did not avail the two opportunities of personal hearing given to them. The ED, considering H&M's explanation through letter and considering the time limit given by the judge imposed a penalty of Rs5 lakh on H&M.

Moneylife has previously reported about the bruising battle between H&M and Rajeev Sawhney (Read, Helios & Matheson under the scanner ). Moneylife has also reported on how the market regulator, the Securities and Exchange Board of India (SEBI), had fined H&M Rs50 lakh for making false announcements to influence the stock price and hiding information about the acquisition of vMoksha.  (Read, Helios & Matheson fined Rs50 lakh by SEBI for financial irregularities; vMoksha co-founder also penalised)

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