The Enforcement Directorate (ED) on Thursday said that it has busted a massive foreign exchange scam to the tune of Rs 700 crore involving Mumbai-based firm Capstone Forex Pvt Ltd, which allegedly bought foreign currency on fudged and forged air tickets and passports.
According to sources in the central financial probe agency, the name of the Capstone Forex came under radar in connection with its investigation into Edelweiss Financial Services Ltd whose Chairman Rashesh Shah was recently questioned by it.
An ED source claimed that Capstone Forex bought forex on "fudged, forged and fake air tickets and passports" and had received more than Rs 700 crore in its accounts from various shell companies.
The source said that during the probe, it was found that many of the shell companies transferred funds to various big corporates and reputed companies.
"Corporates that have come under the ED scanner include CG Power Solutions, Indianapolls Hospitality, which belongs to Jay Mehta Group, husband of Bollywood actress Juhi Chawla, Consultshah Financial Services, Eros International Media, Jain Energy (Jain Irrigation Group), Navarkar Builders, Next Gen Films, and Swatantryaveer VD Savarkar Multistate Cooperative Credit Society."
The source also revealed that during questioning, most of the companies "failed to justify" the reason behind the transfer of funds to Capstone Forex.
He said that Capstone came under the ED's lens following sharp rise in its revenue from Rs 6 crore (approximately) in financial year 2015 to Rs 315 crore (approximately) in financial year 2018.
"While examining bank account statements of the said FFMC (Full Fledged Money Changer), it was noted that Capstone has received hundreds of crores of rupees from various entities, firms and companies during the period of 2017-2019," the source claimed.
According to ED sources, Capstone submitted copies of passports and air tickets to show the proof of the customers to whom it sold the foreign exchange. "However, on checking a few of those air tickets, it was found that the said tickets were forged and fake...," he added.
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ndia Ratings and Research (Ind-Ra) has downgraded Yes Bank Ltd’s long-term issuer rating to ‘IND A-’ from ‘IND A’, while maintaining it on rating watch negative (RWN) due to continued delay and inconclusive quantum of the anticipated equity infusion in the lender.
Ind-Ra says it believes this could adversely impact the Yes Bank’s franchise and potentially create challenges on asset and liability side. The agency notes that the bank has sizable foreign currency liabilities and institutional deposits.
"We are of the view that the required capital infusion is critical for providing sufficient cushion to the possible credit cost impact from the stressed asset pool on regulatory capital requirement in the short- and medium-term, as well as for the bank’s ability to continue to serve its customers adequately," it added.
Although the liquidity position of the bank seemed adequate at end-September 2019 (liquidity coverage ratio of 114%), Ind-Ra says it believes that, in the absence of any swift capital raise, the bank’s ability to manage its asset and liability maturities could get tested further.
"The bank continues to remain in discussions with various potential investors. However, Ind-Ra believes raising sizeable capital in the very near term could be challenging and could require various regulatory and other approvals," the ratings agency added.
The Union Budget was a damp squib, with no big ideas to stimulate economic growth. But finance minister (FM) Nirmala Sitharaman remains cocksure. She told parliament that the economy is not in trouble and ‘green shoots’ are visible; she has even defended her exhausting Budget speech claiming that ‘every aspect of the economy warranted a careful response’. Yes, but people are looking for action and anticipation of situations, instead of post-facto articulation of issues.
While the government is focused on macro-economic factors, let me focus on just one issue that needs urgent handling before it triggers yet another crisis which tramples on the green shoots that Ms Sitharaman has spotted.
It is the looming Yes Bank crisis. The financial sector is getting increasingly jittery about Yes Bank which is struggling to find investors. There is only a limited window of opportunity to fix the problem before panic sets in; that limited time is fast running out. The impact of a failure of the fourth largest private bank is going to roil the financial sector again, just as badly as it did after IL&FS (Infrastructure Leasing and Financial Services) began to default in September 2018. Liquidity will freeze; confidence will be badly hit; and economic recovery will be indefinitely postponed, again.
On 12th February, Yes Bank announced a delay, up to 14th March, in declaring its quarterly results. The Bank, which has appointed Anshu Jain, president of Cantor Fitzgerald, a US-based financial services company, and former co-head of Deutsche Bank, to find investors, has reportedly received non-binding expressions of interest (EOI) from a new set of investors including JC Flowers, Tilden Park Capital, Oak Hill Advisors UK and Silver Point Capital, according to media reports. It is not clear whether this will pan out without other confidence-building measures and support from the Reserve Bank of India (RBI).
The potential impact of Yes Bank’s inability to raise funds has consequences for the entire sector and beyond.
Although foreign investors would like the government to nationalise Yes Bank, RBI is, correctly, reluctant to permit the State Bank of India (SBI) to be the scapegoat that bails out what is essentially a private fraud and mismanagement of funds. It has already bailed out IDBI Bank through LIC and a direct infusion of funds totalling over Rs42,000 crore.
This has pushed the private sector to consider participating in a potential bailout, because the system cannot take yet another systemic blow so soon after the failure of IL&FS in September 2018 and the long-delayed recognition of a massive fraud at DHFL (Dewan Housing Finance Ltd) in 2019.
Sources tell me that one of the most respected names in the financial world has proposed a public-private bailout of Yes Bank, as a last resort, to the RBI governor, Shaktikanta Das. Under this proposal, some of the leading banks, including ICICI Bank, HDFC Bank and, maybe, Kotak Bank, Axis Bank and others, would chip in Rs2,000 crore each, with a seat on the board and a commitment not to withdraw funds for at least two years.
This solution also involves SBI bringing in Rs5,000 crore on similar terms. Such a move would certainly impact Yes Bank’s competitive edge, but would build confidence to attract some global investors who would bring in the rest of the money. It remains to be seen if RBI and the Central government respond decisively to the offer.
It is important to remember that Yes Bank had received a set of bids in November 2019, but they fizzled out over questions on the antecedents of some potential investors. Meanwhile, its former directors continue to foment panic. On 13th February, Deccan Herald quoted from yet another letter written by former independent director Uttam Prakash Agarwal on 30th January which claims, “... withdrawal of deposits of nearly Rs1.02 lakh crore, of which nearly Rs77,000 crore represents the reduction in fixed deposits and nearly Rs25,000 crore represents a reduction in CASA in the last 11 months, i.e., between March 1, 2019, till date...” Interestingly, all former directors and whistleblowers of Yes Bank seem to have a single-point agenda of attacking the chief executive officer (CEO) Ravneet Gill who was brought in specifically to clean up the endless rot at the Bank.
Another fact to ponder over is the complete lack of action or investigation against Rana Kapoor whose dubious banking and personal wheeling-dealing has brought the Bank to its knees. Is it because a close scrutiny of Mr Kapoor’s transactions could turn the spotlight on a couple of corporate houses, very close to the government who are in deep financial trouble? One of them has even declared himself bankrupt.
Meanwhile, the failure to resolve IL&FS has dealt another blow to the government’s posturing about decisive action. The government failed to understand the complexity of IL&FS and its 340-odd group entities with an outstanding debt of Rs94,215 crore.
On 11th February, the government asked for 270 days more to complete the resolution of 105 companies and release another 55 companies from moratorium. Money, raised from various recoveries and the singular sale of wind-power projects to Orix Corporation, remains locked up in an escrow account for want of permission to disburse it. The government has asked for a creditor’s committee to be appointed for five entities with a direction to them to act expeditiously. This is a long and tedious process that is unlikely to ensure a complete resolution of IL&FS in the next several years.
Why is there no attempt to course-correct, instead of trying to push IL&FS through a brand new bankruptcy process? IL&FS was a byzantine conglomerate of over 340 companies with an aggregate debt of Rs94,215 crore. Of this, Rs10,173 crore is owed to pension funds, provident funds, employee welfare funds, gratuity funds and army group insurance funds which aggregate savings of ordinary people. Another Rs44,075 crore is owed to banks.
There is a huge systemic cost to these funds remaining blocked in a slowing economy. An affidavit by the ministry of corporate affairs (MCA) laments the absence of a ‘group insolvency framework’ under Indian law. What stopped the government from framing an IL&FS-specific statute and ramming it through parliament as it has done with several controversial legislations?
Remember, IL&FS was essentially a private company that colluded with government officials and entities; yet, there is no action against its founder chairman and the board of directors, who colluded with him for decades through their silence; all of them remain untouched. So much for the government that claims about tough and unbiased action against financial fraudsters!
At a relatively smaller level, the same stubborn refusal to make haste and look for out-of-the-box solutions was evident in its handling of Punjab and Maharashtra Cooperative Bank (PMC Bank). While the Bank’s fully functioning 120 branches are bleeding money (at Rs1 crore a day), the government is slowly working at legal changes while moving the apex court to block an expeditious resolution ordered by the Bombay High Court.