Political Economy

Why a Multi-Agency Probe Is Needed to Get to the Bottom of India’s Over-Invoicing Scams

The urgency for a multi-agency probe is being felt as the Directorate of Revenue Intelligence investigation into the Rs 50,000 crore scams is struggling to make headway.

The Prime Minister’s Office (PMO) should act on former Reserve Bank of India governor Raghuram Rajan’s suggestion for a coordinated investigation by all agencies into cases of over-invoicing of imported coal and power equipment involving nearly 40 entities owned by India’s top corporate houses.

Some of the businesses under the scanner are part of the Gautam Adani-led Adani group, Anil Ambani-promoted ADAG and the Ruias’ Essar group. The urgency for a multi-agency probe is being felt as the Directorate of Revenue Intelligence (DRI) investigation into the Rs 50,000 crore scams is struggling to make headway.

The Central Bureau of Investigation (CBI) too, as The Wire first reported, abandoned its probe into these cases under less-than-ideal circumstances. The CBI had registered a preliminary enquiry (PE) in the over-invoicing scam after the DRI issued a notice to the Adani Group, which allegedly accounted for a decent share in over-invoiced coal imports. However, the investigative agency later closed it, citing “jurisdictional issues”, in a move that has been criticised by legal experts.

The CBI also only filed a PE against NTPC in the coal import scam that happened during 2008 to 2010, and has mostly avoided a probe against the major corporate houses involved in over-invoicing.

Moreover, the clean chit given by the DRI’s adjudicating authority to the Adani group in cases involving nearly Rs 4,000 crore-over-invoicing of power equipment bill have caused embarrassment to the agency, forcing it to appeal against the order.

On August 22, 2017, the customs adjudicating authority, K.V.S. Singh, dropped all charges filed by the DRI against Adani Power Maharashtra Ltd (APML) and Adani Power Rajasthan Ltd (APRL) for allegedly inflating the total declared value of the goods imported under power and infrastructure heads, which attracts zero or less than 5%, to the extent of Rs 3,974.12 crore.

The decision came after the DRI alleged that the goods – power generation and transmission equipment – imported by APML and APRL in 2009 and 2010 were shipped directly to India by the original equipment manufacturers (OEMs) based in China and South Korea, while the documents were routed through an intermediary entity, Electrogen Infra FZE, UAE (EIF), created in Dubai.

In its appeal filed before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Mumbai in November, the agency claimed that the adjudication order “suffers from several contradictions which indicate either total non-application of mind or recklessness in passing of the order”.

It further argued, “The manner in which the adjudicating authority has gone on to describe an otherwise dubious contract process in glowing terms as transparent, independent and good corporate governance practice… only points at eagerness and bias on the part of adjudicating authority to justify overvaluation ignoring facts to the contrary.”

India’s former Reserve Bank of India (RBI) Governor Raghuram Rajan, gestures during an interview with Reuters in New Delhi, India September 7, 2017. Credit: Reuters/Adnan Abidi

India’s former Reserve Bank of India (RBI) Governor Raghuram Rajan, gestures during an interview with Reuters in New Delhi, India September 7, 2017. Credit: Reuters/Adnan Abidi

The customs adjudicating authority’s clean chit to the Adani group also caused huge embarrassment to the finance ministry, which later assured the Delhi high court that all cases will be pursued to their logical conclusion.

The court had asked the ministry to clarify its stand in these cases while hearing a public interest litigation (PIL) filed by social activist Harsh Mander. It also asked the CBI to explain why it closed the PE even as the DRI was still probing these cases.The PIL had had sought setting up of a special investigation team (SIT) to probe cases of over-invoicing of imported coal and power equipment.

As per the affidavit submitted by the ministry in court, the DRI in 2014 gathered intelligence that certain private companies in the power sector are involved in over-invoicing of coal and power generation equipment sourced from overseas.

The gathered intelligence indicated that while Indonesian coal was being shipped directly from Indonesian ports to India, the invoices were routed through one or more intermediaries in various countries such as Singapore, Dubai, Hong Kong and British Virgin Islands (UK) to artificially inflate value, the affidavit said.

The preliminary probe, according to the affidavit, shed light on the modus operandi followed by companies for inflating the price of imported Indonesian coal.

Following that, show-cause notices were issued to errant companies. The adjudication cases are now at different stages. While some cases are still pending for adjudication, appeals have been filed in the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) against the orders of the adjudication authority, the ministry said in its affidavit.

The ministry further said that due to the scale of imports and the involvement of a large number of parties, cases have been divided into multiple investigations.

Given the involvement of multiple levels of intermediaries in most cases and their overseas locations, and because of the complex nature of transactions, the details of bank accounts of all parties in India and overseas involved need to be procured, said the affidavit.

Since transactions have been carried out within and outside India, legal proceedings have been initiated to recover material evidence from abroad. The affidavit said that the DRI is in the process of collecting documents from banks in India and overseas.

While deposing before the parliament’s estimates committee recently, Rajan said he had red flagged “a list of high profile fraud cases of non-performing assets to the PMO for coordinated investigation” and noted how the over-invoicing of imports by “unscrupulous promoters” was used to inflate the cost of capital equipment.

Rajan’s suggestion assumes added significance given the widespread suspicion that power companies may have inflated their coal and power equipment bills to get higher tariffs approved by electricity regulatory commissions.

Rajan told the house panel, “Unscrupulous promoters who inflated the cost of capital equipment through over-invoicing were rarely checked. Public sector bankers continued financing promoters even while private sector banks were getting out, suggesting their monitoring of promoter and project health was inadequate.”

If we go by Rajan’s deposition before the house panel, the non-performing asset problem of the banking sector and the over-invoicing scam are deeply connected.

Even the finance ministry, in its affidavit filed in the Delhi high court, has admitted that these over-invoicing cases are of complex nature and pursuing them would be a time-consuming affair.

Given that, a multi-agency probe is needed to ensure expeditious conclusion of the probe into these cases.

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