The Amrapali fraud: India’s foreign investment and money laundering laws should not be taken lightly by investors

Jun 24, 2020

Foreign investment in India is regulated by the Ministry of Finance and the Reserve Bank of India (RBI), and foreign investors have a strict onus of complying with India’s Foreign Exchange Management Act, 1999 (FEMA), and its rules and regulations. Any breach of the FEMA rules and regulations can result in penalties being levied against the investing company and its officers or directors.

In an order passed last month, India’s Supreme Court (SC) allowed the Enforcement Directorate (ED) to attach the properties of JP Morgan India for the alleged involvement of JP Morgan’s Singapore and Mauritius entities (JP Morgan) in the money laundering case filed against the Amrapali group of companies (Amrapali Group).

The Amrapali Case

In 2011, the Amrapali Group launched various real estate projects and proposed to construct 42,000 apartments in Noida and Greater Noida in Uttar Pradesh, India. Many homebuyers booked their apartments and were promised delivery within a period of 36 months. The Amrapali Group failed to deliver the apartments as promised, as a result of which several home buyers filed complaints in the National Consumer Disputes Redressal Commission (NCDRC).

In 2017, Bank of Baroda initiated insolvency proceedings against the Amrapali Group and filed an insolvency petition before the National Company Law Tribunal (NCLT). An Insolvency Resolution Professional was appointed, and the NCLT declared a moratorium restricting the Amrapali Group from transferring, numbering, or alienating any of its assets or legal interests in the real estate projects.

The NCLT order acted as bar on the home buyers from prosecuting their case before the NCDRC. Thus, the home buyers filed several of Writ Petitions (WP) under Article 32 of the Constitution of India before the SC.

Diversion of Funds

In course of the WP, the SC sought an investigation to trace the missing funds of the homebuyers and obtained a forensic audit report. The report disclosed that the promoters of the Amrapali Group had created a web of more than 150 companies. Out of the 150 companies, almost 100 companies were used to divert the homebuyers’ funds, and an amount approximating INR56.19 billion comprising the homebuyers’ funds was siphoned off through these companies by way of payment of professional fees to directors, counterfeit billing, and sales of apartments at undervalued book prices.

In addition, the Amrapali Group had also used these funds to buy back its own company’s shares, which had enabled them to avoid the provisions of the Companies Act in respect of buyback of shares.

By its judgment dated July 23, 2019, the SC found the Amrapali Group to be guilty of violating the provisions of the Companies Act, Real Estate (Regulation and Development) Act (RERA), UP Industrial Area Development Act, and the FEMA rules and regulations. The SC also canceled the RERA registrations of various projects launched by the Amrapali Group.

Allegations against JP Morgan

According to the forensic report, in 2010, JP Morgan Singapore and Mauritius had entered a share subscription agreement and invested INR850 million with an understanding to receive a preferential claim on profits called “distributable surplus” in the ratio of 75% to JP Morgan and 25% to promoters of Amrapali Group. Subsequently, the shares held by JP Morgan Singapore and Mauritius were bought back by two firms connected to Amrapali Group’s statutory auditor for INR1.4 billion. This arrangement was in violation of the FEMA regulations, which do not allow the guarantee of assured returns or an assured exit price for equity investments at the time of the investment.

The forensic report further stated that JP Morgan’s investment was indirectly in violation of the FEMA regulations in relation to external commercial borrowings or foreign loans given to Indian companies in the real estate sector.

By its order dated May 22, 2020, the SC has cleared the path for the ED to prosecute JP Morgan for its alleged involvement in Amrapali Group case under the Prevention of Money Laundering Act, 2002 (PMLA). The SC has ordered the attachment of bank accounts and other properties of JP Morgan and its directors to the extent of the overall liability of INR1.87 billion.

As per the SC order, the ED has attached the assets, including the bank accounts, of JP Morgan India. JP Morgan India has filed an application on May 27, 2020 and objected to the attachment of its properties. Its argument is that the investments were made by JP Morgan Singapore and Mauritius and not by JP Morgan India. However, the ED has contended that some executives of JP Morgan India helped the Amrapali Group in diverting funds in violation of the FEMA. No final orders have been passed on JP Morgan India’s application, thus far.

FEMA and PMLA Compliances – Significant!

Post the Satyam scam of 2009, the Amrapali Group case is one of the biggest corporate frauds in India. In the Amrapali Group case, the promoters and directors prepared a well laid out scheme to siphon off the funds of the home buyers.

Moreover, as per the forensic report, it seems that JP Morgan Singapore and Mauritius have violated FEMA rules and regulations, and the PMLA, which has resulted in the attachment of the assets of JP Morgan India. Whether an Indian subsidiary can be held liable for the violations of a foreign parent is a question of law to be debated? However, in the Amrapali Group case, the SC has taken a strict position in dealing with matters involving violations of India’s foreign exchange and money laundering laws, especially as it has impacted the lives of several home buyers.

This case should serve as an eye-opener for all foreign investors investing in India. In order to avoid dire consequences, all restrictions on foreign investments and exits, pricing guidelines, valuation requirements, etc., must be adhered to in line with the FEMA rules and regulations.

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