When dal prices kept rising through the early summer of 2015, those were initially seen as a natural fallout of adverse weather conditions. But once the monsoons subsided, the prices went through the roof, throwing life out of gear. That’s when dal prices hit the headlines in newspapers and dominated discussion on prime time news. The Union government swung into action—first by cracking down on hoarders and announcing that it would import more pulses, and then by increasing the minimum support price (MSP) of two pulse crops in a bid to encourage farmers to grow more pulses. Gradually, the prices stablised and the issue disappeared into the news hole, far from public memory.
It was only for those keeping a close eye on the developments that the elements did not add up. In May 2015, just when Prime Minister Narendra Modi was completing a year at the helm of affairs, the government claimed that the overall consumer price inflation had dropped to a four-month low, and that wholesale price inflation had been negative for the previous six months; only pulses bucked the trend. Even at the global level, there was either a close match or an excess supply of agri-commodities. So, was there was a scam somewhere, as many suspected or conjectured?
Yes, indeed, there was a scam. In fact, documents seized in October–December 2015 by income tax (I-T) officials and a subsequent appraisal report based on those reveal that there was an insidious game at play than just the simplistic hoarding of pulse stocks at the wholesale or retail levels. The ‘Appraisal Report in the Case of Pulse Importers & Traders Group’ of the I-T department summed up the man-made crisis thus: “The abnormal price situation in India was created by a coordinated collusive activity orchestrated by few trading and financial entities. The physical stocks of pulses was cornered in domestic and international markets. Significant long positions on the future were taken on exchanges to create an artificial scarcity at the wholesale and retail levels.” Also, the Indian government did not take position on the dal futures market to control prices despite them being the largest importer.
And, this was how it worked: “Information was gathered that few major commodity dealers having presence in overseas markets as well created a monopolistic condition by procuring and hoarding stocks of pulses in national as well as overseas markets. They rigged domestic rates to an unprecedented level to offload their stock procured at low rate. The super profit earned in this manner was not offered to tax and siphoned off either abroad or converted into unaccounted cash through entry operators.” The profit was spread through the chain from the importing wholesalers right down to the retailers and not just at the level of the hoarders.
Tax officials discovered three types of operators who together worked as a cartel. The tier-I comprised leading commodity multinational corporations (MNCs) who could influence overseas markets. The second tier included domestic dealers who procured and hoarded local stock and offload stocks of the tier-I entities, while the third rung were entry operators who could provide bogus bills to reduce profit and evade taxes. The commodity MNCs shipped out the income to their overseas parent companies through over-invoicing of imports and under-invoicing of exports. Not only was there unbridled profiteering, the cartel members avoided taxation too. The I-T officials have come up with names too:
- Tier I: Glencore Group, ETG Group, Edelweiss Group.
- Tier II: Jindal Group comprising Dalip Jindal, Pradip Jindal, Jindal Agro, etc; Vikas Gupta, Superior Group; Manoj Agrawal; SV Agri Trade; Sharp Group.
- Tier III: Manoj Agrawal, Riddhi Siddhi Impex, Parth International, Gayatri Maa, Gunn Enterpries, Charles India Pvt Ltd.
Other than Glencore and Edelweiss, another major importer of dal and violator was the Sharp Mint group which has been raided by the I-T department for a second time as far more serious tax and money-laundering investigations are under way in their case, as also in the case of a major commodity exchange.
Taken together—the I-T department concurred in its report than runs into more than 2,100 pages—these were the bunch of individuals and companies responsible for the dal crisis that rocked India in October 2015. This writer is in possession of a copy of the appraisal report, even as the working of commodity exchanges are currently being investigated. The main players mentioned in the report were contacted for their responses, but till the time of going to the press, none had responded.
A supply shortage
The first signs of a dal price surge emerged in January 2015, in the aftermath of a below-par monsoon. Prices of moong dal increased by ₹500 per quintal and tur dal by ₹100 per quintal. Retail prices of all four main dals—moong, tur, urad and masoor—registered a 15–30 per cent increase over the prices of a year ago. By the time Modi completed a year in office on 24 May 2015, retail prices of pulses had shot up by a disconcerting 64 per cent. Urad at that time was being sold at ₹105-123 per kg in metros as against ₹64-80 a year ago. For tur, the numbers were ₹102-116 per kg as against ₹68-86 per kg.
In July, food minister Ram Vilas Paswan, said in a written reply to the Rajya Sabha, “Over the last one year, the increase in retail prices of major pulses have ranged between 12.63 per cent to 40.73 per cent. The main reason for the sharp increase in prices of pulses is a decline in production on account of adverse weather conditions.” Pulse production for the 2014-15 crop year (July-June) was estimated to fall to 18.43 million tonnes from 19.78 million tonnes in the previous year. The government planned to import more pulses to bridge the demand gap, but this was where the trap lay. India produces roughly 18-19 million tonnes of pulses annually, but has to import an additional 3-4 million tonnes to meet the domestic demand, the bulk of this being done by private importers. This was where the clue lay. The government failed to hedge future imports with positions in the derivative market unlike in earlier years.
Yet, this hole in the import basket was waiting to be exploited, even as there were murmurs that there was uncertainty about when the stocks would finally land on Indian shores. But when retail prices first topped ₹150 to a kilo, and then breached the ₹200 mark, panic struck the authorities. On 14 October, finance minister Arun Jaitley chaired a high-level inter-ministerial meeting that decided to create a buffer stock by procurement and imports of pulses, take strict action against hoarders and black marketers, besides encouraging states to lift stocks of imported pulses, among others. The government also amended the Central Order under the Essential Commodities Act, 1955 on 18 October to enable imposition of stock limits on pulses sourced from imports, stocks held by exporters, stocks to be used as raw-materials by licensed food processors and stocks of large departmental retailers.
Next came the much-publicised raids. Nearly 75,000 tonnes of pulses were seized from hoarders in raids across 13 states. The ministry of consumer affairs, food & public distribution said in a statement on 24 October 2015, “De-hoarding operations across the states continued. These have resulted in seizure of 74,846.359 MT pulses so far. Total 6,077 raids have been conducted by the states after the amendment in the Central Order under (the) Essential Commodities Act.”
Two months later, raids were conducted on the offices of commodity traders and importers. Raids were also conducted at the National Commodity and Derivatives Exchange (NCDEX) “to shortlist the data of traders indulging in speculative trading of pulses and delivery thereof.” One news report even said, “Edelweiss, Glencore, ETG among other major trading houses are accused of working as a cartel, illegally holding stock, delaying imports, amplifying scarcity, manipulating prices.”
But surprisingly, the role of the multinational corporations, their cartel partners, and how they operated disappeared from the landscape, without even a whimper. The appraisal report of the I-T department reveals all that, and more. It took officials almost a year to make sense of the documents that were retrieved from the hard disks that were seized/impounded during the December 2015 raids. In all, 55 premises were searched under Section 132 of the Income Tax Act, 1961 and 134 under Section 133A.
Glencore: At the core of the issue
All threads of the market manipulation that led to the 2015 dal crisis can be tied to the world's largest integrated producer and marketer of commodities—Glencore plc. Currently ranked 14th in the Fortune Global 500 list, Switzerland-based Glencore plc operates in India as Glencore Grain India Pvt Ltd (GGIPL) with Pravin Raghuvir Dongre as its managing director. Dongre is also the MD of another group company, Agricore Commodities Private Ltd (ACPL). Both companies figured in the I-T investigations.
Tax officials recovered a number of documents that showed how Glencore was controlling operations. One XLS sheet showed how its Mumbai office was maintaining records of third-party sales to Jindal Agro. Another had records of SV Agri Trade’s sales to one Rajesh Trading Co. Yet another XLS sheet aggregated tur dal sales of Glencore, SV Agri Trade and Jindal Agro International. Similarly, a text message from Glencore official Saurabh Bhartia was sent to Dongre in early October 2015. There were multiple text messages which mentioned the existence of a joint venture with the Jindals.
Glencore and the Jindals also traded through many Singapore-based companies. An XLS sheet recovered from one of the Glencore employees (named only as Khandelwal) showed that Glencore extended credit imports to its cartel members. These cartel members were allowed to import through Netherland-based Glencore Grain BV without having to pay for it. There were several files and mails wherein the stock position of cartel entities were aggregated and reported to the Singapore office of Glencore on a regular basis. Glencore executed many trades on behalf of its associate entities in overseas market. Not all trades were settled through delivery. The profit or loss on account of trades settled without delivery was retained abroad by Glencore and utilised as per instruction of the individuals concerned. This was an issue of tax transfer pricing as the entities appeared to work at other than arm’s length.
In fact, Glencore, which controls the Canada and Australia markets, was planning to operate through ETG, a dominant player in Africa and Myanmar. There were several mails indicating that instead of competing with each other, they decided to enter into a partnership for a monopoly of the Indian pulse market. Glencore was to pick up a 51 per cent stake in ETG facilities at a proposed payout of $162.81 million. With this, Glencore would have achieved backward integration by eliminating local millers. Multiple documents were also found from ETG’s office. The deal was to be closed in December 2015.
On re-examining the accounts, the tax officials saw that despite recording turnover of thousands of crores and despite being the dominant market force and a world leader, the Glencore Group hardly paid any taxes. The appraisal report noted, “Above is a sad commentary on tax compliance behaviour of a global giant who fleeced poor Indian consumers through monopolistic trades and robbed off the exchequer of its legitimate dues. Indulging in unethical, illegal and money laundering activities, Glencore-led cartel seriously threatened the economic security of the country.”
Tax officials reworked the accounts and discovered that those were in wide variance with the numbers recovered from the Glencore servers. For instance, for FY 2010–11, they worked out the profit for GGIPL to be ₹62,86,99,803.27, and the total taxes debited to ₹7,42,70,992. Therefore, the net profit before taxes for 2010–11 would be ₹70,29,70,795.3. Instead, the company’s audited results showed a loss of ₹2,32,84,926. The trend was similar for other years. Moreover, there were substantial differences between the closing stocks in the audit results and those found on the computers. The differences were due to over-invoicing of purchases and holding additional stock outside the books in lieu of the price difference. ACPL’s accounts were similarly manipulated. The net profits in 2015 alone (till November) came to ₹53.91 crore, though ACPL had been consistently showing losses. Both companies also suppressed net profit of ₹133.76 crore for wheat, sorghum and other millets in 2015 alone.
One particular mail showed how Glencore was manipulating profits in castor trading through Indore-based Nikhil Commodity & Derivatives Pvt Ltd. The numbers of four companies was mentioned in that mail, with two of them mentioned only as JT and GL. The cumulative profit and losses of the four companies came to a flat zero. Tax officials concluded that JT and GL were benami companies.
Trading was done and positions taken on NCDEX through pro accounts of cartel brokers. The profit was not shown in the books. There were regular email exchanges between Dongre and Bhartia through their Gmail accounts. The pro account positions did not appear in the books of the brokers as transactions of either ACPL or GGIPL, but were camouflaged as that of the concerned broker himself. The accounts were squared off at the broker level. In 2014-15 alone, GGIPL operated through five brokers and one XLS sheet showed how the net position of pulses for each month was squared off to zero. The total realised but undisclosed profit was ₹2.13 crore. Similarly, a profit of ₹1.55 crore was shifted out the previous year. Mails from Bhartia to Dongre also clearly mentioned the actual position of pulses as against the declared stocks. For instance, the difference between 6,310 metric tonnes of chana stocks in the last quarter of 2014 was worked out to be ₹20.19 crore. They also made money from currency arbitrage. GGIPL made $32.4 million through currency arbitrage in January-April 2015, a mail to Dongre revealed.
Glencore: Bigger games at play
The numbers at the international level were bigger. An analysis of mail accounts of key employees of Glencore revealed largescale trading on the Chicago Board of Trade (CBOT) and Bursa Malaysia Berhad (BMD) exchanges. Indian citizens cannot legally trade in overseas markets even under the Liberalised Remittance Scheme (LRS). Tax officials found that mails written by employees of ACPL and GGIPL were sent from India to the Rotterdam offices of Glencore Grain BV (and not the other way round). Those were not transactions done by Glencore Grain Bv that were being conveyed to its India office—in fact, those were transactions entered from India by employees of ACPL and GGIPL that were being communicated to the overseas offices. There were a large number of such mails giving details of trading done on CBOT and BMD. Tax officials worked out the profits: the total profits from 2010–11 to 2014–15 came to $9.44 million.
That there existed an arrangement to trade on the CBOT and BMD markets and to park profits thereon with Glencore, Rotterdam was evident from a draft mail of Dongre. The mail to one Ronald de Gelder at the Rotterdam office talked about crediting profits to the India account. The agreed ratio of profit sharing was 50:50. However, as all transactions were done from India, entire profit needed to be taxed in India, the I-T department pointed out in the appraisal report.
There was overwhelming evidence that GGIPL and ACPL were also earning income outside India which was credited to its India account through the desk maintained at the Rotterdam office of Glencore Grain BV. These details were frequently exchanged between GGIPL/ACPL and officials in Rotterdam. This evidence was recovered from mails and their attachments from accounts @glencore.com and the Gmail account of Dongre. An important mail sent by him to de Gelder acknowledged and documented the profit-sharing and retention mechanism between GGIPL and Glencore Grain BV. Incidentally, these mails were in the draft folder; all important mails which are against local laws had been exchanged as ‘draft’ mails. A part of GGIPL’s profit was earned and retained at Rotterdam in violation of Indian Laws. It was not offered to tax, and was a breach of the Prevention of Money Laundering Act, 2002. The income earned outside India needed to be taxed in India irrespective of the sharing arrangement between Dongre at GGIPL and his counterpart at Rotterdam.
Other mails exchanged between Dongre and GGIPL director Shyam Doshi showed how the GGIPL profit was being calculated both in India and Rotterdam, apart from the fact that those were not being offered for tax in India. There were trades in both pulses and cotton. The I-T officials concurred that the income of the Indian company being parked in Rotterdam needed to be taxed in India. The amount computed only on basis of what was seized came to $43.19 million between 2009–10 and 2014–15.
Glencore: Tax evasion on other counts
In 2008, Glencore plc’s subsidiary Chemoil Energy Ltd and Adani Global Ltd formed a joint venture Chemoil-Adani Pte Ltd for supplying bunker fuel to vessels in Mundra and other ports in India, including Kandla, Jamnagar, Vadinar, Hazira, Dahej and Goa. The JV initially was to supply marine fuel at Mundra. Seized documents showed that sometime later Adani Global acquired 4,900,000 shares of the company. The directors’ resolution towards this sale, however, bore no date.
A mail exchanged between Surish Sharma, who resigned as the director of Chemoil-Adani in the run-up to the sale, and another Glencore official, put the deal at $8 million. In addition to the amount received on sale of shares, Chemoil Energy was to receive another $8 million on sale of properties. According to the I-T department, the transaction should have attracted capital gains tax in India notwithstanding that it was between two foreign entities and the transfer of shares entailed transfer of assets in India. Moreover, through GGIPL and ACPL, Chemoil Energy had a permanent establishment (PE) in India. Besides all this, the transaction was negotiated through GGIPL, Glencore’s PE in India.
The second deal was over Delhi-based Tinna Viterra Trade Pvt Ltd. (TVTPL). Formed as Maple Newgen Trade Pvt Ltd in early 2009, it was renamed later that year after Singapore-based Viterra Asia bought a 60 per cent stake. The JV existed till May 2013 when Glencore took over Viterra Inc globally, causing the exit of Viterra. The JV had been active in trading in agriculture commodities such as yellow peas, chick peas wheat and other grains in the Indian market. After the dissolution, the entire share was held by Tinna Rubber and Infrastructure Ltd (TRIL) and the name was changed to Tinna Trade Pvt Ltd (now Tinna Trade Ltd). According to a mail recovered from Dongre’s Gmail account, $10 million was payable to Viterra Asia Pte Ltd, Singapore. However, Glencore plc was liable to be taxed in India since the underlying assets were located in India. In the end, TRIL paid the amount for the acquisition of shares at ₹10 per share i.e. at par. No TDS (tax deduction at source) was deducted as no capital gains accrued to it in India being transfer of shares at par value. The tax officials reworked the share value, on basis of the balance sheet for 2012–13, to ₹30.5 per share. Viterra Asia, therefore, made capital gains of ₹6.30 crore.
A large number of mails and files were recovered from the premises of the Glencore group which related to its investment in ETC Agro Processing (India) Private Ltd, part of the ETG group. In a mail sent to Doshi in March 2015, Dongre talked about joining hands with ETG to emerge as dominant player in India. Even as the dal shortage was beginning to create a turmoil in India, Glencore and ETG discussed how to control this market. According to a file dated 7 September 2015 that was recovered from the premises of the ETG group, the $130 million deal would have Glencore as the single largest shareholder at 40 per cent. Even though officials of both groups denied any such transaction during the post-search interrogation, the capital gains of ETG and the Glencore’s funding are still being probed.
Glencore: Fluctuation was at retail end
A Glencore spokesperson, in an emailed response, denied any involvement in any role in the creation, abetment or compounding of the dal crisis. “We also unequivocally deny the allegations of forming any cartel with any individual or organisation. Anybody following the spike in dal prices would know that the price hikes were only in two categories of dals: tur and urad. We place on record that Glencore’s core importation commodity in the pulses sector is masoor and yellow peas, which saw no such hike. Our importation of tur and urad are negligible. Therefore, we stand excused of any such charges.”
She argued, “Any close reading of the price fluctuations over the period under discussion will reveal that the entire burden of fluctuation and rise was at the retail end. As a major global producer and marketer of natural resources, our core role is to connect commodities from places of surplus to places where they are most required in an efficient, cost-effective, safe, reliable and responsible manner.
“We base our investment and operational decisions to a large extent on the fundamentals of supply and demand. Commodities are traded globally and this enables countries to import when domestic production volumes are insufficient to meet domestic demand. We also believe that it is very important price signals reach farmers; such price signals enable them to make decisions about the varieties and volumes of crops to grow that are based on their ability to generate the highest return.”
The spokesperson attributed the dal crisis to supply and demand. “Subsequent market intervention by authorities in some states—albeit well-intended—inadvertently led to an exacerbation of the situation and a further rise in prices.” She also argued:
- An acute shortage of tur and urad was caused by the monsoon failure in two consecutive years (2014 and 2015). Tur and urad are kharif crops and are dependent on the advent of rains in Maharashtra, Andhra Pradesh and Karnataka. They are also early seeded crops, unlike soybeans, and any delay in the arrival of the monsoon has a direct proportional impact on final yields.
- Outside of India, tur and urad are only produced in Myanmar and East Africa.Both of these locations are dependent on rainfall as these pulses are mostly grown in rain-fed areas. As a result, the government was unable to buy sufficient stockdespite being aware of the acute shortage of turuntil the 2016 harvest crops from Myanmar and East Africa became available.
- Tur and urad have been de-listed from futures trading on the exchange platform since 2007.This shows that higher prices cannot be attributed to speculation on commodities exchanges.
- The entire price rise was a result of attempts to artificially suppress of prices in major pulses producing states of Maharashtra, Andhra Pradesh and Karnataka.These states kept stock limits in place; these stock limits prevented farmers from selling their produce to domestic traders/millers. As a result, these farmers had to dispose of their pulses at substantially lower prices (at times even below their cost of production) at the time of harvest itself. This demotivated farmers to cultivate pulses, which resulted in lower acreage in following seasons.And these subsequent harvests were adversely impacted as a result of the failed monsoons.
The spokesperson also commented on the data / documents impounded from Glencore’s premises during the raid: “We have suitably responded to all the queries from the income tax department via our various submissions and also during personal deposition of our employees.”
The appraisal report had made note of such submissions and depositions, but had found those to be insufficient or unsatisfactory explanation for the department’s findings.
ETG: Controlling through tax havens
The operations of ETG and its financial details that were ferreted out by the I-T department officials were similar. Founded in 1967 and purchased by its current directors in 1986, Export Trading Group (ETG) owns the most vertically integrated agriculture supply chain in Africa with operations in procurement, processing, warehousing, distribution and merchandising. It is also actively present in North America, India, China and Southeast Asia. The group has substantial presence in India in the agricultural commodity market. In India, the group is headed by Vijay Bhupatrai Doshi. ETG is essentially a tax haven-based group with ultimate control with a British Virgin Islands (BVI)-based company. The main companies of the group in India are ETG Agro Pvt Ltd, ETC Commodities (India) Pvt Ltd, Greenfield Impex Pvt Ltd, and ETC Agro Processing (India) Pvt Ltd and ETG Agro Processing (India) Pvt Ltd.
The two entities that figured in the investigations —ETC Agro Processing (India) Pvt Ltd and ETG Agro Pvt Ltd —are subsidiary Indian companies of the ETG group owned by Mahesh Patel and Ketan Patel, who own 60 per cent and 50 per cent stakes through ETC Group, Mauritius. The rest of the shareholding is held by Vijay Doshi and his family members Hemir V Doshi, Mala Doshi and Heera Doshi.
The first of the companies of the Doshi family that was investigated was Agro Ventures FZC that operates from the Ras Al Khaimah (RAK) Free Trade Zone in Dubai. The investigators examined files pertaining to Pacific Foods Ltd (PFL) in Dubai, which was a joint venture of Parle Biscuits Pvt. Ltd, India; Export Trading Company, Dubai; and Agro Ventures, FZC , Dubai. PFL was incorporated in Dubai in April 2015 to set up biscuit manufacturing plants in Ethopia and Kenya. On examining and reworking the books, the officials concluded that Vijay Doshi and Hemir Doshi would have to explain source of ₹5.82 crore in 2015-16 and ₹18.72 crore in 2016-17 that they invested in PFL.
The second issue was over the tax accrued on the transfer of shares in ETC Agro. In the beginning, the Doshi and Patel families held shares in the ratio of 52.25:47.75. A company called Kiev Services BV then acquired 35 per cent shares from the two families, which were left with 32.50 per cent each. Shares of Kiev Services and Birju Patel (of the Patel family) were transferred to ETC Group, Mauritius in March 2012. As per the exchange rate of 51 in March 2012, $3.8 million (Kiev’s shares) would be equal to ₹19.38 crore and $3.52 million (Patel’s shares) ₹17.99 crore. ETC Mauritius acquired 67.5 per cent of shares before fresh allotment of shares brought down the percentage to 60 per cent. According to the Finance Act, 2012, an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Thus, capital gains on ₹19.38 crore in the case of Kiev Services and ₹17.99 crore in the case of Birju Patel was taxable in India.
But, both of these were incidental findings. The I-T officials noticed that both ETC Agro and ETG Ago had not paid any advance tax in 2015 when the dal crisis was at its peak. The reasons offered to investigators was: “shortage of funds” and “unpredictability” over the previous two quarters (the raids were conducted in December 2015) because of which they expected a dip in profits. However, on examining the accounts, it was discovered that ETC Agro had a taxable income of ₹30.83 crore and ETG Agro ₹37 crore till 30 November. On this, the appraisal report remarked, “It’s in a position to easily shift its profits to Dubai and Singapore as it has been doing in past. Because of IT action in December 2015, assessee could not get time to manipulate its books and hence the admission. However, it’s quite likely that in the period December 2015 to March 2016, it would have booked losses again. AO (assessing officer) must verify these transactions in detail. If so, assistance of Delhi Investigation Wing may be sought.”
These remarks would have been in sync with what the officials found for the previous financial year. On a gross turnover of ₹1807 crore, the ETC Group (for the two companies) claimed to have incurred a loss of ₹2.38 crore despite being a dominant force in pulse trading in the world. The ruse offered for the discrepancies were depreciation/interest. The total amount for depreciation and interest did not tally with the working given by the group. Besides, the losses apparently accrued from trading did tally with the trading losses mentioned in the spreadsheet files. As per these documents, the trading loss was recalculated. After adjusting for depreciation and finance charges, it was found that the net profit before tax would have been ₹4.54 crore for ETG and ₹8.06 crore for ETC in 2014–15 alone. For 2012–13, the adjusted profit before tax was found to be ₹19.54 crore against the ₹7.72 that was shown in its audited accounts. The accounts of subsidiary companies ECL Commodities India Pvt Ltd and Greenfield Impex Pvt Ltd too indicated that the profits shown did not tally with what they had on their books.
Both ETC Agro Processing and ETG Agro traded through their group concerns abroad, with transactions not being incurred at arm’s length. There was overwhelming evidence that export prices were suppressed to park profits abroad. There are several spreadsheets wherein comparisons were made with prices offered by third party contracts. One Excel workbook related to yellow maize showed that the rates for unrelated parties varied from $400 per unit to $566 per unit in 2011 alone. However, exports to ETG companies were at $272 per unit. Exports were directly shipped from India to Ho Chi Minh City, Vietnam whereas bills were raised to its Singapore sister concern. There was no value addition by Singapore’s Export Trading Commodities Pte Ltd, which appeared to have been used merely for re-invoicing to undervalue the export prices. Because of the heavy under-invoicing , ETG/ETC kept on incurring losses on paper. Exports were under-invoiced by 40–45 per cent, and the corresponding profit was shipped out to associate concerns located abroad. Similarly, an analysis of import figures over years showed that imports of ETC Agro and ETG Agro from sister concerns were over invoiced by 30–57 per cent. The group, thus, transferred its profits to its associate concerns which were located in tax havens.
ETG: Crisis Due to Increasing Demand
The ETG Group has denied the I-T department’s allegations. Doshi said over email, “The 2015 price increase was almost entirely driven by two years of back-to-back drought and increasing demand. There was acute shortage mainly in two or three pulses varieties from a total of 20 options available to consumers. But excessive sensationalisation impacted all prices beyond reason.”
Doshi spoke about zero discrepancy in ETG stocks. “During the I-T surveys that was conducted pan-India, there was not even 1 MT difference between physical stock and ERP stock across all locations of ETG. Due to there being no discrepancies in the inventory physically found at all locations with the books of accounts, no seizure /payment of taxes were made at the time of the survey. All the discrepancies which were noted by the I-T authorities at the time of survey and found by them in our computer systems were duly reconciled and submitted to the authorities in the post-survey submissions. The company continues to cooperate fully and provide all the information as required by the government agencies.”
He said, “ETG stock was merely 2–28 days old and 100 per cent within existent stock limits. ETG had 100 per cent legitimately owned and stored stock and very less relative to our processing capacity, when the stock raids were conducted. ETG imports whole tur (raw pigeon peas) and the same is used for processing and not for trading. The dal made from this raw tur is sold daily across various states. It practically never has dal stock of more than 10 days production in the factory which has been verified from the stock registers. The business model cannot afford to hold any more dal inventory that that.”
Doshi also contended that ETG has never had membership of any commodity exchange. “This has also been favourably noted by the concerned authorities. It is entirely into physical procurement, processing, value addition and distribution of goods.” He went on to add, “ETG is perhaps the only company that publishes its prices daily on their website and emails dal prices to the government bodies daily. Prices are determined by the tens of thousands of companies and individuals speaking to each other daily, assessing supply and demand and the market finding its own level. Pulses market is extremely volatile due to the global vagaries of this highly rain dependent crop. Raw pulses prices fluctuate multiple times a day and for a wide range of varieties and qualities that are available.”
ETG could not have controlled prices. “India consumes about 25 million metric tonnes of pulses annually. There are tens of thousands of companies of all types and sizes that operate in pulses across India. It is not practically conceivable that in a mass commodity physical market, a company or few companies can truly influence the market prices. The end produce is not unique by any means and is easily substituted by consumers given the twenty varieties available. Any single company represents a mere drop in the ocean in the commodities market. At the wholesale level one would lose a customer for even ₹1/kg extra pricing expectation as compared with the very broad market.”
Doshi also commented on the trade itself: “While imports account for about 20 per cent of India’s pulses consumption they have attracted 80 per cent of the attention given that, by definition they move in large consignments. Imports have been happening much the same way for the last 40 years. In all probability 2015 was no different on that front. Moreover, the company did not have any purchase /sale of tur or its products with the other companies which were surveyed.
“Millers logically prefer affordable prices. Affordable prices increase dal consumption, result in higher utilization of processing assets, need lower investment in inventory and greatly lower the downside risk. The prices fluctuate on a daily basis and at times one month can do more good or more harm than the rest of the 11 months for any participant in the agri-commodity sector. This is true not just for pulses.”
Doshi also asserted that climate change is a reality and agri-output reliability is under severe pressure. “This key fact and its impact need to be accepted so that real solutions can be found. It is required to efficiently link farmers with consumers. Technology, professional talent and capital are essential to transform the sector. It is time for all of us to focus on solving that fundamental problem in a collaborative environment. We do believe that various government agencies have already studied volumes of data extensively to ascertain existence of any effective artificial influence on the price movements. The government is taking some very strategic steps for the transformation of this sector.”
The appraisal report had also included the full recorded and documented versions and opinions of the ETG Group, but had found them to be inadequate explanations/justifications.
Edelweiss: Operating through a dummy
The Edelweiss Group is one of India’s leading diversified financial services with businesses ranging across capital markets, credit, asset management, life insurance, and commodities.. The group is one of the major players dealing in the Indian commodity market. The parent company is Edelweiss Financial Services Ltd, founded by Rashesh Shah, who is also the chief executive officer (CEO) and chairman. Along with his wife, Vidya Shah, he holds a 27 per cent stake in the group while co-founder Venkat Ramaswamy holds 10 per cent. The others, whose names repeatedly figured in the investigations are Himanshu Kaji (the group’s chief operating officer) and Rujan Panjwani. The main group companies that were found to have played a role during the 2015 dal crisis were Edelweiss Commodities Services Ltd, Edelweiss Financial Services Ltd, and Edelweiss Trading and Holdings Ltd.
On basis of the documents and digital files that were recovered, tax officials matched the books of the 45 Edelweiss companies with the numbers that were filed with the I-T department, and found that (on tallying both realised and unrealised profits) on comparison with returned income for AY 2016–17, in four cases the income returned was significantly less that the profits up to November 2015. The cumulative returned income of ₹2,154,133,000 was 25.18 per cent of the total realised and unrealised profits of ₹8,554,834,978 for four Edelweiss companies—Edelweiss Commodities Services Ltd, Edelweiss Finance & Investments Ltd, Edelvalue Partners and Ecap Equities Ltd. Tax officials have also wanted to re-examine the books of eight Edelweiss companies (EFSL Commodities Ltd, Ecap Equities Ltd, Edelvalue Partners, ECL Finance Ltd, Ecap Equities Ltd, Edelweiss Finance & Investments Ltd, Styrax Commodities Ltd and Edelvalue Partners) which showed a cumulative loss of ₹1,876,311,945 (up to November 2015). The balance sheets for the previous years had showed the returned income was significantly lower than the accrued profits; the appraisal report called for the AO to examine the accounts and mark them as suppression of income in case of unsatisfactory explanations.
The Edelweiss group has been raising funds in Mauritius and Singapore through overseas entities. These funds eventually found their destination in India. Mails exchanged between Edelweiss officials (that were recovered by tax officials) showed how they discussed ways and means of avoiding scrutiny by the Foreign Tax and Tax Research (FTTR) division of the Central Board of Direct Taxes (CBDT). The parent companies of these overseas units in India should be asked to reveal name and address of investors, the appraisal report said. Moreover, ECL Finance Ltd received huge amounts as share capital for foreign PEs and FIIs. The appraisal report asked the AO to make FTTR references to ascertain the identity of the true investors and find instances of round-tripping of funds. All these findings were circumstantial in nature.
Those related to the 2015 dal crisis led to Aster Commodities DMCC, which was formed in Dubai as wholly-owned subsidiary of ECIL Mauritius, which in turn was a wholly-owned subsidiary of Edelweiss Financial Services Limited, India. Aster was used to over-invoice import of pulses. The management and control of Aster vested in the India office of the Edelweiss group. Aster merely issued back-to-back bills to Edelweiss Commodities Services Ltd after enhancing the rates. The goods were shipped directly from the port of origin to India whereas the bills were routed through Dubai. To this extent, Edelweiss Commodity Services Limited not only evaded taxes but also indulged in money laundering, the appraisal report concluded. Three of Aster’s directors —Durga Prasad Jhawar, Vinod Kumar Soni and Udit Sureka —were employees of different companies of the Edelweiss group in India. Even Jhawar’s housing loan had to be approved by the Edelweiss management team in Mumbai. Copies of emails exchanged among Edelweiss employees showed how they had worked hard to escape tax scrutiny in India.
Funds came to Aster mostly in the form of loans. For one loan amount from Axis Bank, Edelweiss Financial Services Limited was the guarantor. All decisions regarding fund transfers and business transactions were taken from and by core management team of Edelweiss at the Mumbai Office. It was seen that Edelweiss divided its business in various segments viz. bullion, commodity, derivatives, etc. Various companies including the overseas ones also dealt in these segments. Business was dealt by the same team at Mumbai irrespective of the location of the entity. All this was ascertained from the emails that were recovered from Edelweiss employees.
Many of these mails drove home the point that all purchases from Aster, which was merely re-invoicing, were handled by the Edelweiss Commodity team at Mumbai, mostly an operations manager called Sitaram Chokhara. One mail showed that a shipment of yellow peas from Canada was being made to Tuticorin port. The seller was Glencore Grain BV and the buyer was Aster. This shipment was for September-October 2015, when the dal crisis was peaking. In this period, a flurry of emails were exchanged between Glencore and Edelweiss. Mails from Glencore suggested that a payment of $3.7 million was made by Aster DMCC to Glencore from a branch of ICICI Bank in Dubai. However, this transaction too was handled by Chokhara far away in Mumbai. These select mails showed Aster was merely a dummy company created solely for re-invoicing. All imports of pulses were handled by Edelweiss Commodity Services Ltd, and Aster was interjected to ship out a part of profits at Dubai. There was also evidence of back-to-back billing by Aster in 2014–15 (during the dry monsoon which eventually led to the dal crisis).
A perusal of these bills showed a clear pattern: Aster consistently over-invoiced purchases of Edelweiss Commodity Services Ltd by close to a third i.e. around 30 per cent. This was discovered by tallying numbers from Edelweiss Commodity Services Ltd with the invoices of Aster. The percentage of over-invoicing varied from 7.59 per cent to 88 per cent, and the inflation was maximum in the case of purchases of pulses made by Aster from Singapore-based Agrocrop International.
This worked both ways, as was evident from the purchases that were made by Edelweiss Commodity Services Ltd. Invoices showed that as against the rate of $640/MT for green peas from Aster, the average rate from unrelated parties was $560/MT. Thus, the Aster rates were higher by 18 per cent. In the case of red lentils, the Aster rates were higher by 23 per cent. Overall, the average rate of inflation of purchase of pulses from its own dummy company was estimated to be 10.8 per cent. For these circumlocutory purchases, the appraisal report called for the income of Edelweiss Commodity Services Ltd be increased by ₹173,77,18,191 in view of the inflation of its purchases.
Edelweiss: Keeping funds abroad
The Edelweiss group created many subsidiary companies in Mauritius, Singapore, Dubai, Cyprus, Hong Kong and Chad which did not pay any taxes in India on the ground that they did not have any PE in India. These were formed to achieve following objectives: ship out profits abroad in tax havens through a complex holding structure designed primarily to defeat tax laws; create and manage ‘funds’; access overseas commodity and currency markets to take advantage of price differential; for speculation in foreign markets. The appraisal report said, “Analysis of seized/impounded data reveals that these companies are manned by employees of (the) Edelweiss group. All decisions with respect to their management and control is taken by core management team of (the) Edelweiss group at Mumbai. The funds by way of equity or loan are also provided by (the) Edelweiss group at Mumbai. Only a charade of documents have been created to show them as separate business entities at arm’s length. However, the so created corporate veil must be lifted to unravel the truth and assess correct income in India.”
The directors at the companies in these places were employees of the Edelweiss group, Mumbai. Mails showed how the directors were chosen to bypass Indian tax laws. Different entities were managed by different employees, but the integrated accounting gave them away. The Edelweiss Group in Mumbai not only provided funds by way of equity, it also stood guarantor to loans from banks. According to one mail from May 2013, $100 million was invested in ECIL Mauritius by EFSL India. An earlier mail from April 2012 related to transferring funds from EC Global Mauritius to Singapore. The mail to Edelweiss COO Himanshu Kaji remarked that a more “hygienic” way to deal was to repatriate the money from EC Global to India and “suffer” a 15 per cent tax, which eventually was not. All these led the appraisal report to remark that the overseas entities viz. EC Global Mauritius, ECIL Mauritius, Aster Commodities DMCC Dubai, EISAA Mauritius, EISAF Singapore, EW Special Assets Advisors, EAAA PL Singapore, EW Special Assets Funds Singapore, Edelweiss Chad, Edelweiss Cyprus should be taxed in India by the AO after due verification.
That was not all; Edelweiss took this forward by carrying out dollar trading in money markets. The appraisal report contextualised this, “Like the thriving non-deliverable forward (NDF) market in Singapore and London, where institutional investors, hedge funds and large business houses punt on the rupee, there exists another market, but more opaque, where bets happen on interest rate movements in India. This is the non-deliverable overnight indexed swap (NDOIS) market, where investors, who think interest rates will rise in India, strike deals to pay a fixed rate and receive a floating rate while those who bet that interest rate will soften enter into contracts to pay a floating rate and receive a fixed rate. As the name (ND) suggests, no delivery of rupees happens in offshore markets, though underlying transactions are linked to rupee rates. The bets are settled in dollars. These large investors had a windfall after the central bank's somewhat unexpected strike in the money market.”
Emails contained evidence of huge profits made from the money markets. The USD trading income of ₹94,22,70,000 for 2012–13 and ₹203,43,50,000 for 2013–14 needed to be taxed in India since: the trading was done by the Dollar Trading Team of Edelweiss at Mumbai; all decisions were taken only with the approval of core management team and the control and management was in India; overseas concerns had PEs in India; and funds were provided from India.
Edelweiss Trading & Holdings Ltd, which offers commodities broking and trading services, too came under the scanner. The company was earlier Edelweiss Commodities Advisors Ltd. Edelweiss Trading & Holdings Ltd was incorporated in 2004 and is based in Mumbai. Edelweiss Trading & Holdings Ltd operates as a subsidiary of Edelweiss Financial Services Ltd. On examining the sales, closing stocks, realised and unrealised profits (primarily of pulses), it was found that the company had understated profits by ₹13,06,36,379 in 2015 alone (till 31 October 2015). Moreover, it was seen from the inventory of closing stocks that for many items (read, pulses) the quantity was shown at a negative value.
Edelweiss: Denial of Cartelisation
Edelweiss has denied having played any role on what the I-T department described as “cartelisation” of the dal crisis. A spokesperson on behalf of Edelweiss Business Services Ltd asserted over email: “Please note that Rashesh Shah, Venkat Ramaswamy and Himanshu Kaji are not on the Board; neither are they CEOs of this subsidiary and nor are they involved in the day to day management of the said subsidiary. We wish to state that the points raised are only allegations and that too, generic in nature, and in the absence of any specific questions it is difficult for us to specifically respond.
“We would also like to place on record that we are not in possession of any such report. We have always run all our businesses in a professional manner, strictly abiding by the laws of the land and all regulatory guidelines. In the case of the agricultural commodities business, Edelweiss has always ensured that the food and civil supplies department has been kept abreast of stock purchase and sales on a monthly basis, since inception. We deny any allegation of cartelisation on our part.”
The I-T department, however, was not satisfied with the responses.
