New Delhi: In permitting the Enforcement Directorate to attach the assets of JPMorgan in India, for alleged violations it committed while dealing with the Amrapali Group in 2010, the Supreme Court has tightened the noose on the US-based investment bank.
The Supreme Court’s order has cleared the path for the ED to possibly prosecute JPMorgan under the Prevention of Money Laundering Act (PMLA), for allegedly helping Amrapali to divert funds meant for its realty projects.
The court order came after the ED’s counsel, additional solicitor general Sanjay Jain, submitted that the agency had prima facie identified Rs 187 crore in the accounts of JPMorgan, as “proceeds of crime” under the PMLA. The ED sought permission to attach the bank’s properties, in accordance with the court’s earlier direction not to proceed without its approval.
The SC has been hearing a batch of petitions filed by hundreds of home buyers, to whom Amrapali did not deliver flats at the promised time. The petitions were filed in October 2017, and after a two-year marathon hearing, the court last July cracked the whip on Amrapali for breaching the trust of homebuyers. Amrapali’s registration under real estate law RERA was cancelled, and it was also ousted from its prime properties, with the court nixing the land leases.
The court also ordered government-owned construction firm NBCC to take over the incomplete projects. It is now supervising completion of the unfinished flats.
The violations committed by Amrapali range from disregarding foreign investment norms, paying dividend without generating profits, setting up fake companies and overvaluing shares.
The Supreme Court had based its July 2019 order on a comprehensive forensic audit that it had ordered in 2018, which showed that Amrapali had diverted funds of 42,000 home-buyers.
Advocate M.L. Lahoty, who represents the homebuyers in the case, said the “startling” report revealed the “criminal nexus” between real-estate companies, financial institutions and government authorities, who together “duped” the customers.
The audit report had alleged that there were “illegal financial dealings” between JPMorgan and Amrapali, and the bank aided the builder in transferring homebuyers’ money to offshore accounts. The court told the ED to look into these allegations last July, and since then, the bank hasn’t asked for a review of that order.
The ED then submitted two reports, one in December 2019 and another in January 2020.
The ED will now proceed to attach JPMorgan’s assets provisionally, and get them confirmed by the adjudicating authority. Once confirmed, the ED will have one year to file a prosecution report against JPMorgan for trial.
‘Violated forex and investment rules’
The Supreme Court had noted the allegation that JPMorgan India violated foreign investment rules to help Amrapali divert money. In court, the investment bank claimed it had invested more than Rs 100 crore in the real estate business of Amrapali Group, and had a claim of Rs 168 crore from the realty firm.
According to the share subscription agreement between the firms, quoted in the forensic audit: “The US-based firm had invested Rs 85 crore on 20 October 2010 to have a preferential claim on profits in the ratio of 75 per cent to JPMorgan and 25 per cent to the promoters of Amrapali Homes Project Private Limited and Ultra Home.
The ED informed the court that the same number of shares was later bought back from JPMorgan for Rs 140 crore by two companies — M/s Neelkanth and M/s Rudraksha — owned by a peon and an office boy of Amrapali’s statutory auditor Anil Mittal. This money, ED said, was remitted back to the United States.
The agreement, on the face of it, appears to be in violation of the Foreign Exchange Management Act (FEMA), which do not guarantee any assured exit price at the time of making an investment. Exit price, the law states, shall be at the price prevailing at the time of exit.
In Amrapali’s case, the audit found that the valuation exercise of shares was done backwards. “This was carried out to cause wrongful loss to the homebuyers of Amrapali Zodiac Developers Private Limited and to give advantage to JPMorgan,” the court had said in its July 2019 verdict.
Also, the agreement is said to be in breach of External Commercial Borrowings (ECB) guidelines under FEMA. JPMorgan, as pointed out in the forensic audit, remitted Rs 60 crore in one of the subsidiaries of Amrapali without obtaining approval from competent company to make an ECB investment.
Both Amrapali and JPMorgan are said to have flouted the provisions of the Companies Act as well. Amrapali Zodiac Developers Private Limited — one of the subsidiaries — could not have brought back its own shares from JPMorgan. Section 77A of the Companies Act prohibits a company from buying back its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares.
‘Money invested in Amrapali was not utilised in project’
A statement by a senior JPMorgan executive revealed the firm was aware that the money invested in Amrapali was not utilised in the project for which it was given. This admission will bring the investment bank under greater scrutiny for its role in what the Supreme Court described as “organised fraud”.
The executive accepted that JPMorgan had knowledge about money being diverted from the shareholder’s agreement and share subscription agreement, valuation of the shares did not follow the correct methodology of discounted cash flow, and that the “valuation exercise was done backwardly in order to inflate the value of share to siphon out the money of home buyers through JPMorgan”.
The Supreme Court had also noted how JPMorgan was getting returns at the rate of more than 20 per cent on its investment of Rs 85 crore, and its agreement with Amrapali Zodiac Developers to invest a substantial part of this investment (Rs 60 crore) in Amrapali Leisure Valley Developers at the rate 0.01 per cent.
This investment, the court noted, was not necessary because the payment plan for this project was construction-linked.