The ED case of Edelweiss

If the allegations on Edelweiss turns true, it only means there is a lot of undisclosed rot in India’s banking system which is yet to come out

The rot in India’s banking and financial system is not yet fully exposed and out in the open and thus with boring regularity, we keep hearing of yet another financial entity biting the dust, due to the scammy dealings of its promoters. The list of biggies of such entities so far has included the likes of ILFS, DHFL and PMC Bank, with similar allegations also against Reliance Capital and India Bulls, though not confirmed. All these entities have been headquartered at Mumbai, India’s commercial and financial capital and hence the next big one to be exposed in this manner, is most likely to be yet another biggie from Mumbai and if the newspaper reports are correct, then that happens to be Edelweiss. The reports say that the ED has been investigating foreign exchange violations of over Rs.2000 crores, by a relatively unknown entity called Capstone Forex, which has its office secretly tucked away in a residential apartment, at Mira Bhayender, Thane. This company is alleged to have illegally acquired foreign exchange of over Rs.2000 crores, by giving a bogus list of tourists, which is then sold to shell entities in India and abroad. The ED’s charge is that the acquisition of forex by Capstone Forex was funded by Edelweiss and that those shell companies to whom the illegally acquired forex was given, too belonged to the Edelweiss group. The common connection between the two entities viz. Capstone Forex and Edelweiss is a chartered accountant called Sanjay Nathalal Shah, who also happens to be an independent director, on the board of a few companies of the Edelweiss group.

The reports say that the said Sanjay Shah has been already questioned by the ED and he is said to have spilt the beans. It appears that Edelweiss has provided funds to Capstone Forex, layering the transaction and routing it through another entity and that it was meant to be the beneficiary of this huge foreign exchange illegally acquired by Capstone, through these funds. The money trail both ways are alleged to be leading to Edelweiss and thus the ED has summoned its founder and chairman Mr Rasheh Shah for questioning, together with all the relevant records. He was required to appear before the ED on the 03.01.2020, which he did not, and then on 09.01.2020 which he again did not and if the reports are correct, he is required to appear before the ED on 13.01.2020. A news channel says that this is a forex smuggling racket of Edelweiss, which has been under investigation by the ED, ITD and IB and that its size could be up to Rs.10000 crores and not just Rs.2000 crores as is presently alleged.

In response to these shocking allegations, Edelweiss denied that it had any transactions with Capstone Forex, and it termed them as unauthenticated, wild and baseless. Its chairman Rasheh Shah has denied any involvement in any scam and said that this is not the first time that ED has approached it. It said that as a responsible corporate citizen, it will fully cooperate with the ED. It said that the media has sensationally reported false allegations, conjectures and innuendo, without presenting their side of the story, equally and fairly, and that it will take appropriate legal action against it, to protect and reinforce the reputation of Edelweiss. It said that it is committed to the highest standards of corporate governance built on a strong foundation of ethics. The larger picture of this unfolding saga is that Edelweiss does not deny that the ED’s charges are bogus/baseless, or that is a victim of some vendetta. All it says is that it has no relationship with Capstone Forex. But then these kinds of illegal and dubious transactions are not done with a direct nexus. They are always layered and routed through different entities, as happens in the case of round-tripping of funds. These are indirectly routed and funded through shell entities, in order to avoid any direct money trails.

Edelweiss now needs to clarify the following issues, to prove these allegations to be wrong:-

1. Did it lend money indirectly to Capstone Forex through shell entities?

2. Were these shell companies linked to it and what happened to the loans it gave to them. Have they been recovered, or are they unsecured, turned bad and not so recognised?

3. What was its compulsion in dealing with an entity having a shell office in a residential complex, tucked away in Mira Bhayander?

4. What is its nexus with those entities who received the foreign exchange from Capstone Forex?

5. Is the connecting bridge between Capstone and Edelweiss, a mere unfortunate coincidence?

Edelweiss will need to come clean, should it want that its reputation is restored. If these allegations are true, it only means that there is a lot of undisclosed rot in India’s banking/financial system which is yet to come out, and that raises the standard questions viz. what was the auditor, independent directors and regulator doing, why was such a scam allowed to go unnoticed and become so big and when there is such a huge misuse of funds why is the Group not being investigated after declaring its founder to be not fit and proper.