On Saturday, the Enforcement Directorate sent a show cause notice to Kolkata Knight Riders and its co-owners Shahrukh Khan and Juhi Chawla in the long running saga of causing a Rs 73.6 crore loss under FEMA in an IPL related case. At the very kernel of the case is the sale of some shares of Knight Riders Sports Pvt Ltd to a Mauritius based firm at a cost lower than their actual value resulting in the alleged loss of foreign exchange amounting to Rs 70 crore and change. One can argue that this is a trifling amount and conversely counter that big fish are involved in this soap running over many moons which has involved SRK's own interrogation.The fact that contraventions to FEMA have taken place are a reality too and no one can be absolved of that. tonnes of paper from govt agencies has been floating around and yet nothing has happened in all these years, leaving one wondering why so much flap and why no closure?
Having followed this story over time, it makes sense to decode what ED is saying. After all contravention of FEMA provisions 2000 have taken place. Knight Riders Sports Pvt Ltd (KRSPL) is alleged to have violated FEMA norms by undervaluing its shares in a transfer deal with co-owner Jay Mehta's overseas company, Sea Island Investments Ltd (SIIL). An audit done by Choksi & Choksi Ltd (on the directions of ED) had shown that the transfer of shares between SRK's KRSPL and Jay Mehta-owned Sea Island Investment (SIIL) was undervalued by the entities involved. The report detailed that the actual value of the transferred shares was much higher.
The KKR franchise bid was won by Red Chillies Entertainments Pvt Ltd for $75.09 million, but the franchise agreement was signed by its special purpose vehicle Knight Riders Sports Pvt Ltd (formed by Red Chillies Entertainment) for the purpose of acquiring IPL franchise rights. After documents were called from Knight Riders Sports Pvt Ltd by way of directives, investigations have revealed that KRS Pvt Ltd had issued shares to Sea Island Investments on March 7, 2009 at par value i.e Rs 10 per share. As many as 40 lakh shares of the other co-owner Juhi Chawla, Bollywood star and Jay Mehta's wife, have been transferred to Sea Island Investments, Mauritius at par value i.e Rs 10 per share on March 30, 2010. Investigations indicated that the transactions don't appear to have been made at fair value, which is in contravention of schedule 1 of regulation 5 (1) of FEMA.
It is also suspected that section 6 (3) (b) of FEMA may have been violated in this transaction regarding pricing of shares. Documents were requisitioned from Red Chillies Entertainments Pvt Ltd which had entered into the franchise agreement with the BCCI. In the long running saga, on July 27, 2010, reference was made to RBI HQ for conducting source inquiry at Mauritius in respect of Sea Island Investments, Mauritius. Ownership patterns revealed by KKR at the time of bid show that Red Chillies Entertainment Pvt Ltd owned 55 per cent, Sea Island Investment Ltd owned 25 per cent, and Mrs Juhi Chawla (Mehta) owned 20 per cent.

The ministry of finance's department of revenue's Financial Intelligence Unit red flagged a whole catalogue of suspicious transactions report regarding a private bank's Suspicious Transaction Report no 10XXXXXX13 of Knight Riders Sports Pvt Ltd. Anuj Gogia, additional director of FIU in a missive dated September 22, 2010 to Arun Mathur, director, Enforcement Directorate alerted him on the wide and varied suspicious transactions, also known as STRs in financial lingua franca.
FIU traces the movement of money by integrating its search with other like-minded international bodies. It specialises in the origin of money and tracks its paper trail to its final destination. More often than not, this comes via the process of round tripping. Which is essentially local investors taking their money out to a place like Mauritius, dressing it up in offshore secrecy, then returning the capital home, gaining the special exemptions (such as zero tax rates) put in place to entice foreign investors —then laughing as they bring it back into India.
FIU thus began tracking individuals: SRK's wife Gauri Khan, SRK's partner Jay Mahendra Mehta, and the late Sanjiv Chawla (Juhi's brother) and entities like Knight Riders Sports PL Escrow A/C (Trust) PAN AAXXXXXX8M. A list of accounts were then investigated: 00XXXXXXXXXXX52 current account opening date on June 17, 2009 in a private bank in Worli Mumbai and 00XXXXXXXXXXX52 current account opening date April 23, 2008 in a private bank on Cadel Road in Mumbai, which are in the names of Knight Riders Sports PL Escrow A/C and Knight Riders Sports Pvt Ltd.
For years, even as all this paper swirled around, SRK had complete immunity from the law. Till September 11, 2011, when he was called in for questioning by ED in Mumbai. The question was simple: how can share application money to the tune of Rs 13.5 crore be received by SRK’s Knight Rider's Sports Private Limited when the company had an authorised share capital of Rs 1 lakh?

The Badshah was grilled by the ED for six hours about a transaction with Juhi Chawla in March 2009. On that date, as many as 40 lakh shares of Juhi Chawla were transferred to Sea Island Investments, Mauritius at par value of Rs 10 per share. The ED suspected the transaction didn't appear to have been made at fair value and was in contravention of FEMA.
Other discrepancies discovered by agencies in Kolkata Knight Knight Riders (KKR) operations included issues related to change of ownership due to related-party transactions, as well as not making statutory filings. Importantly, a report by the Registrar of Companies (RoC) has also made note of KKR's Rs 50 lakhs donation to the Rajasthan chief minister's relief fund, flagging it off in a note before the corporate affairs ministry. This was when Lalit Modi was IPL Commissioner and RCA boss.
The report by the ROC Mumbai has found the change in KKR ownership — leading from related-party transactions — was not in line with the rules governing IPL franchisees. There was "change in control" of the company which was violative of the franchisee agreement, the report said, pointing out that this was not permitted before a period of three years and that too only after permission from the IPL/BCCI.
The related-party transactions in KKR entailed actress Juhi Chawla selling her entire holding to Sea Island Investments, a Mauritius-based company promoted by her husband Jay Mehta. Also, it made mention of Shahrukh Khan and his wife Gauri selling stakes to their company Red Chillies.The report also mentioned several procedural and statutory violations made by KKR. This included not informing the central government while increasing the share capital of the company to Rs 20 crores.
ED has given all the concerned parties a fortnight to reply. Closure in such cases is never easy and the spectre remains overhead, ready for the guillotine to fall any time.
Sandeep Bamzai