SPECIAL REPORT by Sandeep Bamzai: KKR's Smoke & Mirrors

ON TUESDAY, the Enforcement Directorate issued a third summon to mega star Shah Rukh Khan (SRK), asking him to be present at the Mumbai ED office in the first week of November, before Diwali. At the very kernel of SRK's problems with the anti-money laundering agency are issues pertaining to his IPL franchise, Kolkata Knight Riders, which go back at least six years. 

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 subsidiary KNS Pvt Ltd. 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 7 March 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 30 March 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 27 July 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 specializes 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 16 June 2009 in a private bank in Worli Mumbai and 00XXXXXXXXXXX52 current account opening date 23 April 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 11 September 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 Badhshah 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.    

LONG RUNNING SAGA 

• Knight Riders Sports Pvt Ltd or KRSPL was incorporated on Feb 27, 2008....one month AFTER the IPL bidding process. 
• Juhi Chawla's late brother Sanjiv Chawla was on its board.
• The company then had a paid up capital of Rs 1 lakh.
• 99,000 shares were with Red Chillies Entertainment
• 1,000 were with Shahrukh’s wife Gauri Khan.
• Corporate office was N K Mehta International House, 178 Backbay Reclamation, Mumbai 400020.
• At that time, Jay Mehta was not part of Knight Riders, but this office was also used by Gujarat Sidhi and Saurashtra Cement Ltd (owned by Jay Mehta). This showed involvement of Mehta Group in Knight Riders since incorporation.
• On March 5, 2009, authorized share capital was increased from Rs one lakh to Rs 20 crore.
• Additional shares worth Rs 5 crore or 25 % of equity were subscribed by Sea Island Investment in Mauritius in March 2008.
• Sea Island was fully owned by The Mehta International Ltd (a family company incorporated in Bermuda in 1981).
• Shares worth Rs 4 crore were taken by Juhi Chawla, wife of Jay Mehta amounting to 20 per cent of the equity.
• Remaining 10.9 crore shares were taken by Red Chillies Entertainment Pvt Ltd (55 per cent).
• So, in a nut shell, 45 per cent were held by Mehta Group.
• Strangely, though share capital was increased in March 2009, share application money worth Rs 13.5 crore was existing in the annual accounts of March 31, 2008.
• The KKR franchise bid was won by Red Chillies Entertainments Pvt Ltd for $75.09 million, but the franchise agreement was signed by its subsidiary KNS Pvt Ltd.
• After documents were called from Knight Riders Sports by way of directives, investigations have revealed that KRS had issued shares to Sea Island Investments in March, 2009 at only par value i.e Rs 10 per share.

(Sandeep Bamzai is a sports junkie, editor & author. Currently a Visiting Fellow at ORF.  Disclaimer: The views expressed are solely those of the author in his private capacity and do not in any way represent the views of The Fan Garage)

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