CBI may clip Santa's Claws, go after the Ruias & Loop

After a gap of more than two months, the Central Bureau of Investigation (CBI) is getting ready to file its third charge-sheet in the 2G (second generation) telecom spectrum scandal.

This time, according to sources, the focus could be on Loop Telecom, Mumbai’s mobile services provider. Reason: the Ruias of Essar, who are co-promoters in Vodafone, have been linked to Loop Telecom. Under the united access service licences (UASL) given to mobile operators, no promoter can own 10% or more in another licensee in the same area.

But while Essar has since agreed to sell its 33% stake in Vodafone to its UK co-promoter, the CBI says they are the effective owners of Loop Telecom, which is officially run by the Ruias’ sister and brother-in-law, Kiran and IP Khaitan. Loop was almost completely bankrolled by the Ruias and Essar, and even has some common directors and employees.

In January 2008, the disgraced Communications Minister A Raja, now in Tihar jail, gave Loop 21 licences for extending its services beyond Mumbai.

Kiran, sister of Shashi and Ravi Ruia, is a promoter along with her husband of Santa Trading Pvt Ltd, which in turns owns a majority stake in Loop Telecom. The CBI contends that the Ruias invested Rs 1,592 crore in exchange for non-convertible debentures of an equivalent amount in Santa Trading. Santa, in turn, invested this amount to promote Loop Telecom Pvt Ltd.

When Raja allotted UASL licences to Loop Telecom in 21 circles on 10 January 2008, the Essar money was effectively invested in a second telecom company beyond Vodafone, CBI sources allege.

The CBI, for the purposes of its charge-sheet, is relying on clause 8 of the UASL licensing agreement, which has this to say:

_"_No single company/legal person, either directly or through its associates, shall have substantial equity holding in more than one licensee company in the same service area for the access services namely; basic, cellular and unified access service. ‘Substantial equity’ herein will mean an equity of 10% or more. A promoter company/legal person cannot have stakes in more than one licensee company for the same service area. A certificate to this effect shall be provided by the applicant’s company secretary along with application."

The Essar Group thus cannot have 10% or more in Loop, but, through a convoluted structure (issue of non-convertible debentures) what could be deemed an effective stake beyond 10% in Loop.The CBI will claim that the Ruia brothers and theirsister wouldbecollectivelydeemedas “associates” for the purpose of clause 8 of the UASL agreement.

In an argument that runs parallel to what Kalaignar TV is claiming about the Rs 200 crore paid to the company-that it was a loan and not a bribe for inducing Raja to give licences to Swan Telecom-a Loop spokesman told Firstpost that the money lent to Loop by the Essars was a “family affair”. The Essar group, they say, had been a net borrower from the Khaitans, and this was the money involved in Loop. “The Essar Group owed more than Rs 1,400 crore to the Khaitan Group,” a Loop spokesperson claimed, adding that the Essar group had an equity stake of 2.15% in Loop and this had further been reduced to 1.5%.

CBI sources said Essar may be technically right in saying that it had very little direct equity in Loop, but its involvement in the day-to-day functioning of Loop Telecom was too big to deny. The latter could not exist without Essar.

As CBI sees it, Loop Telecom is nothing but a ‘front’ or ‘associate’ of the Essar group. The third CBI charge-sheet, which could include a case involving Essar and Loop, is expected to be filed before or around 6 July, when the CBI will submit its ‘status’ report on the 2G scam investigations before the Supreme Court.

The CBI charge-sheet, now under preparation, takes its cue from a report sent by the Ministry of Corporate Affairs to A Raja in May 2009. At that time, the Department of Telecommunications had received complaints about Essar having more equity in Loop Telecom than the law permitted. It referred these complaints to the Ministry of Corporate Affairs for investigation. And after investigations, the latter wrote to Raja saying that the Essar group had “significant control or influence” over Loop Telecom.

In August 2009, the Additional Legal Advisor to the Communications Ministry, Santokh Singh, however, held that the equity holding of Essar in Loop Telecom was less than 10% and thus Loop was entitled to the spectrum it was allotted in 21 circles in January 2008. Subsequently, ex-Telecom Secretary Sidhartha Behura endorsed Santokh Singh’s decision on the advice of Raja. All the three reportedly ignored the fact that Santa Trading was seen as an ‘associate’ of the Essar Group under clause 8 of the UASL licensing rules.

The CBI’s charge-sheet may name at least three government officials - A Raja, Santokh Singh and Sidhartha Behura-and Loop Telecom promoters-IP and Kiran Khaitan-and Vikas Saraf of the Essar Group, who was on the Loop Telecom board. CBI sources say Vikas Saraf was the ‘common’ link between the Ruias and Khaitans to carry out Loop Telecom operations. A Raja and Sidhartha Behura are already in jail as accused in the Swan Telecom scandal.

The CBI is also examining whether Prashant Ruia (son of Shashi Ruia), Shashi Ruia and Ravi Ruia were involved in the day-to-day running of Loop Telecom. The CBI could conceivably charge-sheet them, too, if they are found to have had “direct knowledge” of their company’s investment in Loop Telecom.

It is significant to note that the CBI has not, so far, considered Anil Ambani as having had direct knowledge of Reliance Communications’ investment in Swan Telecom. Instead, it has arrested his three top executives-Gautam Doshi, Surendra Pipara and Hari Nair-for their alleged role in acquiring stakes in Swan Telecom either directly or indirectly.

Anil Ambani got a reprieve on technical grounds since he apparently had neither approved not attended the meetings where the group cleared buying stakes in Swan through an intermediary company (for more on this, read this). The CBI is checking to see if the Ruias were similarly ignorant about what their executives were doing in Loop Telecom.

The CBI has collected tons of paper and documents as evidence to prove that Essar was the real financial operator in Loop. In addition, it is also likely to list several directors of the Essar Group as witnesses to present its case. The CBI believes that several Essar directors, including Girish Sethi, V Ganesan and Rajiv Sawhney, were involved with Loop Telecom. Interestingly, Girish Sathe, Company Secretary of Essar Technologies Ltd, was the authorised signatory registered at the portal of the Ministry of Corporate Affairs and his email ID on the portal is common for the Essar Group and Loop Telecom.

The CBI alleges that Loop Telecom and Essar had common directors, employees and even office premises. The Essar Group had given bank guarantees for every major business transaction of Loop Telecom, the CBI alleges.

For instance, in 2008, Essar gave a bank guarantee for a loan of about Rs 725 crore from the State Bank of India (SBI) consortium to Loop Telecom. Two Mauritius-based companies-Capital Global Ltd and Gypsy Rover Ltd-which have indirect stakes in Loop Telecom, have the same addresses as other Essar Group companies in Mauritius.

The Loop spokesperson again claims that it was a family affair. “On account of a family relationship between the Ruias and Khaitans, certain employee(s) of Essar who have knowledge of the telecom sector have been on the board of Loop as independent directors to provide help and assistance to us,” the Loop spokesperson said.

However, Loop was an independent operating company with over three million subscribers, over 500 employees, and its own corporate headquarters in Mahim, Mumbai, he added.

In a recent development, the Mauritius government, in its reply to the CBI’s queries, has confirmed that Santa Trading, promoted by the Khaitans, owned Loop Telecom. And the CBI claims they have a ‘strong’ case to prove that the Essar Group provided financial, technical and administrative support for Loop Telecom operations, without which the Loop Telecom could not survive.

Strategically, the Essar involvement in Loop makes eminent sense. Having negotiated an exit price of $5 billion in Vodafone, the Ruias had both the financial muscle and willingness to re-enter the booming sector. Loop would have been the obvious re-entry vehicle. But the courts will decide whether Loop belongs effectively to them, or is just some “family” relationship with no business intent.