KKR faces ED trouble over Rs 100 crore forex violation

The eighth edition of the Indian Premier League (IPL), which kicks off on April 8, may turn out to be a tough season for the Kolkata Knight Riders (KKR) and its owner Bollywood actor Shah Rukh Khan. Enforcement Directorate (ED) has stumbled upon some startling audit findings indicating forex violation of around Rs 100 crore.

The audit done by Choksi & Choksi for the ED has arrived at a conclusion that the transfer of shares between Knight Riders Sports Pvt Ltd (KRSPL) and Jay Mehta-owned Sea Island Investment (SIIL) was undervalued by the entities involved.

An e-mail sent to KKR and respective entities remained unanswered.

According to Foreign Exchange Management Act (FEMA), the price of shares issued to persons residing outside India should not be lower than the price worked out under the guidelines set by the stock market regulator SEBI, in case of a listed company or on the basis of fair valuation of shares by a chartered accountant as per guidelines of the erstwhile Controller of Capital Issues (CCI).

The ED has surmised that the value of shares issued to the Mauritius-based entity SIIL appears to be inconsistent with the pricing guidelines.

What will be ED's next step?
"We have written to KRSPL and its shareholders including Shahrukh, Juhi Chawla and her husband Jay Mehta seeking explanation on under-valuation of share price. If they do not answer before the deadline, i.e. March-end, we will process the show-cause notice to the respective companies and their owners," a senior ED official told dna.

At what price were shares transferred?
In the audit report, the finding says that when the equity shares of KRSPL were issued to SIIL, the fair value per equity shares of KRSPL should be between Rs 70 to Rs 86. However, the equity shares were issued at Rs 10 per share. "This simply means that shares sold to SIIL were 8 to 9 times undervalued by KRSPL," says the audit report.
Similarly, in the case of transfer of equity share of KRSPL from Juhi Chawla Mehta to SIIL, the fair value per equity share should be between Rs 83 to 99 but was transferred at Rs 10 per share.

What was the response of KRSPL?
dna learnt that KRSPL contested the ED probe and audit finding by claiming that they computed the share issuance under net asset value method (NAV) prescribed under FEMA,1999. The valuation report submitted by KRSPL to ED said, "The company (KKR) is recently incorporated and there is no certainty about the profitability of the company. Hence we believe that market value method known as Profit Earning Capacity Value (PECV) method is not suitable for valuation of the shares of the company."

Is ED convinced by the reply?
The calculation was done considering the potential future probability of KRSPL, assuming that the franchise agreement remains in force for more than 10 years – that is till 2021. Despite the calculation method, the finding also raised question that why the share price was deliberately undervalued from its market price and hurriedly sold to overseas entity within a year.

What else is ED probing?
According to an ED source, the agency is in the process of examining the audit report and several deals KRSPL has had with others during the IPL initial seasons. "Also, we are probing the legality of money transfers from tax havens abroad," the source said.

SRK faced ED heat during IPL 2 too
In its first questioning session in 2011, ED questioned SRK on the KRSPL deal. ED wanted to know if there any due diligence conducted on SIIL before the allotment of shares to them on March 7, 2009. It also probed why KRSPL allotted 50 lakh shares to Sea Island Investments at a value which appears to be understated the basis of fair valuation of shares as per guidelines CCI.

Why Juhi Chawla faces big penalty?
dna has learnt that Juhi Chawla also failed to pay capital gains on the transfer of shares. So in case of contravention of forex law, the penalty will go up to 300%. The share transfer is believed to have happened in 2008-09.

At the time of incorporation in February 2008, Red Chillies Entertainment Pvt Ltd, run by Khan, held 9,900 shares of KRSPL and his wife (the nominee of Red Chillies) held 100 shares. In March 2009, Red Chillies sold 50 lakh shares to the Jay Mehta-owned Sea Island Investment Ltd, while it bought the entire lot of 40 lakh shares from Juhi Chawla. Juhi received Rs 4 crore for the sale of the 40 lakh shares on March 26, 2010.

As of now, Red Chillies holds 110 lakh shares, while Sea Island Investment holds 90 lakh shares of the total 2 crore shares.

According to sources, KRSPL received an amount of $13.18 lakh (Rs 6.06 crore) from Sea Island Investments - in its Citibank Mumbai Account.