Meetu Jain 
New Delhi: Union and state government departments appear to have been given the nod to do business with foreign banks located in tax havens which who have a history that can at best be called dodgy.
As part of tender conditions for government projects, Reserve Bank of India guidelines require bank guarantees that are to be issued by nationalised or scheduled banks. For the past few years, however, this requirement has been done away with by project managers. Sometimes, even if the condition for a bank guarantee from a government bank is specified, officials look the other way. The result has been that hundreds of bank guarantees are now being given by the Euro Exim Bank Limited, a bank located at Saint Lucia, an Eastern Caribbean island country.
The bank’s balance sheets, audited by Grant and Thornton and viewed by The Wire, indicate a net worth of around Rs 1,900 crore. However, as of December 2023 alone, this bank, by its own admission, has done business worth Rs 26,560 crore in India. RBI guidelines say a bank’s outstanding obligations should not exceed 10% of its total owned resources.
‘Very risky’
The bank says in communication seen by The Wire that its functioning hinges on the fact that “transactions can be structured without the need of any hard collateral or margin money from the client”. All that the bank charges as per its own admission is a transaction fee ranging from 4.5% to 6.5% of the cost of the bank guarantee. With not enough reserves and no collateral charged, the question arises as to how the bank will pay up if a guarantee is invoked by a government entity.
Former chairman of National Highways Authority of India, Raghav Chandra says, “This is certainly not established practice and an unusual situation. I have not come across such a case in my entire career. It is very risky from the point of view of a possible situation arising where you have to invoke the bank guarantee in case of non-performance of the contractor.”
These guarantees have been given to state governments under both the Bharatiya Janata Party and parties in opposition to it, like Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, and Madhya Pradesh, along with the National Highway Authority of India. It is believed that these guarantees are furnished mostly by private contractors for government contracts.
Interestingly, while the bank is headquartered in the Caribbean, it is doing a majority of its business in India and even has an office at Gandhinagar in Gujarat. The bank is mainly into issuing bank guarantees and letters of credit, as per its website. Opening an account is prohibitively expensive and not encouraged by the bank.
Indian banks’ role
Government banks in advisory capacity do not seem to mind.
The Department of Financial Services is yet to respond to questions from The Wire on whether it sees any risk involved and if this has been red flagged. Experts say it is the SWIFT code that the Indian bank recognises of a corresponding foreign bank for it to acknowledge that the bank is kosher. A SWIFT code or a BIC number is used to identify banks and financial institutions globally.
But of late, Indian banks have been shrugging off the responsibility of looking into any guarantee given by a foreign bank. “This is akin to playing the postman. In the case of the Mumbai Metropolitan Region Development Authority, for instance, the advising bank is State Bank of India. With SBI lending its reputation to such questionable bank guarantees, it becomes easy for smaller banks to follow suit,” says an SBI official requesting anonymity.
With details of such business practices now becoming public, several infrastructure companies are on the backfoot.
The Mumbai Metropolitan Regional Development Authority that awarded the prestigious Rs 14,400-crore Thane-Borivali twin tunnel project to Megha Engineering and Infrastructure Limited, in complete violation of its tender conditions with regards to the bank guarantee, has now cracked the whip. In documents The Wire has viewed, Megha Engineering has been told to substitute the bank guarantees with those from a scheduled bank. The tender norms say the bank guarantees shall be from a scheduled commercial bank in India and shall be governed by Indian laws and the jurisdiction of Indian courts.
MMRDA is not alone.
The National Highway Authority of India has decided, at least for one project the documents of which The Wire has viewed, to do away with the RBI’s requirement of a scheduled bank for bank guarantees altogether. Euro Exim Bank gave a bank guarantee of Rs 22 crore to NHAI in 2022. Sources in NHAI say they can confirm that the requirement of a scheduled bank was done away with and NHAI decided to accept a bank guarantee given by a foreign bank in one particular case. The sources said that since an Indian bank was involved in “advising” the bank guarantee, they went by what the Indian bank said. For the 2022 bank guarantee by Euro Exim, the Union Bank of India clearly said that it is “advising” the bank guarantee “with no risk or responsibility to itself”.
An NHAI official said, “NHAI follows all general financial rules of the finance ministry on all subjects.”
The Chandrababu Naidu-led Andhra Pradesh government is now reviewing at least 31 bank guarantees issued mainly by the previous government. “The AP government is seized of the matter and is examining all options. No view has been taken as yet,” it said. Government sources are yet to respond to questions as to whether the tender conditions for projects in Andhra Pradesh allowed a foreign bank such as Euro Exim to do business.
Why else is the bank doing business in India problematic?
The bank was accused by the UK’s Financial Conduct Authority of trying to do business in the country under false pretences, claiming to be a representative of a bank in The Gambia called Euro Exim Bank Limited. “We have checked against the list of banks on the Central Bank of Gambia website and note that Euro Exim Bank Limited is not included in the list and does not appear to be a genuine Gambian Bank”, the FCA said in a letter to the bank’s director, Sanjay Thakrar. The Wire has viewed the letter.
The FCA suggested the bank voluntarily cancel its registration in the UK and that otherwise the FCA would be “minded to take action to cancel the firm’s registration”. The bank now has just a representative office in the UK.
Thakrar, believed to be the promoter, had coincidentally in December 2016 asked his agent, who was getting regulatory clearances for the bank, to get his existing shares transferred to his colleague Kaushik Punjani. He also resigned and got Punjani appointed as sole director. Later, Thakrar “rejoined” the bank and is now “Head of Global Operations”. Thakrar did not answer questions emailed to him. He also did not respond to phone calls.
The firm next tried to scout for a licence in The Gambia but that move came a cropper with the government raising objections in the registration process for off short companies. Correspondence seen by The Wire indicates the bank’s agent even tried to unsuccessfully bribe government officials in The Gambia. The bank then moved to a new jurisdiction, at Saint Lucia.
The bank appears to be in trouble in neighbouring Bangladesh as well. As per an audit that was conducted at the behest of the Bangladesh Commerce Bank Limited, Euro Exim Bank was found to be one of five foreign banks that did not have licence to open a letter of credit.
The situation is a lot smoother when it comes to doing business in India. Take the Maharashtra government’s MMRDA case for instance. The government agency asked Megha Engineering and Infrastructure Limited to replace the bank guarantees only when questions began to be raised in the media. In a point-by-point rebuttal to the government’s objections, Megha Engineering told MMRDA, “The substitution was done following discussions with the general consultant and the finance division of MMRDA”.
In response, the latter said, “No formal instruction (was) given … regarding acceptance of Exim Bank’s BG” (sic).
No one in the government deemed it fit to ask who accepted them and why, when there were no instructions to accept the bank guarantees. Megha Engineering is now being threatened with “appropriate action” if the guarantees are not replaced. Megha Engineering refused to comment on the issue.
No government agency has found it worthwhile to check the ratings of the Euro Exim bank either. Graham Bright, the bank’s CEO admitted to The Wire that the bank is “privately rated” by Moody. He adds, “We are not S&P rated, not having been through their independent rating process.” He, however, refused to answer questions on the bank’s business practices being followed in India.