dna impact: JCT sought forex refund to 'escape forex violation' in Malaysia

Thapar Group's flagship JCT Ltd, which was hit by an unfavourable verdict by a Malaysian court, is now attempting to wriggle out of a potential foreign exchange violation case against its investment in Kuala Lumpur.

In a reply to BSE Ltd signed by JCT's company secretary Nidhi Goel, a copy of which is available with dna, the textile manufacturer has said, "It may be specifically noted that the company was under an obligation to seek refund of the advance under the provisions of the Foreign Exchange Management Act, 1999."

Following a report in dna on October 13, BSE had asked JCT for an explanation as information about the legal suit, its liability and legal fee payment was neither reported by the listed company in its financials nor announced on the stock exchange.

The case pertains to remittance of $1.25 million from a now-defunct Malaysian company CNLT (Far East) Bhd to JCT in June 2007, now declared void by Kuala Lumpur High Court in a verdict in June 2014, and ordered its managing director to pay dues claimed by former employees of CNLT.

During the court proceedings, it was found that in 2002, RM 5,502,792 (Malaysian Ringgit) (equivalent of Rs 10 crore) in loan from shareholders that came from JCT to CNLT, which was then an associate company.

Apparently, these funds were credited by CNLT, in the name of JCT, but JCT had not disclosed it in India until the winding up of CNLT in January 2009. In fact, CNLT reported RM 8,875,393 in 2006 and 2007 as loan from JCT. But during the court proceedings in Malaysia, neither did CNLT nor JCT prove that it was an advance payment for purchase and that it was refunded subsequently with compensation.

As per the instructions of the KL High Court, liquidators called a meeting of unsecured creditors in Malaysia in October, 2014, and passed a resolution to call back the funds from JCT. Unsecured creditors have authorised liquidators to take necessary legal steps to recover the money.

The recovery process is currently on and the liquidator is expected to seek a court order to recover $1.25 million from JCT.

When contacted by dna, JCT said in an e-mailed statement, "It is pertinent to note that the points raised by you contain matters that are sub-judice as these form subject matter of the appeal filed by JCT Limited before the Court of Appeals, Kuala Lumpur, which is pending adjudication. Hence, it would not be appropriate for us to comment on the points raised by you."

The Indian company has now claimed that the funds ($1.25 million) that came to it in June 2007 was the refund of an advance ($890,000) paid by JCT in December 2006 along with the compensation ($360,000) of purchase of yarn that was not supplied by CNLT.

A source who is close to the court development in Kuala Lumpur, however, told dna that it was proven in the court that it was an unsecured loan from JCT to CNLT. "This was siphoned off by CNLT to JCT to avoid regulatory problems in India with reference to non-compliance of FEMA rules," he said.

"In 2006, CNLT was planning to restructure its debt. It required to increase shareholders' contribution to seek more loans or restructure loans. Only shareholder who could contribute funds then was JCT as CNLT was its associate. But any such contribution requires board's consent, but management can decide to remit funds as a business transaction like advance against purchase and this needs no board approval. JCT chose to remit through this option. Subsequently, the then chairman and now an advisor to JCT, MM Thapar confirmed it in a letter to CIMB, another lender to CNLT," said sources.

In its reply to BSE, JCT has further claimed that CNLT (Far East) Bhd has never been an associate company, and it held only 15.73% in CNLT. "JCT was only an investor and by no means would it quality as an associate company," Goel claimed in the letter to BSE, adding that JCT is only an unsecured creditor of CNLT.

CNLT's ex-employees, who are fighting the case in Kuala Lumpur, have raised several objections to the JCT's reply, calling it "a pack of blatant lies".

For instance, as per annual reports of JCT (from 2004 to 2009) CNLT was always an associate and related party where control/influence exists. What is more, out of six directors of CNLT, four were from the JCT board. They were MM Thapar, Samir Thapar, Mrs Thapar and Mahesh Sahai, who is a practising chartered accountant in India.

Further, the then executive director Prem Sahgal, an Indian citizen and a permanent resident of Malaysia, was representing JCT.

The KL High Court order dated June 13, 2014, a copy of which is in possession of dna, has come down heavily on the fund transfer to JCT. "…the pre-dominant purpose was to siphon off or 'squeeze out' all remaining assets from CNLT and channel them to JCT," says the court order.

The court has also ordered an inquiry by the liquidator for an account for funds siphoned or channelled to JCT Ltd by former MD of CNLT, Prem Krishna Sahgal. It has also ruled that remittance made to JCT is void and instructed the liquidator to call it back.

JCT has now claimed that all discrepancies are in the books of accounts of CNLT and not its own.

Ex-employees have also submitted evidence that chairman MM Thapar had written a letter to CIMB, another secured lender, requesting for approval of loans and confirmed that shareholders loan have been increased by RM 3.2 million (equivalent $890,000) in December 2006.

dna had earlier reported on October 13 and later on August 25 that the former employees of CNLT had taken up the case against CNLT and JCT. It was also reported that Prem Sahgal had appealed against the verdict which upheld some serious charges against him. The charges included fictitious invoices and inflated revenues, over valuation of plant and machinery and siphoning of funds to JCT. The court had also asked the managing director to cough up RM 2.9 M claimed by 83 ex-employees in salary of nine months and retrenchment benefits.

Though CNLT and JCT claimed the remittance was paying back advance ($890,000) against purchase with compensation ($360,000), the court did not accept it in its verdict. Former employees and suppliers of CNLT proved in court that the remittance was part of paying back unsecured loans secured from JCT.

JCT was first served notice in India almost two years ago in February 2013. JCT's appeal against the verdict will be heard in March 2015.