NDTV -- Sham transactions or legit deals?

How much merit is there in allegations of financial misdemeanour, money laundering and tax evasion against NDTV?
PRANATI MEHRA and PARANJOY GUHA THAKURTA investigate in a 3 part series.

This story is a slew of claims and counter-claims, with allegations of financial misdemeanour, money laundering and tax evasion flying thick and fast. The dramatis personae includes two political heavyweights one of whom is a cabinet minister, one of the country’s best know TV personalities who is owner of a media company, a controversial income tax official with an arrest warrant against him and two of his female colleagues accusing him of slander. 

Behind the allegations levelled last December by Ram Jethmalani against finance minister P Chidambaram, and NDTV, is an account of what is a major tax dispute involving a media organisation.  And since a reasoned order of a tax panel (Dispute Resolution Panel) was passed on December 31, 2013, The Hoot decided to examine the whole story. Many of those contacted by us spoke only on condition of anonymity.  

To begin with, here's a short list of the dramatis personae.  

* Ram Jethmalani, 90-year-old former Union Law Minister and member of the Rajya Sabha belonging to the Bharatiya Janata Party. (Though his relations with his party have been strained of late). 

 * Palaniappan Chidambaram, Union Finance Minister, who is also a lawyer and a member of parliament.

 * Prannoy Roy, one of the best-known faces on Indian television and co-founder of the New Delhi Television (NDTV) group of companies which is currently going through a phase of financial stress. He is perceived by some as leaning towards the Congress though he would have us believe he is not politically partisan. An important shareholder in the group's flagship is a company promoted by Abhey Kumar Oswal whose daughter is married to industrialist and Congress MP Naveen Jindal.  

*Sanjay Kumar Srivastava, an officer of the Indian Revenue Service (IRS), currently Commissioner of Income Tax in the Central Board of Direct Taxes, Ministry of Finance. He has accused Roy's company of not just evading taxes but also aiding the Finance Minister and his son in laundering money.  A warrant of arrest has been issued against him for contempt of court in a case filed by two of his female colleagues from the IRS, Sumana Sen and Ashima Neb.  

*Swaminathan Gurumurthy, Chennai-based chartered accountant, journalist and leading light of the Swadeshi Jagaran Manch affiliated to the Rashtriya Swayamsevak Sangh, the ideological parent of the BJP, who has actively been pursuing the allegations against NDTV with Roy, and to whose questions Roy had replied.  

*Madhu Kishwar, founder of the Manushi organisation which espouses feminist causes,  and whose website was one of the first  to air the allegations against NDTV, a supporter of Gujarat Chief Minister Narendra Modi, and someone against whom NDTV has served a notice of  libel.  

Other players in the story include Prayaag Akbar, son of journalist  M.J. Akbar. A publication with which Akbar is associated has been sued by NDTV for defamation.

Srivastava’s allegations

IRS officer Srivastava filed an application in the special CBI court  of  Judge O P Saini in November 2011 listing out a series of allegations against NDTV, Chidambaram and two of his colleagues (Sen and Neb). Judge Saini who is hearing the cases relating to the 2G (second-generation) telecommunications spectrum scam, threw out his application  on the ground that he had not been able to furnish evidence linking the Finance Minister with the funds allegedly laundered by NDTV.    

The two women IRS officers, Sen and Neb, then moved the Delhi High Court alleging that Srivastava had continued to use intemperate and defamatory language against them despite several restraining orders by courts. They moved the court to issue orders against him for contempt of court. A single judge bench held Srivastava guilty of civil contempt and ordered his imprisonment for 15 days and imposed a fine of Rs. 2,000 on him. A division bench of the court subsequently confirmed this order and a warrant of arrest was issued against Srivastava.  

Documents relating to these allegations, including Srivastava's November 2011 application, had been circulated among journalists but the story was largely ignored until a sensational letter written by Jethmalani to Chidambaram became available on various websites.  

In a letter dated December 6, 2013, Jethmalani claimed that Chidambaram and his son were beneficiaries of a large sum of money laundered by companies associated with the NDTV group located outside India. The monies  had allegedly been given to father and son in 2007 in the form of bribes by telecommunications companies whose activities are being probed in the 2G spectrum scam.    

On 19 December, Chidambaram replied to Jethmalani describing his allegations as "outrageous" and said he had forwarded his letter with annexures that had been attached to the Finance Secretary-cum-Revenue Secretary Sumit Bose (the senior most officer in the Ministry of Finance) to inquire into the veracity or otherwise of the allegations.  

Sources in the office of the Finance Secretary told one of us that investigations are being conducted but nothing has been found so far to substantiate the allegations of money laundering against the Finance Minister made by Srivastava and repeated by Jethmalani and Gurumurthy. (Gurumurthy has, of course, doubted if Bose can conduct investigations in an impartial manner since he is, after all, Chidambaram's subordinate in the Ministry of Finance.)  

Investments under scrutiny

According to Jethmalani's letter, a mysterious group of investors allegedly gave NDTV 300 million UK pounds (the currency is given as USD elsewhere) in 2006 which was paid into the group's London-based subsidiary company, NDTV Network, Plc (NNPlc). These allegations were being investigated by Srivastava (who was then an Additional Commissioner of Income Tax in its inspection wing). Crucial pages in the files that he had prepared are said to be missing, and Jethmalani says these related to Chidambaram’s role in the money laundering conspiracy. Srivastava thereafter investigated the accounts of NDTV’s group companies and claimed that he had found another allegedly fraudulent transaction. The day after a notice was issued to NDTV in this regard, Srivastava was suspended.  

Subsequently, his letter says, it was claimed that the NDTV group shut down its London subsidiary although it had provided a return of 52,000 per cent on investments that had been made in 2011. The source of funds used to liquidate the company was allegedly not explained by NDTV. 

NDTV’s transactions of the last few years have been examined  in a report of the Income Tax Department's Dispute Resolution Panel (DRP). Sources in Finance Secretary Bose's office said the proceedings of the DRP, which are quasi-judicial in nature, will follow their course. 

The allegations against NDTV are complex in nature. In an order dated December 31, 2013, the DRP(comprising three officers of the rank of Commissioner, Income Tax) said that NDTV Ltd had entered into a "sham transaction" with Universal Studios BV, Netherlands. Universal Studios BV is a subsidiary of NBC (National Broadcasting Company) Universal Inc., USA and is part of the GE (General Electric) Corp group. 

 What are these transactions?

  • Universal Studios BV bought stake in NDTV’s subsidiary NDTV Networks International Holdings (NNIH), Netherlands for  $ 150 mln (or Rs 642 cr) in 2008-2009. By the same transaction, Universal Studios indirectly  acquired 26 per cent stake in  NDTV Networks Plc, (NNPlc) the London subsidiary.
  • The stake was bought back by NDTV Networks BV, Netherlands for Rs 58 cr in the next financial year.
  • This is what the DRP calls  a sham transaction.
  • The second transaction is : NDTV Networks PLc raised $ 100 mln in the UK by way of step up coupons (bonds) in 2007. The original investors were eight entities, some of them in the Cayman Islands and British Virgin Islands.
  • These bonds were devalued in 2009 when they were redeemed  for a total of $72.5 mln.
  • The third transaction is an unsecured loan of Rs 365.25 cr rasied by NDTV through NNPlc and NDTV Networks BV.  While the DRP has added Rs 254.75 cr out of this amount to NDTV’s income since it seems "not genuine" it has left out Rs 110.50 cr since it relates to the 2007 step up coupons (specifically the currency fluctuation) while the DRP is examining  only the assessment year 2009-10 or financial year 2008-09.
  • When NDTV says that in the NBCU transaction, of the $ 150 mln, $ 50 mln were to be used by its downstream subsidiaries, it probably refers to this loan of Rs 254.75 cr, which the DRP has taken as a separate transaction.   

The Income Tax Department's DRP ordered the assessing officer for NDTV Ltd to accordingly make an assessment. The DRP’s orders are binding on the assessing officer and can only be challenged at the level of the Income Tax Appellate Tribunal (ITAT).  

Highly-placed sources in NDTV stated that the two investments in the group can be explained in very clear and simple terms. "First, a leading US TV network, NBC (a subsidiary of GE) invested $150 million, primarily in NDTV's new entertainment channel 'Imagine'. The channel did not do well and NBC liquidated its holding for $25 million." (The DRP however cites a much  lower figure in crores.) 

They added that all the transactions were publicly reported by GE to the Securities and Exchange Commission, the financial regulatory authority in the United States, and by NDTV to the Reserve Bank of India and the Securities and Exchange Board of India (SEBI).  

As far as the second deal is concerned, NDTV sources said that Jeffries, a leading US investment banker, took the lead in arranging a loan (through the issuance of a kind of financial debt instrument or bond called 'step up coupons') of $100 million to NDTV. The global markets crashed a year later and the bond holders needed liquidity and negotiated to redeem the loan for $72.5 million. The sources said these transactions too "were globally audited and meticulously reported in full in NDTV's annual reports".

The Income Tax Department however has alleged that the details of the NBC Universal transaction were never mentioned by NDTV in its balance sheet for the year 2008-09 nor revealed to the department’s investigation wing when it asked for it in 2010. It further claimed that details of the transaction were not disclosed to the department's assessing officer in February 2013.  

The assessing officer wrote: "This subscription of shares of the assessee’s (NDTV Ltd) group company (NDTV Network International Holdings BV), having a face value of Rs. 40-50 per share (equivalent to one $ in INR) by NBCU (NBC Universal) @ Rs.7,015.05 per share and its subsequent sale back to the assessee’s other group company @ Rs.634.17 per share, is therefore a sham transaction and it is a fit case which requires the lifting of the corporate veil."  

It was further alleged that the share price was arrived at not by any valuation either by the seller or buyer and that no confirmation from NBCU about the transaction was filed.  

NDTV’s explanation for the huge difference in share prices at the time of sale and repurchase was a mutual future projection (by the seller and buyer) of the success of NDTV’s ventures. These projected events did not eventually materialise. The company said they had sold a "dream" to Universal Studios and the dream later turned sour. Hence, the low price at which NDTV Networks BV, Netherlands could buy back its stake.  

NDTV said the investor was part of the globally renowned GE Corporation and was involved in many such ventures succeeding or failing in a particular year. Hence, the particular transaction relating to NDTV need not be viewed with suspicion. The deal was a subscription to pick up a fresh stake, it was pointed out.  

Besides, NDTV said it had made a disclosure of the transaction in its "notes to accounts" in the company's audited accounts for the financial year 2008-09 and also disclosed the buyback of 26 per cent stake in NDTV Network Plc in its audited accounts for 2009-10. Thus, the company argued, there was neither concealment of the transaction nor any attempt to do so.  

Soon after the transaction between companies in the GE and NDTV groups took place, the international financial markets collapsed. The funds obtained had been used mainly for the entertainment channel, NDTV Imagine. When that failed, NBCU wanted to exit and, in fact, did so 18 months after coming in, according to NDTV’s explanation.  

The DRP also pointed to the subsidiaries NDTV floated abroad, and observed that “some of the subsidiary companies are incorporated and liquidated by the promoters at frequent intervals.” Why did the group chose to float as many as 21 subsidiaries and associate companies abroad, some of them in tax havens?  

NDTV sources claimed that this was on account of "tax efficiency". They said: "Of the 21 subsidiaries of NDTV listed in NDTV's annual report for 2009-2010, ten were in India and eleven were overseas (four in the Netherlands, four in Mauritius and one each in the UK, Sweden and the United Arab Emirates). Of the eleven associate companies mentioned in the report, eight were in India and three in Mauritius." 

The structure was set up following advice from Pricewaterhouse Coopers and international legal firms keeping in mind that NBCU wanted to be a part of NDTV 's entertainment business through its Dutch subsidiary, they added. 

Many international financial transactions and deals are routed and structured through tax havens to avoid payment of taxes.  So in the eyes of the tax department these deals toowereprobably no exception.  

The Income Tax Department's DRP, however, sought to place all the evidence against NDTV in the context of the Base Erosion and Profit Shifting (BEPS) initiative of the Organisation for Economic Cooperation and Development (OECD) which aims at preventing double non-taxation in international transactions.

"Two conglomerates are involved in this transaction--- (one) NDTV Ltd and its subsidiaries and the second is (the) GE group of companies. As is well known, NDTV has its operation mainly in India and its proposed venture(s) of NDTV Labs etc were also located in India. It is not possible to fathom out the intention or rationale to float the companies in the Netherlands to indulge in such complex and layered transactions. This is the precise kind of holding structures which are the subject matter of (the) BEPS project," the DRP stated.

When the DRP asked the company to furnish the information before December 2013, NDTV did provide details about eight corporate entities, most of them registered in Cayman Islands, describing them as 'initial investors' in the step-up bonds issued.

It also gave a copy of a loan agreement between NBCU, NDTV Ltd, NDTV Plc, and NDTV Networks BV.(This transaction is discussed a little later).

NDTV sources claimed that of the eight bond-holders, two were registered in the UK, and one each in the US and Switzerland. The bonds were subscribed by well known international financial companies such as Credit Suisse, Liberty Harbour (part of Goldman Sachs), Lehman Brothers and other "reputed" names. They added that all documents pertaining to their identity and credit-worthiness were filed with the tax department and confirmed by Jefferies (the placement agent) and the Bank of New York (the trustee).  

On the issue of another loan of Rs 365.25 cr raised by NDTV through NNPlc and NDTV Networks BV, the DRP observed that a claim of Rs.110.5 crore relates to a different year of assessment and was, therefore, being left out. However, the DRP said the panel was not convinced about the "genuineness" of the balance amount  of Rs.254.75 crore and chose to add it to NDTV’s taxable income.  

Thus, the total additions to NDTV’s income for the assessment year 2009-10 would be close to Rs.900 crore, and the tax payable on this would be around Rs 300 cr if one assumes that the company has to pay corporation tax at the rate of, say, 33  per cent. Penalties and interest may be added.  

During our conversation with representatives of the top management of NDTV, they repeatedly asserted that all transactions that had been entered into were above board and had been disclosed to the tax authorities.

They said that the negotiations with representatives of NBC Universal and the GE Corporation (for the investment of $150 million) had gone on for six months. "Jeff Zukker, who was then head of the NBC group (and who now heads CNN International), personally participated in the discussions," the sources added. 

On the issue of step-up coupons through which NDTV Networks Plc raised $100 million in 2007, the sources emphasised that the money was paid back in 2009 though not in full, since market conditions had deteriorated drastically in the wake of the worldwide recession. While $70 million was paid back in principal amount, an additional $2.4 million was paid by way of interest. NDTV sources said the discounted value of the bonds was paid after considerable negotiations in a deal handled by UBS, New York. 

The sources in NDTV said the group had raised loans from the overseas branches of two nationalised Indian banks, namely, Bank of Baroda and Bank of India, to pay back the investors in the step-up coupons that had been issued. They again argued that these transactions were above board.  

The deals were structured by lawyers engaged by GE Corp of the US (of which NBC Universal is a subsidiary) and professional accountants from KPMG and PricewaterhouseCoopers, the NDTV sources added.

The sources added that in the case of the NBC deal, the share subscription agreement said that up to $ 50 million (of the total of $150 million) could be used by "downstream" companies of the NDTV group. "The Indian tax authorities have unfortunately taken this $50 million to be a separate transaction and wrongly alleged that NDTV did not pay tax on this amount," the sources in NDTV argued, adding that this "amounts to double taxation".  

The step-up coupons worth $100 million issued in 2007 seem to have generated a lot of controversy and this is because some of the addresses of the subscribers to the issue are those of attorneys in tax havens like British Virgin Islands and Cayman Islands. Among the investors is also Lehman Brothers (International) Europe, located at 25 Bank Street, London,Liberty Habour (a Goldman Sachs Fund) based out of New York and Credit Suisse, London.

Srivastava rejects NDTV explanation 

Srivastava’s counsel, S. K. Gupta rejected NDTV’s explanation given to us on the repayment to bond investors to the tune of $72.4 million. He claimed in a written communication that NDTV had not explained why investors would forego $27.6 million and why the investors did not invoke the guarantees given to them by NDTV Ltd. He also asked how the loans from Bank of India and Bank of Baroda were repaid.

NDTV sources told us that under the bond agreement, there was an undertaking to provide a guarantee at the appropriate time, which would be limited to 40 per cent of the value of the original bonds or $40 million. Therefore, the bond-holders were better off settling for the $72.4 million in 2009. In any case a guarantee was not provided, they said, adding that the "loans taken from Indian Banks to buy out the bonds, were repaid through the proceeds of the sale of NDTV Imagine to Turner Asia Pacific Ventures, a Time Warner company".   

On whether these transactions are reflected in the balance sheets of NDTV and its subsidiaries, Srivastava claims they are not, while NDTV sources contend that the relevant documents have been given to tax officers in India, including documents relating to the tax deducted at source (TDS) return of NDTV Networks Plc.

The sources in NDTV said that much would depend on what is contained in the fresh order of the income tax authorities issued to the company based on the December 31, 2013 findings of the DRP. The company would thereafter decide whether or not it should appeal before the appellate body, ITAT.  

NDTV sources said the fundamental flaw in the argument put forth by IRS officer S. K. Srivastava and others is that there is a presumption of guilt based on the following "universal truth", namely, "that NBCU used a tax friendly country, the Netherlands, and some of the bond holders are registered in  tax havens  and therefore were dealing in 'hot money' and that all this 'hot money' has round-tripped from India.'

The sources said that "the NBCU deal was done in the jurisdiction of  Netherlands because it was tax efficient for both parties". They added: "Companies and individuals do try and do transactions that are both legal and tax efficient. There is nothing wrong with that. Almost every corporate in India that has had overseas investment has followed similar tax efficient methods." 

Related links:

Part II: NDTV -- The mystery Rs 1 crore holiday
Part III: NDTV--Targeted by the BJP?

Such articles are only possible because of your support. Help the Hoot. The Hoot is an independent initiative of the Media Foundation and requires funds for independent media monitoring. Please support us. Every rupee helps.

Subscribe To The Newsletter

Employees of the Hindustan Times were told on June 20 that because of the difficult period the company went through last year, and the continuing "challenge on revenues" there will be no salary increase this year.  A Variable Performance Bonus has been paid to "all eligible people," and  a special fixed monthly payment was announced  (for the period Apr’17-Mar’18) for those people whose relative salary is low. This will be done across HT Digital Streams, HT Media Ltd, and Hindustan Media Ventures Ltd.           

This account  in Caravan published on June 19 describes how a reporter in Delhi was attacked by people he was interviewing for a story on the demolition of a makeshift mosque in Sonia Vihar. They attacked him when they discovered he was a Muslim, snatched his phone and demanded that he delete the recording he had made. Over an hour and a half he was slapped, kicked and punched, while his laptop was taken from his bag and switched on. He lost the data on it, and was ultimately rescued by the police.                

View More