In a significant development, the Reserve Bank of India (RBI) has validated RTV’s investigative journalism by issuing a circular aimed at curbing fraudulent bank guarantees, targeting entities like Euro Exim Bank. This move also alerts the Enforcement Directorate (ED) to potential violations.
For months, RTV has uncovered how Euro Exim Bank Limited has issued fake bank guarantees worth thousands of crores in India, despite the company having a net worth of only Rs 8 crores approximately. The question arises: how can such a company issue bank guarantees worth thousands of crores without RBI approval?
In its circular, the RBI stated:
“The Reserve Bank of India (RBI) has come across instances of guarantees (including Standby Letters of Credit [SBLCs] and/or performance guarantees) issued by persons resident outside India, favoring persons resident in India, which are not permitted under the extant FEMA regulations.”
It is crucial to note that Euro Exim Bank is not recognised as a legitimate bank by the Indian government or public entities. As a result, any guarantees issued by Euro Exim Bank cannot be accepted by governmental or public bodies, as they lack a legitimate payment mechanism. Such guarantees are considered unenforceable, unlawful, and illegal instruments, essentially acts of fraud. They violate the Foreign Exchange Management Act (FEMA), the Prevention of Money Laundering Act (PMLA), and the Banking Regulation Act, falling outside the purview of regulatory oversight by the RBI.
According to RBI regulations:
– Guarantees must comply with the Contract Act and RBI guidelines, free from prohibitory clauses.
– If a foreign bank issues a guarantee in Indian Rupees, it must have a branch in India, and the guarantee must clearly specify the payment mechanism.
– For guarantees issued in foreign currency, the issuing bank must adhere to RBI guidelines, including confirmation and liability undertakings by an Indian bank.
Furthermore, any commission paid to third parties for these guarantees constitutes a direct violation of FEMA and PMLA. Such cases should be reported as fraud to the RBI, ED, and Central Bureau of Investigation (CBI).
Overall, with this RBI circular, RTV’s findings could serve as crucial evidence for investigative agencies like the ED and CBI, potentially initiating action against those involved in the issuance and acceptance of these fraudulent bank guarantees.
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