Details of an attempt to create an offshore vehicle through which Mr Anil Ambani could invest in securities in India, in breach of foreign institutional investor regulations, have emerged during a tribunal hearing in London, which began this week.

The London tribunal involves three former UBS employees, including Mr Sachin Karpe, the former head of UBS' Asia II wealth management desk. Britain's Financial Services Authority has fined him £1.25 million — which he is now appealing in the tribunal — and imposed a ban for a string of breaches of the regulator's code.

Mr Karpe is accused of directing the implementation of an investment structure to enable Mr Ambani to invest in Indian securities, in “breach of Indian law,” in contravention of UBS' own compliance rules and “deliberately” concealing the true nature of the client's investment from the Swiss bank, according to the prosecution's opening statement.

Mr Karpe is also accused of routing payments through another client's account to “obscure the source of funds for investment in the investment structure.”

SEBI stricture

In January this year, the market regulator, the Securities and Exchange Board of India, imposed a Rs 50-crore penalty on Reliance Infrastructure and Reliance Natural Resources Ltd, in a settlement, which will also ban the firms from trading stocks on Indian exchanges until December next year.

The same settlement also bans Mr Ambani and four executives from such transactions until December this year.

Mr Jonathan Crow QC, acting for the FSA, referred to Mr Ambani as a “mega client” during the proceedings. “Mr Karpe knows perfectly well that this kind of structure is not allowed, but his attitude seems to be that if the client's rich enough, he will do it,” the QC told the tribunal on Tuesday.

Under the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations 1995, an Indian resident or non-resident is not permitted to invest in securities in India through a Foreign Institutional Investor except in particular circumstances.

Many attempts made

“The evidence clearly shows that Mr Karpe… made several unsuccessful attempts to set up an investment structure to allow Mr Ambani and/or his family companies (“the Reliance Group”) to invest in India securities in breach of the FII regulations,” the prosecution's opening statement read.

Mr Karpe and another UBS employee who cannot be named for legal reasons, “clearly appreciated” that to get approval from UBS' compliance division, they would have to be misled as to the identity of the beneficial owner.

“In the interim, Mr Karpe had to resort to an indirect investment under which the Reliance investors invested over $250 million in the Pluri Cell E structure, which was used to acquire, inter alia , Indian equities and synthetic equity swaps,” it continued. Pluri refers to a Mauritius-based fund.

Two attempts were made to get compliance approval in Zurich, in January and June 2006, as well as from Singapore in December 2006, with Mr Karpe's colleague insisting that the clients were French nationals, according to email evidence cited by the prosecution.

“Mr Karpe must have known that the ultimate beneficial owner was Mr Ambani's family/Reliance,” the prosecution statement says.

Mr Karpe denies that he knew the structure they were attempting to create was illegal.

“The client asked for a transaction. Mr Karpe enabled it, or assisted in enabling it. There was no suggestion that the client himself was damaged,” his lawyer, Mr Michael Blair QC, told the tribunal.

“So, the most that can be thrown at his door in relation to anything that is within the controlled functions is that he probably ought to have told the customer that the bank would not deal with him because it was not legal in India.”

UBS was fined £8 million in 2009 for failing to conduct business with due skill, care and diligence.

Reliance response

The Reliance Group spokesperson said: “The matter is nearly five years old, and has already been closed with Indian regulators under the consent order framework in January 2011.The matter relates to regulatory action in the UK against former employees of a foreign bank, for unauthorised trades made by them and misuse of a large number of client accounts.

“The bank has already accepted the weaknesses in its internal systems and processes, and settled the matter with the UK regulators by payment of a fine.

“There are no charges levelled against us by the UK regulators in these proceedings. As such, we are not party to these proceedings, and not represented therein.”

“All aspects reported by the media today, including the ownership and/or beneficial status of certain entities investing in India, were considered by the Indian regulators, while passing the consent order in January 2011.”

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