When the Income Tax Department raided the premises of Hero Motocorp and allegedly found alleged illegal business expenses of over Rs 800 crore, Rs 60 crore “unaccounted” cash used to purchase land in Delhi and role of some shell companies, little did it know that the alleged fraud would be so huge.
A complaint sent on April 12 to Cabinet Minister for Road Transport Highways and Shipping Nitin Gadkari by Chartered Accountants, Akash Sharma and Hiren Shah lists several other financial regularities.
It says that FAME2 is a central government funded Electric Vehicle Subsidy program for the promotion of the sales and domestic manufacturing of EV components/vehicles within the country. The Phased Manufacturing Program (PMP) defined under the FAME2 subsidy scheme mandates 100% or majority of the components to be manufactured in India for Electric 2W, who avail the subsidy scheme. The policy documents are attached with this mail.
The department of heavy industries (DHI) is currently disbursing subsidies to all such EV 2W OEMs who are submitting declarations or undertakings of compliance with the above policy guidelines. However, in matters of utilization of public funds, the old adage of “Caesar’s Wife Must be above Suspicion” is highly relevant.
It is indeed baffling then how the leading electric two wheeler OEM in the country is perpetuating a daylight fraud by claiming the subsidy amount through falsified representation of being compliant with the PMP norms, even though a careful reading of their audited financial statements of FY21, reveals a completely opposite picture, and the same is attached along with this mail.
On the key financials and the Cost of Goods Sold (On Page 6 of 245 of audited financial statements of FY 21), it is declared as below:
| (in INR Lacs) | ||
| Particulars | For the Year ended March 31, 2021 | For the year ended* March 31, 2020 |
| Revenue from Operations | 31,564.05 | 24,379.45 |
| Cost of Materials Consumed | 22,999.68 | 20,005.42 |
On the Imports Components C.I.F Value (On Page 11 of 245 of audited financial statements of FY 21), it is declared as below:
| (in INR Lacs) | ||
| PARTICULAR | For the year ended 31.03.2021 | For the year ended 31.03.2020 |
| Raw Materials & Components | 23,341.84 | 16,359.82 |
Thus, strongly confirming the fraud that in FY 21, the domestic purchases by Hero Electric Pvt Ltd are insignificant and entire raw material to manufacture their electric scooters is being met through Chinese imports.
Further, a prima facie analysis of the imports declaration filed in the various bill of entries over the last 24 months, with the customs department (CBIT&C) including declared packing lists, business profile of the declared exporting Chinese company to Hero Electric, and the customs duty rates availed for the imports under the said declared bill of entries, reveals the exact nature of this fraud, to wrongfully claim the FAME2 subsidy benefits.
It is evident that on one side through their Audited Financial Statements, Hero Electric Pvt Ltd is importing (directly or indirectly) majority of their components, while fraudulently availing the FAME 2 subsidy amount by claiming majority of the components as being domestically manufactured (as per the PMP norms) through wrongful declarations with DHI.
It alleges that this is indeed a daylight fraud being perpetuated by Hero Electric for wrongful claims under the FAME2 subsidy policy.
The following key numbers can be noted from the analysis of the limited data :
The total value of imports C.I.F done by Hero Electric Pvt Ltd is as follows:
FY21 (1st April 2020 to 31st March 2021): ~ INR 233.4 Crore (as per Financial Statements)
FY22 (1st April 2021 to 28th February 2022): ~ INR 565 Crores (Approximate)
The total value of the Lithium Ion Battery Packs imported (C.I.F) by Hero Electric Pvt Ltd is as follows:
FY21 (1st April 2020 to 31st March 2021): ~ INR 120 Crores (Approximate)
FY22 (1st April 2021 to 28th February 2022): ~ INR 251 Crores (Approximate)
In FY21, around 75,000 Lithium Ion battery packs were imported, and in FY 22 (11 month data) more than 1,40,000 Lithium Ion Battery packs were imported from China by Hero Electric Vehicles Pvt Ltd.
This is indeed a severe violation of the PMP norms considering that the deadline for imports of fully assembled Lithium battery packs has expired long ago in 2019 and Hero Electric Vehicles Pvt Ltd has neither built any in-house battery manufacturing capability nor purchased these Lithium batteries from domestic battery pack manufacturing companies.
93% of the overall imports are just from two Chinese trading companies, thus showing significant over dependence on Chinese trading firms.
Approximately more than 1,45,000 (One Lakh Forty Five Thousand) DC Motors and INR 200 Crores worth of mechanical, lighting and body related components have been imported from China within 11 months of FY 22, and all these are in 100% violation of the PMP norms.
While the above data and analysis which captures only the direct imports of Hero Electric Vehicles Pvt Ltd fully establishes the fraudulent claims in the FAME2 subsidy, however, their indirect imports of critical components through trading agents in India, also further needs to be analyzed with the chain link establishment between the Level 1, Level 2 and Level 3 suppliers list declared by Hero Electric Pvt Ltd to DHI and checking the further direct imports data linked with the IEC registration of these trading firms.
Being a leading EV2W company in the country, the onus indeed lies strongly with Hero Electric Vehicles Pvt Ltd to come clean on this matter and offer a formal explanation to the relevant authorities which should be made public not only for protecting the integrity and stature of the FAME 2 subsidy, but also in the larger interest of safeguarding the reputation of Union Govt of India in-front of the International Investment Community, who have been showing significant interest in the recent times to deploy large PE funds in Indian EV start-up and components manufacturing eco-system.
It may be recalled that raids were conducted on March 23 at its offices in Delhi and nearby Gurugram, apart from the residence of its chairman and CEO Pawan Munjal.
The CBDT issued a statement later saying the operation was carried out covering more than 35 premise, “Incriminating documents and digital evidence have been found and seized indicating that the expenses ostensibly shown to have been claimed towards business purposes are not fully supported by evidences. “Expenditure aggregating to more than Rs 800 crore has been booked in the guise of purchase of services from a specific event management entity,” the policy-making body for the tax department said.
Company version
While a statement from the company on the CBDT statement is awaited, it had said in a regulatory filing that it was a “law-abiding corporate, with robust internal financial controls” and its “financial statements are duly audited”.
However, in the case of the real estate business entity, the CBDT said “several incriminating documents” have been unearthed from the premises of persons involved. “These contain records of on-money (cash) transactions where cash was being received in lieu of sale of units in their various real estate projects across Delhi,” it said. In the case of the company operating chartered flights, the statement said “evidence” related to booking of bogus expenses and non-recognition of income totalling to over Rs 50 crore, rotation of funds and suspicious loans through a dubious NBFC floated by a key person, layering and re-routing of funds through paper companies and claiming bogus interest expenses, etc. were unearthed.
Hero MotoCorp became the world’s largest two-wheeler manufacturer in 2001, in terms of unit volume sales in a calendar year, and has maintained the title for the past 20 consecutive years. Till date, it has sold over 100 million units across domestic and international markets. Led by Pawan Munjal, the company has presence across 40 countries spanning Asia, Africa, and South and Central America.
