ED’s Vedanta raids raise questions about proportionality, perception

Tuesday’s raids conducted by Enforcement Directorate (ED) officials on the premises of the Anil Agarwal-led Vedanta Group were unfortunate. As a rule, a business should be raided only if there is incontrovertible evidence suggesting its involvement in heinous crimes. It is a bad practice to carry out physical searches on routine financial matters. The group faces allegations of the violation of the Foreign Exchange Management Act (FEMA) rules pertaining to royalty payments. To begin with, Vedanta is a business house, not a mafia organisation which should be raided.

It is a house the Indian government has done business with. Anil Agarwal-promoted Sterlite played a key role in the country’s first privatization move while taking over Bharat Aluminium Company (BALCO) by buying 51 per cent of its stake in 2001. The next year, he bought a majority stake (nearly 65 per cent) in another public sector undertaking Hindustan Zinc Limited (HZL). So far, there is nothing on record to hint at the criminal involvement of any of the companies promoted by him. The allegations of violations against the Vedanta Group are not serious enough to call for such drastic action. This has resulted in a steep fall in the shares of the group companies.

This is not to say that corporations should be allowed to flout rules and regulations, but action against the guilty should be effective, not sensational. Besides, any action by the ED is viewed as politically motivated because of its excessive use by the Central government. Whether such perceptions are entirely fair is beside the point. In matters of public confidence, perception often carries as much weight as reality. Over the years, the Armed with extensive powers of search, seizure, and arrest, ED has emerged as one of the most powerful investigative agencies in the country,

However, the frequent use of these powers in high-profile cases has generated concerns among legal experts, opposition parties and sections of civil society about the need for greater safeguards against excessive enforcement. This backdrop makes every major ED action politically consequential. When a prominent corporate group such as Vedanta is subjected to searches over alleged FEMA violations, many observers are inclined to wonder whether such measures were absolutely necessary and proportional to the nature of the allegations.

FEMA is fundamentally an economic and regulatory statute. While violations must certainly be investigated and penalised wherever established, such cases are generally distinct from offences involving fraud, money laundering, organised crime or threats to national security. Consequently, enforcement action under FEMA should be calibrated in a manner that reflects the nature of the alleged violation and minimises unnecessary disruption to legitimate business activity. The timing of the raids has also raised questions.

One must remember that the group is reportedly undergoing a demerger process, which will split the existing business into five different verticals. Any action that creates uncertainty around the group inevitably affects investor sentiment, market valuations and the interests of thousands of shareholders who have no connection whatsoever with the alleged violations under investigation.

The sharp decline in the share prices of the group’s companies following reports of the searches illustrates how regulatory actions can have far-reaching consequences that are beyond the immediate targets of an inquiry. If law enforcement agencies are to command public trust, they must not only act lawfully but also demonstrate fairness of their actions.