Canara Bank's ₹509-crore Rajesh Exports exposure:

The Rajesh Exports-Sebi case has renewed attention on Canara Bank’s ₹509-crore exposure and the trade-finance transactions that linked the company to its Swiss subsidiary

The dispute between Rajesh Exports Ltd and Canara Bank has drawn attention to a trade-finance arrangement that left the lender with an outstanding exposure of about ₹509 crore.

At the centre of the case are letters of credit (LCs), a common financing tool used in international trade. Under this mechanism, Canara Bank issued LCs on behalf of Rajesh Exports for gold imports. Once shipping and trade documents were presented, the bank was required to pay overseas suppliers, while Rajesh Exports was expected to reimburse the lender later, NDTV Profit reported.

The arrangement functioned smoothly for years. However, when several LC-backed payments became due in 2020 and Rajesh Exports failed to repay the bank, Canara Bank was left bearing the liability.

Where did the LC payments go?

A key feature of the arrangement was that many of the payments under these LCs were made to Valcambi SA, a Switzerland-based gold refinery that is a step-down subsidiary of Rajesh Exports. This meant that funds released by Canara Bank under the trade-finance facility were routed to a related overseas entity within the Rajesh Exports group, while the repayment obligation remained with the Indian parent company.

As long as the LC cycle continued, the structure remained operational. But once repayments stopped, the bank was left exposed even though the overseas beneficiary had already received payment, the report said.

Why has the transaction structure attracted attention?

The case has raised questions because the LC mechanism ensured that payments reached the overseas subsidiary before repayment was secured from the Indian parent.

When the cycle broke, the risk shifted to Canara Bank. The lender’s exposure eventually rose to around ₹509 crore and was classified as a stressed asset after devolved LC liabilities remained unpaid.

Canara Bank has since initiated recovery proceedings and put the exposure up for sale, indicating challenges in recovering dues through normal repayment channels.

What is Rajesh Exports’ defence?

Rajesh Exports has disputed the bank’s claims. The company has argued that the losses arose from foreign exchange movements and the bank’s handling of forex transactions rather than any repayment default. It has also maintained that the arrangement was backed by cash margins and therefore did not represent a conventional lending risk, the report said.

However, the Debt Recovery Tribunal rejected these arguments, holding that obligations arising from letters of credit are binding and must be honoured.

Despite the ongoing dispute, Rajesh Exports continues to describe itself as a debt-free company.

For now, Canara Bank has indicated that it does not expect a material financial impact from the exposure, citing provisions already made and recovery efforts underway.

What is the ongoing Sebi probe about?

The Canara Bank dispute has gained significance because it overlaps with concerns raised by the Securities and Exchange Board of India (Sebi) regarding Rajesh Exports’ overseas subsidiary structure.

In an interim order issued on June 3, Sebi alleged possible misrepresentation of revenues and diversion of funds involving the company and its promoter. The regulator’s investigation began after a shareholder complaint in March 2024 regarding large receivables that had remained outstanding for years.

A major focus of the probe is the group’s overseas network. Rajesh Exports operates through REL Singapore, which owns Global Gold Refineries AG (GGR), the parent of Valcambi SA.

According to Sebi, nearly 97-99 per cent of the group’s consolidated revenue between FY21 and FY25 was linked to overseas subsidiaries and step-down subsidiaries. The regulator has questioned differences between revenues reported at the consolidated level and figures reflected in subsidiary accounts.

Rajesh Exports has said the apparent mismatch is due to different accounting treatments, arguing that Valcambi’s standalone accounts capture only processing income while GGR records the gross value of gold transactions. Sebi has said it has not received sufficient documentation to independently verify this explanation.

Disclaimer: Moneywealth research provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

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