Rajesh Exports Used Bank LCs To Fund Subsidiary Payments Before Default, DRT Order Shows

Rajesh Exports Ltd.'s dispute with Canara Bank is casting fresh light on how the gold exporter used bank-funded trade finance to route payments to its own overseas subsidiary, raising questions about the flow of funds within the group as repayment obligations later went unmet.

The case centres on the use of letters of credit, a standard financing tool in global trade. Under this structure, Canara Bank issued LCs on behalf of Rajesh Exports to pay overseas suppliers for gold imports. The bank was obligated to settle the dues once documents were presented, with the company required to reimburse the lender at a later date.

In Rajesh Exports' case, however, the overseas beneficiary was often Valcambi SA, a Switzerland-based gold refinery that is a step-down subsidiary of the group. This meant that payments made under the LCs were routed to a related party overseas even as the repayment liability remained with the Indian parent company.

The arrangement worked as long as the LC cycle was maintained. But the structure came under stress in 2020 when multiple LC-backed payments fell due and Rajesh Exports did not repay the bank. Under the terms of the instrument, Canara Bank was still required to honour the LCs and settle with foreign counterparties, ensuring that the overseas entity in the chain received funds.

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The result was a rollover of risk onto the lender. Canara Bank's exposure to the company rose to about Rs 509 crore and was eventually classified as a stressed loan after devolved liabilities remained unpaid. The bank has since moved to recover dues by putting the entire exposure up for sale, signalling the difficulty of resolution through conventional repayment channels.

Rajesh Exports disputed the claim, arguing that the losses were linked to foreign exchange movements and the bank's handling of forex transactions rather than any default on its part. It also contended that the arrangement was fully backed by cash margins and did not constitute a conventional lending risk. The Debt Recovery Tribunal rejected these arguments, holding that obligations arising from LCs are binding and must be honoured.

Rajesh Exports still maintains that it is a debt-free company, despite this outstanding loan.

The sequence of transactions has drawn attention because it highlights how the LC structure ensured priority payments to the overseas subsidiary, while leaving the Indian lender exposed when the cycle broke. The bank-funded nature of the payments meant that cash moved overseas before repayment was secured domestically.

The issue takes on added significance in the context of a broader regulatory probe. The Securities and Exchange Board of India has said that 97% to 99% of Rajesh Exports' consolidated revenue was linked to overseas subsidiaries such as Valcambi, and has flagged mismatches between reported group figures and underlying subsidiary accounts.

Canara Bank has said in reports that it does not expect a material hit from its exposure, citing provisions and recovery efforts already underway. Still, the dispute offers a detailed look at how intra-group trade flows were financed, and how the risk ultimately crystallised when repayment obligations were not met.

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