KFC, Pizza Hut's parent co Yum under ED's lens

US-based Yum Restaurants, which owns the franchise of KFC and Pizza Hut in India, has come under the Enforcement Directorate's (ED) scrutiny for allegedly failing to bring in Rs 390 crore ($80 million) foreign investment in the country after getting the government approval.

The company, however, denied having received any show-cause notice, or any wrong-doing.

The ED issued show-cause notice last week to the firm and asked Yum Restaurants India to reply within 30 days of receiving it, according to sources.

"Yum Restaurants India has not received show cause notice by the Enforcement Directorate and would also like to clarify that no show cause notice has ever earlier been served to the company during the course of its operations in India," a company spokesperson said in its response.

Yum was granted permission by the Foreign Investment Promotion Board (FIPB) in 1993 where it had said it will bring in 80 million dollars in India in two years in two tranches of 40 million dollars each. Besides, it had also said that its business in India would be "foreign exchange-neutral".

The company, however, brought in $35.5 million only, allegedly leading to a violation of the Foreign Exchange Management Act, and also the FIPB licence agreements, sources said.

"We would like to categorically state that the company adheres to the highest standards of ethical business practices and compliant with applicable Indian law," Yum spokesperson said.

The company, while presenting its case earlier, had said that bringing in the money under the FIPB licence is "not an obligation".

The ED, the Finance Ministry's arm that looks into FEMA violations and other money laundering activities, started sending notices to the company about four years ago.

The authority has sent show-cause notices to the company on alleged FEMA violations involving more than Rs 668 crore, sources said.

Among other violations alleged by the authority are payments of 5 per cent of net sales to the parent company Yum Inc in the US in the form of royalty, which is not permissible under the agreement. "This is money going out of the country and the company above all is showing it as royalty in its Income Tax returns also," a source said.

Another charge against the company is that payments as supply chain management fee have been made directly to the parent company while the services have been provided by the Indian firm.

The Indian company provides services to neighbouring countries like Bangladesh, Mauritius and Sri Lanka but the payments for the services have been made to the parent firm and not routed through India.

The authority said that this might not be the only case. There may be many more as the FIPB does not have any mechanism to check whether whether the terms of the licence are being adhered to.