Sucheta Dalal :Why Robert Vadras win?
Sucheta Dalal

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Why Robert Vadras win?  

October 15, 2012

If regulatory oversight is lacking in everything from realty to banking, it is preposterous to exhort aam admi to go the courts

Sucheta Dalal

Sometimes, less than 140 characters tell a whole story, like this tweet by Deepak Joshi on 11th October. He said, “Behind every successful builder is a successful politician.” That, in a nutshell, explains DLF’s generous sales and interest-free advances which helped Sonia Gandhi’s son-in-law, Robert Vadra, become a billionaire so quickly. As recently as March 2011, his company Skylights Hospitality Pvt Ltd had a capital of just Rs5 lakh but assets of over Rs50 crore. He had also set up a score of other companies whose acquisition of land and apartments across India are still being unravelled as I write.

That the builder-politician nexus is common knowledge was obvious from the many tweets triggered by my query about politicians who are into realty development. No wonder all political parties are silent about civil rights activist Arvind Kejriwal’s demand for an inquiry into what was the quid pro quo behind DLF’s generous interest-free advance of over Rs65 crore to the first son-in-law of India.
   The Congress party reacted to Mr Kejriwal’s questions with outrage. Cabinet ministers who took to television channels to deny wrongdoing, refused an inquiry into why the Haryana government had de-reserved a plot meant for a hospital, clearing the way for Mr Vadra to acquire prime property. Everybody hectored activist Arvind Kejriwal and his associate Prashant Bhushan to file a court case; some said that only DLF shareholders had a right to question its sweetheart deal. Is this really correct? From shareholders’ perspective, the absence of a quid pro quo makes the interest-free advance to Vadra even more questionable. But let’s examine some facts about how the wheels of investigation, regulation and justice work in India
    Since the State can always acquire property in the name of public interest and development by paying compensation, the realty business is mired in dubious deals, corruption, obfuscation and brazen politician-builder partnerships. This dirty nexus keeps prices sky-high, the supply of residential and business assets in short supply, transaction costs unreasonable, and property records in disarray. The absence of a realty regulator and lack of transparent property records also ensures that realty remains a convenient parking place for the slush money of businessmen, politicians and government officials. So where does this leave, as Mr Vadra would say, the mango people (aam aadmi)? Whose job is it to investigate suspicious deals and take them to courts? Why don’t any of the systemic checks & balances ever work against the rich and the powerful? And what is the job of various regulators that have been set up at taxpayers’ expense? Let us look at how the failure of watchdogs hurts investor confidence and the economy.
    On 9th October, Rashtriya Ispat Nigam quietly dropped its initial public offering (IPO), apparently because investment bankers felt it will only find buyers well below its book value. The disinvestment was part of the reforms package recently announced by the government. Earlier, the ONGC issue had to be bailed out by Life Insurance Corporation (LIC) at the finance ministry’s orders because it found no takers. This is partly because battered and scammed investors have little interest in public issues. Over two decades of economic liberalisation, the investor population has shrunk from 20 million in 1990 to 8 million in 2009 (including mutual fund investors).
    Despite a slew of reform announcements and infusion of billions of round-tripped dollars, the stock markets remain volatile and shallow. One wrong order by a dealer in a brokerage firm triggered panic selling on 5th October exposing how large trading volumes are nothing but froth generated by speculative, algorithm traders. There are very few real, long-term investors coming into the secondary market.

    The saga of Kingfisher Airlines and the UB group shows how an unscrupulous industrialist can hijack the banking system after purchasing clout and a seat in the upper house of Parliament. In many ways, the massive loans that Vijay Mallya has extracted from the system legally are far worse than the sudden riches of Robert Vadra.
   Kingfisher Airlines owes over Rs7,000 crore to 17 banks. Its borrowings have ballooned to this level because banks indulged in reckless lending and because they have been prevented from enforcing the massive personal guarantees of Vijay Mallya and by his UB group companies or forcing a change in management when it was still attractive to a potential buyer. Banks with the largest exposure to Kingfisher are State Bank of India (Rs1,580 crore) and IDBI Bank (Rs720 crore); Bank of India and Bank of Baroda have lent it over Rs500 crore each. This is not the only example of politically motivated lending without adequate security.
   Deccan Chronicle Holdings (DCL) of Hyderabad has raised over Rs4,000 crore from banks on the basis of what may be fraudulent and inadequate collateral. The money has been splurged on a fleet of luxury cars, a media empire that makes no money and an Indian Premier League cricket team. The only reason for this generosity towards the Reddy family of DCL is their huge political clout.
    By Congress leaders’ logic, should shareholders of the banks sue them for reckless lending to these business groups? In the case of Kingfisher and Deccan Chronicle, the failure of lenders to initiate timely action to protect their loans has acted like a poison-pill making the airline unattractive to other buyers as well. Remember, bankers who lobbied hard for enactment of the SARFESI Act had assured us that it would end the saga of ever-greening bad loans because they would be empowered to initiate stringent action against defaulters. Why hasn’t it happened? Instead of launching an inquiry, deputy governor of the Reserve Bank of India (RBI),KC Chakrabarty assures us that Kingfisher Airlines “does not pose any systemic risk tothebanking system.” Does this mean that RBI will wait until the system is at risk and then organise a bailout at taxpayers’ expense? Is it practical for the mango-people to approach the courts to ask why the watchdog failed even to bark, far from biting?  
   Another watchdog, the Securities & Exchange Board of India (SEBI) woke up on 10th October to launch an investigation into the see-saw stock price of United Breweries but not Kingfisher. In both cases, the wild price swing happened as a direct result of statements made by Vijay Mallya. Why don’t the shareholders of Kingfisher sue? The answer is simple. Because most of the smart ones have dumped the stock and left.
    DLF, whose promoters are close friends of the Vadra-Gandhi family, is an un-fancied stock. It de-listed its shares within three years of its first public issue leaving retail shareholders in a lurch. When the market turned bullish again, it tried to shake-off the retail shareholders before its re-listing in 2007 by giving them a pittance, even as their post-listing price instantly put the promoters at the top of the list of richest Indians.
Realty has no regulator. Even if there were one, the rich and powerful would have had scant regard for it. The recent record of another regulator, SEBI, shows it e.g., insider trading charges against the Gaurs of Jaiprakash Associates, Arun Jain of the former Polaris Software Labs (12 years after it happened) or VK Kaul of Ranbaxy (a former employee turned independent director), price manipulation by promoters of Platinum or ‘utter disregard’ of orders by the notorious Alka Securities. In such a situation, to tell people demanding an inquiry into shady deals, to approach the courts themselves, is rather ludicrous.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at [email protected]

-- Sucheta Dalal