Sucheta Dalal :In The Court Of Public Opinion (16 December 2002)
Sucheta Dalal

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In The Court Of Public Opinion (16 December 2002)  

A C Muthiah, a large defaulter who has been served notices under the securitisation ordinance took over as head of the Federation of Indian Chambers of Commerce and Industry (Ficci) and told us not to mix up his leadership of the influential industry body with his defaults. As the Indian Express reported on Friday, the Prime Minister (PM) and the Finance Minister (who described bad loans as the ‘loot’ of public funds) attended the meeting where Muthiah officially assumed charge of Ficci’s top spot.

This is not the first time that defaulters have clambered on to exalted platforms such as board of banks and financial institutions. Kulwant Rai remained on the board of the Industrial Development Bank of India (IDBI) for several years while his controversial Usha Group defaulted on its loans and was allowed restructuring of its repayments. That he stayed out of the room when his loans were discussed is hardly a consolation. ICICI’s contentious restructuring of Arvind Mills’ large borrowing is attributed to the fact that he was on its board of directors. A media magnate under investigation for violations under the Foreign Exchange Regulation Act remained on the Reserve Bank of India’s (RBI) esteemed central board for several years. Often enough, industrialists’ interests on the boards of lending institutions and banks are represented by their senior executives — the beleaguered Sajjan Jindal group is an example.

Politicians actively encourage the saga of recognising, honouring and glorifying defaulters as a reward for their support. That is probably why another defaulter, Shashi Ruia of the Essar group remains on the PM’s advisory council following the intervention of a swadeshi ideologue. At the Ficci meeting on Friday, the PM said that “good politics leads to good economics”, but apparently failed to realise that decisions made out of political expediency lead to bad politics and bad business.

While the nation is debating whether the tough Asset reconstruction and securitisation bill would allow lending institutions to reduce the Rs 1,10,000 crore mountain of bad loans, the PM incongruously called for an end to the ‘Inspector-raj’, which he said, had survived the ‘license-permit-quota raj’. If the PM was so worried about the slowdown in economic reforms and development, shouldn’t he have been exhorting lenders to initiate tougher recovery action so that the lenders themselves do not need frequent bailouts? This situation will continue until shady business practices, anti-investor behaviour and brazen manipulation of economic decisions begin to be tried in the court of public opinion. Why should the search for good candidates be restricted to State and Union legislatures? Why should it not be extended to esteemed appointments to various boards, advisory councils and industry associations?

The Securities and Exchange Board of India (Sebi) has put in place a corporate governance code, but it seems futile to ask companies to follow the highest ethical practices, unless there are tangible benefits associated with good governance and consequences attached to bad business values.

Sebi’s corporate governance ratings could be the way forward, but it would need the support of government and industry. The government has to agree that only the heads of companies with high corporate governance ratings would be invited to be part of the advisory committees and prestigious councils of the PM or his ministers. Only such industry leaders would be invited to boards of the RBI, Sebi, large public sector undertakings, banks and financial institutions. Were this to happen, industry associations such as Ficci and the Confederation of Indian (CII) would perforce have to be more discerning and not allow defaulters to exploit the platform that they provide.

The same applies to other issues. When Grasim’s attempt to make an open offer for Larsen & Toubro shares at Rs 190 (instead of the Rs 306 that it paid Reliance) hit the front pages, and remained there for several weeks, a Tata director heaved a sigh of relief. At least Tata Finance is off the front pages, he said.

Unfortunately, the Birlas are either unaware or unconcerned at the damage to their public image. No matter what Kumarmangalam Birla believes, public perception is that the Grasim is trying to use a legal loophole to ‘get away’ with a lower price offer to retail investors. This is not doing the group’s reputation any good. Yet, sundry lawyers, consultants and auditors are advising him — often through television programmes — to go all the way to the Supreme Court with his fight to pay less to retail investors because he stands a good chance of winning his case on technical grounds.

Maybe Birla should hear the story that noted consumer activist Manubhai Shah likes to tell. Mr Shah often cites the case of Greenpeace, an international NGO, against McDonald’s, over the cruelty of its chicken slaughtering technique. Greenpeace lost the case and was asked by a British court to pay damages to McDonald’s. Convinced about the correctness of its case, Greenpeace decided to appeal the decision; but it was in for a surprise. McDonald’s pleaded with it to drop the litigation, waived the damages and was willing to discuss the issue. To the multinational fast-food giant, the allegations and counter-allegations that would routinely make it to media headlines, as a part of the continued litigation were so much more damaging that they preferred to close the issue and end the story.

Industrialists would probably argue that this could encourage frivolous litigation by unscrupulous NGOs; but that would be untrue. Public opinion is passive but not ill informed. For example, when Sebi charged Hindustan Lever with insider trading a few years ago, there was barely a blip in its stock price because investors refused to believe the regulator. Similarly, when an NGO blocked the construction of a flyover causing untold harassment to the public, people refused to support its cause and forced construction to be completed.

Public opinion is a powerful tool, which can be effectively used by the people to force changes in society. I suspect that when the noted playwright Vijay Tendulkar sparked off a controversy among Marathi literary circles by advising a fellow litterateur not to accept an award from a politician, he was essentially advocating a trial in the court of public opinion. He would however have been more effective had he chosen an obviously corrupt target rather than the affable Manohar Joshi.

With corporate governance ratings, Sebi and the government have a unique opportunity to provide incentives for better business practices and clean up the corporate sector. Will they grab the opportunity and make a difference?

“All that is necessary for the triumph of evil is for good men to do nothing”: British Parliamentarian Edmund Burke.

-- Sucheta Dalal