Sucheta Dalal :Plumbing the depths with Enron (13 January 2002)
Sucheta Dalal

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Plumbing the depths with Enron (13 January 2002)  

Top accountants destroying vital documents, politicians accepting huge donations—it can’t get much worse


Enron is a case study in the dangers that will inevitably arise when unrestrained corporate greed is joined at the hip with the legalised bribery and influence-peddling that passes for government these days. This could easily be a comment about the Indian situation, but it is in fact the New York Times (NYT) writing about the mounting evidence of Enron’s fraud and its cozy relationship with US policy makers.

Last Friday, the auditing giant Arthur Andersen announced, it had destroyed or deleted an undetermined number of electronic and paper documents related to Enron’s financial troubles. Soon after this astonishing disclosure, the US Attorney General John Ashcroft and his chief of staff David Ayres stepped back from the Justice Department’s criminal investigation into Enron citing “conflict of interest. Ashcroft had received $ 61,000 in campaign funds from Enron executives and $ 25,000 from its CEO and chairman Kenneth Lay.

Lay, a close buddy of US President George W. Bush had met top White House officials before the collapse, raising questions about how much the government knew about Enron’s problems and what help had been offered. While US authorities insist that Enron continues to be investigated by several Congressional committees, the Securities Exchange Commission (SEC) and the Justice Department, the American people wonder if anyone ‘un-connected’ with Enron will even be available to conduct the probe. The NYT says that SEC Chairman Harvey Pitt may also ‘have to excuse himself’ from the investigation because, ‘as a lawyer in private practice he did work for Arthur Andersen, the company that audited Enron’s books with its eyes closed’.

Another disturbing revelation is that Enron’s top 29 officials had cleaned out their own holdings when the stock began to plummet. ‘You’ll have to look long and extremely hard to come up with an example of corporate treachery in the United States that’s as horrible as the Enron debacle’, says the NYT. Well, Enron’s corrupt influence over our own policy makers, bureaucrats, bankers and lenders was just as pervasive. They bent backwards to please Enron, made scandalous lending decisions and twisted the rulebook to clear the project twice over.

The difference is that Enron’s shenanigans in India continue unchecked. Last fortnight, the Financial Express reported that officials of the controversial Dabhol Power Company (DPC) had removed certain critical parts, e-chips and code CDs from the plant to render it unusable. An anonymous letter had informed the Industrial Development Bank of India (IDBI) that these parts as well as several ‘plant-related maps, manuals and other papers were burnt and some were taken out of the country.’ When IDBI asked DPC for an explanation, it was startled to receive an admission.

DPC Managing Director K Wade Cline said that the parts were removed for ‘security reasons’ so that they could be ‘used optimally in future’. He said that the plant could be recommissioned upon various ‘preparatory steps’ being taken. As for maps, manuals and documents, he said that they were removed to London for the arbitration proceedings. He claimed that no originals were destroyed and only duplicates were eliminated in order to minimise storage costs.

Doesn’t this sound exactly like the actions of Enron and its auditor Arthur Andersen in the US? These shocking developments only expose, once again, the failure of Indian financial institutions (and bureaucrats and politicians) to take charge of the closed DPC plant and to safeguard national interests. These institutions have pumped in over Rs 6,200 crore into the 2184 MW DPC project. They have a first lien over all the assets and properties of DPC and have even guaranteed the loans of foreign lenders.

Moreover, according to IDBI, as much as 75 percent of shares of the three major lenders are pledged with it. Why IDBI, even the 15 per cent shareholder of DPC, the Maharashtra State Electricity Board (MSEB) has not been informed about the removal of critical equipment and document. The lethargy of Indian institutions in safeguarding their interests only compounds their original failure to assess DPC’s costs and viability before taking such an extraordinarily high exposure to the project. They not only endorsed its ridiculously high costs, but also underwrote the exposure of more prudent foreign lenders.

The lenders have yet to initiate any action against DPC officials under various Indian statutes including the Customs Act of 1962. Only the MSEB seems to have asked some tough questions so far. The Financial Express reports that MSEB’s investment subsidiary, which holds the DPC equity stake, has said that Enron’s action in removing critical equipment ‘is extremely serious in relation to the exercise of direction under article 226 of the Constitution of India’.

The MSEB has asked DPC for a detailed list of equipment and documents that have been removed along with the permissions if any that were obtained for their removal. MSEB has pointed out that since the equipment is imported under a license with concessional customs duty and is also mortgaged to the lenders, it would require prior approval from the Customs and Excise authorities or attract penal provisions under Indian laws.

But these written threats are hardly good enough. The lenders must initiate swift legal proceedings against DPC’s top executives and stop them from leaving the country until the parts and manuals are brought back to the country. Instead, DPC is dictating the terms of the dialogue! It promises to restore the equipment and manuals only as part of ‘preparatory steps’ before restarting the plant.

Interestingly, included in these steps is the signing of a new operating and maintenance contract, hiring of new staff, purchase and delivery of fuel to the site and a complete evaluation of the plant.

Is DPC trying to gain another bargaining chip in its negotiations for the sale of its equity? And what are the financial institutions doing about it? So far, they are only bleating before the central government for a rescue package, including tax concessions, duty waivers, government guarantees, tax free bonds, creation of unworkable distribution circles and central loans in order to make the project viable. This only means that in granting mega power status to DPC, the ordinary taxpayer will again be paying for the follies of policy makers and Indian financial institutions in a bailout that will rival that of the Unit Trust of India’s US 64 scheme.

-- Sucheta Dalal