In some ways, we are back to the pre-reform days. But corporate India thinks it can prosper by quietly adjusting to the grim reality
Sucheta Dalal
February 1992: I wrote about a secret meeting of top industrialists threatened by economic reforms, at Mumbai’s Belvedere Club at the Oberoi Hotel, to strategise about how to lobby the government to slow down. It was the infamous Bombay Club, many of whose participants have vanished from the list of top industry groups.
May 2012: India Today reports how Kumar Mangalam Birla, Sunil Bharti Mittal, Vittorio Collao and Jon Fredrik Baksaas were shuttling between various ministries, desperately trying to explain how the telecom regulator’s recommendations would kill the Indian telecom industry.
Are we back to square one, after two decades? In 1992, middle-class India, fed up of government monopolies, waiting lists, shortages and hair-brained policies that bankrupted India, was hugely supportive of reforms. Even the Harshad Mehta and Enron scandals didn’t touch Dr Manmohan Singh’s personal reputation or raise questions about his ability. In 2012, middle-class India is again exasperated—this time, about the loot of national resources by politicians and industrialists supported by feckless bureaucrats. But the biggest damage is to Dr Singh’s credibility. He is seen as the man who stood by silently and allowed the perversion of institutions and regulatory mechanism.
Public anger is not restricted to business but also extends to media (vanishing ethics), exploitative educationists, rapacious doctors (in cahoots with hospitals and pharma companies) and a broken justice system (the entire gamut of lawyers, courts, regulators, policemen and investigation agencies). When public anger spilled into the streets and manifested in demonstrations, the government was forced to act.
A string of scandals—from Adarsh Housing Society, 2G (telecom), Commonwealth Games, Bellary Mines and the investigation in Karnataka and Andhra Pradesh (Yedurappa’s and Jagan Reddy’s machinations) have signalled that even ministers, members of parliament (MPs), senior bureaucrats, corporate executives and politically-connected industrialists will not be spared from arrest and jail when the tide of public opinion forces government agencies to act. Over the past two years, it has become clear that a government desperate to ensure its own survival will sacrifice friends and financiers.
Is corporate India learning any lessons? Well, some of the wiser industrialists do worry about civic strife but others, like Vijay Mallya, are blithely unconcerned at the outrage over their debt defaults, inability to pay taxes, salaries and rents. Those like the Ruias of Essar are busy ring-fencing themselves from the consequences of their dubious dealings. Four months ago, a steel sector source told us how family-owned business houses are working at protecting themselves from the new environment. He said they wanted to put professionals in charge of management and were even planning to vacate board directorships. “You mean corporate India will make way for professional management?” I asked, anticipating a defining moment in India’s corporate history. My source hastened to correct me. There was no question of letting go of control, he said. A two-level committee structure would ensure that owners remained the power centre but professionals would sign-off and implement decisions.
“Why would professionals put themselves in the line of fire?” I asked. After all, it is widely perceived that Gautam Doshi and others were the fall guys who were arrested and spent months in jail taking the rap for the Anil Ambani group’s decisions. This happened soon after Anil Ambani managed to persuade the Securities & Exchange Board of India (SEBI) to bury a major scandal about unauthorised trades ($3.2 billion worth) in third-party Swiss bank accounts by paying a paltry penalty of $10 million in a consent deal. The deal also ensured that the Reserve Bank of India (RBI), enforcement directorate and tax authorities did not investigate the matter, despite a detailed complaint by Froriep Renggli, a Zurich-based law firm.
In early June, the Essar group announced the precise game plan outlined by my steel-industry source. It was clearly a fallout of the arrest-threat faced by Ravi Ruia and Prashant Ruia over the Loop Telecom deal in the 2G scam. So, these first-generation entrepreneurs, with one of the worst track-records regarding minority shareholders and multiple defaults in payments to lending institutions, are being lauded by a pink paper for being the family-controlled corporate group to ‘separate ownership from management’. Will it work? We will only know when the two-committee structure that meets listing requirements, as well as insider trading and governance rules is in place and top professionals accept a position that gives them regulatory accountability and fat salaries but no real power.
The Sahara group is another example of how the powerful patronage of politicians has reduced almost every regulator to helpless impotence when it comes to its opaque financials, complex corporate structure, lack of accountability and non-transparent businesses. The RBI steadfastly refuses to answer questions related to the Sahara group. Only SEBI demanded compliance from the group’s two companies that issued debenture-like instruments without regulatory clearance. Sahara has dragged SEBI to the Supreme Court, where India’s most respected legal luminary represents it.
The group flaunts an endless supply of cash while wrapping its lack of financial transparency into a strange corporate philosophy called ‘corporate materialism’ which proclaims that “in the last 33 years not even a single rupee of dividend has been declared by the group and not even a single rupee has been shared from the profit by anybody.” Will anyone explain how the RBI or the ministry of corporate affairs have allowed a group with this weird financial claim to collect over Rs70,000 crore of public money (according to its own newspaper advertisements)? Or how the group has the funds to sponsor the Indian cricket team for so many years? Sahara claims to have spent an astounding Rs1,085 crore on sports and social activities until the end of June 2010.
Then there is Reliance—both halves of the now divided group. The Mukesh Ambani-led business empire goes to court demanding that SEBI must settle a massive insider trading charge through its consent order route, which has been put on ice ever since a public interest litigation questioned its legal validity. Reliance is upset at SEBI’s two-time rejection of its request to file consent proceedings, allegedly because it was willing to pay a paltry amount under the settlement terms. Reliance’s flagging credibility is apparent from its drooping share price which was hit by the many exaggerated claims about the gas-find in its Krishna-Godavari basin wells. The Ambani couple, and their billion-dollar residence, are regularly featured on society pages; yet, come Sunday morning and Nita Ambani beams beatifically from television screens proclaiming that Reliance Foundation is “taking India from darkness to light, from ignorance to knowledge, and from dependence to self reliance.”
The problem of wealth concentration by influencing policy-making is not peculiar to India. Nobel Laureate, Joseph Stiglitz, in a recent article, writes about the dangerous consequences of growing inequality in the US during the same period. He quotes the billionaire investment guru Warren Buffet saying, “There’s been class warfare going on for the last 20 years and my class has won.”
Dr Stiglitz argues that the trickle-down effect does not work when wealth is concentrated among fewer people. “The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price,” he warns. A poorer country like India will pay that price much sooner than the developed nations. Don’t our industrialists and policy-makers foresee the consequences of their actions?
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]