Why India Inc Is Scared And How They’ve Been Party To Their Own Distress

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The thick dust of the coal block allocation scam refuses to settle down. After enveloping over a dozen mining companies in its black soot, the coalgate twister threatens to blow away Prime Minister Manmohan Singh and the bureaucracy. Last week, all the underlying issues of the coal allocation fiasco came to a flashpoint with the CBI alleging that the Aditya Birla Group was another beneficiary of crony capitalism. With the CBI digging deeper to unravel the corporate-political nexus, all fingers are now pointing at the PM, who was in charge of the coal ministry when the mines in question were allocated to the business houses.

The past and the present of this case remain murky. Over the past decade, India has been a cauldron of obfuscated rules and regulations, which has resulted in the exploitation of resources of all kinds, from 2G spectrum to coal, with little transparency and no auctions. This cross-stitch of situations opened up opportunities for misuse. Politicians exerted power, bureaucrats displayed control and industrialists tried to influence decisions to get resources their way.

The loopholes in the system meant that apart from bona fide companies, which had the necessary expertise in sectors where auctions were held, fly -by- night operators also managed to lay their hands on scarce resources.

Now, tough questions are being asked. Was the policy flawed? Is India Inc to blame? Did the collusion of business and politics cost India its resources? Is the CBI’s chase of tycoons a witch-hunt? Are proper allocations and rotten ones being tarred with the same brush? Is the prime minister now cornered even more after last week’s events? Why did it take only a Birla to get India Inc to speak in one voice? Should corporate India not contemplate how it uses the system when it suits them and criticises it when it doesn’t work for them?

Kumar Mangalam Birla was all of 28 when he took over as chairman of the Birla empire in 1995 after the sudden death of his father, Aditya. He learnt everything on the job, kept the grey-haired advisers in place, consulted with veteran bankers and took the firm from $2 billion to $35 billion in revenues. With global ambitions and fire in the belly, the god-fearing Birla meticulously expanded the group’s business. At the same time, he earned his stripes as a substantially (and relatively) honest business leader. But the CBI filed an FIR against Birla last week, charging him with conspiracy in a coal block allocation to his company, Hindalco. And unaccounted cash was recovered from some offices of his business house.

The CBI filed FIRs against Birla and former coal secretary PC Parakh for alleged irregularities and criminal conspiracy in the allotment of two coal blocks in Odisha in 2005 under the Prevention of Corruption Act. Coordinated searches were carried out at six locations, including offices of the Aditya Birla Group in Mumbai, New Delhi, Hyderabad and Bhubaneswar.

In its FIR, the CBI alleged that Parakh had reversed the steering committee’s decision to allocate the coal block to PSUs after a meeting with Birla. Parakh defended the decision saying if he was wrong then so was the prime minister, who was in charge of the coal ministry during the time of allocations, including the one to Hindalco.

The Birla Group has clarified that “the application for the Talabira II mine was made in 1996 by Indal, which was acquired by Hindalco in 2000. The actual allocation of the mine was done in November 2005, which is nine years after the first application was made”.

As the case snowballed, the Prime Minister’s Office (PMO) issued the following statement: “The prime minister is satisfied that the final decision taken in this regard was entirely appropriate and is based on the merits of the case placed before him.”

While the prime minister was at the heart of this case as the signing authority, several government officials came out to defend Birla and attack the CBI. This overwhelming attention to this case begs a few clarifications. Why do Union ministers need to come out and defend Birla and call him “iconic”? That Union Petroleum Minister Veerappa Moily made statements like “investigating agencies and the judiciary must ensure that India does not become like Russia, where investors are not prepared to go and billionaires are put behind bars”, reflects on an internal misunderstanding of the government’s responsibility.

Is this just an attempt to take on the Supreme Court under whose watch the CBI is pushing such investigations? Does it imply that politicians are embedded with business to such an extent that they can’t look at cases objectively? All these are concerns irrespective of whether Birla is charged in the case or not. Such reactions are providing fodder to those who argue that the UPA government has been squarely focussed on helping big business flourish. It also reeks of political expectations of big businesses as the poll season nears.

There has been a huge uproar within the business community. The main grouse is not that industry is above investigation but that these must have a trail of real evidence. Naina Lal Kidwai, the chief of industry body FICCI, displayed concern that “capable and highly regarded officers and business leaders cannot be made scapegoats of mere suspicion and misconstrued actions”.

To everyone’s surprise, India Inc, which otherwise tries to be politically correct, took a collective stand to oppose what they call an ad hoc approach by the CBI to haul up, harass and embarrass the country’s top industrialists.

“The CBI’s track record in this regard is extremely poor,” says Subodh Bhargava, chairman of Tata Communications and a veteran in the manufacturing industry. “On many occasions, they have moved ahead on flimsy grounds, eroding the individual’s credibility.”

Bhargava is angered by the lack of homework done by the CBI before making allegations in front of the media and the public. “Do a thorough probe and then go to the public,” he says. “Why is it that the CBI is now asking the PMO to give the details of transactions with Mr Birla. Why didn’t they do the paperwork before? You don’t seek information later; you need to prepare all that before you announce names and hurt reputations.”

The CBI has plenty of work ahead. According to reports, the agency will probe favours allegedly shown to top corporate houses such as Mukesh Ambani’s Reliance, Anil Ambani’s ADAG and the Tatas, as well as kickbacks given in the aviation sector, manipulation of Unitech’s stocks and illegal gratification paid to tax officers arising from Niira Radia’s tapped conversations.

With such significant scrutiny on the horizon, corporate captains are keen to seek shelter from defamation without enough evidence. “It is ludicrous that an FIR has been filed against Kumar Mangalam. He is straight as an arrow. Our system is such that the biggest fraudsters go scot-free,” says HDFC Group chairman Deepak Parekh. Sumant Sinha, chairman of wind energy company Renew Power, shares the sentiment. “Dragging someone like Birla’s name into this is an absolute shocker,” he says.

Corporations look to the West for swift decisions in big business cases. Rajat Gupta is a good example where the American judiciary took a clear stance after all evidence was collected and made a concrete announcement that left no room for debate. Indian courts are infamous for taking years to conclude the process and pronounce judgments. The individual’s reputation remains suspect and hanging for years and years.

“If this is not harassment, then what is?” asks Bhargava. “Should the CBI go public on the basis of just circumstantial evidence?”

It would be valid to question why India Inc didn’t make this collective stand when the spotlight was on the telecom scam or the Radia case. Why didn’t India Inc speak up when the CBI opposed bail in corporate cases or cancelled licences? Even in the issue of retrospective taxation (which mainly hit oil major Shell and telecom giant Vodafone), the criticism has been sporadic by industry captains, but more coherent by analysts. Have they been selective in voicing their anger? Could they have put pressure for more transparency from day one? Why did it take a case against Birla for this to change?

No doubt, corporations have plenty to answer for. Efforts are now on to collectively safeguard India Inc because many firms had colluded with the government. Greed, errors of judgement and shortcuts did prevail over the system.

“Yes, India Inc needs to introspect,” says Bhargava. “Do we need to succumb or show the patience to demand without fear or favour what is legitimately due to us?”

CII chief S Gopalakrishnan echoes Bhargava’s views. “Every effort should be made to ensure that there is no atmosphere of fear created when it comes to decision-making,” he said in a statement. “Swift decisions and a transparent policy environment are pre-requisites for an enabling business climate. This is best done if the government and industry work together. The industry should not feel discouraged to interface with senior officials on issues that need the government’s attention.”

Is India Inc getting carried away? What lurks in the background is the fear that tomorrow it could be anyone under the CBI lens for any decision of the past. Are there not enough examples to prove that companies were hand-in-glove with some in the government when it suited them to receive resources out of turn? Fly-by-night operators enter the scene when allotments were done in a hurry as in the case of coal blocks.

As TEHELKA has reported, at the very start of UPA-1, the then coal secretary PC Parakh had informed the PM that the extant system under which a screening committee headed by the coal secretary with representatives from various ministries, State-owned corporations and state governments allocated captive coal blocks, was arbitrary, opaque and prone to corruption. An investigation conducted in August 2012 shows that the UPA announced the auction policy in 2004 but did not operationalise it until 2010. This led to a mad scramble for captive coal blocks between 2004 and 2009.

Reminiscent of the 2G scam, where non-serious players entered the fray and acquired precious spectrum that they could later sell at a premium, private operators rushed in to get captive coal blocks. These companies were aware that once the auction procedure came into force, the very blocks that the government was giving away for almost free would be priced at market-determined rates.

The 2G spectrum scam and the mad scramble for creating Special Economic Zones have been stark examples of how the government gave up competitive bidding opportunities and created a hoopla around the need for resources, making it the only bedrock of growth. It also showed how corporations arrived on the scene and enjoyed the resource loot thanks to a political nexus.

Former Union power secretary EAS Sarma considers all these as clear-cut cases of crony capitalism. Over the past decade, crony capitalism has created an “illusion of abundance” of a scarce resource, generated an artificial demand for that resource and rushed the government into creating non-transparent allotment procedures, he says.

“The first-come-first-served procedure had been a statutorily prescribed approach to allotment of all minerals, including coal,” he says. “In 1991, this could have been replaced by a more transparent auction system, but it was not done as the reform’s focus was on privatising rather than introducing competition. The story is similar in other sectors such as telecom and power.”

An MP from Odisha and a witness to many projects plagued by controversy, such as Posco and ArcelorMittal, admits that the problem is more complicated. “On the one hand, India has often demonstrated extreme hostility to the private sector and created hurdles in the path of investment,” he says. “On the other hand, there have been many examples of crony capitalism, where special favours have been granted to certain companies and lobbies. And that has, indeed, meant that the interests of many citizens have been compromised. The checks and balances necessary to ensure that everyone concerned gets a fair deal lies not in ever more complex and contradictory rules, but rather simplified ones that favour open/competitive practices over discretionary powers.”

But an unlikely voice from the Planning Commission questions India Inc. “If corporates were taking advantage of a weak State, how are they themselves not to blame? When the system bites back, why are they not prepared for it?” wonders Plan panel member Arun Maira.

Where corporations may be spot on is that they seek clarity, transparency and quick closure. Not all companies can be tarred with the same brush and not all are seeking undue favours. Maira cites the example of the power sector. “You let some companies set up power plants, dig coal and put it on stream but then you dictate the price at which the power should be sold,” he says. “There is need for us to be fair to both the producer and the consumer.” In this regard, corporates then stare at operational losses and the project turns dormant again.

Many people say that the prime minister’s defence of the Birla allotment indicates the randomness of the policies on allocation of natural resources. Manmohan Singh’s decision to overturn the cancellation of the allotment — a decision taken earlier by the screening committee — shows a lack of strength in institutional mechanisms as individual discretion took precedence. On the other hand, the prime minister has been selective on when to stand up and defend a decision. In earlier cases, Manmohan Singh distanced himself saying he wasn’t aware or that’s what his Cabinet colleagues told him to do. These instances show a lack of consistency in standing up collectively for a government policy.

“I have never been so depressed about my country in the past 20 years as I am today, especially after what they did to Kumar Mangalam Birla,” says former Infosys board member TV Mohandas Pai. “Because if the minister in charge and later the government gives him the licence for which he applied many years ago, and then the investigative agency says there’s a conspiracy without any hard evidence, this is a sad commentary on the state of regulations in this country.”

This ping pong battle is also the reason why there is a clamour for clear and simple laws that leave no room for loopholes. One can blame corporations for circumventing the system’s problem areas and taking advantage of the vagueness. But this ambiguity in the relationship between corporations and the government has created an unsaid and unwritten bond between select company owners and politicians. This cosy relationship finds comfort in money in most cases.

Maira insists that there are no short-term prescriptions. The government has failed to take into account all stakeholders — those who exploit resources and those who are at the receiving end (communities). The onus of framing good regulations, however, is on the State.

Corporations are grappling with a “to do or not to do” syndrome when it comes to doing business the political way. Permissions are long-drawn and shoddy, rules are not clear and the norm today can be a crime tomorrow.

The 2G scam is as much an example of corporate exploitation of the system as it is of systemic flaws within the decision- making apparatus, which is part of the political system. With companies such as Reliance, ADAG, Tata, JSPL, Essar, Adani, JSW and Bharti facing questions/investigations in one matter or the other, it’s obvious that they have learnt to benefit from a system full of loopholes.

However, to put the blame squarely on industrialists is unfair. As one CEO remarks, “The rules of the game are set by the government through its policies. If a permission was given and no objection raised during allotment, then what has changed between then and now?”

It would also be prudent to ask that if so many corporations are to blame, could the problem not lie in the government policies?

One thing is for sure. More FIRs against corporate bigwigs is only going to strain the relationship between the State and India Inc. The government is going all out to reassure the industrialists that the State is not working against them. But further accusations against corporate India will not be taken too kindly by the industry or investors abroad. If India’s slowdown to 4.5 percent growth wasn’t enough, this promises to be another blow to its image as a business destination.

“Everything has suddenly gummed up,” says a senior government bureaucrat on the condition of anonymity. “As if we threw sand, oil and dirt in a perfectly good machine and stopped it from running.”

On the one hand, India has been trying to woo foreign investment and bring dollars into the country by opening the investment floodgates in retail, aviation and other sectors. On the other, a litany of such cases against corporates is creating more uncertainty.

According to a PTI report, Vedanta’s Anil Agarwal claims the Birla issue was discussed at 10 Downing Street by British Prime Minister David Cameron. Parekh echoed this worry: “The corporate world is very upset. The investment climate gets vitiated because of this. The country is not able to attract much foreign investment and domestic entrepreneurs are opting to invest abroad.”

But the question India needs to ask itself is whether it’s time to use this slowdown and corruption spill as an opportunity to clean up. Could this hunt for resources be replaced with a more cohesive thinking on sustainable growth with job creation? Can our policymakers plan a transformation of what TEHELKA has been calling a “design defect”?

Would it make sense to get rid of the illusion that India remains the cynosure of the world and actually get down to fix a system that only feeds on big business? Rural jobs, people-intensive businesses — aren’t these issues due for some focus?

There are other investors who are taking a more long-term view and believe that the churn in the system may finally do good to the economy and lead to future investments.

Sanjay Nayar, the CEO of investment firm KKR India, hopes that things will get better. “The gradual move from a rather unclear and semi-discretionary system of allocation of scarce resources to a more transparent one is a big plus for India in the long term,” he says.

Not only will it attract incremental foreign capital and technology, which we need to increase mobilisation of resources, but also increase the confidence of Indian businesses to make more investments in a manner that doesn’t disregard the environment and the people.

As former Infosys CEO and UIDAI Chairman Nandan Nilekani put it, “Sarkar, samaj and bazaar cannot work in isolation from each other.” The sooner that is embedded in India’s style of doing business, the better it will be for all constituents hoping to be part of a more holistic growth story.

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Corporates & the Climate of Fear 

Sachin Pilot, Corporate Affairs Minister
Sachin Pilot, Corporate Affairs Minister

The first thing we need to do is re-instil confidence in the investor and the business community. This atmosphere of suspicion and hostility is having a very negative impact and is detrimental for the country. Of course, it is important that those who violate the law or are non-compliant with regulations should be properly investigated and penalised.

The law is — and should be — agnostic to status, religion or profession. No one is above the law. But the way things are just now, the loose allegations, the name-calling, this is very harmful and has much larger implications. A fear psychosis has been created among the corporates, political leaders and bureaucrats. Agencies must be very sure, their investigations must be very thorough before they go after people. You cannot paint everyone with the same brush. There may be a very few cases in which such broad brushing has happened, but the reality doesn’t matter: once a perception has been created, you have to grapple with that.

As corporate affairs minister, I can only say that what we need is a good, fair regulatory regime; and a predictability around how those rules will play out. Unfortunately, there has been a certain amount of overreach in the past couple of years — by individual ministers, particular departments, or agencies and institutions.

The bureaucracy is paralysed and we need to create elbow room for them to take decisions. Right now, there is huge resistance to taking any decisions for fear of it being misread. Everyone is insisting that the coal allocation process was arbitrary, but you must remember there were inter-party and state governments involved in those committees. It’s not as if coal was yanked out of the earth and sold in the open market. They were meant to create fuel supply assurance to investors who were setting up power plants.

In any case, all of this is now sub-judice, so I wouldn’t like to comment on it further. But I want to emphasise that we urgently need to clear the air and not just boost foreign investor confidence but that of our own domestic entrepreneurs and corporates’

2 COMMENTS

  1. “randomness of the policies on allocation of natural resources” – more or less puts things in perspective. The rest of the article seems to wriggle desperately around the fact that some have been caught greasing the palms. And the others will soon also be in the same boat.

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