February 18, 2019

SCAM – A Chapter from Best Seller, Dr. MANMOHAN SINGH A Decade OF Decay

Decade of Decay Manmohan Singh

Scam, A Chapter from the Best Seller Dr. MANMOHAN SINGH DECADE OF DECAY



                                                                                        S c a m




2                                                                                                                                        P Chidambaram as FM ? PM hits a new low !

As luck would have it, I was seated next to a local Congress party leader at a local function. The topic invariably veered to the role of P. Chidambaram in 2G scam, the related Trial Court judgement and the impending one by Hon’ble SC.

“But sir he did not do anything at all” the party faithful remonstrated. “Exactly that is the point,” I retorted and added “Can the sentinel of nation’s finance the Finance Minister (FM) – be absolved of all responsibilities while his cabinet colleague loots the national exchequer?”

As he wrenched his hand I riled him further “Is he not one of our most efficient ministers?” Before I could proceed further I noticed, palpable tension in my friend’s face. His clenched fists and grinding teeth were a dead giveaway. Choosing not to embarrass him any further I swiftly concluded the conversation.

But larger questions remain unanswered to this day – was he “directly” involved or was his sheer incompetence that allowed Raja to scoot with the loot?

These were succinctly captured by the Trail Court in its Order dated 4th February 2012 as hereunder [Para 64]:

  • Whether entry fee for the UAS Licences and the price of spectrum was jointly determined by Mr. A Raja and Mr P Chidambaram?
  • Whether they have deliberately fixed a low entry fee, discovered in 2001 auction, for spectrum licences?
  • Whether Mr. P. Chidambaram deliberately allowed dilution of equity by the two companies, that is, Swan Telecom (P) Limited and Unitech Wireless (Tamil Nadu) Limited?
  • If so, whether these facts prima facie show criminal culpability of Mr P Chidamabaram also along with Mr A Raja?
  • Whether there is any material on record to show criminal culpability of Mr P Chidambaram?

To understand all that is stated above a reference at the outset to thePrevention of Corruption Act (PCA) would be in order. Accordingly, a “public servant” is said to commit the offence of “criminal misconduct” under sub-clause (ii) of clause (d) of sub-section (1) of Section 13 where by abusing his position as a public servant, obtains for himself or for any other person any valuable thing or pecuniary advantage; or under sub-clause (iii) while holding office as a public servant, obtains for any person any valuable thing or pecuniary advantage without any public interest.

Readers may well be aware that the entire 122 2G spectrum licenses granted by the Ministry of Telecommunications were held to be void by the Hon’ble Supreme Court.

The reason? These licenses – “read valuable thing or pecuniary advantage” – were fraudulently obtained by these companies as public servants (A Raja and other officials) in Telecom ministry abused their positions. Consequently, these officials attracted the provisions of S 13(1)(d)(ii) of PCA.

The moot question now is the role of Chidambaram. Was he completely oblivious of the loot and hence innocent? Assuming for a moment that he was indeed oblivious and hence innocent, does that absolve him of all ministerial obligations, duties and responsibilities under the Constitution as also charges of “criminal misconduct” under PCA?

Trial court judgment:

Sidestepping these profound questions the Trial Court summarily concluded:

As per Cabinet note dated 31.10.2003, the decision regarding spectrum pricing was to be taken by Finance Minister and MOC&IT and after this decision was taken, Mr. P. Chidambaram agreed that it would be the price as discovered in the year 2001 and also told Mr. A. Raja that there is no need to revisit the same. This decision was subsequently conveyed to the Hon’ble Prime Minister also. To that extent, there is material on record. [Para 66]

However,  there  is  no  material  on  record  to  show  that Mr P Chidambaram was acting malafide4 in fixing the price of spectrum at the 2001 level or in permitting dilution of equity by the two companies. These two acts are not per se illegal and there is no further material on record to show any other incriminating act on the part of Mr P Chidambaram. A decision taken by a public servant does not become criminal for simple reason that it has caused loss to the public exchequer or resulted in pecuniary advantage to others. [Para 67]

In the end, Mr P Chidambaram was party to only two decisions, that is, keeping the spectrum prices at 2001 level and dilution of equity by the two companies. These two acts are not per se criminal. In the absence of any other incriminating act on his part, it cannot be said that he was prima facie party to the criminal conspiracy.

There is no evidence on record that he was acting in pursuit to the criminal conspiracy, while being party to the two decisions regarding non-revision of the spectrum pricing and dilution of equity by the two companies. [Para 69]

In short, while conceding that he was party to all the decisions taken by A Raja, in the absence of demonstrable Mens Rea – that is guilty mind – the Court held party his action did not constitute “Criminal Misconduct” within the provisions of PCA.

Naturally, students of law wonder how the learned judge came to such a sweeping conclusion especially when evidence of Mens Rea and criminal conspiracy is an outcome of sustained interrogation and detailed investigation.

Matters in Supreme Court and people’s court

But there is a fundamental question of Law that remains unanswered to this date – whether Mens Rea is necessary in the first place for cases falling within S 13(1)(d)(ii) and (iii) of PCA. Crucially, will its existence have to be proved beyond doubt even before commencing an investigation?

The Delhi HC recently had an occasion to go into these complex issues in Runu Ghosh. Readers may recall that Runu Ghosh was the Director in Telecommunications ministry when Shuk Ram was the minister.

The question confronting the HC was in the absence of adverbs like wilfully, fraudulently, dishonestly, corrupt or illegal means to qualify the verb, whether any act of a public servant would constitute “criminal misconduct” if he while holding such office obtains for any person any pecuniary advantage which is – without any public interest?

The Court holding that public servants are an entirely different class, and therefore opined that they must have a higher standard of behaviour. Therefore, when a public servant’s decision exhibits complete and manifest disregard to public interest with the corresponding result of a third party obtaining pecuniary advantage or valuable thing, he is fastened with responsibility for “criminal misconduct” under Section 13 (1) (d) (iii).

The Court came to a conclusion that the offence- under Section 13 (1) (d) (iii) “advisedly does not require proof of intent, or mens rea, because what Parliament intended was to punish public servants for acts which were without public interest.” [Para 78]

Consequently, the courts opined: “the silence in the statute, about the state of mind, rules out applicability of the mens rea or intent standard,” and therefore concluded, “a decision is said to be without public interest, if that action of the public servant is the consequence of his or her manifest failure to observe those reasonable safeguards against detriment to the public interest, which having regard to all circumstances, it was his or her duty to have adopted.” [Para 81]

Now this judgement of the Delhi HC is under appeal with Hon’ble SC. Yet the ratio is simple – Public Servants taking any decision that is opposed to public interest, with or without Mens Rea, are bound to be held accountable.

Forget the technicalities for a moment. Will we exonerate a watchman who simply looked away while the house he was supposed to guard got burgled? Will he not be accountable? Will he not also be a suspect? Will he not be questioned by the police?

That brings us to the reappointment of Chidambaram as FM. Whether Chidambaram is guilty of “commission” (pun unintended) or not is under the active consideration of Hon’ble SC. But on “omission” there is little doubt – as a sentinel of the nation’s finances, he failed to prevent the loot of our exchequer. And by appointing him the PM has surely hit a new low.

Nevertheless, this interpretation of PCA in Runu active case by Hon’ble Delhi HC is perhaps the most important development in our fight against corruption. Naturally, this implies that any public servant cannot act against public interest and should he choose to do so, it shall be held to be “Criminal Misconduct” under PCA.

That implies an FM cannot, innocently or otherwise, look the other way while his cabinet colleagues loot the public exchequer. Crucially, this opens the door for prosecuting a public servant should he act contrary to public interest – even if it were a case of inaction, guilty mind or no guilty mind.

No wonder the decision of Hon’ble SC is awaited with bated breath. Should Chidambaram be held guilty by Hon’ble SC, by extension the PM too shall be guilty. That explains why the ruling combine is increasingly getting nervous.

Trial court order – clean chit or a long rope ?

The US Department of Justice defines white collar crimes as economic offenses that constitute those classes of non-violent but illegal activities which principally involve traditional notions of deceit, deception, concealment, manipulation, breach of trust, subterfuge or illegal circumvention.

“A murder may be committed in the heat of moment upon passions being aroused. An economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequence to the Community.”

This was the profound observation of the Hon’ble Supreme court in the securities scam case – popularly called as Harshad Mehta case.

Obviously, when an economic crime is carried out in a calm and collected manner, it becomes extremely difficult even for best of investigating agencies to figure out the role played by various parties.

Some may have actively connived; some passively. And that is the crux of the issue – whether the former finance minister “passively connived” with the other accused in the 2G scam.

It is in this context one has to look into the petition of Subramanian Swamy to the Trail Court seeking to include P Chidambaram as an accused in the 2G scam.

The court neatly summarized the questions before it in Para 64 of its Order as to whether the former finance minister had a role in pricing spectrum (along with Raja) in 2008 at 2001 prices and subsequently “allowed” dilution of equity by companies who got spectrum at such ridiculously low prices.

The Order concedes that Chidambaram “agreed” that spectrum in 2008 could be priced at rates discovered in 2001 and also “told A Raja that there is no need to revisit the same.” Is this dissuasion material?

The Trial Court concludes: “In the end, Mr. P. Chidambaram was party to only two decisions, that is, keeping the spectrum prices at 2001 level and dilution of equity by the two companies. These two acts are not per se criminal. In the absence of any other incriminating act on his part, it cannot be said that he was prima facie party to the criminal conspiracy.”

Is it not that the very pricing of spectrum at prices discovered in 2001 declared to be malafide by Supreme Court in its order cancelling 122 licenses? Yet the courts did not find the sufficient ground to proceed against the former finance minister.

Strange facts; stranger judicial logic!

Commenting on the approach of Trial the Supreme Court castigated it for overlooking the decision taken by the “Council of Ministers in 2003 to approve the recommendations of the Group of Ministers the DoT and Ministry of Finance were required to discuss and finalise the spectrum pricing Formula.”

It adds that the “entire approach adopted by TRAI was lopsided and contrary to the decision taken by the Council of Ministers and its recommendations became a handle for the then the Minister of C&IT and the officers of the DoT who virtually gifted away the important national asset at throw away prices by wilfully ignoring the concerns raised from various quarters including the prime minister, Ministry of Finance and also some of its own officers.”

More importantly, the Supreme Court comments that soon after obtaining the licences, some of the beneficiaries off-loaded their stakes to others, in the name of transfer of equity or infusion of fresh capital by foreign companies, and thereby made “huge profits.” Surely not an innocent comment!

In the final analysis the Court states: “The exercise undertaken by the officers of the DoT between September, 2007 and March 2008, under the leadership of the then Minister of C&IT was wholly arbitrary, capricious and contrary to public interest apart from being violative of the doctrine of equality.”

Is that not the reason that sections of the media have been baying blood for over three years now? Is that not the reason why CAG came out with its report pointing to a gargantuan scam? Is that not the reason why CBI is investigating the matter?

Is that not the reason why Swamy and other have taken the matters to courts? Is that not the reason the courts including the Supreme Court is monitoring the matter? Is it not 9the reason why Raja is in jail?

Now to the Trial Court and its Order on the former finance minister. It correctly observes that a decision taken by a public servant does not become a criminal for the simple reason that he has caused loss to public exchequer or resulted in pecuniary advantage to others.

But that is a matter of investigation, trial and greater interpretation of law.

That takes us to the clause (d) of sub-section (1) of section 13 of the Prevention of Corruption Act.

Accordingly, a public servant is said to commit the offence of criminal misconduct when he, by “abusing” his position, obtains for himself or for any other person any valuable thing or pecuniary advantage.

Simply put, the moot point here is not how much money is made directly by a public servant, but it is all about allowing someone else to make merry by refusing to intervene – i.e., simply doing nothing.

Does that constitute an abuse?

In the instant case, the question that remains unanswered even to this date is whether the former finance minister committed a criminal misconduct by abusing his position?

Was his reluctance to decisively intervene tantamount to a breach of trust as trustee of national finances? Was dissuading Raja, as explained above, part of a grand design?

Strangely, the Order focuses only on the issue of conspiracy – a grey area in criminal law, especially in white collar crimes.

In the Parliament Attack case, the Supreme Court opined that “conspiracy is mostly proved by circumstantial evidence; usually both the existence of conspiracy and its objects have to be inferred from the circumstances and the conduct of the accused.”

Obviously this is a matter of trial, not at pre-trial stage where everyone can have an opinion. But that is irrelevant in the eyes of law.

Again in the Bank Scam case, the Supreme Court dealt with extensively on the issue of Breach of Trust – an issue that will increasingly confront perhaps not only the former finance minister, but the entire Manmohan Singh’s cabinet.

Similarly, proving the offence of Criminal Breach of Trust by a public servant is extremely complex.

Again these are matters of hair splitting details. Nevertheless, the terms of the section are very wide. They apply to one who is in any manner entrusted with property or dominion over property.

It merely provides, inter alia, that if such a person dishonestly misappropriates or converts to his own use the property entrusted to him; he commits criminal breach of trust.

Further in Jaikrishnadas Manohardas Desai the SC observed that to establish a charge of criminal breach of trust, the prosecution even during a Trial is not obliged to prove the precise mode of conversion, misappropriation or misapplication by the accused. Remember we are not talking of trial but pre-trial stage.

Therefore the billion dollar question is whether the former finance minister committed a breach of our trust as a trustee of our national finances, not as a co-conspirator, but by being an innocent by-stander to the entire scam?

It is reiterated that white collar crimes are violations of law that involves gross (ab) use of power or breach of trust. Finally one key question remains unanswered – when did the former finance minister comprehend that it was a fraud on exchequer and what did he do once he realised the same? That may well decide the fate of this case in ultimate analysis.

Those who have been following the 2G scam realise that it unfolded at a glacial pace over a six month period beginning September 2007.

Several correspondences were exchanged between the cabinet ministers including Raja and PM including objections from the then law minister H R Bharadwaj.

The short point – everyone knew that the issues involved were contentious. Yet, no one from the Government – including the former finance minister – deemed it fit to intervene. Was it simply because no one smelt anything fishy?

Or was there is a “superior compulsion” for the entire cabinet, more specifically the former finance minister, to be a mute witness to the loot?

Needless to emphasize, all these matters can be considered only during trial, including allegations of malicious suppression and planned omissions.

Simply put, the question posed to the Trial Court was whether there was “prima facie” material to include the former finance minister “as a co-accused.”

Given the facts and circumstances of the case, surely, such sweeping conclusions cannot be drawn either way now.

Nevertheless, since the Trial Court in its wisdom has rejected this plea at the threshold, matters shifts to higher courts – possibly Supreme Court – which will have to decide whether the former finance minister was a victim of circumstance or villain of the piece; whether ministers can plead ignorance when one of their colleagues engages in such gargantuan loot and finally whether the prime minister is responsible for the sordid affair in our constitutional scheme of arrangement.

Over to Supreme Court!

UPA’s ‘eminent’ lawyers forgot the law

Perhaps there is no historical parallel in any democracy where the image of the incumbent government is so completely disgraced and hence divorced from that of the country. This is what happens when rootless wonders, power brokers and alien agents manipulate constitutional shortcomings and capture power.

Simply put, the story of UPA is one of omissions and commissions. In fact, every time the Supreme Court upholds the majesty of law, the UPA government invariably finds itself in the dock.

And surprisingly, this is a government that is studded with several “eminent” lawyers most of whom forgot the elementary legal principle – fraud vitiates everything. That explains why, once the fraud was established by the petitioners, the Supreme Court had no choice but to necessarily cancell all licences. Little do we realise that had Supreme Court failed to cancel these licenses, India would have well and truly become a classical definition of banana republic.

Interestingly, details of the fraud leading to the allocation of these licenses have been in public domain for over a few years now.

No wonder, the judgement does not surprise many who have been following the case. Strangely, those who were silent when India’s image was dented by the fraud in the first instance seem shocked and surprised when the Supreme Court has actually remedied the situation.

Or are they implicitly carrying brief for the fraudsters? Obviously, the implications of this order are profound: It is now a matter of detailing that the lower courts have to do and figure the smaller question of who actually committed the fraud and prescribe appropriate punishment.

Nevertheless there are serious questions for the UPA government – how many of our cabinet minister(s) – given the facts and circumstances of the case – directly or indirectly participated in this fraud? And this, not the order, is actually denting the image of the country across the world.

Given this paradigm, the usual suspects have been pressed into service – obviously to salvage the image of the UPA government. In the process no one seems to be bothered about the image of the country.

Over and above their false beard which is falling apart, the arguments put forth by these “experts,” have been a dead giveaway. Some have opined that FDI flows would be adversely impacted on account of this judgement.

Some have commented as to how foreign investors may even shy from entering into a contact with the Indian government in future. Some have called this judgement perverse.

But it was these very buffoons – yes buffoons – who were going all over the town last week welcoming the Supreme Court judgement in the Vodafone case, which gave a tax relief in excess of Rs 11,000 crores to Vodafone. And now when their sponsorers are in the receiving end, they are damning the judgement, judiciary and the Indian legal system.

In the process little do most people realise that in both cases it was less than honest approach of the government – read union cabinet – that precipitated matters in the first place. And that is the central to the issue on hand. Investments, much less foreign investments, do not get impacted by such events.

On the contrary, investors across continents will be assured that in India rule of law prevails. To me that is the biggest take home from the Supreme Court decision in cancelling the licenses. Forgetting this cardinal principle of investment, sponsored analysts have been hopping from one studio to another, writing columns and even speaking in various forums as to how FDI flows will be impacted by this judgement.

And it is this cabal – consisting of some in the media, corporate houses and professionals who are at the root of the present conundrum. What has in fact dented the image of the UPA government is not the fraud per se as much as the defence put forth by its team of “eminent” lawyers.

Importantly, the Supreme Court order has clearly exposed the understanding of law by these “eminent” lawyers. Every time an “eminent” lawyer from the UPA opened their mouth; the UPA loses a million votes, the nation its credibility.

What is forgotten in the melee is that the UPA government cannot from now on localize the theatre of conflict to A Raja, the former telecom minister. In fact, given the profound implications of the Supreme Court Order, it is impossible from now 14on for the Union Cabinet to escape from the fallout.

And for this sorry state of affairs, the UPA government has to blame it “eminent” lawyers. But if you thought “eminent” lawyers of the UPA were the problem, hang on. There are “eminent” economists who have damaged the country as much as the “eminent” lawyers but with a crucial difference.

If “eminent” lawyers of the UPA have damaged the nation with their loquaciousness, “eminent” economists have damaged the country by their silence!

Infraction of law is half the problem. The other half is economics. How could an economist worth his salt allow pricing spectrum in 2007 at prices that were detained in 2001 and be silent? It is a matter of time that courts will be compelled to comment on their silence too.

The problem with eminent economists, like eminent lawyers, is that they do not commit small mistakes. Let me amplify. While it may be extremely difficult to benchmark the performance of these “eminent” economists (unlike lawyers who have been exposed by the Supreme Court rulings), it is interesting to know that The Economist, in its recent edition attempted to compare the economic performance of several emerging economies including India.

Using what it calls as wriggle-room index, The Economist, has attempted to calculate the flexibility available in the monetary and fiscal policies in an economy especially in the context of potentially destabilizing economic developments in Europe. This analysis by The Economist ranks 27 emerging economies according to their monetary and fiscal wiggle-room.

The Economist employed five indicators to assess the head room available in an economy including – inflation, credit flows, interest rates, currency movements and current account balances. India scores a very high 85 on a scale of 100.

That effectively means that India has very little head room to tackle any macro-economic imbalance.

What is galling to note here is that India has a score that is only rivalled by rudderless Egypt. Argentina, Pakistan,15 Venezuela, Columbia are some of the countries (ones that do not even have structured governmental institutions, much less “eminent” economists) that are seen by The Economist to have managed their economy far better and therefore have a lower score and hence a higher wriggle room to manage a crisis.

Mercifully, The Economist has not included warn torn Iraq and Afghanistan in its index. Surely the wriggle -room index is not comprehensive. Nevertheless, it is indicative of all that is wrong with the current state of economic affairs in India.

But there are several tell-tale signs that all is not well with the Indian economy. Reports by international as well as national bodies, are increasingly pointing to a looming economic crisis in India. The odds are in favour of a serious economic crisis.

The precarious state of the finances of the government, the pathetic state of our infrastructure and poor performance of social sectors – in short governance deficit – are all sufficient deterrent for any investor, foreign or domestic, into India.

This explains why there is a significant flow of outbound investment from India. When Indians are reluctant to invest in India, is it fair to expect FDI?

                                                                                                                               Chidambaram: Caught by courts, bowled by Swamy?

As the trial begins in the special court on the 2G spectrum scam, there is a riveting side story — perhaps more interesting than trial itself.

The special court last week directed the Central Bureau of Investigation to provide documents related to ‘equity dilution’ by telecom operators that were allotted telecom licenses in 2008 to Janata Party chief Subramanian Swamy.

Swamy, it may be recalled, had petitioned the special court to provide him with the correspondences between the then telecommunications minister A Raja and the then finance minister P Chidambaram. Naturally, this has set the Yamuna on fire.

What is so extraordinary about this equity dilution? Why is the nation riveted to the contents of the file? Why has this issue increased the political temperature in the already surcharged atmosphere, especially days before the Parliament is supposed to meet for the Winter Session?

To understand, one must revisit the sequence leading to the alleged scam. It may be recalled that Swan Telecom was allotted a license for a mere Rs 1,500 crore (Rs 15 billion). Swan subsequently sold 45 per cent of equity to Etisalat, a foreign company for a whopping amount of Rs 4,200 crore (Rs 42 billion), merely months after it was allotted spectrum.

Similarly, companies promoted by the Unitech Group purchased licenses for approximately Rs 1,600 crore (Rs 16 billion) per license. Almost instantly, they sold 60 per cent of their stake for Rs 6,200 crore (Rs 62 billion) to Telenor, another foreign company.

That implies the value of each company to be close to Rs 10,000 crore (Rs 100 billion)!

Significantly, these companies did not have any assets other than licenses which they had acquired. Apparently, these sales at such elevated prices to foreign layers imply that the licenses were originally sold by the government at throwaway prices.

But the value of the license is half the issue: the dilution is the crux of the issue — the conclusive evidence of the scam. And this requires some elaboration.

According to the arguments put forward by the accused, the existing promoters have not sold their shares to these foreign players. Rather, it is the companies in which they owned shares (and also licenses) sold fresh shares to these foreign players.

In the process, the promoter’s holding was at best diluted, not sold. Interestingly, while there was a three-year lock-in period for the sale of shares by the promoters, there was no stipulation on allowing ‘strategic partners’ and ‘equity dilution’ by existing promoters.

That, in turn, meant that Telenor and Etisalat had acquired licenses indirectly in October 2008.

Importantly, the former telecom minister is on record stating that dilution of equities by the alleged beneficiaries of 2G spectrum scam to foreign firms was first cleared by the government and did not constitute any offence.

Assuming for a moment that the former telecom minister and by extension the former finance minister are right, then it brings us to the next logical question: in a country where a second-class berth allotted to you for a mere Rs 100 by Indian Railways cannot be transferred to another person, how can such licenses valued at several hundred crores (billions) of rupees be indirectly transferred?

Rs.500 crore of expenditure at Rs.8,400 crore

The counsel for the former telecom minister had reportedly stated in the open court that “the matter (about sale of equity by spectrum licensees) was discussed between the prime minister and the then finance minister.”

According to him, “The then finance minister had himself told the prime minister that the dilution of equity was not sale and was completely allowed under corporate law.”

And that in turn has brought the then finance minister directly into the fire.

“The then finance minister( who is now home minister) had said in front of the prime minister that dilution of shares does not amount to sale of 2G license as per the corporate law,” and added to good effect, “Let the prime minister deny this.” [Source: Several press reports]

Fascinatingly, these arguments about dilution of shares were made even as early as in November 2008, days after Swan and Unitech entered into the ill-fated agreement.

More interestingly, both these companies wrote to the ministry of telecommunications on November 4, 2008 after several press reports raised inconvenient questions on these agreements.

The crux of the arguments put forth by these two companies at that time (as it is even to this date) was that the foreign players were ‘not investing into an entity where the only value is the spectrum that it holds’.

This meant that substantial amount of work had gone about between January 2008 (when the licenses were allotted) and November 2008, when this communication was sent.

Unitech, for instance, claimed that it set about building a team of Indian telecom professionals to build the company, its network, its business processes, offices, distribution channels — in short do everything for launching a successful telecom operation.

Simultaneously, it also claimed that it engaged a banker of international repute to identify a strategic partner which ultimately led to the agreement with Telenor.

For all these efforts, Unitech declared that as at September 30, 2008, its total expenditure on all these accounts aggregated to approximately Rs 2,100 crore (Rs 21 billion).

In short, according to Unitech, Telenor, its s trategic partner was partnering with it at a stage “where about 6 months of effort and Rs 2,100 crore (Rs 21 billion) of expenses have already been expended.”

Put simply, Telenor was investing into a company that was already up and running and not merely an entity that had acquired licenses.

But the letter also concedes that the Rs 2,100 crore (Rs 21 billion) of expenditure includes the license fee of approximately Rs 1,600 crore (Rs 16 billion)! In short, till September, Rs 500 crore (Rs 5 billion) were spent on setting up the business and Rs 1,600 crore were spent on licenses.

Remember that the company had not yet commenced commercial operations. In effect, Unitech wants us to swallow their logic that Rs 500 crore of expenditure along with the licenses was to be valued at Rs 10,000 crore (Rs 100 billion).

Simultaneously, they also want to us believe that the licenses were not resold at higher prices! That means the licenses allotted to them in January 2008 at approximately Rs 1,600 crore (Rs 16 billion) was even as at September 30, 2008 valued at RS 1,600 crore.

That in turn implies hat out of Rs 10,000 crore (Rs 100 billion) valuation of the company, the spectrum valuation remains a mere Rs 1,600 crore.

The balance Rs 8,400 crore (Rs 84 billion) represented the value of expenditure (representing salaries, travel and other sundry expenses to put the operations in place) aggregating to about Rs 500 crore!

Will an investor value expenditure 16-17 times its original value? Remember all these expenditure are nothing special — every company incurs some start up expenditure to put in place its team, arranges logistics and possibly attempts to identify potential partners.

Every finance professional will concede that the aggregate cost of several expenditures incurred in a planned manner is much more than the each one of them incurred independently. But 16 times?

Well, that is stretching the issue too far. But fortunately for Unitech and Swan, it had a willing listener in the telecommunication ministry.

But what about the finance ministry?

Incidentally, the Unitech-Telenor deal was initially objected by the home ministry on security grounds, only to retract in 2009. The finance minister who maintained a stoic silence then blessed the deal as the Union home minister.

According to information available in public domain, in face of strong objections from the IB and RAW, the Foreign Investment Promotion Board had deferred the approval on this matter but the home ministry diluted all objections by placing a ‘flimsy’ clause.

Accordingly, Telenor’s staff affiliated to its Pakistani arm would not be permitted to work in India! That in turn paved the way for approval by the CCEA in 2009.

It is pertinent to note that all these information was in the public domain for long. Surely, the correspondence between the then finance minister and the then telecommunications minister — and to be provided by the CBI to Swamy — will possibly provide more clues as to what was the opinion of the finance ministry, crucially its minister about the share valuation, unless there was no communication in the first place!

Was it simply a case of issue of fresh20 capital leading to equity dilution of promoters? Or was it a case of transferring the control of companies and by extension precious spectrum that it had obtained — fair or foul to another by circumventing the law of the land?

Assuming that such companies (and not the promoters) were indeed the beneficiaries of the share dilution, was the then finance minister also tacitly approving the same? Either way, the revenue was lost. Possibly someone made money, but that is irrelevant.

Crucially, while all these were been played out in full public glare what was the then finance minister doing? Was the ministry party to all this by its tacit silence?

Or has the then finance minister provided the necessary approval after consultations with the prime minister? Inconvenient questions indeed that the former finance minister may have to answer in the coming days.

2G scam: Some questions without answers

It is now free-for-all. It is the prime minister versus the finance minister versus the home minister versus the PMO versus the CBI versus the CAG versus the bureaucracy versus the corporate versus the political parties.

In fact, the list of protagonists who seem to be at each other’s throat seems to be increasing by the minute. And it is a bitter fight, a fight to the finish, as it were.

Or is it the other way around? Given the levels of judicial activism, notably the Supreme Court on such matters, one suspects that each one is attempting to save oneself. In the process, is the damage to their colleagues merely collateral and not diabolical as it is widely perceived?

Whether one is doing all this under some covert political compulsions or implicitly attempting to defend oneself is left to the imagination of the reader.

The net result: confusions, contradictions and conflicts.

In the process, several questions remain unanswered to this day on the 2G scam. For instance, even after approximately two years after the First Information Report was filed on this matter, we do not know for sure even to this date as to what is the official policy of the government.

Was it to auction spectrum? Or was it to allot spectrum on a first-come, first-serve (FCFS) basis? If so, was it to be done at prices determined in 2001?

Simultaneously, to this day we are unclear about FCFS. First come yes, but where — to the minister? And first serve whom? The minister’s interests?

If allocation and not auctioning of spectrum was the policy of the government, why then was it subsequently changed to auction for 3G? If spectrum for 2G can be allocated at 2001 prices why not allocate the same for 3G using it as a benchmark?

Such a shift in the policy is akin to allotting three-tier berth in trains on FCFS basis and AC two-tier berths through auctions.

What is interesting is that we are repeatedly told that the government did not go in for the auction of spectrum for 2G to improve tele-density in the country.

If improving tele-density was the avowed objective, what is the benchmark? At what level of tele-density will the government auction spectrum? And that is the crux of the issue.

Bizarre facts, panic reaction

Can the logic of allocating spectrum in 2001, when the tele-density in the country was a mere 4 million, be cast in stone and held to be the correct one even in 2008 when the tele-density of the country was 350 million and growing at 10 million every month?

Crucially, why does the government hesitate to file an affidavit in the Supreme Court putting forth its policy? Surely, in Telecom Minister Kapil Sibal (and also TRAI) they have an excellent resource who had originally propounded the zero-loss theory?

If indeed it is zero loss to the government, why is it that the former telecommunications minister, A Raja, is behind bars for the past eight months? In contrast, if it is a mere issue of procedural lapses in allocation of spectrum and licenses, where is the criminality?

In such a scenario, the issue boils down to allotting to EFGH instead of ABCD. Importantly, there would be no revenue loss to the government should the former be allotted instead of the latter.

If that be so, why then has the Central Bureau of Investigation (forget the CAG for the moment) filed documents in courts suggesting revenue loss in excess of Rs 30,000 crore (Rs 300 billion) to the revenue and arrested several people in connection with the scam?

And finally, why did the Enforcement Directorate issue notices for violation of FDI (foreign direct investment) policies?

Let me hasten to remind the reader that despite two years of intensive and extensive investigation by the CBI, there are seemingly no direct evidences of money changing hands involving the former minister.

Yet, why is A Raja behind bars? Remarkably, why is he refusing to even move bail for himself?

Incompetence compounded by paranoia

It all began on November 1, 2007 when the then law minister, H R Bharadwaj, noted on a query from DOT on the subject “in view of the importance of the case and various options indicated” that the “whole issue is first considered by an empowered group of ministers.” This was sent to the PMO (prime minister’s office).

Yet the PMO ignored this advice of the law minister. Why? Significantly, was Bharadwaj eased out of active politics and made the Governor of Karnataka simply because he dared to suggest something inconvenient?

Subsequently, Dr Subramanian Swamy petitioned the prime minister and sought his sanction to prosecute A Raja as early as November 29, Yet, the PMO chose to remain silent and did not act till matters were precipitated by Swamy through the intervention of Courts. Why?

Strangely, on November 2, 2007, the prime minister wrote to Raja requesting him to be fair and transparent and “to let me know of the position before you take any further action in this regard.”

Subsequently, there were several correspondences between the two on the subject in the next 2 months.

Further, on December 26, 2007, in a letter to the prime minister, Raja refers to “several discussions” with the then external affairs minister, Pranab Mukherjee, and with the prime minister himself, and provides a detailed note of his proposed decisions on the vexatious subject of spectrum allocation.

Extraordinarily, Raja claims that “he was enlightened by the external affairs minister (Pranab Mukherjee)” to take such pre-emptive and pro-active decisions to avoid any further confusions and delay.

By a remarkable coincidence on the very same day, Pranab Mukherjee too wrote a top secret note to the prime minister stating the obvious

— policy formulation revision and change is the prerogative of government. Nevertheless, he too cautions that this should be done in a transparent manner.

But these are fundamentals of governance. Why then market it to the prime minister? Was the prime minister oblivious of these fundamental issues? Why then mark it as top secret? Or was Mukherjee cautioning the prime minister against Raja?

Crucially, what did the PMO do after receiving this communication?

One would have thought that the prime minister and the PMO were sufficiently warned by end of December 2007 on the possible moves by Raja and the resultant consequences.

Yet, they chose not only to remain silent but as a document released by PMO on an TRI petition reveals that the prime minister wanted to be kept at “an arm’s length” on this issue.

Little do we realise that despite their best efforts the prime minister, his ministers and the UPA government are getting increasingly sucked into the vortex of 2G scam.

And that is where the incompetence24 within government is giving way to paranoia.

No wonder, an innocuous note — office memorandum dated March 25, 2011 — prepared by a low ranking official in the finance ministry and “seen” by the finance minister was enough to paralyse the government for a week.

Mercifully the ‘crisis’ was blown over by an equally insipid statement made out by the finance minister. However, what is crucial to note here is that the finance minister, while distancing himself from the note, has not disapproved the contents or its conclusions.

And therein lies the rub. The Department of Economic Affairs (DAE) in the ministry of finance (MoF) had argued way back in November 22, 2007 that “it is not clear how the rate of Rs 1,600 crore (Rs 16 billion) determined as far as in 2001, has been applied for a license given in 2007 without indexation, let alone current valuation.”

What is so spectacular about the MoF note of March 25, 2011 is that the unsaid portion seems more potent than what it actually said. If one goes through the dense language, ignores the leap in logic and tolerates the usual incoherence associated with a note of a bureaucrat, it is apparent that several forces were working in tandem and simultaneously at cross purposes on this matter.

The questions raised here and the latest revelations made through the above mentioned note make it apparent that several high ranking persons — perhaps, even at the level of the PM and his cabinet colleagues — were in the know of these developments, not post facto, not even on real time basis but even before the drama unfolded.

It is indeed a tragedy that everyone claims now that he was not in the know of what was happening in the telecom ministry when all that is stated above was in public domain since January 11, 2008. It requires a complete suspension of our sense of disbelief to hear these arguments.

Whatever be it, increasingly the former chief minister of Tamil Nadu, M Karunanidhi, is probably getting vindicated by the day. At the height of the debate leading to the arrest of A Raja in February 2011, he said it is impossible to believe that a scam of this magnitude could have been orchestrated by Raja alone.

Karunanidhi is spot on. Raja was not alone. Events over the past few months have demonstrated that there were several actors in the entire saga — some actively conniving with Raja, some passively.

But given the high positions ‘they’ occupy, it is impossible to believe from now on that the probe will be free and fair, and taken to a logical conclusion unless of course the Supreme Court decisively intervenes on this matter.

Law catches up with DMK but what about the others? 

She purchased a house in Chennai for Rs 57,000 in 1969. She sold the said property to her watchman for Rs 60,000 a year later in 1970. The Registrar, however, claimed that he was a witness to only Rs 15,000 exchanging hands. The same day she entered into a lease agreement for renting the said property with the watchman for a monthly rent of Rs 100. A couple of years later, the watchman sold the house to her mother for Rs 45,000 — i.e. at a loss of Rs 15,000. Subsequently, the mother willed the said house back to her in 1973.

Who is she? She is Rajathi Ammal, wife of former chief minister of Tamil Nadu M Karunanidhi and mother of jailed Rajya Sabha MP Kanimozhi. Bewildered by the turn of events, the Sarkaria Commission

—that went into allegations of corruption against DMK chief M Karunanidhi and the then chief minister of Tamil Nadu in the mid-70s termed this (and several such instances) as ‘scientific corruption’.

If corruption involved merely thousands of rupees in the mid-seventies, it involves several thousand millions of rupees now. One can blame that on inflation in the country. But let us not forget that the science of corruption too has developed in India since the 70s, more particularly when it involved a southern political party, to alarming proportions.

The net result: corruption has become26 bigger, better, and more brazen. The operating word here is brazen.

Scam exposed by schism in the family?

Even by the admission of the Central Bureau of Investigation (which has conservatively estimated the possible revenue loss to the government), the scam was worth around Rs 22,000 crore (Rs 220 billion). The sum of Rs 200 crore (Rs 2 billion) revealed by the CBI in its charge sheet seems to be like the tip of the iceberg.

Surely those who know how our governments at the States and the Centre function know for sure that kickbacks are never as low as a per cent or two of the revenue foregone.

In fact, people who often work their way through the corridors of power point out that the ongoing rates for getting things done even legally — euphemistically called ‘speed money’ or cash to hasten the process of decision making — is well in excess of a per cent or two of the potential gains.

More importantly, in cases where one has to bend the law — as in the case of 2G spectrum allocation — it is estimated that the sum payable to the powers-that-be will in all probability be in excess of 30 per cent of the potential gains!

Therefore, given the prevalent state of affairs in the country, it is indeed inexplicable that someone should be jailed for allegedly receiving graft of Rs 200 crore.

What is all the more interesting is that the persons charge sheeted and incarcerated happen to be a former minister, corporate honchos of a leading Indian business house, and a Rajya Sabha Member and daughter of former chief minister of Tamil Nadu.

Given these developments, one may be tempted to state that the law has finally caught up with those who violated the law. But has it?

It may be recalled that the first family of the DMK has faced several corruption allegations in the past. Interestingly, their opponents are never tired of pointing out the oft-repeated confession of M. Karunanidhi that he had travelled ticketless in a train six decades ago to Chennai from his native town.

From a ticketless traveller to being one of the richest families in Asia within a few decades is no ordinary feat.

But for a person who was charged with engaging in ‘scientific corruption’ in the mid-seventies, it is indeed intriguing that the law took over three decades to catch up on a mere Rs 200 crore-matter! And that too was by a remarkable accident. Let me elaborate.

Remember, that in mid-2007 the first family of the DMK had developed a serious fault line.

An ostensibly innocuous opinion poll in a Maran-controlled daily hailed the performance of Dayanidhi Maran as one of the best performing ministers of the UPA government. That set a chain of events that presumably culminated in the arrest of Kanimozhi last week.

The Maran-controlled media house was attacked by DMK loyalists in Madurai (the stronghold of Alagiri, Karunanidhi’s son). In the melee three employees were killed. Marans immediately fell foul of the first family and Dayanidhi Maran had to resign from the Union Cabinet and make way for A Raja.

Though they subsequently patched up by 2009, the fact remains that trust — the key element in such a relationship — is believed to have evaporated by then.

Nevertheless, in the interregnum it was this schism in the first family that is believed to have tipped some in the media to critically analyse the 2G spectrum scam in great detail.

But for this divide within the DMK family, experts wonder whether the 2G scam would have been exposed at all.

Naturally questions arise. Was the scam exposed simply because of schism in the family? Did the running feud between the Marans and others in the family, result in this unenviable situation for the DMK and its first family? Crucially, will there be more exposes, especially of any cash payments made?

The answer to these questions unfortunately seems to be a ‘yes’.

But what about the watchdogs?

That takes us to a more important question (given the magnitude of the scam, its brazenness and the fact that it was public knowledge since mid-2008), why is it that the system failed to identify culprits? Why is it that the government of India with all its offices and institutions dependent on such accidents in a family for the scam to be brought to be exposed?

Why is it that we expect the Supreme Court to step in and monitor these cases when as a matter of routine these should have been prevented by the administration in the first place? Why is it that our administration repeatedly abdicates its responsibility without any let or fear?

The answers to these questions are obvious. Those who believe that the Pakistani establishment was oblivious of the existence of Osama bin Laden in Abbottabad are entitled to believe that the Indian establishment was unaware of the 2G scam till events overtook them.

Till date the CBI has charge sheeted 17 persons (which includes three corporate houses). Yet, it is impossible to believe that the scam of this magnitude was orchestrated by this small number of persons and the rest in the establishment were not in the know of the scam.

To me the 2G scam was caused partly by the avarice of some business houses and partly by the brazenness of some of our elected representatives. After all, their track record suggested that nothing would be amiss. But this alone could not have ensured this scam in all its dimensions.

It required active as well as passive connivance of someone within the establishment. Time has come to target those guilty of dereliction of their duty within the establishment. Yet there is not much of a whisper on the failure of our watchdogs to bark at an appropriate time.

If watchdogs fail to bark why have them at all at enormous costs to the exchequer?

The 2G scam is a simple story of Anybody, Somebody, Everybody and Nobody retold. Anybody could have prevented the scam. Somebody could have raised the alarm. In fact, Everybody is responsible, while Nobody did anything to prevent it.

The cabinet secretary, the revenue secretary, the law secretary or for that matter the finance secretary, could have prevented the scam. Yet each one of them did precious little to prevent the scam as it unfolded.

Most in the top echelons of our bureaucracy have perfected the art of writing in green ink in the left hand margins after the note has been approved by half a dozen lower ranked officials. Little do they realise that even the boy at a tea stall could do the same without much ado!

Similarly, the law minister, finance minister or the prime minister too could have prevented the scam. But they apparently turned a Nelson’s eye to the unfolding events. Of course, it is inappropriate to charge them as being a party to the scam, but their questionable silence is bound to raise eyebrows.

As pointed out, the 2G scam investigation was an outcome of a vigilant media tipped off by irate people thanks to the feud within the DMK family. That was serendipity at its very best. However, we cannot depend on family feuds every time to expose scams.

Rather, we need to have appropriate systems in place where watchdogs perform their role. Importantly, watchdogs should be punished should they refuse to bark when there is a need to.

The 2G scam is a perfect occasion for us to travel a bit further and punish all those who could have prevented the fraud and yet chose to remain silent. Should we fail, we would have learned no lesson from the 2G scam.

Spectrum Money Trail:

Money-laundering at its very best?

It is the most outlandish corruption story one has ever heard in India – bribes for the 2G Spectrum deal were routed through cheques to a media company owned by the first family in Tamil Nadu. Even by our remarkably abysmal standards that must be a new low; and in terms of sheer brazenness, a new high. A chartered accountant friend, tongue firmly in cheek, remarked: “What about Service Tax?” Service Tax is not applicable to bribes; I pointed out dryly.

Even as the ranges of allegations are difficult to absorb, some serious questions emanate from a plain reading of the Balance Sheet of DB

Realty Limited for the financial year 2009-10. It may be noted that the company in question came out with a public issue for 3.21 crores shares of Rupees 10/- each at a price of Rs 468 (including a premium of Rs 458) aggregating approximately Rs 1500 crores in February 2010.

A perusal of the Annual Report of the company for the said year brings out some interesting details:

  • The income of the company for the said year is Rs 226.61 crores. But this income is not out of operations, but is merely the share of profit from a firm called Dynamix Realty in which the Company is a partner.

More is to follow. The Notes to the Consolidated Accounts of the company for the year 2009-10 tells an interesting story. The said partnership firm, according to the Annual Account, has a project by which it is entitled for two components – viz. land component and construction component. Since the partners and their share of profits are different in each component, the said project is further divided into two projects viz.

  • Project I – Land component is a partnership between Eversmile Construction Company Private Limited (Profit share of 99%) and Conwood Construction and Developers Private Limited – (Profit share of 1%).
  • For Project II involving construction component, DB Realty holds a 99% share and Conwood Construction and Developers Private Limited, the balance. Since, DB Realty has share only in Project II, the profit has been considered in the books of DB Realty on the basis of project wise break-up of audited accounts.

But the facts get more interesting here. The said firm has a turnover of Rs 479.43 crores and expenses of Rs 248.21 crores. The profit before tax obviously works out to Rs 231.22 crores. As far as I understand the tax rate for firms aggregates to 30% in India. In the current context that would work out to approximately Rs 70 crores. Net of taxes, the profit available for distribution should be approximately Rs 160 crores, of which 99% could accrue to DB Realty Limited. But what has been accrued is Rs 226.61 crores! Has DB Realty accounted for profits before taxes rather than profits after taxes?

This is where things get murkier. The auditors of DB Realty have stated very clearly that they have relied on the financial statements audited by

“other auditors.” Further, DB Realty has not provided the details of subsidiary companies as required by Law as it has got an exemption by the Central Government to provide the necessary details under S 212 of the Companies Act. The moot point is – when the entire Income of the company arises from such firms, whose interest is being protected by not furnishing such details? It may be noted that in case of partnership firms – it does not even have to disclose any detail to anyone excepting some tax authorities, to whom it can submit a totally different set of accounts. Needless to emphasize, all these are manageable in the Government for an “unofficial price” in India.

Further, the auditors in their report have pointed out that DB Realty has lent money aggregating to Rs 745 crores to 17 parties, of which loans aggregating to Rs 465.01 crores (and these were interest free loans!) were made to parties which had negative net-worth, meaning that the money was lent interest free to parties whose Balance Sheet was not sound!

Well would you do it? The company has not written off these sums nor have they provided for the same merely on the representations of the management that these loans are good and recoverable.

Naturally, all these raise several questions. After all, DB Realty was a high profile company and is listed in the stock exchanges in India. It had a very successful Public Issue in early 2010. Yet, it escaped the scrutiny of all financial sentinels. That its entire income from operations for 2010 is dependent on the share income (as explained above where the sums do not match) makes it a peculiar case, if not downright an unlawful one.

Obviously, all these loans are unsecured, and could possibly be written off over the years as irrecoverable. And for all those who are beneficiaries (i.e. those who took loans in the first place) of such write-offs, it would be tax free white money! Welcome to the Socialist, Democratic, Secular Republic of India. And such planning happens day in and out in this world of corporates that are invariably linked to political parties. And that is plain and simple Money Laundering.

The Money Laundering Dimension

Money laundering, it needs to be understood, is the culmination of several predicate crimes that necessitate money laundering in the first place. It is often remarked that it is the saint that removes the taint from money. Yet some others term it as the mother of all crimes. Bringing back laundered wealth into mainstream economies as good clean money is crucial to ensure that such money is put to profitable use.

Obviously, the end game of a money laundering exercise is to ensure that money is cleansed of its criminality. Therefore the Prevention of Money Laundering Act states that “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds and projecting it as untainted property shall be guilty of offence of money-laundering.”

According to the Balance Sheet of DB Realty Limited, it loaned a sum of Rs 504.22 crores to Dynamix Realty, which in turn loaned a sum of Rs 209.25 crores to Kusegoan Realty Private Limited. Then, Kusegoan Realty Private Limited loaned 200 crores to Cineyug Films Private Limited, and Cineyug in turn loaned 214.24 crores to Kalaignar

  1. These have been repeatedly substantiated by various press reports.

Interestingly, Kusegoan Realty Private Limited explains the loans from Dynamix Realty: “The Company has taken Unsecured Loans from Firms. In the Opinion of the Company, keeping in view that all members of the said firm are companies, the said loan in “substance” represents inter-corporate deposits and consequently outside the purview of the term deposit as defined under the Companies (Acceptance of Deposit Rules) 1975.”

That in effect is a tacit admission from Kusegoan Realty Private limited that it was not the money of Dynamix but that of Realty which eventually made its way to Kalaignar TV. Why should DB Realty limited provide unsecured loans through Dynamix Realty, and then Kusegoan Realty, and subsequently Cineyug, to fund Kalaignar TV? Why should Kalaignar TV, a company with a paid-up share capital of a mere Rs 100 lakhs need a loan in excess of Rs 200 crores? What did it do with the money? According to the press reports, Kalaignar TV is reported to have returned the loan taken along with interest. Well that is interesting! Nevertheless all these questions remain unanswered to this date.

Further, it may be noted that India is a member of the Financial Action Task Force (FATF) on Money Laundering. This is an inter- Governmental body whose purpose is to develop an international response to combat money laundering. FATF has adopted a set of forty recommendations (thoroughly reviewed in 2003 to take into account changes in money laundering and anticipate future potential trends) titled “The Forty Recommendations on Money Laundering.” These constitute a comprehensive anti-money laundering framework. Although not binding as law upon a country, these recommendations have been widely endorsed by the international community as the applicable international standards for combating money laundering.

While admitting India as a full- fledged member into the FATF, it sought to improve monitoring of transactions with Politically Exposed Persons (PEPs). Surely Kalaignar TV is a politically exposed party. It is therefore expected that every single34 financial sentinel in this country will be technically and legally equipped to monitor transactions with such PEPs by having greater monitoring, evaluation and surveillance. It is surprising that all these happened right under the noses of every single financial sentinel of this country.

Naturally when watchdogs go to sleep, one need not be a seer to state who would be the ultimate beneficiary. Hundreds of crores seem to have been moved from a publicly listed company into some partnership firms to be routed to a company with a significant political profile.

Yet not one of them blew the whistle. And all these came out simply because of the intervention of the Hon’ble Supreme Court, CBI and other investigating agencies working under its supervision. And that to me reflects the comprehensive failure of our financial sentinels. In this scenario, why blame the politicians or corporates?

As usual Mr Sibal, you are wrong!

“If that logic were right, then it is true of giving away any public asset at a lower price or an institutional price or for free. Whether it is land for a hospital, land for a school, air waves for the telecom sector.” That was Kapil Sibal articulating his point in (mock?) seriousness in a chat show. And the logic referred to at the outset? It was obviously about auctioning coal blocks.

What is interesting is that he added: “If that is the case, the government should be in the business of auctioning everything so that people in this country should pay and so that inflation should be 15 per cent and nobody can afford to live. So, I think this is a wrong way of looking at it.”

In short, the counter-logic of Sibal is that if the government had gone in for auctions, the winner of each auctioned coal block would have loaded his bid price to the final cost of production of power, steel or cement. And that would have had an adverse impact on domestic inflation.

There is a fatal flaw in this argument which Sibal conveniently hides; one that is incomprehensible to sections of our media. Unable to understand the issue, media does not question him. An un-critiqued Sibal, therefore, assumes that his arguments are perfect. And a “perfect” argument by an articulate lawyer spoken in Queen’s English – becomes the ultimate defence of our Government.

There is no free lunch in economics

To understand all these, a reference to the extant policy of the Government of India is essential. Accordingly in 1993 by an amendment to the Coal Mines (Nationalisation) Act the Central Government allowed a company to mine coal for captive consumption provided it was engaged (i) production of iron and steel and (ii) generation of power.  Further, in 1996, the Government included cement production as an approved end-use for the purpose of captive mining of coal.

And remember that it is only to these three sectors viz., steel, cement and power that the Government of India can, under the extant policy, allot coal. The crux of the issue here is not allotment of coal to these three sectors. Rather it is all about allotting coal blocks for “free” that come under intense scrutiny.

Sibal the senior minister must know (as he must as a senior lawyer) that there is nothing called “free allotment” when it involves governments. Free allotment, readers may note, is not merely restricted to monetary angle alone. A land allotted free for a school or a hospital by the Government comes obviously with a rider of say admitting students free or treating patients at subsidized tariffs as the case may be.

It is pertinent to note that without these riders courts have held such allotments to be arbitrary, and therefore in gross violation of Article 14 of the Constitution. Hence the riders in the first place!

But what is the conditionality in allocating coal to select players? What are the stipulations placed on the allot tees? Nothing, except that the allocation made shall be used to meet the coal requirement of the permitted end use project. Nothing more, nothing less.

As evidence, allot tees are expected to have a “legally binding” and “enforceable supply contract.” This again happens to be a bogus stipulation as most allot tees seem to have entered into phony Memorandum of Understanding with respective state governments by promising to set up steel, cement or power plant, ensured such government recommend their case and got the blocks allotted.

And in the absence of direct conditionality where the free allotments are measured and benchmarked, Sibal, comes out with this specious logic – free allotment of coal has directly curbed the prices of cement, steel and energy and indirectly to curb overall inflation. It is now his word against yours!

Given this paradigm, isn’t it logical to expect when government allots coal for free it should extract something tangible from the allot tee? Is it not fair to expect say through a “demonstrable” reduction in prices of cement, steel or power costs wherever government has allotted coal blocks free?

Isn’t it a legitimate expectation especially given the fact that coal – a precious natural resource and a significant input material – is offered “free” to these beneficiaries, they should also have been mandated simultaneously by our government to factor this free input in their final output?

All what Sibal says is possible provided one lives in Stalin’s Russia where input and input prices were controlled. This is not possible in an economy that is substantially liberalized and significantly integrated with the global economy.

Prices of cement, steel or power are more or less market determined in India with very little or no role of government controlling the same through input costs. And in all these, international supplies especially in case of steel and cement, plays a significant role in determining domestic prices.

So in effect while one got coal “free” and went about setting up cement, steel or power plants, they had no compulsion to pass this benefit to the consumers – you and me!

Obviously for this reason alone Sibal is wrong. Free coal has nothing to do in the ultimate analysis in determining the selling price of steel, cement or power. Free allotment of coal is free lunch offered to specific allot tees by the government. That is all about it.

Free lunch sponsored by the Government of India? Is this the stated policy of the Government of India? Surely, given these angularities in the coal allotment policy, it is quite likely that this will be successfully challenged in a court of law.

Exposing the fatal flaw

That is not all. Allot tees of coal blocks have literally squatted on their allotments. The policy of the Government of India mandates that the coal production from the captive blocks shall commence within 36 months (42 months in case the area is in forest land) of the date of allocation in Open case mine and in 48 months (54 months in case the area fall under forest land) from the date of allocation in Underground mine.

It is in this connection that the CAG in his Report points out that “production of coal from captive mining was not encouraging. Out of 86 such coal blocks which were to produce 73 MT of coal in 2010-11, only 28 coal blocks which included 15 blocks allotted to private sector, could start production by 31st March 2011 and produce only 34.64 MT of coal during 2010-11” [Para 5.2].

The moot question – why should someone get coal allotted and yet refuse to use the coal? Who benefits by squatting on such allotments? If coal has to be hoarded why get such allotments in the first place?

The answer to this could be complex and case sensitive. One plausible reason is that coal was allotted to those who had no intention in using it in the first place.

Some have, in the absence of clear policy guidelines, sold major portion of the shares. This implies ultimate beneficiaries of coal allotment have got coal blocks possibly circumventing the policy guidelines by using front companies. In the alternative the original allottees have scooted making huge premium on such transfers.

Another possible reason is that allot tees did not mine despite such

“Free” allotment is that it creates an artificial shortage of coal within India, forcing India to import Coal. The demand-supply gap of approximately 50 MT in 2007-08 has now risen to 70 MT in 2010-11. With huge commissions and kickbacks available in import of coal, it is in everyone’s interest to adopt this practice. Let the policy be damned.

Such policies, without prohibition on sale of shares, ensured powerful and well-connected people getting coal allotment in their companies and transferring shares in such companies to others (possibly at a premium).

Yet another set of allot tees ensured that they squatted on the allotment of coal leading to a surge in import of coal to India. This possibly allowed someone to make huge commissions on imports.

Interestingly, Sibal’s final argument makes compulsive reading: “And the fundamental issue is when the coal cannot be sold and is used for captive consumption, the loss or gain will occur when electricity is generated and at a certain tariff. It has not occurred earlier. So therefore there is no loss.” No Loss? Well does this not sound like the infamous Zero loss theory in the 2G case?

Whatever be it, no one, definitely not the CAG, is arguing that coal was re-sold and hence by such allotments someone somewhere made huge money on re sales. Rather the argument of the CAG is simple – “Free Allotment” without stipulations resulted in a possible revenue loss to the Government. And since stipulations on end prices are unworkable as demonstrated above, the entire policy of “Free Allotment” was deeply flawed.

Sibal knows this. Yet, as a loyal foot soldier he continues to defend the indefensible. In the process one of the most articulate, well educated and our efficient minister seems to get it wrong yet again. Poor man.

One can pity him.

Coal-gate – Economic reforms to economic deforms?

Interesting. Very interesting. One of the allot tees of the coal blocks happens to be Pondicherry Industrial Promotion Development and Investment Corporation Limited (PIPDIC). Readers may note that

PIPDIC was set up by the Government of Puducherry in 1974 with the twin objective of promoting the Industrial Development of Puducherry and providing financial assistance to entrepreneurs. Surely coal does not figure in all these.

But yet inexplicably PIPDIC was one of those to whom Naini Coal Block in Orissa was allotted by the Coal Ministry on 25th July 2007. What has PIPDIC – a Puducherry Government sponsored finance institution to help entrepreneurs got to do with coal is beyond my comprehension. Yet it got coal allotted by the Government of India.

Interestingly the Coal Mines (Nationalisation) Act 1973 allows captive mining in certain cases. This policy obviously includes those who require coal – viz., power plants, cement and iron and steel plants. But where does PIPDIC figures into all these?

But that is not all. Coal allotted to PIPDIC was in turn sub-allotted to J R Power Gen (P) Limited. This is where things get murkier. Promoters of J R Power Gen (P) Limited in turn have already sold 51 per cent of their holdings to KSK Energy Ventures. According to some reliable sources 49 per cent balance too are on offer.

It is a remarkable coincidence that the director of J R Power Gen (P) Limited happens to be a son of a prominent minister of UPA from Tamil Nadu! One does not need be a seer to figure out a shell company – in this case J R Power Gen (P) Limited would have got exorbitant premium for the shares so transferred.

Well why do I call this a shell company? The answer is simple. The Coal Ministry is reported to have issued notice as late as May 10th 2012 to PIPDIC – the original allot tee and after five years of allotment of coal blocks – stating it has “not made serious efforts to develop the coal block even after repeated assurances.”

It is also noted “that all important milestones such as grant of previous approval, mining plan, environment management plan, mining lease, forest clearance and land acquisition are pending.”

Further, according to documents available the said company had also entered into an MOU with Orissa Government in April 2010 for setting up a power plant of 1980 MW for an investment aggregating to Rs 7,988.90 crores. Again this MOU entered into by 2010 must be sham for the coal mines were not yet ready for exploitation even two years later i.e. in 2012 as explained above.

What unites Puducherry as well as Orissa Governments, J R Power Gen and coal allotments? Is it an MP from that Union Territory who is also a minister at PMO? Your guess is as good as mine.

Whatever be it welcome to Coal Gate – which is yet another saga of loot and scoot in India!

Well doesn’t all this resemble the 2G spectrum scam where real estate companies, which could not have otherwise qualified for spectrum, got spectrum in 2008 that too in 2001 prices and immediately diluted the promoters’ stake for a huge premium?

Coal-gate – a by product of administrative lapse

The sum and substance of the CAG report is that Coal-Gate as it is popularly referred – is by and large a by-product of administrative lapses and lack of transparency. Much as I am tempted to comment on the numbers, as a Chartered Accountant, I am consciously not referring to the possible gain to private parties as highlighted by the CAG.

This is for the simple reason when it comes to valuation no two accountants can ever agree and for that matter, even on the methodology adopted. But on matters of administrative lapses and lack of transparency there cannot be any different views. These are binary. Either there are administrative lapses or there are no lapses.

Further, it may be noted that the CAG is an institution thought out by our founding fathers to audit the functioning of the government. And when this auditor – a Constitutional Body – points out administrative lapses and lack of transparency in the functioning of the government, and hence a possible loss to exchequer, it is no laughing matter.

Consequently, while one can ceaselessly debate on the numbers I must hasten to add that the fact of the matter is that administrative lapses coupled with lack of transparency has led to substantial gain to such allottees. In this connection one is compelled to draw the attention to the reader to the following in observations in the CAG report:

In all, since July 2004, 142 Coal Blocks were allocated to various Parties.

This allocation lacked transparency and Objectivity. And this, in my opinion, is the crux of the issue.

Since there is substantial difference between price of coal supplied by Coal India and coal produced through captive mining, there is a “windfall gain” to the person who is allotted a captive block. In effect, the lack of transparency and objectivity referred to by the CAG is the cause, the windfall gain the effect.

The inordinate delay of the Ministry of Law & Justice to amend the MMDR Act in order to facilitate auctions and competitive bidding of coal mines added to this mess.

What is interesting to note here is that the MoC had precisely attempted to introduce transparency / competition in the allocation of Coal blocks a few years back. In fact the CAG in turn quotes the judgement of the Hon’ble SC on the 2G matter to buttress its arguments in allowing auction as the preferred route.

The arguments that such allocation was done in the overall public interest falls flat when the CAG report points out that the out of the 86 such coal blocks which were to produce 73 MT of coal during 2010-11 only 34.64 MT of coal were produced during 2010-11.

What Next?

What has been witnessed on Coal Gate till date is a trailer of a C grade Bollywood movie. The main picture is yet to arrive. Yet there are tell tale signs that Coal-Gate is conclusive evidence of calibrated loot flourishing in India under UPA. What else would explain why Ministers write letters to the Prime Minister seeking his direct intervention on allocation of Coal Blocks in which their relatives are interested?

Obviously this is a classical case of crony capitalism, corruption and command economy in operation. Everyone everywhere is party to the loot – the State Government, the Central Government and possibly as I demonstrated – even governments in Union Territories. That implies bureaucracy, politicians, businessmen and even sections of our media at every level has been geared to this economic model.

The CAG report demonstrates how allot tees are unable to mine coal even after getting the allocation. In this connection one is reminded of the erstwhile License – Permit Raj of the pre-liberalisation era where one would get licenses merely to sell it or in the alternative prevent a competitor from acquiring one. And we thought we have travelled long since then!

It was such myopic policies that ensured India stagnated and strangulated from within for four decades after independence. Under PM Dr Singh, strangely such policies have made a silent yet powerful re-appearance.

Let me hasten to add in these troubled times coal and spectrum allocation to cronies by bending rules are not exceptions in the post liberalisation era. Route permits for buses at the state level are examples of distorted economic management in India as much as choice of routes, timing and operation of flights by the civil aviation ministry.

In both cases the respective government works to sabotage state run carriers, distort or eliminate competition and in the process ensure people with high connections earn exorbitant profits at the cost of others.

Yet Dr Singh the economist and architect of reforms has done precious little to address the situation.

And for all these policy disarray Dr Singh cannot, in my considered opinion, escape the charge of being willy-nilly party to this mess if not the loot. As a PM, by merely refusing to address the extant situation, stem the rot and remedy the same, Dr. Singh has now emerged as a singular impediment to economic growth in India.

Consequently, the devastating economic model of “cash and carry” only flourishes in India.

As the national clamours and seeks more economic reforms implying

elimination of discretion, state intervention and favoured allotments, thanks to Dr Singh and his idea of economic management we have “Economic Deforms” in its stead where we have more of discretion, allotment and state intervention – a return to pre 1991 days of economic management.

In short, Dr Singh, the architect of reforms, has in effect been the architect of this model of economic reforms. Whatever the Finance Minister Dr Singh gives, the Prime Minister Dr Singh takes.

It is time for deepening economic reforms. It is time for eliminating such incapacitating policies. It is time for India to grow and effectuate her tryst with destiny. And for that to happen it is time for Dr Singh the deformer to go.

Coal-gate: Mr. Minister, can you answer these questions?

Subodh Kant Sahay, a cabinet minister writes a letter to the Prime Minister on February 5, 2008 stating, “I would like to bring to your kind notice that M/s. SKS Ispat and Power Limited (SKS) have applied for two coal blocks for their steel plants in the State of Chattisgarh and Jharkhand. A brief note in this regard is enclosed. I shall be grateful for your personal intervention in this matter.”

The “personal intervention” is almost instantaneous. Next day, on February 6, the Prime Minister’s Office (PMO) sent a “most immediate” note signed by a director, Ashish Gupta, to the coal secretary stating

“please find enclosed for action as appropriate a copy of a letter submitted to the Prime Minister by Subodh Kant Sahay, Union Minister of State for Food Processing Industry (Independent charge), along with a note regarding allotment of two coal blocks to M/S SKS Ispat and Power Limited for their steel plants.”

As if on cue, the screening committee does the needful by issuing the letter of allotment on the very same day i.e. February 6, 2008.

Nothing wrong, I guess, in ministers and MPs writing letters seeking intervention of PM especially when it involves huge sums of investments into their home states. But what is stunning is that the brother of Subodh Kant Sahay happens to be in the Board of SKS and was reportedly present in the Screening Committee meeting of February 6, 2008 when this matter was discussed.

As usual the Minister denied it at first, then diffused and finally stonewalled any further questioning by the media.

Then came Kapil Sibal. To a pointed question on these issues in a popular TV Chat show Sibal replied a “petition on these facts was filed in the Delhi high court by Prakash Industries Ltd, (PIL)” and added triumphantly “And the judgment has been rendered that these facts are false, and the high court has imposed a penalty of Rs 250,000 on the petitioner.”

Surely, Sibal the Minister was referring to Para 61 of the Judgement of a Single Judge Bench of the Delhi high court in PIL Vs Union of India which dismissed the petition with “costs of Rs 250,000”.

What Sibal the lawyer failed to reveal is that a division bench of Delhi HC had on July 20, 2010 directed “that there shall be stay of realisation of costs as directed by the learned single Judge in paragraph 61 of the order impugned.”

In short, Sibal the politician is doing what he does best, misleading the nation.

Confusion compounded

Now that the core of the Sibal’s argument stands demolished, let us explore the Order of the Delhi HC and its relevance to the discussion on hand. According to Para 40 of the Judgement the “entire thrust of PIL’s argument has been that it was arm-twisted into signing a JVA with Respondent No. 4.”

And yes Respondent No. 4 happens to be SKS Ispat and Power Limited – the very company in which the brother of Subodh Kant Sahay happens to be a Director. And why did PIL go to court and what was its dispute with SKS? Let me elaborate.

According to PIL, it applied for Coal Blocks in Fatehpur, Chhattisgarh on January 12, 2007 for setting up a power plant of 625 MW. Simultaneously, SKS too applied for the same block stating it was seeking to set up a power plant of 1100 MW. However on January 24, 2007 it entered into an MOU with the Chhattisgarh Government for setting up a 600 MW power plant.

At the core of the dispute is how much coal is to be allocated to SKS from the said coal block and shared with PIL. The petitioner, PIL, contended that it must be only for 600 MW as it is the basis on which SKS entered into an MOU with the state Government and forms the basis of recommendation by the State Government to the coal ministry and not 1000 MW for which the ministry actually allotted coal.

The crucial question now is whether coal for a 1000 MW power plant was allotted to SKS subsequent to the letter from the minister or prior to it, as claimed by the minister.

According to the Extract of the Minutes of the 47th Appraisal Committee held in Delhi on 23 and 24th April 2012 “It was informed that Fatehpur Coal Block was allocated jointly to M/s SKS Ispat & Power Ltd (SKSIPL) and M/s Prakash Industries Ltd (PIL), vide letter dated 06.02.2008 by Ministry of Coal.”

That clearly settles the matter that coal was not only allotted but allotted in a favourable ratio of 62 per cent for SKS and 38 per cent for PIL on February 6, 2008 and not 50-50 as it probably hoped. How much was the influence of the minister in getting this done is anybody’s guess.

But there is another twist in the tale. It was argued in the Delhi HC by counsel for the Minister that the “recommendation was not for the allocation of coal blocks for the power project of SKS in Chhattisgarh but for it steel plant in Jharkhand.” Steel? Jharkhand? Surprises never cease, do they?

But if indeed it were so, why should SKS enter into an MOU with the Chhattisgarh Government for setting up a power plant? How could coal be allotted on the recommendation of Chhattisgarh government for a steel plant in a neighbouring state viz., Jharkand? Where is the recommendation from the Jharkhand Government seeking coal allotment or for that matter an MoU?

If coal were already allotted prior to February 2008, why should the brother of a minister be in an official government meeting in which he has no business? Why should the minister be writing to the PM for allotting coal to a company which has already been allotted coal? Crucially, how many letters has the minister written for coal allocations for such projects in his home state of Jharkhand?

More questions

That is not all. To buttress his arguments the counsel for the Minister argued that “The letter written on February 5, 2008 was considered by the 36th Screening Committee which was considering allocation of coal blocks for non-power sectors.” The implication is that allotment for power plant of SKS in Chhattisgarh could not have been possibly done on that day, being reserved for allotment for non-power blocks.

It is pertinent to note that the decision to jointly allocate the Fatehpur coal block to both PIL and SKS had already been taken by the Screening Committee at the meeting held on September 13, 2007 subject to the condition that both parties form a JV Company. This was done in the last week of January 2008 and once intimated to the coal ministry, the final allotment letter was issued in the first week of February 2008 when the screening committee met once again.

This is a simple truth that no one wants to explain.

It may not be out of place to mention that there is no other allotment to SKS in non-power sectors, either in Chhattisgarh or in Jharkhand, in February 2008 or for that matter subsequently. That implies that the letter of the minister was only for ensuring a favourable allotment ratio and not allotment per se.

What is indeed galling is that SKS had alleged that PIL has already been declared a wilful defaulter in a list prepared by the Reserve Bank of India (RBI) during the court proceedings. Further, it also pointed out that PIL had statutory and contractual over dues of Rs 40,533 lakh and contended that PIL can “never raise the required resources in view of their past track record and financial position of the company.”

If that were a contention of a senior counsel in a Court of law the moot point is how the government can allot coal to a “wilful defaulter.”

Remember it is with this “wilful defaulter” SKS entered into an MOU in January 2008 and got its share of coal allotted. PIL for its part is no saint either. It entered into an MoU with SKS and as an afterthought, protested.

Whatever be it the fact of the matter is that the mess is far too complicated and the stench overwhelming! If the explanation of the minister was brazen, the defence offered by his colleague Kapil Sibal was atrocious.

Nevertheless all these have put one of the several coal block allotment to intense public and media scrutiny. The sad part is that it is corporate war that is exposing the chink within the system. If only PIL had not gone to the court and accepted lower coal allotment, the letter written by a Union Minister would not have become a focal point in Coal-Gate.

Thank Lord for small mercies for only God knows how many ministers,how many companies and how many letters have influenced Coal-Gate. For starters can the ministers answer some of the questions raised here?

And now a Rs 100 crore scam hits ICAI !

Created by an Act of Parliament in 1949, the ICAI (The Institute of Chartered Accountants of India) was set up even before our Constitution was formally adopted. That was not without reason. The Government realized the importance of sustained development of accountants and auditors including codification of ethical standards for chartered accountants. Ostensibly, all these were aimed, at the sustained growth of our economy.

In the interregnum, the ICAI has produced some of the best finance, accounting and taxation professionals who went to occupy very important positions in India as well as abroad. No wonder, chartered accountants till recently had an innate pride that they have graduated from an institution that has, without doubt, exacting standards set for the profession as well as for itself.

However, it is a matter of deep anguish that in the recent past, the ICAI is witnessing a steady decimation of values and ethics. What is galling is that most members of the Council, the apex administrative body of the Institute, have been enmeshed in one controversy or the other.

In one of my previous columns titled ICAI in dire need of an overhaul I had pointed out, “The elections to the Council of the ICAI are due this December. Experience tells me that it would turn out to more pompous than the elections in UP, more vitriolic than it is in Tamil Nadu and of course more virulent than it is in Bihar. With the sole exception of booth capturing, all the ills plaguing the general elections in India are witnessed in our elections.”

That was in early 2009. And I was wrong in my assessment of the capacity of my colleagues contesting to the Council of the ICAI. The elections to the Council of the ICAI held subsequently in 2009 were marred by believe it or not -booth capturing! [Source: Hindu Businessline dated December 8, 2009]. And these50 elected “honourable” members were to guide the fate of this profession.

While it may have shocked the collective conscience of the puritans in the profession, the degeneration of the past few years suggests that it was waiting to happen.

Appealing to vote on caste and other sectarian lines is passé in this elite profession. Contestants boasting of a “vote bank” are common knowledge in this noble profession. Some attempt to “influence voters” would shame politicians in general elections.

Naturally, these chaps who get elected through such dubious means are by legislation responsible for drafting accounting standards, designing auditing standards and in the process regulating the profession of accounting and auditing in India – a vital cog in the national economic wheel.

Funny isn’t it? Well in a way it isn’t. After all the national trait of exploiting the inherent weakness of democracy is now mirrored within the ICAI too. Remember, ICAI does not operate in a sterile zone.

Stalwarts as mentioned above existed despite the system, not because of it. In the process little do we realize that the ICAI has failed to produce one document – yes one document – of international standard. When was the last time ICAI quoted internationally? Nationally? At a sub-national level? This failure, at an intellectual level is appalling to say the least.

The land scam

In its stead, ICAI has been consistently known to “adopt” (read cut, copy and paste) documents produced by international bodies. Put pithily, copyright, for ICAI has always been right to copy. Given this paradigm, for an institute that has consistently failed on the intellectual front, it is indeed intriguing that it seeks to set up Centres of Excellence (COE)!

Bereft of a robust intellectual exercise, it may not be out of place to mention that for the past few years, acquiring lands and constructing buildings had become the new norm within ICAI. If you were an office bearer of ICAI, you must be involved in some construction. This includes branches, regional centres and of course at the central level which is directly in charge of COE.

While the ICAI’s cumulative gross block of land and buildings at a pan Indian level acquired from the inception till date is reportedly only around Rs 350 crore (Rs 3.5 billion), a single project – COE – at Nagpur is estimated to come up at a cost Rs 150 crore (Rs 1.5 billion). Surely, this raises questions on economic viability, propriety and of course on the manner in which the entire project was approved.

Let me elaborate on these alleged irregularities:

  • The proposal / recommendation of Finance Committee taken its meeting held on 18th January 2012 proposing to establish Centres of excellence at various places (including Nagpur) was not been placed before the Council for its approval. Naturally, when the scam hit the media, some Council members were stunned.

The CVC norms in floating tenders were not followed. When there was only one eligible offer, the contract in right earnest should have been cancelled and recalled. Given the actual location of the land, some experts are questioning the value of such land.

  • There is no budgetary provision in 2012-13 for establishing COE.
  • Interestingly the tenders received in respect of other cities were not at all considered or taken up for consideration. Nagpur was chosen for special treatment. Is it a pure coincidence that the President of ICAI hails from Nagpur too? This is the crux of the issue.
  • While the Government allotted land at Bangalore (10 acres) and in Mount Abu, Rajasthan (25 Acres) are lying idle for the last four years, there is no justification for purchase of this land in Nagpur with such huge investments.
  • In the past the ICAI has never acquired, to my knowledge, private lands for establishing such projects. It may not be out of place to mention that the only COE established till date was in Hyderabad which is also not being utilized fully. Hence, in my opinion, there is no justification for this second COE with such a big facility.
  • While the contractor has reportedly quoted a cost of Rs 3,900 per sq. feet of built up area including cost of land and infrastructure, the ICAI apart from agreeing to the above rate (without any negotiation), has also reportedly agreed to pay an additional 10 per cent of the above price towards lease rental charges aggregating to over 10 crore.
  • The entire process of approval was carried out by people within ICAI who do not have any engineering or technical background.

After coming to know of the project through various press reports, the Council in its meeting held on 15th October 2012 ordered for suspension of the project and formed a group consisting of few Council members to look into the matter and give its report.

Why are chartered accountants silent?

Elections to the Council of the ICAI are due in the first week of December 2012. Naturally, it is expected that this alleged “Land Scam” would dominate the forthcoming elections. Right?

Unfortunately it is not. The reason for the same is not far to seek. Most chartered accountants are oblivious to these developments within the ICAI. And those who are in the know are loath to intervene.

But what about Council members – the leaders of the accounting profession? Their silence on this matter is indeed disconcerting.

Let us not forget that the popular perception in the country is that behind every successful scam lies a chartered accountant. Yet, most chartered accountants do not realize that outbreak of every financial scam in the country dents the collective image of the profession.

Now a scam has hit the ICAI itself. Certainly it will severely damage the image of the profession much more, more so, if it is not addressed pronto. But yet the leaders of the ICAI are in a state of denial adopting an ostrich like attitude hoping that something bigger and better will outgun this one.

What is forgotten in the melee is that the President of ICAI whose members, as chartered accountants, sit on judgment over the financial transactions of their clients is under a cloud. Instead of addressing the same, he has been in a state of denial. A sense of deja vu?

But this is not a scam limited to one the President alone. The failure to discharge the onerous responsibility cast on the Council to check such excesses of any single individual, more importantly the President should disqualify each one of the Council members from even contesting in future. Yet most of the outgoing Council members are contesting in the forthcoming elections.

In private conversations with me, some of them fail to see the writing on the wall. They are not collective failures but collective disasters. They have been silent when this scam was orchestrated simply because most have several skeletons in their cupboard. (Of course those who have raised their voices have been in a hopeless minority).

And in this tacit understanding of silence between errant Council members, the image of the profession is the loser.

Do chartered accountants realize this? If so why are they silent? Will they vote out delinquent Council members in these elections?

The mysterious case of missing

$ 500 billion ! –[Part I]

It is a $500-billion fraud story, perhaps not yet fully realised by the financial world.

Despite its size, mainstream media, both in India and abroad, seem to have ignored it. Perhaps most of them are unaware of the story in all its dimensions.

The victors of this game — the global financial players — are silently jubilant while the victims — are facing the situation with inexplicable stoicism. In short, the global silence on this issue is funereal.

A startling revelation by an IMF Working Paper, authored by Randall Dodd, points out to the extent of damage caused by currency derivatives.

It estimates that over 50,000 firms in several Asian countries — including India, Sri Lanka, Malaysia, Indonesia, Japan, Korea, Hong Kong SAR, Taiwan and China, besides a few other countries — had lost in excess of $530 billion — yes, $530 billion! — due to exotic currency derivatives.

According to this paper, “an international pattern of exotic derivatives trading appears to have helped transmit the financial crisis from the United States and the European Union to many different emerging market economies.”

It further adds rather ominously: “The losses turned out to be large enough to have financial market and macroeconomic consequences. As these large financial sector problems appeared in country after country, the pattern began to take shape.”

And that is the crux of the issue.

In India, for instance, the paper points out that Axis Bank (a small player in the Indian context) is being sued by its customers that lost over $3 billion on foreign currency derivatives.

Similar stories are reported from Brazil, Poland, and Mexico, with the Brazilian authorities estimating that its loss to be in exceed $28 billion!

A well-planned operation

That is not all. The IMF paper increasingly points to a well thought out and planned operation carried out with military precision by certain global banks. These contracts, for instance, were entered around the same time in 2007-08.

Further, the banks in these countries sold these ‘products’ to these exporters with a missionary zeal. At times banks have lured exporters with freebies and, in some instances, even with bribes. It surely was taken from Art of War: Draw them in with the prospect of gain, take them by confusion.

Subsequently, the exporters found to their horror that the deal had turned bad and they were saddled with significant losses.

The profile of the victims too is similar across continents — mostly the victims were small and medium enterprises, usually exporters (SMEs).

These ‘products’ were in effect complex currency derivatives. And when currencies gyrated violently, as they did in 2007 and 2008, exporters uniformly across continents found out that they were holding the wrong end of the stick.

What is intriguing is that the potential gains for these exporters — read potential loss for the banks — were strictly capped to favour banks under these contracts.

However, potential loss for exporters — read potential gains for banks — remained uncapped. And when the potential turned into actual, all hell broke.

Naturally, the adverse currency movements (from the exporters’ perspective) turned into a virtual bottomless pit for them.

Obviously, the banks had done their home work pretty well in structuring the contracts as well as anticipating the currency movements of 2007-08.

Or did they fashion these contracts fully confident of shaping currency movements across continents? This requires some global investigation.

Nevertheless, exporters — some of whom are bankrupt — now allege that the banks had lured them into these contracts with repeated assurances of absolute safety and decent profits.

Banker allege that the exporters by their excessive greed have turned a simple hedging mechanism into a complex profit making tool. Exporters in turn have invoked the concept of mis-selling and alleged breach of trust by banks.

Further exporters now claim to have no financial expertise to comprehend these complex products and the magnitude of risks embedded in them.

Derivatives: Complexity compounded by confusion

Derivatives, it may be noted, are the confluence of high-end mathematics and economics. And most people can neither comprehend mathematics nor economics.

Naturally explaining all these to the uninitiated is akin to a dumb teaching Chinese to a blind. Surely, in this diffused scenario of charges and counter charges, things cannot get any worse. Risk management is definitely a risky business.

But what is worrying is the size and complexity of the derivatives traded globally, especially those entered Over The Counter (OTC). It may be noted that as at December 31, 2009, the value of outstanding OTC derivatives across the globe aggregated to in excess of $615 trillion.

That implies that every person on this planet (with a population of 6 billion) has a derivative exposure in excess of $100,000! Naturally, the gargantuan size of the OTC derivatives, and their obscurity and complexity poses a significant systemic risk to countries.

As already pointed out several of these cases are in Courts. What is confounding the judicial system across countries, besides its inability to fully comprehend these ‘products’, is how to balance the contractual obligations (between financial players and SMEs) on the one hand and to decipher the global pattern on the other, and figure out the linkages between the two.

In the process they seem to be falling between the two stools.

With the benefit of hindsight it can be safely stated that there is a very clear pattern in the manner in which these products were marketed, structured and sold by financial players.

While exporters and SMEs were felled by their own greed, one is indeed stumped by the laser like precision of global banks that marketed and seem to have profited by all these.

Unfortunately, in a world of globalised finance, regulation to this day is strictly national. That provides the necessary leeway to global banks to wreak havoc at a national level and get away citing contractual obligations without getting probed at the global level.

Greed or machinations of the banks — it is your call. But the moot point remains — how could global banks be so sure of the currency movements even before they entered into the contracts?

Are central bankers a mute witness to a game played in a rigged casino?

Why currency derivatives are like rigged casinos! [Part II]

The IMF Paper on the damages caused by currency derivatives authored by Randall Dodd has now spawned a serious debate across continents.

As already pointed out in the first past to this three-part series, the loss for business entities is estimated to be in excess of $500 billion with the corresponding gains suspected to accrue to global banks. Anecdotal evidence available with us suggests a clear pattern to the entire game. The moot point that remains for greater examination is: Is this merely a co-incidence or is there something more to it than meets the eye?

To unravel this issue, a reference to fundamentals of business management, crucially risk management in a business entity, is inevitable. Risks to a business entity center on currency volatility, interest rate fluctuations or credits default risks. The core of the derivatives game is to neutralise these risks.

Unfortunately, normal human mind refuses to comprehend the entire gamut of risks and hence is unable to quantify risks. Enter the financial specialists — who not only map, quantify and mitigate risks but also reduce risks by using complex mathematic models through computers (of course) into simple numbers.

Normal curves are usually abnormal

Models are in turn based on past statistics. And one of the most important tools used in the financial world is the ‘normal distribution curve’ that lies at the centre of modern finance, especially risk mapping, explanation and management.

Noted derivative expert Satyajit Das tells us that “there is nothing normal about it.”

The normal distribution curve explains why there is a 67 per cent chance that any observation in any sample size of the population will be plus or minus one standard deviation of the mean, 95 per cent chance that it will be within two standard deviation of the mean and 99 per cent chance that it will be within three standard deviation of the mean.

Most financial models are based on such statistical tools — of course, made increasingly convoluted through human ingenuity.

‘Analysts’ tell us as a matter of fact that the balance 1 per cent can be ignored. “There is a 1 per cent chance that your flight may crash or there could be an earthquake tomorrow,” they tell their gullible audience.

Even a lamb to the slaughter would seem to be much smarter than those bamboozled by financial models explained by such specialists.

It is such statistical analysis (of course, packaged through glib talks, presentations and false promises) of the past that it used to predict, explain and manage business risks of the future.

And when the 1 per cent strikes, it is disaster compounded by paranoia. ‘Analysts’ coolly rationalise all these as ‘risks embedded in any transaction’. Surely the world does not realise that risk management, especially through experts, is an extremely risky!

In 2007 and 2008 the world was to witness the lethal potency of the 1 per cent virus. It is well known that in the world of currency movements, the future is never an extension of past.

Exchange rates, experts say, have ‘non-normal distribution’ curves. In short, if currency risks are quantified based on past data, one is surely inviting trouble. All this is common sense. But as we know common sense is extremely uncommon.

Heads I win, tails you lose

Now let me return to the patterns evidenced in this scam. What is interesting to note here is that most local currencies on the backdrop of robust global economic growth witnessed in 2007 appreciated dramatically vis-a-vis the US dollar.

Consequently exporters lost revenues. Naturally, they began searching avenues for augmenting their revenue loss caused by currency appreciation. Recall mid-2007 when ‘experts’ predicted that dollar could ‘shortly’ depreciate to about Rs 32.

This provided a perfect setting for bankers to enter the scene with their exotic currency derivative ‘products’. Remember that this appreciation of local currencies happened in the first place on account of significant forex inflows. And when the supply of dollar increased, naturally as a consequence, its value vis-a-vis the local currencies decreased.

This is where the exporters panicked and fell for the currency derivatives.

Interestingly, these contracts were so brilliantly structured that the banks could never lose money not matter what. These structural flaws in such contracts were brilliantly demonstrated by Nobel Laureate Robert F. Engle in a testimony to a Korean Court in late 2009.

Engle also demonstrated that the only possible losera in such contracts, in every conceivable scenario, were the counter parties to the banks and not the banks themselves. It was a classical case of ‘heads I win, tails you lose’.

Yet, across continents, these contracts were marketed with missionary zeal by those from the world of finance as absolutely safe and completely secure. Safe yes, secure yes, not for the SMEs, but for the banks!

Importantly, evidence suggests that banks first approached SMEs in several countries and marketed these ‘products’ with an (oral) guarantee of making good the revenue loss on account of appreciation of local currencies.

And when the dollar further depreciated in 2007, these exporters panicked. Banks insisted on firms to reimburse their loss. Firms refused simply because the loss on such contracts exceeded their net worth several times over. Contracts were promptly closed out unilaterally by banks.

And in the aftermath of the economic crisis of 2008, the dollar inexplicably appreciated (strange phenomenon when the US economy was in a crisis) against most currencies which would have turned the deal profitable for these SMEs.

Unfortunately, for these SMEs, banks by then had terminated these contracts.

Obviously, the timing of marketing these contracts is intriguing. The surge in forex flows into these countries triggered the currency appreciation upfront. This, in turn, triggered the marketing of these contracts.

A vulnerable exporting community was psychologically quite ready to willingly suspend its sense of disbelief as these ‘products’ were sold to them.

It is obvious that there are several coincidences in this entire game. Global banks, it seems, had anticipated currency movements fairly well. Consequently, they structured their ‘products’ in such a manner that they never lost.

It is a different matter all together that the naivete, and to some extent the greed, of the business units across continents came in handy.

It is common sense that in any business there cannot be only one winner unless it is a rigged casino. An in this case there is only one winner across continents. And that makes one suspect whether we are mute witness to a rigged casino.

Who will bell the big banking cats? [Part III]

The manner in which currency derivative contracts were structured, marketed and the conditions that enabled their marketing in the first place across continents points out to a larger design of some international banks.

As pointed out in the first two parts of this series, SMEs lost over $500 billion on currency derivatives contracts that they entered into with banks. Interestingly, in these contracts, banks never lost. If it was sheer coincidence, it was remarkable coincidence, no doubt. I am reminded of my high school teacher who often used to tell us that coincidence is the word we use when we can’t see the levers and the pulleys.

Naturally, evidence available with us points out to the need for a complete investigation. And in such a diffused scenario, let us not forget, absence of evidence does not point to the evidence of its absence.

But who will bell the cat, especially those large global banks? National regulators, especially Central Banks, are not designed to carry out such investigations across continents.

Similarly, federal investigating agencies in most countries are structurally incapable of unearthing frauds, if any, of such magnitude. Further, laws in several countries are based on the theory that one is innocent till proven guilty.

And in this catch-22 situation, global banks continue to carry out their operations without any let or fear of even being investigated, forget being penalized.

In the absence of any detailed investigations any patterns would at-best ‘indicate’ the possibility of a global conspiracy but may not actually stand the scrutiny of courts, which in criminal cases does not rely on preponderance of probabilities but only on hard facts and unimpeachable evidence.

Nevertheless, in a path-breaking decision in early 2010, the Orissa high court on a Public Interest Litigation has ordered for an investigation by the Central Bureau of Investigation in India.

This is despite the fact that the order was based on a preliminary enquiry conducted by the CBI which came to a tentative conclusion that it could not “definitively establish a criminal conspiracy” by banks.

The high court obviously felt that a detailed probe by a statutory agency, even if it is unable to unearth the global dimensions, has to be carried out in the first place before coming to any definitive conclusions.

What makes the matter far more intriguing is that the banks have rushed to the Supreme Court seeking a stay on such investigations by the CBI.

While the Supreme Court has indeed granted an interim stay, the matter is expected to come for hearing in January 2011. And the world of finance is awaiting the decision of the Supreme Court with bated breath.

After all, it will be the first instance where some federal investigating agency would investigate whether the banks in India had contracted such derivative contracts from their international counterparts in bulk and retailed it to hapless SMEs in India in retail.

Simultaneously, they would also explore whether there was a criminal conspiracy by banks in selling such “products” to SMEs in India.

Similarly, it could also throw how the banks had violated the guidelines of the Reserve Bank of India made under the Foreign Exchange Management Act with such impunity.

Obviously, the reward must have outweighed the risks arising from violation of FEMA. Surely the bankers are supposed to be masters of evaluating risks, aren’t they?

In fact, in its affidavit filed before the Orissa high court, the RBI has already conceded such contracts have indeed violated FEMA guidelines and suggested a probe by the Enforcement Directorate. ED or CBI, does it matter?

Nevertheless, taking stock of the entire situation, the Orissa high court had ordered a probe by the CBI, which till the interim stay was imposed by the Supreme Court in March 2010, had actually commenced the probe.

Whatever be it, the subsequent act by banks in attempting to stall the

CBI probe suggests that there is something more than it meets the eye. Naturally that makes the outcome of the probe, as and when it happens, exciting.

But such a probe even when carried out by the CBI would be inadequate in the current circumstances. Derivatives as already pointed out are extremely technical, especially those linked to interest rate and currency movements.

While one does not seek to prejudice the Supreme Court, it is humbly submitted that the CBI probe would at-best be a trigger, a starting point for a larger probe.

Central banks, with their understanding of the subject, are ideally positioned to carry out this probe. Unfortunately, in this matter, if the needle of suspicion is on global banks, it is equally on central banks who have played ball with global financial players.

It is impossible to believe, given the preliminary evidence on hand, that global financial players took positions unless they were pretty sure of the manner in which the Central Banks would move interest and currency rates. After all it takes two to Tango.

Even otherwise the Central Banks are structurally incapable of carrying out such a probe. Another possible avenue could be the International Monetary Fund.

But with its credibility being suspect in the eyes of some countries, it is a non-starter. Naturally that leaves us with only one alternative. This probe needs to be carried out through close coordination of governments.

Ideally the G-20 is well positioned to discuss, debate and take appropriate action on this front. It may be recalled that the G-20 Declaration in the London summit specifically agreed to expand the Financial Stability Forum to “assess vulnerabilities affecting the financial system, identify and oversee action needed to address them.”

Surely, given the magnitude of the loss incurred by these business units and its potential to cause systemic vulnerabilities to the national economies and even by extension global economy, the manner in which these “products” were structured and sold needs to be thoroughly investigated by G-20 as much as the manner in which currencies managed in these countries by central banks.

Strangely, the G-20 till date has not even mentioned this issue in passing. That takes us to the fundamental question — are governments too in the payroll of these global financial players?

The only way governments can refute this allegation is to coordinate amongst themselves, investigate and take the matter to a logical conclusion. Will they? Most probably not; $500 billion is too large a sum to ensure the continued silence of the governments.

Credits: To “RARE PUBLICATIONS”,  Mr. M.R. Ventatesh and Mr. Ranganaathan S

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