The Heist

Published: Mon, 10/01/2012 - 11:19 Updated: Mon, 10/01/2012 - 11:25

With unethical practices ruling the Indian market, many dubious companies are selling the country down the drain, borrowing huge loans from public sector banks and buying assets abroad, and refusing to pay back their gigantic debts, even while the Indian State pampers them in the midst of scandals and scams
Hardnews Bureau Delhi

 

In May this year, the London Metropolitan Police (LMP) reportedly detained four foreigners trying to smuggle a huge amount of foreign exchange into England. Although there is no official admission about the identity of these people, sources claim that, of the four, three were senior employees of an Indian corporate house with sizeable investments in all kinds of businesses in the United Kingdom and other parts of the world. As is its practice, the LMP will not reveal the identity of those detained — later released — till it completes its investigation and files its chargesheet. The money seized from senior officials of the Indian company was allegedly linked to money laundering and drug trafficking.

So smart has been the political and media management by the company in this embarrassing case that there has not been a whisper about the incident in the British or Indian media. A Google search, too, yields nothing. Earlier, the charges were to be filed after three months, but now it is learnt that it may actually happen in October-November. In the absence of media scrutiny into the case, there is little likelihood that a country undergoing a double dip recession would really bother too much about any business house — white-white, black, yellow or brown — bringing cash into the country. Interestingly, this Indian company routinely runs into problems with the Indian State and regulators.

Interestingly, this is not the only Indian corporate house that has been funding its overseas businesses through dubious means, including diverting funds from Indian operations even while giving an impression of being smothered by a mountain of debt. So well established are these arrangements and networks that, quietly and stealthily, many Indian companies have chosen to locate 50 per cent of their businesses abroad.

The cases of Kingfisher Airlines and Deccan Chronicle Holdings show how credit lines were extended even when they were bleeding and there was no prospect of them returning the money 

Indeed, for Indians it could be a matter of pride that their companies are becoming global brands but looking into the way it is happening raises serious doubts about our regulatory framework as well as the attitude of the central and state governments. And the narrative that it is the political class which is fully responsible for this mess is not entirely correct when one takes a look at the mode of operations of big corporate houses.

The Reserve Bank of India (RBI), which should keep a watch on the conduct of the banking system in the country, needs to introspect on how public sector banks are allowed to extend credit lines to big businesses that are routinely defaulting on loan repayment. “Most of the Indian businesses are built on taking loans from the bank and not paying back and declaring themselves bankrupt. What they really do is take money out of their company and invest abroad or in real estate,” explained a business analyst.

These companies, many of them prospering in the environment of cronyism fostered by proximity to the powers that be, have been beneficiaries of the big corruption scandals that have engulfed this UPA regime. The new Chief Economic Adviser, Raghuram Rajan, has pointed at the emerging oligarchies  that could control major businesses and consequently government policy and lead the country to a middle income trap due to corruption and cronyism -— as evidenced in countries like Mexico.

Whether it is the  2G spectrum sale or allotment of coal blocks or the modernisation of airports or civil aviation scams, there is a clutch of new and old business houses that have enjoyed windfall profits. Since some of these companies did not have the capacities to manage these businesses, they have offloaded majority stakes to foreign multinationals to rake in riches. In some cases, the unknown companies that managed to get licences due to proximity to certain political bosses were benamis of the established business houses. Investigations by the Central Bureau of Investigation (CBI) into the sale of 2G spectrum and grant of coal block licences clearly shows this link.

The RBI, that should keep a watch on the conduct of the banking system, needs to introspect on how public sector banks are allowed to extend credit lines to big businesses that are routinely defaulting on loan repayment 

A number of unknown entities that were been exposed by the CAG report as being  recipients of these favours were later to be found to be in that ‘sacred space’ at the behest of the big boys who could not bid for any licences on their own. The CBI has found a money trail and other proof of pay-offs taking place through entities in Mauritius, Cyprus and other tax havens. There has been a phenomenal flow of funds passing through all kinds of filters, but, significantly, Indian regulators and enforcement agencies have been loathe to blow the whistle on this. 

The RBI as a regulator leans heavily on big corporate houses and is protective towards their interests and is not known to question the goings-on in many public and private banks. There have been innumerable cases, all well-documented, where the RBI just failed to discharge its responsibility towards banks that were too liberal in showering patronage on big biz. The securities scam of the 1990s and many RBI inspection reports of banks like the Indian Bank evidenced criminal profligacy in giving out loans to companies which could have been stopped if the central bankers were more vigilant.

The recent public display of differences between Banking Secretary DK Mittal and the RBI is linked to the finance ministry demanding  public sector banks show greater commitment to priority sector lending than playing footsie with large corporate houses.

Economic historians like Vivek Chibber, author of a seminal book on India’s development story, Locked in Place, suggest that the Indian development model, based on import substitution, allowed primacy of the capitalist class over the State. And, in every activity, after India gained independence, government policies reflected protection of indigenous industry, making even the public sector subservient to their interest. The RBI’s attitude has been in line with this
dominant thinking.

The SBI’s colossal Rs 11,70,652 crore debt is 83.54 per cent of its own liabilities. The PNB has a debt of Rs 4,16,852 crore and the Bank of Baroda a debt of Rs 4,08,444 crore

Ever since policies of economic liberalisation were ushered into the country, many large companies have been running their affairs like multi-national companies that do not bother about capital controls imposed by the government and routinely take capital out of the country not through the Foreign Direct Investment route (FDI) for acquiring or merging businesses, but by using hawala, transfer pricing and mis-invoicing.

The total quantum of capital outgo, even through official channels, is so substantial that it raises serious questions about the Indian government’s policy of allowing Indian companies or their subsidiaries to prosper abroad at the expense of their domestic businesses.

In 2010, an interesting paper written by two economists, Ajay Shah and Ila Patnaik, with a teasing title, ‘Why India choked when Lehman broke’, provided details about how Indian corporates conducted themselves during the crisis caused by the collapse of  Lehman Bros in September 2008. “When the global money market collapsed after the failure of Lehman Bros, these firms were suddenly short of dollar liquidity. They borrowed in the rupee money market, converted rupees to USD to meet obligations abroad.”

On some days, during this period of crisis, the RBI lent as much as Rs 90,000 crore through repos. The operation of these Indian multi-national companies during the crisis was clearly suggestive of their ability to take money borrowed from Indian banks out of the country despite de jure capital controls. Such clever devices have been used by many of the companies that have operations abroad and show inordinate losses in their domestic operations.

The Supreme Court wants Sahara to pay back Rs 24,500 crore to millions of its investors. SEBI has complained to the Supreme Court that it has not fulfilled its order and wants to attach its properties 

A close look at the companies listed by the Bombay Stock Exchange under substantial debt would buttress the above assertion. The public sector banks are bleeding due to the criminal and corrupt nexus of Indian private sector-banker-bureaucrat and the politician. The cases of Kingfisher Airlines and Deccan Chronicle Holdings, which have been attracting media attention for the dramatic collapse in their business models, show how credit lines were extended to companies even when they were bleeding and there was no prospect of them returning the money.

Eyebrows were not raised when Kingfisher managed to convince the State Bank of India to buy its shares at higher than the market rate and also give a loan against it. It was such win-win situations that were created by the public sector banks at the expense of the role they should have played. Deccan Chronicle Holdings, with a flamboyant owner who would flaunt his opulent lifestyle and fleet of luxury cars, that ran TheDeccan Chronicle (also The Asian Age and The Financial Chronicle), an IPL team (Deccan Chargers) and many other businesses, was found to have gone bankrupt. Almost Rs 5,000 crore or a billion dollars seems to have gone down the tube. Just a month before Deccan Chronicle was found fibbing about its riches, rating agencies like CRISIL were giving it high investment rating. 

It is clear that many entities are involved in creating a chimera of professionalism and integrity to not only fool small investors but also extract loans from willing bankers. It is only in the case of the poor and small businesses that the bankers display extraordinary zealousness about collateral and banking norms. They seem ready to lose big money in big loans rather than small money in small loans.

Most Indian businesses are built on taking loans from the bank and not paying back and declaring themselves bankrupt. What they really do is take money out of their company and invest abroad or in real estate

Out of the top 25 banks, 19 are public sector banks that are in debt, largely on account of loans to the private sector in telecom, power, and so on. State Bank of India’s colossal Rs11,70,652 crore debt is 83.54 per cent of its own liabilities. Other banks are also reeling under the heavy weight of debt. The Punjab National Bank has a debt of Rs 4,16,852 crore and The Bank of Baroda a debt of Rs 4,08,444 crore. 

There has been a spike in debt levels of large business houses like the Lanco, Adani, GVK, Vedanta and GMR groups in the past five years. This has led to “a much higher borrower concentration risk at Indian banks”, in comparison to other emerging markets.

The Lanco group, which lost the Ultra mega power plant to Anil Ambani’s Reliance Energy, has seen a significant jump in its debt level in the past five years. Adani, the GVK group, Vedanta and GMR all star in the list of top 10 companies in debt, according to Credit Suisse.

The Lanco group’s debt grew by 76 per cent in the last five financial years, Adani’s by 74 per cent, GVK’s by 65 per cent, Vedanta’s by 58 per cent and GMR’s by 55 per cent. The combined debt of the top 10 groups grew over five times in past five years, from Rs 99,300 crore to Rs 5,39,500 crore, at a compounded annual growth rate of 40 per cent, says the report.

The Credit Suisse report further documents the total debt for 2012:  The Essar group heads the list with Rs 93,800 crore, Vedanta is snapping at its heels with Rs 93,500 crore. Reliance (Rs 86,700 crore), Adani (Rs 69,500 crore), Jaypee (Rs 45,400 crore), JSW (Rs 40,200 crore), GMR (Rs 32,900 crore), Lanco (Rs 29,300 crore), Videocon (Rs 27,300 crore) and GVK (Rs 21,000 crore) follow.

The Lanco group’s debt grew by 76 per cent in the past five financial years, Adani’s by 74 per cent, GVK’s by 65 per cent, Vedanta’s by 58 per cent and GMR’s by 55 per cent. The combined debt of the top 10 groups grew over five times in the past five years, from Rs 99,300 crore to Rs 5,39,500 crore 

Credit Suisse said that the aggregate debt of these ten groups accounts for about 13 per cent of total bank loans and a whopping 98 per cent of the entire banking system’s net worth. What is also troubling is that nearly all the banks have exposure to all these companies, so if they cave in due to some reason then the entire financial sector could be at risk.

Interestingly, at the time when the likes of Adani, GMR and Vedanta were piling on debt, they were furiously acquiring assets all over the world. Adani bought mines in Southeast Asia and Australia, GMR was building an airport abroad and Vedanta was busy snapping up companies everywhere.

At the time when these companies were expanding abroad questions were asked as to why government financial institutions should bankroll them if they do not bring any assets to the country. Adequate and satisfactory answers have not been received from the government on this. Similarly, a company like GMR has used its proximity to the central government to extract favours in building and running the Delhi airport, which were not originally promised in the bid document.

This manifest amorality and disregard for regulatory bodies has been acquiring epidemic proportions. While there is some institutional backlash against the unending blizzard of scams that has hurt the country, there are still many uncanny questions about the phenomenal growth of businesses due to the inability of the Indian State to make sense of the business model of many companies.

The big test of the State’s resolve to re-establish the authority of a regulator is taking place in the case of the Sahara Group, a Lucknow-based residuary non-banking company that went around selling debentures against the advice of the Securities and Exchange Board of India (SEBI). Now, the Supreme Court wants the group to pay back the mind-boggling amount of Rs 24,500 crore to millions of its investors. The court has instructed the Sahara Group of companies to furnish the names of those who had bought these debentures to SEBI by a certain date.

SEBI had complained to the Supreme Court that Sahara has not fulfilled its order and wants to attach its various properties in different parts of the country. Sahara, which is the official sponsor of the Indian cricket team and spends money lavishly on sporting activities, including Formula 1 and IPL, has issued full page advertisements in newspapers, debunking suggestions that it has done anything wrong.

Ever sinceliberalisation was ushered in, many large companies have been running their affairs like MNCs that do not bother about capital controls imposed by the government and routinely take capital out of the country — not through the FDI route for acquiring or merging businesses — but by using hawala, transfer pricing and mis-invoicing 

In fact, the onus is on the government to prove that Sahara, with business worth some $35 billion, could have grown so big by violating the law of the land. If it has indeed transgressed the law and the poor investors have been shortchanged then subsequent governments need to explain in Lucknow and Delhi how they allowed this to happen.

There is indeed an urgent need for redefining the relationship between indigenous capitalists and the State to ensure that a policy framework is created whereby market forces are subjected to professional regulation that prohibits companies from making windfall profits and squirrelling it out of the country in tax havens and other businesses. Indeed, in the absence of a new framework, India’s growth story could soon come to grief.

With unethical practices ruling the Indian market, many dubious companies are selling the country down the drain, borrowing huge loans from public sector banks and buying assets abroad, and refusing to pay back their gigantic debts, even while the Indian State pampers them in the midst of scandals and scams
Hardnews Bureau Delhi

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