The financial scams tumbling out of corporate America’s closets rattled the Prime Minister enough for him to threaten increased regulatory measures to strengthen good governance practices. It would be nice if the PM took a careful look at what is happening in the US. It is true that Kenneth Lay was a buddy of George W Bush, but he isn’t sitting on his Bush’s industrial advisory council after Enron began to default on its financial commitments.
Sure, Enron enjoyed unprecedented political patronage, but neither that, nor its size prevented its spectacular flameout. Ditto for Arthur Andersen, one of the big four global accounting giants. Or Merrill Lynch, which paid up $ 100 million for fudging analysts’ reports without admitting anything. In the US, scandals get punished. Shady CEOs are shown the door and their companies file for bankruptcy and get taken over. Unlike India, they are not kept alive like a festering sore on the financial system.
We, on the other hand have developed a wonderful multi-layered system to protect crooked industrialists and officials who collude with them. Statutes such as Sica and BIFR shelter companies and public financial institutions and banks provide the oxygen. Now that non-performing assets have ballooned to Rs 1.5 lakh crore (Ernst and Young’s estimate) and the lenders too have turned sick (IFCI Ltd. and Unit Trust of India’s double debacle) they are kept alive with taxpayers money doled out by the exchequer.
The resuscitation process has a simple objective: to allow industrialists to rip off the system with a percentage of the funds ploughed back as political contributions; to protect institutional heads and petty officials who do the politicians’ bidding and also line their own pockets; and finally keep the cosy system going by pumping in public funds at regular intervals. A couple of weeks ago, it seemed that the new asset reconstruction process would finally make it easy to chase loan defaulters, but our industrialists have gone straight to the Prime Minister asking for a dilution of the rules. They want the rules to cover only “wilful defaulters” and not the rest of them. This pious demand is a complete sham because none but the most inconsequential and irretrievable companies are classified as “wilful defaulters”. It is also a hoax that industrialists are worried about being unfairly targeted by lenders. Even a cursory look at recovery attempts by financial institutions show that the diversion of funds and defaults are part of a cosy nexus between companies, lenders and government.
Lets look at IFCI, which is struggling for survival. Last week, its chairman sounded rather hurt when he told a newspaper that he had “expected more cooperation from our stakeholders”. Obviously, IFCI expected government to bail it out with regularity (it needs over Rs 4,500 crore to meet redemption demands this year alone) and show alacrity in restructuring its high cost loans. He also says — “if corporates can avail of debt restructuring, why cant IFCI”. This frightening alienation from reality should worry any finance minister who wants to clean up the system. An IFCI which mismanages its own funding requirements, borrows recklessly at high interest rates, has a pathetic lending portfolio, shows criminal negligence in project appraisals and has defaulted on its financial commitments is planning a change in profile. It has now published “snazzy booklets” offering its expertise in project advisory services, credit syndication, debt and equity placement and even legal advisory services. Had a private institution in the same situation come up with this plan it would have attracted hoots of derisive laughter.
Ideally, IFCI ought to be wound up, or, if it is kept alive, should shrink its operations and concentrate of asset reconstruction and recovery. But its past track record of collusion with industry and lack of seriousness in tackling white-collar crime raise serious doubts about its ability to do that either.
Last year, IFCI conducted four vigilance inquiries, which indicted its own officials. They pertained to Punjab Woolcombers of Ludhiana, AVI Packaging (India) Ltd, Mideast India Ltd and AEC Ssangyon Ltd. Each established rampant irregularities and collusion but ended in token disciplinary action. Punjab Woolcombers was encouraged to raise $ 3 million (backed by an IFCI guarantee), through an External Commercial Borrowing to repay IFCI’s loans. This crooked evergreening attempt however failed because the company pocketed most of the money and defaulted on the ECB, forcing IFCI to cough up that too. An IFCI official, MM Sikka was held guilty of deliberately allowing the funds to be diverted to two other companies of the promoter Jangilal Oswal. His only punishment was a forfeiture of his retirement benefits, although he was caught colluding with AVI Packaging too. This company forged documents, quotations, and agreements to extract nearly Rs 30 crore from IFCI.
The third, AEC Ssangyong played another trick. Having obtained a $ 8.55 million loan, it kept changing the project location and refused to even take charge of the plant and machinery that it had imported. The lenders suffered heavy demurrage costs before they realised that the promoters (the AEC group and a Korean company) had neither financial nor technical capability to implement the project and it was abandoned. CD Ghosh, a Chief General Manager was held responsible in this case, as well as Mideast India, which belonged to the high profile socialite Rita Singh. Mideast forged signatures and fabricated insurance papers to make fake claims of Rs 3.8 crore. It took IFCI for a ride about a shoe factory it was to set up at Kalol; but the only price that CD Ghosh paid for both these lapses was a token Rs one lakh deducted from his retirement benefits.
Similar inquiries detected irregularities and collusion in cases such as Core Healthcare, Mardia Steel, Mardia Chemicals, Foremost Factors Ltd and Vetro Tech (India) of the Usha Group, Shalimar Synthetics, Continental Float Glass and others. None of the internal inquiries has ever touched upon the role of IFCI’s various chairmen, although it is common knowledge that the largesse to certain industry groups was dictated by them.
Reading these horror stories of collusion and corruption makes one fact very clear: the collusive nexus between corporate houses and industry is so strong that no borrower need ever fear that they would be harassed or victimised by asset reconstruction rules unless they are indeed wilful defaulters. The next few weeks will tell us whether finance minister Jaswant Singh falls for the whining by his industry friends or keeps his promise of building investor confidence — unfortunately he can’t do both, he will have to make a choice. -- Sucheta Dalal