Of sleazy, criminalised capitalism

Print edition : May 12, 2001

Proliferation of financial scandals and pillage of the exchequer have become integral to the Indian economy. The NDA has added a wilful policy dimension to the country's criminalised capitalism.

IF nothing else, the Securities and Exchange Board of India (SEBI), one thought, would seal the fate of the controversial deal to sell 51 per cent of Bharat Aluminium Company (Balco) to Sterlite Industries. (SEBI's April 19 order held Sterlite guilty of 'insider trading' malpractices, and banned it from accessing the capital market for two years.) The NDA government might be thick-skinned enough to ignore the total, indeed heroic, strike since March 3 of the 7,000 Balco workers in Chhattisgarh. It could malign the deal's political critics. It could turn a blind eye to thoughtful questioning of the agreement on economic, ethical and environmental grounds. But surely, it could not ride roughshod over the verdict of a statutory watchdog body, which followed more than two years of investigation.

Yet, that is precisely what Disinvestment Minister Arun Shourie did by weaving a web of sophistry around the SEBI order. He concluded: the order applies only to Sterlite Industries (India) Ltd (SIIL), not to that Sterlite which has taken over Balco's management - although the two are the same corporate entity. Sterlite cannot borrow from the market, but Balco can. Ergo, the Sterlite-Balco deal remains unaffected; the government will proceed with privatisation, aiming to sell off the equivalent of one Balco each fortnight!

However, a reading of the SEBI order on the 1998 Bombay Stock Exchange scandal suggests that Shourie is wrong. SEBI's ban on Sterlite, BPL and Videocon accessing the market for two to four years is the greatest indictment by any statutory body yet of corporate malfeasance in the stock market. The least it entails is that the black-listed companies are kept out of any process of divestment of public sector undertakings (PSUs). Sterlite's Balco takeover must be immediately cancelled.

SEBI found the three companies guilty of systematically colluding with shady stockbrokers, Harshad Mehta included, in rigging share prices. It has initiated legal proceedings under Section 24 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Act against many of their directors, including three directors of Sterlite, headed by chairman Anil Agarwal.

SEBI's action confirms the public's worst suspicions about Sterlite's ethics. Earlier, the 'insider trading' scam led to the sacking of the BSE president and executive director and action against 34 brokers. The recent order is based on what SEBI says is 'clinching evidence'. This is its first crackdown on 'insider trading', that is, manipulating shares based upon privileged information to make windfall profits. Insider trading is pernicious. In countries which regulate markets strictly, it attracts severe penalties, including forfeiture of licences, heavy fines and jail terms.

Shourie referred to the Law Ministry the issues raised by SEBI's order. But this was pure tokenism, with a lot of hair-splitting over whether the order applies to the entire Sterlite group or to SIIL alone, and whether it is effective retrospectively.

IT should be obvious from the tone, content, spirit and logic of SEBI's order that the malpractices and fraud in question pertained to corporate groups and the various companies/entities they floated, which the Board specifically identified. SEBI lifted Sterlite's corporate veil, so to speak, by naming its directors and their malpractices. Shourie cannot put back the veil and pretend that Sterlite is an unknown company insofar as it controls Balco. The change in Balco's ownership does not change Sterlite's character or culpability.

After the Balco-Sterlite deal was signed, and until the SEBI order, Shourie repeatedly distanced the government from Balco because its majority ownership had been transferred to Sterlite. This Sterlite-Balco identity or equation was his defence against searching questions on the Centre's unprecedented move to approach the Supreme Court against the Chhattisgarh State government. Today, Shourie is splitting up that equation.

That apart, a company - or rather, management - that is unworthy of public trust cannot be considered worthy of handling public sector undertakings (PSUs) that form valuable assets. The question of 'retrospective' effect is a red herring. A blacklisted, and morally and legally indicted management cannot be allowed to buy a PSU - today, yesterday, tomorrow. This argument should in and of itself clinch the issue.

As it happens, the deal is open to many other serious objections: it is economically irrational, politically deplorable, legally unsustainable and environmentally unsound. It makes a mockery of Parliament's democratic sovereignty. The roots of the takeover lie in the National Democratic Alliance's ideologically driven approach to PSUs: private good, government bad. To push the deal through, the government undervalued Balco's market worth, breached the law of the land, and sold the family silver to a buyer with a comprehensively tainted record.

Far from being transparent, decision-making on Balco was guided by capricious choices: of the 'global adviser' (Jardine Fleming), evaluator (named by the adviser, who completed the job in an unseemly eight days), and assessment methods. Going by replacement value, Balco is probably worth over Rs. 3,500 crores. Its 210 MW captive power plant is worth Rs. 1,000 crores. This, with the cash reserves added, alone double the amount paid by Sterlite to appropriate Balco.

As if this was not bad enough, the Balco deal violates a fundamental rights verdict of the Supreme Court in the landmark Samatha case, which vests ownership of adivasi land in tribal people and forbids its transfer without proper compensation. This 1997 judgment demands that all industrial and mining activity in tribal areas not in conformity with tribal rights must stop 'forthwith'. It casts this responsibility on both the Central and state governments. It also mandates that 20 per cent of all profits from privately run mines or factories be 'set apart' for facilities for adivasis. This includes all past profits.

The Sterlite deal mentions no such obligation. Company chairman Agarwal says he is totally unaware of the Samatha judgment. He told The Times of India (February 25): "I have no idea... We have only bought shares of Balco and nothing has changed..."

THE government was legally wrong to have divested from Balco without Parliament's approval. If the Preamble to the Constitution of India being a Sovereign, Socialist Republic has any meaning, and if the Directive Principles of State Policy have any significance, then PSUs cannot be treated as mere commodities to be created, traded or sold off. Article 39 of the directive principles requires the state to distribute 'material resources' so as "best to subserve the common good". Each of India's PSUs was created by a specific Act of Parliament. (In Balco's case, two Acts, of 1965 and 1984.) Companies created through Parliament's approval cannot be disposed of without Parliament's mandate. Not if democracy means anything.

Selling family silver cheap is bad enough. Selling it to a dubious buyer is worse. Sterlite has a questionable external commercial borrowings record. It is also environmentally unacceptable. Its copper smelter at Tuticorin in Tamil Nadu violates coastal zone regulations. The plant, obsolete and reconditioned at its core, emits large amounts of poisons, including arsenic, oxides of sulphur, and heavy metals such as lead, cadmium, antimony and bismuth. The plant is highly accident-prone. It has already claimed three lives in four serious mishaps.

This only strengthens the case against Sterlite's Balco takeover. Modern Foods - India's first case of 100 per cent PSU privatisation - is becoming an embarrassment as it gets ready for reference to the Board for Industrial Finance and Reconstruction (BIFR). The case of Balco, the first unit in the current big ticket disinvestment agenda, could be much worse. The government's insistence on pushing the Sterlite deal speaks of complicity in criminalised capitalism.

This is itself part of a larger pattern reflected in proliferating financial scandals, hijacking of policy-making by narrow-interest groups, and defrauding of the public exchequer. Under the Vajpayee government - India's most right-wing regime since Independence - this pattern has been forged into a conscious agenda to which numerous Ministries, and the Prime Minister's Office (PMO), are suborned.

Thus the capital markets have never been more blatantly manipulated than in the last three years - a fact repeatedly confirmed by the wiping out of thousands of crores in capitalisation day after day. Our stock market scam is also a banking scam, intimately connected with the abuse of large sums of money borrowed without adequate security. The Ketan Parekh episode, which closely models the 1992 securities scam, derives from such abuse. Closely connected to this is deinstitutionalisation of term-lending development banks and mutual funds/insurance companies. Put simply, the entire financial sector has been rigged to subserve parochial interests through undeserved advances, influence peddling, and often, downright bribery.

Although industrial licensing has been abolished, government discretion continues to matter hugely in major areas - external commercial borrowing permits (regularly abused by big business), fixing of tariffs (for example, high import duties on cars and alcohol, but low rates on food), exemptions from legal obligations (without which neither private entry into basic telephony nor the Enron contract would have materialised), and decisions on (dis)investment (whether and how to divest, which corporations to favour with unfettered entry and profit repatriation and so on).

These decisions are made on the strength of political contacts and doubtful liaisons. The role of the PMO and the so-called Strategic Management Group (in which Brajesh Mishra and N.K. Singh were the linchpins) is crucial here. Take the controversial decisions on fixed/mobile telephony which violate transparency and fairness. The present ungainly fight over spoils between the two groups is being conducted without any reference to the public interest or the importance of low-cost connectivity, especially in rural India. Here too, the licit or illicit gains are of the order of Rs. 10,000 crores - perhaps higher than the bribes paid in the Rs.40,000 crores defence procurement budget (even assuming a 10 per cent cut).

SCAMS apart, the Vajpayee government will go down in history for two things, no matter how short its life: mindless foisting of 'strategic partners' upon PSUs; and relinquishing the task of writing industrial policy to the interested groups themselves. Thus, industry representatives dominate the Prime Minister's Council on Trade and Industry, and each of its committees. Many have high stakes in the very areas where their 'expert' opinion is sought - much in the nature of the fox being consulted on guarding the chicken-coop. Captains of industry have fully exploited this opportunity to rig policies.

This spells a new kind of permissiveness for business and a qualitative policy shift: government for the rich and the privileged, a plutocracy in the garb of formal democracy. A government that bestows favours upon the already privileged, which runs scam after scam, and promotes mindlessly right-wing policies to bankrupt the exchequer, presides over a plutocracy, not democracy. That is the government Vajpayee has given India - a regime that is a darling of big business, and the rich and corrupt.

Such a government thinks nothing of subsidising grain exports - over food for the poor. (Between November 2000 and March 2001, it spent Rs.664 crores on such export subsidy, compared to Rs. 498 crores on grains meant for those below the poverty line.) It has just announced that it will export three million tonnes of rice although millions of Indians go hungry. Nothing could be more morally repugnant than this. Let us face it. Moneybags and thugs rooted in this criminalised capitalism are hijacking Indian democracy - the country's single greatest achievement since Independence. Democracy must be rescued. But we should be under no illusion that that will be easy. An authoritarian elite steeped in hierarchy, and pampered by Hindutva right-wingers, will not give up its power and privilege readily. It is going to be a long haul.

The haul may have been made longer with the Supreme Court's intervention - ironically, on May Day - asking the Balco workers to call off their strike and accept a deductible two-month wage advance. Rather than reiterate the Samatha rationale, the Judges asked the Chhattisgarh government to produce a list of industries to which public land has been leased.

The scales stand further tilted against PSUs and their workers. The Sterlite management can barely conceal its glee.

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