The Modi government is making new changes to alter the system of allowing black money generation, forgetting its ‘crusade’ against it
BY ALAM SRINIVAS
When it comes to black economy, Narendra Modi hopes to emulate the late Indira Gandhi. Publicly, both the prime ministers were seen as crusaders against the dishonest. They took brave, even audacious, decisions to curb black money.
In the end, both deliberately created a new paradigm, a new black economy that was more expansive, but included new actors who were their loyalists and staunch supporters. The new illegalities were under their thumbs.
It is easier to prove this with Indira as Modi’s work is still in progress, and we still don’t know how far he will succeed in his nefarious schemes.
However, the similarities are there, and it is evident that the two prime ministers have been following a similar path, albeit with technical differences, given that the 1970s were different from the 2010s. If Modi is able to pull it off, like Indira, he will create a new eco-system of corruption, and force other players to follow the new rules of the game.
Take the case of political funding. In Indira’s time, it was legal and several companies paid by cheques to the political parties. Within the Congress, the moneybags, as well as political power, was controlled by a group of politicians, dubbed the Syndicate and headed by the powerful K Kamaraj.
If Indira had to exercise control independently, and not remain a Gungi Gudiya (Dumb Doll), as the Syndicate called her when it appointed her as the prime minister, she had to snatch away the party’s growing money purses.
Unity of Opposites
Hers was a masterstroke; she banned political donations. No alternative, like state funding, was provided to fund elections. Hence, every dime spent by political parties became illegal. The decision had several implications.
One, it allowed the prime minister to go after any business house, which financed the Syndicate, because it was against the law. Two, it forced the Syndicate to dishonestly collect funds. Three, only the ruling regime could go soft on those who gave it enough money to win the next election.
Modi did the opposite, but with the same objective. In his times, although political donations were allowed, and revealed by the parties as and when they felt like, it was generally in cash. Thus, the identities of the donors were unknown.
Publicly, both Indira Gandhi and narendra modi were seen as crusaders against the dishonest. They took brave, even audacious, decisions to curb black money
The government capped this at Rs 2,000; no cash donation over this amount was allowed. Then, it introduced electoral bonds, and anyone with a KYC-compliant bank account could buy them from specific branches of the State Bank of India at specified periods, and in specific multiples.
Donors could buy the bonds, and donate it to the parties of their choice. The parties could cash them through verified bank accounts. However, the law stated that the identity of the donors would remain hidden.
The bonds would not carry the donor’s name, and the party would not know who gave it the money. The government explained that this was to prevent the donors’ details from becoming public. Still, the donor could claim tax deduction for the amount, and the political parties could claim tax exemption.
Hence, the new system was just like the old, with hidden donors who could save taxes, and tax exemptions for the parties. But there are two crucial differences. Donors’ names would be registered at the branches of State Bank of India from where the bonds were purchased.
Those of the recipients would be listed with the respective bankers of the political parties. Since the banking system was either controlled or monitored by the government, both the names could be traced. It would allow the ruling regime to pressurise the donors, and curb the money flow to certain parties.
Indira allowed cash to become systemic in politics. Modi swept off the cash, and replaced it with a new system, which too was hidden, but could be unveiled if the government wished to. In both cases, the ruling regimes could curb the flow of funds to political parties, albeit for different reasons.
Demonetisation, which was essentially sucking out old cash and replacing it with new, had the same political effect. It allowed the decimation of existing cash coffers.
Bank nationalisation in 1969 by the Indira government too was aimed to create a new loyal set of corporate financiers. Since the regime controlled the decisions of the bankers, the former could dictate the latter to fund specific business houses and specific projects.
Thus, the government could determine which businesses would grow, and which falter. In addition, it could impact the funds available with the Syndicate and opposition parties.
The entire lending chain became discretionary; politicians decided commercial actions. In many cases, the decision came from the top, or Indira’s Kitchen Cabinet and her loyal staff at the Prime Minister’s Office.
Those who dared to support Indira’s political enemies were denied licences under the Licence-Permit-Quota Raj. Even if some business houses sat on licences issued earlier, they couldn’t pursue the projects because banks were unwilling to lend.
Despite disinvestment in state-owned banks and the growth of private banks, the banking sector is still in government’s control. But, in recent time, there is a new way to create loyal business houses. Welcome to the shadowy and mysterious ways of the National Company Law Tribunal (NCLT).
It is easier to prove this with Indira, as Modi’s work is still in progress, and we still don’t know how far he will succeed in his nefarious schemes
But we are getting ahead of the story. It began as bad loans of nationalised banks zoomed with no signs of recoveries. In a bid to prevent the situation from going out of hand, the government introduced a new bankruptcy code.
It made it easier for companies to declare bankruptcy, and faster for them to be taken over by others, or by the original owners. The NCLT was set up to hasten the process.
Either deliberately or by default, it allowed companies to be purchased at huge discounts, or haircuts. A company with Rs 100 debt could be bought for as low as Rs 15, if the NCLT forced the lenders to agree. Funnily, even the original owners could buy back their own firms at cheaper prices.
Take the case of Atul Industries, which went to the NCLT because it was unable to pay back its debt of Rs 29,500 crore. Reliance Industries, in partnership with JM Financial, offered to pay back Rs 5,050 crore in the second round, which was Rs 100 crore higher than the first bid.
The offers were rejected both times because they didn’t get the requisite 75 per cent support of the lenders. Then the percentage requirement was reduced to 66 per cent, the court asked lenders to vote again, and this time it was accepted.
Consider the ramifications, not just in this case but others too. The haircut, or discount, was as high as 83 per cent. The two buyers had to repay Rs 5,050 crore, instead of Rs 29,500 crore. There are several such cases that were resolved by the NCLT.
In private conversations, the original promoters contended that they could have paid this amount if the bankers had agreed because their asset base is much larger. So, NCLT can easily emerge as the new way to help loyal business houses, if the government wishes to do so.
It began as bad loans of nationalised banks zoomed with no signs of recoveries. In a bid to prevent the situation from going out of hand, the government introduced bankruptcy code
An investigative series by www.scroll.in found three broad sets of buyers in NCLT cases. “The first set of buyers is global organisations with access to cash, looking for new opportunities,” it said. These included giant pension funds, sovereign funds, private equity players, banks and financial institutions, and asset reconstruction firms.
The second set included other foreigners, but companies in the same businesses that they bought. “They see these auctions as a beachhead into India,” said one part of the series. The third was obviously a “small group of Indian business houses”.
Government-funded deals, especially those related to exports and imports, are invariably used to create black money for several reasons.
One, it leads to the deposit of dollars in foreign accounts and tax havens that cannot be traced easily.
Two, since such deals are huge, the volumes of commissions and bribes are substantial. A few deals are enough to stash away hundreds of millions of dollars.
The paradigm shift from the 1970s was that this became systemic. Global geographies were divided among the loyalist non-resident Indians. All bribes related to the deals that originated and ended in those regions were paid to the respective NRIs, who then deposited it in the final recipients’ accounts.
The modus operandi was simple. Each of the interested buyer and seller would open a letter of credit (LC) in the name of NRO, or one of his several benami firms. While the LCs of the unsuccessful participants would be allowed to lapse, the one of the winner was cashed. The relevant banker transferred the money into the specific account.
In the above manner, bribes were paid. More importantly, they were difficult to trace. Each day, tens of thousands of LCs were opened in the 1970s. The number in the Modi regime is in tens of millions.
To trace a specific LC, and connect it to an account was like searching for a needle in a haystack. Unless one knew where and what to look for, the paper trail was lost forever. The identities of the bribe giver and receiver were hidden. Only the participants knew.
During the 1990s, such deal-making process became democratised. There were too many players, and centralised control became impossible. Partly this was due to economic reforms. A series of coalition regimes allowed more political parties to partake of the booty.
The representatives of the smaller parties, as was witnessed in the 2G scam, were able to by-pass the prime ministers and finance ministers. Local and regional leaders had a say in how the money would be distributed, and in what manner.
Today, it is being alleged that Indira’s form of centralisation is back. The Rafale aircraft deal hints that this may be true. The Opposition has charged that the decision to buy the fighter planes, and give a huge chunk of the “offset” business to a renowned business house, was taken at the highest level.
Congress’ Rahul Gandhi has used several words to describe the role of the prime minister, which was vehemently denied by the ruling government.
However, the more important change is that the long shadow of the government may impinge on private cross-border deals. A recent report uploaded on a website detailed several deals between Russian state-owned entity, Rosneft, and two Indian firms, the private sector Essar Group, and state-owned ONGC and other oil firms. Allegedly, politics played a crucial role in ensuring their completion. They were decided at the highest levels in both nations.
“First, between September 2015 and October 2016, Kremlin-controlled Rosneft sold 49.9 per cent in its Vankor oilfield in the northern parts of eastern Siberia to Indian public sector oil companies (largely ONGC). According to oil and gas experts in Russia and India, the Indian companies significantly overpaid Rosneft.
Towards the end of these transactions, in October 2016, Rosneft announced its purchase of a refinery and port owned by the Essar Group in Gujarat. The price surprised observers in both Russia and India – it was much higher than initial valuations,” explained the report.
Other newspaper reports claimed that the acquisition of a minority stake by ONGC Videsh, ONGC’s offshoot to acquire foreign assets, was “reached on July 8, 2015, during the meeting between the President of the Russian Federation Vladimir Putin and Prime Minister of the Republic of India Narendra Modi”.
Both leaders were keen to let the second one to go through, after Rosneft decided to pay $13 billion for Essar Oil, which was double its earlier offer.
It seemed like a classic ‘You scratch my back, I scratch yours’ kind of an agreement. The Indians invested and overpaid when Russia was reeling under the US sanctions, and needed the money.
The Russians paid more when the Indian private company desperately needed a way out, and its oil assets had to be saved because of the huge debt. Apart from business interests, it involved politics and diplomacy. In other words, a classic win-win sequence of deals!