Adani Controversy 2.0: Big Lesson

To operate globally, in the interdependent, globalised world, Indian politics must reform, to relieve India Inc of the burdern of financing Indian democracy off the books

Lessons from the Adani Incitment

It’s certainly not good news for India Inc or those who run the economy, for one of India’s largest business groups with a record of efficient execution of large projects to be indicted in US by securities regulator SEC on charges of bribery, regardless of its merit. Remedial action of a structural kind is imperative, if Indian companies are to do large-scale business in today’s globalised world, in which capital, materials and talent are routinely sourced across borders, and expectations of accountability and transparency also transcend national boundaries.

Only about 1% of SEC’s enforcement actions come under the Foreign Corrupt Practices Act, and these tend to lead to the largest fines. At the same time, 98% of SEC’s actions end up in settlements, with or without fines and with or without admissions of guilt. How the charge against Adanis will pan out remains to be seen.

Regardless, we must admit bribes and corruption have been part of Indian business and politics for long. There’s corruption in private sector meant to enrich businessmen and executives at the expense of their own companies and shareholders. There’s corruption by civil servants who occupy positions in which they can delay, withhold or expedite decisions businessmen await. And there’s political corruption that prevents the exercise of state power to stamp out corruption of other kinds.

Bank managers take commissions to sanction loans. Purchase managers choose vendors depending on commission offered, other things being equal. Fund managers are routinely suspected of front-running – tipping off friends and family on which stocks their funds plan to invest in. So, friends and family can purchase these stocks or their derivatives in advance, and book profits when prices rise as the fund buys them up. When companies acquire other companies, a fraction of the sum paid to buy the company is known to be diverted by those who run the acquired company, into the offshore account of the acquiring company’s promoter, effectively robbing the acquiring company.

Greed and low probability of getting caught or being prosecuted beyond final appeal in their lifetime incentivise such behaviour. Another theme at work for businessmen is the need to acquire capital to grow businesses. Primitive accumulation of capital was a nasty business when industrialists of today’s rich world began their scramble to riches. It entailed piracy on the high seas, slave trade, slave plantations, loot of colonies, and exploitation to the bone of women, children and workingmen. Indian industrialists can only envy their rich world counterparts at their Indian stage of development and proceed to accumulate capital in their own dirty little ways.

The most corrosive corruption is of the political kind. Most Indians are proud of the label ‘world’s largest democracy’. But few think it necessary to be part of financing the democratic machine – the system of political parties, their extensive offices across the land, their workers, cost of travel, publicity, rallies etc. Parties are expected to mobilise funds in whatever manner they think fit. And that is what they do.

When GD Birla funded Congress, so the party could famously keep Gandhi in poverty, and, alongside, carry out other political activity, the money was given quietly. No sethji wanted the Raj to know how much he was funding the party seeking its overthrow. That tradition of quiet, informal funding continued after Independence. Initially, funds were used only to finance politics.

Gradually, such funding was augmented through extortion, sale of state patronage, and loot of the exchequer via inflated govt contracts – used to build personal fortunes, as also to finance politics. It falls to India Inc to finance our political parties in this manner. And that calls for vitiating corporate governance and integrity of accounts and audits, taking large amounts of money off the books – to fund political machinery.

During the stock market boom in liberalisation’s early years, industry realised the value of declaring, rather than concealing, business profits. It led to superior valuation on the markets, and promoters clambered on to lower rungs of the billionaires’ ladder. In the Satyam scam, the company showed profits it didn’t have, even paid tax on them, so that share prices would soar and, alongside, the loans that could be raised by pledging them.

Project costs were inflated to obtain loans much larger than required. Surplus capital so mobilised would be taken out during project implementation, to create the war chest needed to pay off politicians, civil servants and protection rackets. Offshore funds would be used to buy into stocks and inflate their prices, so that yet more capital could be raised via loans secured by the shares.

Business corruption and political corruption form a symbiosis that has fuelled growth for some time. It may appear commonplace within the country. But to outsiders, whose capital is deployed in the Indian growth story, this symbiosis looks like cancer.

Business corruption feeds politics, of all brands. To liberate business from this burden, politics must receive an alternate stream of funding –voluntary contributions from 1bn voters, willingly given and openly accounted for. And politics must become clean, stripped of activity that cannot be openly declared, such as bribing defecting MLAs, distributing cash on poll eve and paying people to attend rallies.

He who has not sinned, let him cast the first stone. If Indians were to follow this, stones would rest in peace forever. We need to stop the sin, not just stop stones flying. That might prove painful. But that’s what’s called growing pains.