Squeeze the law abiders, do deals with law breakers - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Squeeze the law abiders, do deals with law breakers A  A  A

27 APRIL 2013

The quality of public governance is deteriorating at an alarming rate, not only in India but also globally. Last week we witnessed several more distressing examples of this.

In the Saradha collective investment scheme collapse, the attention of all our elected representatives across parties is focussed on pointing fingers at each other on TV talk shows, rather than on seizing the assets of the culprits and trying to recover as much of the illegally obtained depositor's money as possible.

Depositors and agents committing suicide, but the thick skinned political leaders care not a whit. The CMD of Saradha has been charged, in an FIR (First Information Report) not for swindling the public, but for non payment of salaries! It is, perhaps, in order to later provide an escape routem, once a 'deal' is struck! What a criminal disdain for public sentiment and what appalling apathy.

So public governance is all about how to whack those who abide by the law, and to do backroom deals with those who break the law, allowing them to swap their ill gotten gains for personal freedom.

For example, buyers of flats of a few buildings in Worli, Mumbai, are to become homeless when these flats, found (after years) to have been illegal, are demolished. At the same time, the Adarsh flats remain standing, because of the connections enjoyed by their owners.

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We live in an animal farm, where some animals are more equal than others.

T N Ninan has given several excellent examples of this 'robbing Peter to pay Paul' syndrome in his artricle in Business Standard April 27

Or take the recently introduced LBT (local body tax) and LPT (local panchayat tax) which Maharashtra is seeking to introduce, to replace the revenue lost by abolition of octroi (a tax leviable on inter-state movement of goods). Traders in Maharashtra have called a strike against it. Their reasonable averment is that if the Government wishes to introduce these, they should merge it, as Gujarat has done, with VAT, to obviate the need to keep a different set of records, and thus be subjected to harassment and corruption demands by a different set of inspectors.

But public governance is about whacking the law abiders, such as the traders, and doing deals with the law breakers, such as those who ferry illegal stuff across state borders.

Consider, too, the ludicrous demand against Shell, by the IT Department, which has, under transfer pricing rules, slapped it with a penalty for 'underpricing' shares issued as rights to its parent, which owns 100% of the Indian subsidiary. Shell has gone to court over this, as it should.

Juxtapose this with the modus operandi used by several policy makers to collect bribes. They get their family members to set up dummy companies and issue equity shares in them to the bribe givers at an exorbitant premium. A year or two later, the shares are sold by the bribe giver, to the promotes, at a pittance. The loss is the bribe. It is tax deductible! This modus operandi is well known and has been reported in the media last year. Why is this not investigated?

Because - public governance is to whack the law abiders (such as the Shells of the world) and to do deals with the law breakers.

Doesn't anyone in Government realise the harm this is doing to the country? Or, if they realise, does no one care?

Whilst India was trying to get Rs 15,000 crores from Shell on the logic of an unsustainable tax demand, China gave permission to Shell to invest $ 100b. in developing its shale gas fields.

Shale gas is the next major 'bridge' fuel to be used when fossil fuels start to taper off. Australia is fast becoming one of the major sources of shale gas, after the USA. Perhaps China may overtake both. But shale gas discovery and exploitation requires technical expertise and capital, and China has been wise to create an investment climate that attracts companies. Perhaps China will become energy independent after a decade. India will still be fighting with Shell in a court of law.

In the case of the Sahara group, although Securities and Exchange Board of India (SEBI) attempted to forestall the collection of funds through OFCD (optionally fully convertible debentures), the group effectively used various courts of law and fora to stall SEBI's efforts, and go ahead with the collection. It has now bloated into humungous proportions. But it was only last week, after a decade, that the Supreme Court realised, and stated, that the group was manipulating the courts, something which was obvious years ago when it got a court order staying SEBI's order.

Now, although this website has a different view on commissions to mutual fund distributors, this columnist feels that banning payment of commission to distributors could have contributed to the growth of such unregulated 'collective investment schemes' also known as chit funds. A better way would have been to inform investors in the regulated mutual fund industry that the kickback of commission they get from the distributors is, in fact, their own money! Thus informed, they could then decide if it was in their interest to invest in a regulated, mutual fund entity, or in an unregulated chit fund promising untenably high returns.

We thus create our own messes and problems.

And, to add insult to injury, the Government of West Bengal, which seriously failed to stop chit funds like Saradha from growing on the back of false promises, has set up a Rs 500 crores 'fund' to recompense investors. This will come (at least Rs 150 crores of it; the rest is unclear) from a 'sin tax' by imposing an extra tax on smokers. In a lamentable display of apathy, Mamata Banerjee exhorted smokers to smoke more, so that she could collect tax to pay for a fraud which her Government permitted to be continued!

If this is not a Kafkaesque situation, one doesn't know what is!

How can any leader suggest her people to smoke more, knowing it is carcinogenic?

For that matter, how can any political leader of a region that faces water scarcity, as in Solapur, permit the setting up of 19 new sugar factories, as Maharashtra has done? Sugar factories are huge guzzlers of water. So the priorities of the Government are to provide a living to 19 families of the sugar factories, never mind if the livelihood of millions of farmers is hit in the process? This is criminal.

In corporate results, Maruti Suzuki came out with impressive results, doubling Q4 net profit to Rs 1147 crores. HDFC Bank (Q4 net profit up 30%) and Axis Bank (22%) were also encouraging.

In corporate news, Reliance Jiyo (the telecom company of RIL's foray into 4G) signed a deal with Bharti to use the latter's undersea cable network for its telephony venture. Jet Airways sold a 24% stake to Etihad Airways for Rs 2,061 crores, a price higher than the initial price. R Jagannathan beautifully explains why in this article. This was after the Government of India suddenly increased the seat allocation with Qatar.

If it is any comfort, shafting of investors is a global phenomenon. US banks were profligate in issuing sub prime mortgages, even to those who had no income, no jobs or assets (acronymed NINJAs). Banks were betting on higher home prices to bail such loans-that-should-never-have-been-made, out. When home prices zigged instead of zagged, the banks went into a tizzy, and used unfair means to foreclose the mortgages, even in cases where borrowers had not defaulted!

Ultimately, under a court order, a settlement was reached, and some sort of formula was used to 'recompense' those whose homes were unfairly foreclosed. No less than 4.2 million people got shafter, and will get crumbs.

Perhaps the final example of the lean in favour of the too-big-to-fail banks versus the too-small-to-matter people is seen in the way the former are able to manipulate different markets. We had seen the way a handful of banks had manipulated the setting of the benchmark LIBOR rate, on which interbank loans were based. In the above article, the same handful of banks is manipulating the interest rate swap market, a $ 379 trillion market.

Last week the BSE-Sensex gained 270 points to end at 19,286 and the NSE-Nifty gained 88 to close at 5,871. Instead of reacting adversely to the brouhaha over the clean chit given by the JPC to the PM and the FM in the telecom spectrum allotment scam, investors were guided by the chance that the Reserve Bank of India (RBI) may lower interest rates in its meeting on May 5.

Now political attention will focus on the news that the PM was, indeed, kept informed about coal block allotments. This provides more grist to the political mill, a constant merry go around of you-stab-my-back-i'll-stab-yours.

So the movement of the Stockmarket would depend on the unfolding of more political scandals and the feigned howls of protests by equally scandalous opposition figures, but which spook foreign investors, and the probable cutting of interest rates by the RBI, which cheer them. When spooked, foreign institutional investors (FIIs) pull out their money, they pulled out $ 1.2 b in the first quarter. Will they be spooked again, or will they see the drama played out by politicians for what it really is - a kabuki drama to pay lip services to the concerns of the electorate?

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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7 Responses to "Squeeze the law abiders, do deals with law breakers"
Sanjay Saini
Apr 29, 2013
Great article, I felt very ashamed and sense of grief. I wish the leadres and policy makers too have felt the same. As someone has said after deep darkness ther is a ray of hope. I am still straining my eyes in search of that ray. Like 
Prashant Manohar
Apr 29, 2013
Ms.Mamata Banerjee has set up a fund to help the Chit Fund investors who lost money. It is high time the Supreme Court should intervene and stop all kinds of populist political gifts to the people who lose money solely on account of their own financial decisions.As a logical extension, should the governments at Centre or States set up funds to finance losses in stock market, commodity markets etc? Why should taxpayers' money should be wasted like this? Like 
Prof. N K Jain
Apr 28, 2013
We the law abiding citizens of the world are mute spectators to the excesses being committed by the political figures across the world. We do simmer in disgust but there is no real solution to the problems. Financial literacy is one means thru which we can educate the people but most of the investors are blinded by greed to fall prey to promoters of Ponzi schemes. Even Shoba De's article in TOI makes us fume over the same issues but without any remedy. Like 
madhav ranade
Apr 28, 2013

every tax is passed on by them ... and sometimes even 120/130 % as most consumers dont even know the exact percentage etc .....

TRADERS hv minimal regulations to follow compared to manufacturing / service industry and now a few things r being implemented they r up in arms .....

pl dont take a very simplistic view of anything .....
Apr 27, 2013
Apr 27, 2013
unfolding the truth of poor Indian governance.....describing clearly the difference between regulated and unregulated sectors of investments and ignorance of poor investors and losing their money and showing poor thought quality of politicians through intensive analyzing articles. thanks. Like 
Noshir H. Gundevia
Apr 27, 2013

Dear Sir,

You have the facility of words to put the current state of affairs so succinctly in a short article. Many people understand but are unable to spell it out as you have done. Hammer it on, in the fond hope that the powers that be wake up. More power to your elbow in this endevour. You have the support of the silent majority if it ias any comfort.
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