An IDC Analysis


New Delhi, 31 July 2002

Our regular readers would have perceived that in our attempt to contribute to a robust Indian defence and security system, we have been in the forefront to suggest three major changes in the Indian Defence scenario.

We wrote strongly of the folly of not permitting Agents for defence purchases and now Defence Agents are legal. However, in their desire to retain their stranglehold on defence purchases, the powers that be have stipulated such draconian conditions that according to the media only three applications have been received 末 so it is business as usual!

India is the sixth largest importer of Defence goods, so several representative offices have been opened here and some ex- service officers have been employed in the Rep offices, which is a step in the right direction.

A second thrust had been to advocate strongly again, the immediate appointment of a CDS with power 末 who can steer the rudderless but fine Indian Armed Forces away from the grip of the clueless IAS and muddled politicians 末 to achieve cohesion between the three services which is lacking. But what do we have, a watered down CIDS has been put in place with many promotions to placate the senior ranks and some 50 senior officers await the appointment of a CDS. The Strategic Force Commander is still to be sorted out and as the cool customer Gen S Padmanabhan is due to retire early next year the game is about getting the right personality. All this is happening with the hapless Army still mobilized, though professional courses have just been resumed.

A third thrust had been to advocate that defence contracts be made more transparent to control corruption 末 as there are a host of people in uniform who cannot speak up and expose the system 末 because they have to protect their backsides. After the Tehelka exposes things are much worse with witchhunting the order of the day. India is ranked fifth on the list of corrupt countires and we can vouch for this in daily life. Today even the Armed Forces have been found indulging in this malaise that is eating into India 's guts. There is cause for worry. A Major General who was in charge of Procurements, was trapped in the Tehelka case and his assets speak for themselves. He can expose a lot but he is reticent as he was a professional who got tempted seeing what goes on. 

In the past the Bofors and HDW submarine cases remain still unsolved but reek of money taking. These were relics of the past but in the recent times the Coffin case, the Tehelka exposes and such have indicated that the malaise is far gone and so we present this piece from Mohan Guruswamy.



By Mohan Guruswamy

The revelation by the Xerox Corporation in the USA that its Indian subsidiary, Modi Xerox, had paid over US$ 800,000 as bribes to obtain sales for its products seems to have shocked our government into taking action against Modi Xerox. An apparently outraged Department of Company Affairs (DCA) has swung into action and is preparing to charge the company with a slew of offenses ranging from falsification of accounts, misdeclaration of expenses and other such 砥ncommon offenses. They must be rare and uncommon offenses indeed, for no other Indian company has been investigated by the DCA for committing such perversities in the recent and recallable past. But we know better, don稚 we? At a time when we see privatization as a panacea to our corruption blighted existence, I would like to insert some words of caution. Private sector can be more corrupt than the public sector. Privatization does mean the end of dishonesty, but the beginning of much more.

Why do companies resort to this kind of creative accounting? The answer should be very obvious to all, except of course the DCA, which will strain every one of its few and feeble sinews to find out why only to let us know what we already know. If the DCA is really earnest about all this it should first find out how its own Xerox machines were purchased? Or for that matter every xerox machine, whatever be the brand, the government owns. It will discover that each and every copying machine would have been purchased under rate contract, just as every air-conditioner, every bit of furniture, every scrap of paper and everything else needed for everyday use to make the life of the common citizen more burdensome.

The rate contract is an artifice by which purchase prices for various articles are fixed by the Director General of Supplies and Disposal (DGS&D). To get onto the DGS&D rate contract is a major achievement and firms have to get their products approved after a process of evaluation (no pun intended). Successful evaluation entails a substantial pay-off to those concerned. Since prices are fixed the various departments can place orders on the vendors directly. The choice of make and supplier is left to the purchasing office or agency or department. To get the order requires payment. To get the supply certified as functioning to specification requires payment. To get the bill passed requires payment. To get the cheque in hand requires payment. How else would a Modi Xerox get money for these payoffs? It has to rig the books and turn good money into bad money. Or else it can kiss its existence good bye!

But lets get one thing very clear. Not all the money the executives say is meant to pay off the buyer goes to the buyer. What actually happens is that a good part of what is taken from the company in bags to ostensibly pay off the buyers ends up with the bag carriers who are full time company executives. This money is then shared between the corporate executives. Likewise not all the money supposed to pay off the customs, excise, IT, labor, and local government, sales tax and police departments goes to the officials. Sure you need to pay these officials on a regular basis but what they get is not what is on the number two accounts.

Many years ago I took over a very badly managed company, a major part of whose business was to supply air-conditioners and water coolers to government offices. One of the first things I noticed was that a rather high percentage of costs were accounted by sales administration and product promotion expenses. I probed a bit and was let into the big secret. The company was running a slush fund to pay off various officials. When I proposed a deep cut of these expenses I was told that business will grind to a halt and that these expenses were essential and that this was standard industrial practice. I consulted some other CEO痴 in the same line of business who only confirmed that was how the real world worked. I agreed with the executives that pay offs were inescapable but from now on all payments will be handled directly by my office. I had few takers, literally, and was able to slash these expenses considerably. Business far from being adversely affected actually prospered.

Most companies buy equipment and material at inflated costs. We know that the Dabhol Power Company promoted by Enron put up its huge power generation project at a cost of over Rs 6,000 crores when a similar sized project was set up for half that amount in another country. Enron even reported that US$ 28 million or over Rs.100 crores was spent on 兎ducating Indian opinion leaders like politicians, bureaucrats and journalists. All newspapers specializing in reporting on economic and business matters without exception endorsed the Enron proposal, and all those who opposed the project were called various names. Almost every person involved in facilitating the Enron project in India benefited from it. Even the bankers, lawyers and consultants made huge amounts. The legal cost itself amounted to a few hundred crores! Now that the Dabhol plant is up for sale the financial institutions who insisted on sinking over Rs 5,000 crores in the company, against better advice if I may say so, have not got an offer of more that Rs.2,500 crores. Why will anyone want to pay Rs 6,000 crores for something that should not cost more than Rs 2,500 crores? The Indian people, generous to the core will end up paying the bill when the bill should be sent to the likes of Atal Behari Vajpayee, Pramod Mahajan, Bal Thackeray and Sharad Pawar who rammed the deal down our throats.

The purchase function in every corporation is inevitably in the hands of very trusted and carefully chosen executives. In the typical family managed company these jobs are reserved for the owner痴 brothers-in-law or nephews. Another way to loot a company is to procure parts or raw material from companies owned by relatives or by the owners themselves. I know of one instance where a company was sourcing a finished product from the owner痴 company at a far higher cost than a similar product manufactured in-house. Take any major manufacturer and you will find that persons closely connected with the owners or top managers own most of the sub-contractors and ancillaries. Even public sector companies are no different. Many a successful entrepreneur started off by moonlighting as a supplier to his employer.

The appointment of distributors is another source of large private incomes to corporate executives. At one time most Maruti dealers were appointed on the basis of relationship to an influential person or by the size of 菟arty donation. With the growth of the automotive industry the dealership to get, seems to be a petroleum products outlet. The income possibilities by selling adulterated petrol and diesel are far greater than the regular income. Soon we will have private sector gas stations. No wonder relatives of our top politicians are vying with each other to be appointed as dealers.

Most of our top executives, apart from maintaining two sets of books, have two sets of standards also. On one side they will talk about professionalism and ethics while stealing their companies blind. After all how are they going to pay for those apartments in London and for the trips to Monte Carlo ? One fellow not being satisfied with ripping a few crores from his ailing corporation to pay for a palatial house where his wife stays, had to do it twice to get an equally palatial home for his girl friend. Another ailing group while retrenching its senior executives gifted its aging patriarch a brand new BMW.

The needs of the highly placed are many and they have to get cleverer each day. There are many very creative and ingenious ways by which owner-managers and senior executives steal from their companies. A company chairman was caught stealing from his company by placing advertisements in bogus souvenirs for charitable causes where the object of the charity was himself. One of the cleverest that I have come across is where an owner was making huge donations to charitable trusts floated specifically to collect these monies for him. The government caught on many years ago leading to his being raided and arrested along with his top executives. Naturally nothing has come of this. Everyone was paid off. The total paid up capital of the top 864 companies is Rs.59,214 crores and these companies together have a turnover of Rs.704,919 crores. We can very safely assume that 10% of this turnover or Rs.70,000 is stolen each year. Not bad at all for an investment of Rs.59,214 crores! If there were a school for scoundrels most of the star faculty would be Indians. As it is most top US business schools count many Indians among their faculty stars.

Project costs in India are routinely padded up to enable the promoter to make money even before the project gets off the ground. The new Finance Minister has quantified the NPA痴 of just the Financial Institutions to be over Rs.80,000 crores and has rightly described them as a loot. With the coming of the new international trade regime, the inflated project costs and high interest rates are making most of our companies unable to resist the overseas onslaught.

It is fashionable to believe that this kind of systematic looting is restricted to the old economy industries. Well I hate to disabuse you of the notion. Many overseas acquisitions by our larger IT companies are fraudulent deals involving the purchase of hollow companies with grossly inflated and falsified assets. When you set up a smokestack old economy industry the payoffs come from equipment suppliers and contractors. But in a new age company all that is needed are banks of PC痴 and servers, all of which are relatively low cost products with well-publicized prices. You will agree that buying a PC is very different from buying a 1400MW power plant. So the kickbacks have to come by making some extraordinary purchases. Remember the huge sums paid for websites a few years ago?

Let痴 not get too hypocritical and seem outraged about what Modi Xerox did. The Xerox Corporation has done us a great service by revealing to the world as to how business is done in India . Maybe some good will come out of this? Thank you Xerox!

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