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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 –– 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 –– who can steer the rudderless but fine Indian Armed
Forces away from the grip of the clueless IAS and muddled
politicians –– 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 –– as there are a
host of people in uniform who cannot speak up and expose the system
–– 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.
THANK YOU XEROX!
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
“uncommon” 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’t 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’s 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 “educating” 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’s
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’s 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 “party 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’s 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’s 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’s
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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