Tuesday, May 21, 2013

Political Business Tree that Gives and...

Companies run by family members of some politicians are like every other company. And they are not, as these four practices that run through their businesses and have aided their meteoric rise show. John Samuel Raja D reports

Talk about business growth and opportunity. In the last five years, Theon Pharmaceuticals, controlled by the immediate family of former railways minister Pawan Kumar Bansal, has increased in size from 15 crore to 152 crore.

Elsewhere, in the same period, 757 crore of cash has come into seven companies owned by Anand Kumar, the brother of former Uttar Pradesh chief minister Mayawati. Robert Vadra, the son-in-law of Congress president Sonia Gandhi, has quietly assembled a real estate business estimated in the region of about 300 crore.

And YS Jaganmohan Reddy, son of the late Andhra Pradesh Congress leader YSR Reddy, has seen his wealth increase six-fold, to 446 crore, in the space of just two years. These are growth rates that would make even a blue-blooded corporate go green with envy. In times that have been tough and trying, these four blueblooded family members of politicians in power have built businesses from scratch. These companies are like every other company. And they are not, as these four business practices, which have aided their meteoric rise, show.

Robert Vadra aside, the others have been selling shares in their fledgling companies to outside investors at a premium—usually hefty—even as the promoters themselves subscribe at par value. Thus, the promoters are able to pump cash from external sources into the company without diluting their equity stake much. The most recent case is that of a company promoted by the family members of Pawan Kumar Bansal, the former railways minister who resigned earlier this month following corruption charges against one of his nephews. Company filings with the Ministry of Company Affairs (MCA) show that in March 2011, the board of Mirage Infra passed a resolution to issue 4,000 shares to a non-promoter shareholder, Rajeev Garg, at a premium of 990 per share, which brought in 40 lakh into the company. However, a year later, in March 2012, the Mirage board approved the issuance of 46,000 shares at their par value of 10 each to three family members of Bansal’s extended family. Pawan Kumar Bansal declined to respond to a questionnaire sent to his office. Similarly, companies owned by Anand Kumar, Mayawati’s brother, have received huge capital infusions by issuing shares to outside investors. ET was the first to report this, in January 2013.

For example, DLA Infrastructure, which had a net profit of 2.2 crore in 2009-10, garnered 100 crore by selling its shares at a premium. Another company, Dia Realtors, with a net profit of 4.5 crore in 2011-12, collected 71 crore. The sale of shares at a premium is one of the ways in which 757 crore of cash came into seven companies owned by the 37-year-old Kumar when Mayawati was the chief minister of UP between 2007 and 2012. MCA filings show that another 346 crore came from the sale of investments (which were not disclosed) and 12.7 crore from advances received from third-parties that were forfeited. ET could not reach Ambeth Rajan, who handles media queries for Anand Kumar, on his mobile or landline numbers. The issuance of shares at hefty premiums forms a central part of the disproportionate assets case made out by India’s premier investigating agency against YS Jaganmohan Reddy. In one of the charge-sheets against Jagan Reddy, the Central Bureau of Investigation (CBI) describes these “investments as part of quid pro quo arrangement for the largesse and the benefit obtained by the investors”. Jagan Reddy, while filing his nomination papers for the 2011 Lok Sabha elections, disclosed that his personal wealth had shot up six-fold in two years, from 73 crore to 446 crore. The filings showed that three-fourth of his wealth was derived from share ownership, in particular in Bharathi Cement Corporation, a company in which he held majority shareholding for a few years. MCA filings by Bharathi Cement for the last six years show that eight outside investors, including Dalmia Cement (Bharat) and India Cements, bought shares at a huge premium, while Jagan Reddy and his family members subscribed to the same at par.

As per calculations done by ET, these eight investors invested at least 142 crore by subscribing to 0% preference shares, paying between 90 and 1,440 per share, between April 2007 and March 2008. Two months before external investors started investing, Jagan Reddy picked up 30 million shares at 10 per share, paying 30 crore. As a result of these transactions, Jagan, along with his relations, held near 100% of Bharathi Cement, while outside investors —who brought in at least 4.5 times more than Jagan Reddy —have no stake as their preference shares have no voting rights. “By the time outside investors came in to invest in Bharathi Cement, the promoters had already done a lot of work and invested a lot into the company,” argues Madhulika Chavva Reddy, spokesperson for YSR Congress Party, which is headed by Jagan Reddy. “The project already had all the permissions along with the entire land, what is private land was also procured from farmers, loans were sanctioned and the project was in the construction stage. Moreover, the investors who came in were only investors, they did not sign any corporate guarantees to the bank. The rest was totally Mr Jagan’s.”

The CBI, in its chargesheet, has alleged that a similar transaction took place in Jagati Publications Pvt Ltd, which runs the print operations of the Sakshi Group, owned by Jagan Reddy. Its chargesheet says that outside investors invested 1,246 crore over two years in Jagati, at 350 per share, and benefited from the decisions taken by the Andhra Pradesh government when his father was at its helm. “There are no complaints that Mr Jagan has either siphoned or misappropriated the premium amount in the companies,” says Madhulika Chavva Reddy.

Real estate seems to be the most popular business area, with Vadra, the extended Bansal family and Anand Kumar all expanding their presence in the sector at a brisk pace. In the last five years, for example, Vadra has been buying—and sometimes selling —land, and has also diversified into building housing projects, and in developing and managing hotels. ET was the first to report this, in March 2011. An October 2012 article in the Economic & Political Weekly, titled ‘Where Do Indian Billionaires Get Their Wealth?’, pointed out that the primary source of wealth of 20 of 46 India’s billionaires in 2012, as listed by Forbes magazine, was ‘rent-thick’ sectors. This paper by Aditi Gandhi of the Centre for Policy Research and Michael Walton of Kennedy School of Government, Harvard University, termed seven sectors —real estate, construction, infrastructure, ports, media, cement and mining —as “rent thick because of the pervasive role of the state in giving licences, reputations of illegality, or information on monopolistic practices”. In October 2012, Arvind Kejriwal, founder of the Aam Aadmi Party (AAP), had alleged that DLF, the country’s largest real estate developer, had given companies owned by Vadra an interest-free loan of 65 crore and heavy bargains on land in exchange for political favours. Refuting those allegations, DLF had said then that these were not loans, but advances to buy land in Manesar and Faridabad. Subsequently, in one transaction, a Vadra company bought 3.53 acres of land from farmers for 7.5 crore in February 2008. In less than four months, it obtained a licence to change the land use to build residential houses, and sold the land to DLF for 58 crore. Vadra did not reply to an email questionnaire sent to Vadra’s personal secretary, Manoj Arora, on May 16.

This transaction is not the only one between these fledgling companies, trying to find their feet in business, and established companies. DLF also gave Vadra a 50% stake for 35 crore in its hotel joint venture in October 2009, and has since done three transactions worth 446 crore with it. Similarly, two close associates of Anand Kumar had links to a business group, Carnoustie Management, in which DLF and Unitech invested 6 crore and 335 crore, respectively, between 2010 and 2012. Both DLF and Unitech have said these investments were part of their normal business transactions. Even Theon Pharmacenticals, which does contract manufacturing from its plant in Baddi, Himachal Pradesh, counts Ranbaxy, Cipla, Piramal, Mankind and Torrent as its clients in its MCA filings. Theon is owned by Bansal’s wife, Madhu, and their two sons, Amit and Manish. The company has seen its turnover rocket from 15 crore in 2007-08 to 152 crore in 2011-12.

One factor in Theon’s meteoric rise — which began soon after Bansal’s first appointment in the UPA government in January 2006 —is the availability of funding. Theon secured a loan of 60 crore from Canara Bank in 2007, when Bansal was the minister of state for finance in the UPA-I government in charge of banking and insurance. The BJP has alleged the loans were extended to Theon after Bansal cleared the appointment of Sunil Kumar Gupta, a chartered accountant who was the auditor to several companies owned by the Bansal clan, as a director in Canara Bank. The bank also loaned 40 crore to Mirage Infra, a company in which Bansal’s nephew Vijay Singla is a director, in 2008 despite it not having any running business. Gupta told The Times of India that he had limited powers to sanction any loan for the companies. “First, I was a non-official director and then a shareholder director. These profiles have limited powers. As far as conflict of interest is concerned, my wife and I are not at least auditing the same firm. The question must be asked to the promoters why they were interested in making us directors,” he said.