The Perils of Transparency

Many lessons can be drawn from the events of 1997. One of the saddest is that crooks who function in the dark get away scot free, while people attempting to be transparent are jumped on the harassed.

I had originally expected that the hawala case would dominate politics in 1997. But it proved a damp squib once the Delhi High Court ruled that the Jain diaries could not be considered evidence without supporting material. The police, who had stumbled onto the diaries only by accident, simply could not unearth supporting evidence (some attribute this to incompetence, others to corruption and political influence). And so a string of top politicians were discharged-LK Advani, Arjun Singh, Madhavrao Scindia, Yeshwant Sinha, ML Khurana and many more. All those who blandly denied taking money from the Jain brothers were let off.

One man did indeed admitted taking Rs 3lakh. This was Sharad Yadav, Janata Dal chief. He had said from the start that he had accepted this as a cash contribution to his party and handed it over to the Janata Dal, a transparently recorded transaction. He argued that this transparency showed it was not a bribe. He repeated this in interviews to Zee TV and New Delhi TV.

Far from getting plaudits for transparency, he suffered. The judge who had freed many others insisted on framing charges against Sharad Yadav on the ground that the accused had admitted taking the money, and so the onus lay on him to show that it was not illegal gratification.

That sums up the sad state of affairs in India today. Transparency is penalised and deviousness rewarded.

The lesson is driven home by at least three other incidents in 1997. Two involved the Tatas Early in the year, Ratan Tata proposed that all Tata companies should contribute to a Tata Brand Equity Fund, and also subscribe to a Tata Sons rights issue at the high price of one lakh rupees per share. This was criticised by columnists (including myself), merchant bankers, and consumer activists as an attempt to use shareholders’ money to strengthen the control of Tata Sons over companies of the Tata group.

Yet virtually no criticism was levelled by observers at dozens of other industrial houses where too promoters have devised stratagems to use shareholders’ money to strengthen their personal control, mainly through intricate crossholdings. Why did the Tatas get the flak and not the others? Because Ratan Tata chose a relatively transparent route, while the others devised opaque routes. People attacked what was visible, and said little about what was not.

Something similar happened later in the year when Tata Tea was found to have provided hospital treatment to a prominent leader of the terrorist outfit United Liberation Front of Assam (ULFA). Now, virtually every tea garden in Assam has been paying off ULFA. The state government is too weak and ineffective to protect those who refuse to pay. The vast majority of tea gardens have been giving ULFA suitcases stuffed with cash. But the Tata group frowns on stuffed suitcases, and looked for some other way to pacify ULFA. It hit on the idea of giving ULFA access to the welfare funds of the company for medical help to Assamese people.

On surface, this looked like a clean, white-money route out of a dilemma. But it soon turned out to be a bad idea. It left a paper trail, soothe police were able to track down records showing how the ULFA leader was taken to Mumbai for treatment. Had the Tatas simply given a stuffed suitcase to ULFA, like everyone else, nothing would have happened. Alas, they opted for a more transparent route, and this enhanced visibility made them sitting ducks.

My final example is that of Hindustan Lever Ltd (HLL). Long praised as a fine example of good corporate governance, as a company that has truly done wonders for its shareholders, it became the first company to be accused of insiders trading by SEBI. Hindustan Lever had merged earlier with its sister company Brook Bond Lipton India Ltd (BBLIL).

Then merger was formally declared in April, although the marked knew that merger talks had been going on for months. Now, towards the end of March, UTI offered for sale a large parcel of BBLIL shares. The market price at the time was Rs 320 per share, and Hindustan Lever purchased some more shares of BBLIL. It then extinguished all these bough-back shares, reducing its equity capital to that extent. The aim of this was to maintain a 51 per cent holding for Unilever, the foreign parent, in the merged entity. However, all buy-backs to reduce equity also enhance value for minority shareholders, since the assets of the company are not spread over a smaller number of shares, increasing assets per share.

When accused of insider trading, HLL pointed out that (a) it bought the shares for extinction not for sale at a profit; (b) If it simply wanted cheap shares for Unilever, it could under SEBI rules have issued fresh shares to Unilever at is the average price of the previous six months, which was only Rs 273; (c) it could not be an insider into itself ( a technicality, but an important one).

Now, nothing is more common than insider trading in the stock market. When SEBI banned insider trading in 1992, many market-men were puzzled. For them, the whole point of stock market trading was to make use on inside information. However, they soon realised that SEBI had no effective policing system to deal with insider trading. Insiders simply had to use bogus names or other simple ploys to hide their identity and could then mint money with impunity.

Hindustan Lever Ltd was not trying to make a profit in the dark. It believed (though many critics and lawyers disagree) that its premerger purchase was legitimate. And so it informed SEBI and all shareholders of the purchase. Whereupon SEBI, a watchdog unable to nab insiders trading in the dark, jumped on the one company that had been transparent.

Critics argue that transparency is not enough, and that Hindustan Lever crossed the borderline in this case. In this article, I do not wish to go into the merits of the charges against Hindustan Lever, the Tatas or Sharad Yadav. I wish to make a quite separate point.

This is that we have created an incompetent and corrupt state incapable of catching those who plunder in the dark, yet willing to harass those who are transparent. And its procedures are so dilatory that those harassed will suffer for years. The moral is clear. Keep all your transactions black, lie through your teeth, cook your books, and you will flourish. But deal transparently in while money and you may be taking a terrible risk. Satyameva Jayate.

What do you think?