This is the third part of the four-part series on the difficulties of an entrepreneur doing business in India and how India loses by forcing small businesses to pay for bribes and lose out to multinationals. PS Deodhar talks about how corruption manifests in different forms and how it affects the small and medium entreprenuer and how it affects India
Then in 1982, I was sucked away from APLAB into New Delhi by Rajiv Gandhi, a close friend since 1975.His brother, Sanjay, had died in an air crash in 1980, and gradually, I began spending more time in Delhi than in Mumbai. In 1984, I left the management of APLAB in the able hands of Subhash Joshi, who was well-groomed in the APLAB culture. I was away for over eight years. I did hinder APLAB’s growth by advising Subhash and his sales team not to participate in any government business in which I was even remotely involved. This was how my ethics were stunting the company’s development.
APLAB's growth was greatly hurt, but I had no option. I had decided to work for the government, but had pledged to myself that I would not indulge in any unethical actions. No hospitality from anyone who gained out of my position in the government. I even refused government salary by accepting a token that I had to. It gave me a nice feeling. I was free to call a spade a spade. I don't think Rajiv was ever put in picture about his mistakes as bluntly as I did.
But then, there was another face of Delhi that is now common knowledge; corruption. Let me share my own encounter with corruption.
In 1985, I advised the government to float a tender for the bulk purchase of colour television tubes to save foreign exchange. India was importing these at US$76 a piece. The tender created fierce international competition. The lowest bid was $64 and ET&T, of which I was the Chairman, negotiated down to $63. We saved six million dollars for the country in a stroke and went on doing the same till 1989! Orders went to several companies in Japan, S. Korea and France. Then, after all of this was over, a supplier came to meet me and surreptitiously told me that he had set aside a dollar per tube and wanted to know how and where he should give it. I called ET&T's Financial Director, Mr. Patro, and told him that we were getting another dollar in discount from this supplier and he should see how our company could accept it. That evening the rep called me to apologise. He told me that this had been the prevalent practice.
He was, however, worried. I told him that I am not a policeman and that he should rest assured that I was pleased to see the government saving another fifty thousand dollars. Such news spreads very fast. After that, no one troubled me again as I had earned a reputation. Mr. R. N. Patro was probably impressed too. When I became the Chairman of the Electronics Commission, he gave up his Directorship in a PSU and joined me as my Personal Secretary! He shielded me from the bureaucrats and would moderate my responses to ensure that I wasn’t victimised. He was indeed my protector and worked for me till he passed away. However, back home at APLAB, Subhash ran into problems since all along the government had been a large customer for APLAB. Such a reputation did not do much for the business.
The nine years in Delhi were a disastrous experience for me. I found almost no one amongst the politicians or top bureaucrats, who was interested in nation building, something that demanded sustained well-planned efforts. We had remarkably brilliant bureaucrats and very sharp, cunning and street-smart politicians. I found that the former were more concerned with their careers than the nation. Those among them heading the ministries barely had a year before they would retire, so the only future thoughts they had were about themselves and not the country. Their immediate concern was about their post retirement plans. The politicians were a cunning lot, but most had no vision for India. Their vision was limited to themselves and their region, their electorate and their caste.
Let me again divert a bit from the subject matter and share my talk with Rajiv. I often told Rajiv that he was the only leader who had a national acceptance as the country's leader just because he was equi-near and equi-distant from all states, linguistic groups and religions. Every other leader in Delhi was a regional leader. Even today, none of our leaders can claim that they are national leaders. Sonia and her children have that advantage -- they too belong to all. One can't say the same about Narendra Modi and other popular Chief Ministers of a few states. Those who became ministers in Rajiv's cabinet also had no domain knowledge relating to their ministry. Add to this the fact that confused Rajiv reshuffled his ministry 27 times! My erstwhile friend Madhavrao Sindia was the only one who led the Railway Ministry for all the five years. No minister had the domain expertise in the ministry he or she was looking after. What else could you expect other than chaos? I feel that the Indian economy weakened so much during his time that the country reached the brink of bankruptcy a year and half after he lost the power.
Corruption is under sharp focus today. It provides good fodder for the news-starved news channels. They offer good entertainment. Right to Information and the thirst for sensational news of television news channels is exposing a growing number of financial scandals arising out of a nexus between greedy businessmen, politicians in power and bureaucrats. It appears that a huge portion of taxes that a few of us pay is going into the private pockets of politicians and bureaucrats. But the corruption in the country is far deep-rooted today and has spread widely to even the lowest rung of our governments in the states and at the centre.
Post 1990 liberalization, we have another change caused by rapid advances in telecommunications and the call for commercial globalisation. This is an overwhelming change since it altered the social behaviour of the people at large. Thanks to the American multi-nationals and our trader class business houses, our society too has now become totally money-centric. Nobility, sacrifice, selfless service and wisdom are no more the measures of a respectable personality -- instead it is the wealth that one sits on. Since we now measure people in terms of money, everyone wants it at any cost and by any means. Corruption is one way our government servants find it easy to make money by using their authority, not only to get gratified by the law-breakers, but also by indulging in extorting it from hapless citizens with threats to frighten them and forcing them to give in. There is a great amount of innovation in swindling. It is now a way of life in our country.
After fifty long years of managing a technological manufacturing company, I understand that for a spectacular business growth in India, one has to indulge in corruption, bribes and collaboration with tax authorities. The more you grease palms, the more you succeed. However, I experienced that the scale and spread of corruption rose sharply from the early 90s to its current fearsome level.
While corruption is detrimental to business for all types of companies—large and small, multinational and local—it poses particular problems for small and medium firms started enthusiastically by technical entrepreneurs. They suffer the most. They are more vulnerable to corruption. As a result, their profit margins and sometimes, their very survival is at stake when corruption takes hold. Many factors influence the ability of technical entrepreneurs to set up and expand small businesses, such as financial issues, education, training, technology, access to information, property rights, infrastructure, and export possibilities, but corruption has been identified as a major obstacle for the healthy development of the SME sector. Companies like APLAB do create the highest employment, especially for the unskilled and semi-skilled people, but the effects of corruption are most devastating.
Most Indian small and medium scale manufacturing companies state that they have been asked for bribes in order to obtain licences or permits from the local government and need to pay the related officials responsible for the collection of taxes and duties. Then one has to pay bribes to acquire government contracts. The most prevalent and well-known form of corruption affecting the Indian industry is bribery—the offering made to a public official for any undue advantage so that the official acts or refrains from acting in the exercise of his or her official duties. In this respect, SMEs are frequently faced with requests for additional payments for services they are entitled to anyway. But, one also needs to distinguish between acts of bribery that represent a burden to businesses, and those that are regarded by some companies as advantageous. For instance, a bribe provided with the aim of winning a contract, clearly represents an advantage or benefit to the entity paying it, whereas an undue payment, required in order to get an electricity supply connection, is obviously a burden. This distinction was deemed important because the two types of transaction involve different incentives and disincentives, and different costs and benefits, and therefore have to be dealt with in different ways. Bribery is not the only form of corruption that plays a major role in our industries. Embezzlement or misappropriation of funds by a company owner or employees, fraud by selling substandard products etc. have a significant, direct influence.
In the last part of the series, PS Deodhar talks about how honesty, competency and craftsmanship from small companies are not favoured by the government.
The earlier two parts of this series can be accessed here:
(PS Deodhar is founder and former chairman of the Aplab Group of companies. He is also the former chairman of the Electronics Commission of the Government of India and was an advisor to late Prime Minister Rajiv Gandhi on electronics. He also was the chairman of the Broadcast Council in 1992-93 that set in motion the privatisation of the electronic media with metro channels.)
How can illegal passport touts audaciously call themselves “online passport agents” and advertise brazenly on the Internet?
If you go to the passport website of the ministry of external affairs (MEA) and click on this link: http://passportindia.gov.in/AppOnlineProject/pdf/Public_Notice.pdf, you will see the public notice which reads: “Members of the public are advised to desist from dealing with touts / agents who may be charging exorbitantly for their service and further, may be making false promises about arranging assured urgent appointment or faster passport service delivery. After the launch of Passport Seva Kendras, the appointments are available to general public through the website. Alternatively, certain categories of applicants are allowed to walk in without appointment, details of which are available on the website.
“The Government has not authorised any intermediary/ representative to undertake such activity or to give such assurances. Such incidents of harassment/ influence by them may be reported to the concerned Passport Officer.”
If the public notice is in such uncertain terms, why is it that the website www.justdial.com is filled with contacts of “online passport agents” from various cities like Delhi, Chennai, Coimbatore, Kolkata, Jaipur, Mumbai, Pune and you can just go on and on. Why is it that the harassment of not getting online appointments by citizens across cities, due to an obvious nexus between passport agents and passport officials, which helps agents to probably ‘block’ appointments and deny it to the rightful applicant. Is not being tackled?
For further proof, some of the passport agents of Pune met Prakash Javadekar, Pune’s Rajya Sabha MP, who has taken up the issue for Pune, with the ministry of external affairs (MEA). They confessed that each one of them has access to a keyword/ codeword which helps them block two appointments per agent. Obviously, the number of passport agents seems to be large enough to ensure that individuals do not get their rightful chance. That the passport agent fraternity is having the alleged backing of the powers-that-be can be established by the fact that they continue to go about their business in brazen ways.
Moneylife which has been carrying a sustained campaign against the Pune passport mess had a comment on 3rd April (in the reader’s comment slot under an article), by a passport agent openly advertising that he charges Rs500 “for booking online slot in any of the PSK (Passport Seva Kendra)”.
Naresh Kevalramani, one of the readers of Moneylife wrote to JustDial on 22nd March, “It is very sad that when the Government of India has banned all agents/ middlemen for passport applications/ processing, your website is showing passport agents by the dozen.
I think that your portal—JUSTDIAL—which is one of the leading service providers in India is doing an ILLEGAL ACT by promoting PASSPORT AGENTS whom the GOVT OF INDIA itself has banned.
I have marked a copy of this mail to Ms Deshmukh who is heading Pune Passport Grievance Forum (PPGF).”
Anita Singh, customer service officer of JustDial replied:
“Thanks for writing to just-dial.com .
With respect to your below mail we appreciate your concern and for bringing it to the notice of just-dial.com. We shall look into the matter and do the needful. For any further queries, kindly contact customer service on 02261607080.
You can also mail us on - [email protected].
Thanks and regards
Anita (CS) “
Well, sadly, JustDial’s reply seems to be a standard one for every such complaint, as no action has been taken as yet. Advertisements of “online passport agents” merrily flourish.
Redington’s management indicated that based on the advice from two out of the big four audit firms in India and eminent tax lawyers, it is confident that this tax liability will likely be reversed
As per Redington India’s filing with the BSE, the Indian income tax (I-T) department has proposed to bring to taxation the imputed profits on transfer of Redington Gulf FZE, Dubai shares to Redington International Holdings (RHIL), Cayman Island leading to potential demand of Rs1.38 crore ex interest for year 2008-09.
The company indicated that this transaction was disclosed fully in FY09 to the relevant authorities, including the I-T department and its discussion with tax experts indicates that it has a strong case. Analysing the case, Nomura Equity Research in its Quick Note has included seven cases where shares were transferred to a group entity without consideration out of which in five cases the verdict was in favour of the company.
Redington Gulf shares were transferred to a newly formed entity RIHL to facilitate investment by Investcorp, a private equity investor
Nomura Equity Research states that Redington’s Middle East and Africa business, Redington Gulf FZE (RGF), Dubai was a 100% subsidiary of Redington (India) before FY09. In FY09, private equity investor, Investcorp Gulf opportunity fund (as it is a Middle East-focused fund) wanted to purchase a stake in RGF. As per Jafza law in Dubai which applied to RGF, the entity can only have one shareholder. To facilitate investment by Investcorp, Redington International Holdings (RIHL), Cayman Island was created as a fully owned subsidiary of Redington India, which had a 100% shareholding in RGF. Subsequently, Investcorp bought a 27% stake in RIHL.
Management remains confident on reversal of tax liability
Redington’s management indicated that based on the advice from two out of the big four audit firms in India and eminent tax lawyers, it is confident that this tax liability will likely be reversed. According to management there are precedents where shares were transferred to a group entity without consideration (called ‘gifting’) and the transaction was treated as tax exempt.
Tax liability of Rs138 crore (ex interest); no deposit to be paid now
Going further Nomura states that while there was no consideration paid on transfer of RGF from Redington India to RHIL, the I-T department has made a potential demand of Rs138 crore. This is based on a fair value ascribed by the tax authorities at that point of time to RGF of Rs800 crore (and a cost base of around Rs210 crore). The company has indicated that it does not have to pay any penalty, as both the income tax department and RBI were informed about this transaction and re-organization. However, in case the verdict does go against the company in the dispute resolution panel (DRP), Income Tax Appellate Tribunal (ITAT), high court and eventually Supreme Court, the company will be liable to pay interest as well on the amount of Rs138 crore. The company does not have to deposit anything until this case is with the DRP (which has to decide at the latest by Dec 2013), but may have to pay 50% of the demand amount or bank guarantee if the dispute escalates to ITAT/high court/Supreme Court.
Precedents – favourable and unfavourable rulings
Goodyear Tyre and Rubber Company, 2011: The Delhi High Court dismissed the petition filed by the I-T department against the Authority of Advance tax Ruling (AAR) in the case of Goodyear Tyre and Rubber Company. Goodyear US held a 74% stake in Goodyear India (GIL), which was transferred to Goodyear Orient Company (Pte) Singapore, a 100% subsidiary of Goodyear US. The AAR ruled that no capital gains tax would accrue where shares were transferred 'without consideration' by the holding company in the US to its wholly owned subsidiary in Singapore. As well, transfer pricing provisions will not be applicable in the absence of liability to pay tax.
Deere & Company, 2011: The AAR ruled that gift of shares by the applicant, a US-based company to its group company in Singapore made without any consideration, has to be held as a gift and therefore will not be subject to tax in India.
Nadatur Holdings and Investment, 2012: The Karnataka High Court dismissed the revenue department’s appeal and upheld the genuineness of gift on the basis that there is no bar for gifting of shares to a company. The high court held that the definition of ‘gift’ means transfer by one person to another of an existing property made voluntarily and without consideration and includes deemed transfer or conversion of any property. Since the taxpayer was a separate legal entity, shareholders of the company can gift shares to the company.
DP World, 2012: The Mumbai Tribunal held that there is no restriction under the Transfer of Property Act on gift of shares between companies, if permitted by Articles of Association.
Dana Corporation (2009) and Amiantit International Holding (2010): The AAR held that once the transaction is held to be outside the purview of Indian tax net, the question of applying provisions of transfer pricing and treating the arm’s length price as the transfer price would not arise.
Orient Green Power, 2012: The AAR has held that ‘gift’ of shares between two corporations is a “strange transaction” and would not fall under Section 47(iii) of the Act. Further, it declined to give ruling on taxability of gift of shares of an Indian company by a foreign company, citing lack of material to conclude on the genuineness and validity of the transaction as reason.
Castleton Investment, 2012: The AAR has held that the transfer pricing provisions are applicable to “any income arising from an international transaction” and that the word ‘income’ has a wide connotation. Accordingly, AAR held that application of transfer pricing provisions are mandatory for correct determination of gains accruing from an international transaction irrespective of the fact whether the same is chargeable to tax in India or not. In other words, the AAR held that applicability of transfer pricing provisions (i.e., Section 92 to 92F of the Act) does not depend on the chargeability under the I-T Act.
Redington India remains buyers of India’s largest distributor of IT and electronic products. Nomura concludes with the view that the potential of the Indian market should be seen in the context of a doubling of the middle-class population in the next 10 years (source: Dell), which is likely to mean increasing average disposable income that should drive IT/electronic penetration rates in India, in our view. The company has end-to-end coverage of the distribution value chain (procurement, warehousing, non-banking team. It has a credible history of managing inventory and credit risk, which we consider key to success in the distribution business. Average provisions for inventory and receivables were 0.04% and 0.1% over FY08-FY12 for India and overseas business over the same period, respectively.
Redington India was trading at Rs42.70 on the BSE in noon trade today. The brokerage states that the current P/E valuation at 6.7x FY14F EPS is a 43% discount to its six-year average of 11.7x and is an attractive entry point.