How Two Regulators Have Dealt with Profiteering during COVID
On 24 March 2020, the prime minister (PM) announced a hard, 21-day lock-down to deal with the COVID-19 pandemic. The impact on people and businesses was immediate and devastating. India is among the worst-hit economies with a 23.9% decline in GDP (gross domestic product) announced by the CSO (central statistical organisation) for the April-June 2020 quarter. Malls, theatres, cinemas, restaurants, gymnasiums, etc, dependent on physical footfalls, have remained locked down for six months. Many of these, including multi-outlet restaurant chains with borrowings, will simply not bounce back. 
 
Governments around the world swung into action to provide relief and liquidity to help businesses and people get their lives back on track, to the extent possible. India had bigger problems and less leeway to do as much. Where business is concerned, India has offered only a moratorium on loan repayments and minor relaxation in tax filing and compliances. In fact, the reliefs are so insignificant that organisations of chartered accountants (CAs) across India recently appealed to the finance minister (FM) to provide relief to taxpayers, mainly businesses.
 
This column is about how two regulators have behaved in the pandemic. One is the National Pharmaceutical Pricing Authority of India (NPPAI) charged with regulating drug prices; the other is the NAA (National Anti-profiteering Authority).
 
The Reluctant NPPAI 
While Indians struggled to understand COVID and cope with their finances, those in the business of making protective gear for healthcare workers (HWCs) saw an opportunity for rampant profiteering. Sanitizers vanished from shop shelves to return at a huge mark-up. N-95 masks (up from Rs17 in February 2020 to Rs400 by March-end), personal protective equipment (PPE) kits vital to HWCs shot up 300% or more. Face shields, that now cost under Rs50 including taxes, were sold at Rs250 to Rs300. Moneylife Foundation, our sister entity, which was deeply involved in COVID relief work for public hospitals, had a ringside view of this ugly situation. How did NPPAI deal with this?
 
When appeals to the authorities to check about profiteering in N-95 masks failed, I teamed up with activist Anjali Damania in June and filed a public interest litigation (PIL) in the Bombay High Court in June with the help of senior counsel Mihir Desai. NPPAI was ordered to look afresh at capping prices of N-95 masks and pass an appropriate order as per clause 20 of the Drug Price Control Order (DPCO). 
 
Astoundingly, NPPAI sided with opportunistic manufacturers and even fudged the timeline by permitting April 2020 (when profiteering had peaked) as the base for looking at the price increase, to avoid punishing those involved in the loot. It claimed on Twitter that manufacturers had voluntarily reduced prices. In a formal response to the Court directive, NPPAI admitted that there was profiteering but declined to cap prices saying it was not the right time.
 
Soon after, on 30 June 2020, the government removed masks and sanitizers from the list of ‘essential commodities’ claiming that ‘there are no adverse reports from states or Union Territories’ about the price or availability of these products. It is almost as though our PIL backed by extensive proof and multiple sting operations by the media, demonstrating rampant hoarding and profiteering in these masks, simply did not happen! Contrast this with how a zealous temporary regulator is on a rampage to curb profiteering by businesses that are struggling to survive!
 
The Zealous NAA  
The NAA was set up in 2017 for a period of two years, to ensure that GST (goods and services tax) was passed on to consumers when the new law took effect. Most countries do this when they switch to GST and wind up the regulator very quickly. India rolled out GST without enough preparation and the law hasn’t stabilised in three years. But government won’t give up on an opportunity to harass business; so NAA’s life was extended by two more years in June 2019. I am not, for a moment, suggesting that NAA should behave like the NPPAI; but to be oblivious to the unprecedented financial strain due to COVID and to demand disgorgement with penalty and interest from those struggling to survive post-24th March is surely bizarre. 
 
During the COVID crisis (April to August 2020), NAA has sent out notices alleging profiteering and demanding immediate payments to a slew of businesses. On 24th July, the Delhi High Court had stayed penalty proceedings against Patanjali Ayurved so long as it deposited the alleged profiteering of Rs75 crore in the Consumer Welfare Fund (CWF). PVR, whose movie theatres have remained shut for six months with zero revenues, was hit with an NAA order on 20th August. On 24th August, the Delhi High Court bunched petitions by 40 companies against NAA rulings. These included: Hindustan Unilever, Patanjali Ayurved, Jubilant Foodworks, Reckitt Benckiser, Johnson & Johnson, Phillips India and others others.
 
Most companies, who are in Court, have pointed to the lack of methodology and procedure to determine how the reduction in prices / benefit of input tax credit passed on to consumers is to be calculated. They have also questioned the constitutional validity of the action. The Financial Express reports that NAA started multiple anti-profiteering investigations into Subway’s franchisees for not passing on the cuts. We learn that the parent company has also been served a notice for royalty collected on the basis of ‘profiteering’. 
 
In the midst of the hard lock-down, NAA found two Subway franchisees (one each in Rajasthan and Maharashtra) guilty of profiteering. It has since served notices to many others in Mumbai, Pune and other cities as well. On 23rd September, the Delhi High Court upheld NAA’s claim about Gaurav Sharma Food Industry and ordered the firm to deposit principal profiteered amount but struck down the interest and the penalty claim. The sum involved in this case was just Rs7 lakh; but there are others who have been asked to cough up as much as Rs80 lakh and deposit half the sum in CWF. 
 
 
The impact is devastating for several franchisees, who are struggling to stay afloat in the hope that normalcy would return soon. With direct customers drying up, their only sales come through delivery apps like Swiggy and Zomato who take away 20% to 22% which accounts for the bulk of their profit after salaries, rent, royalty fees and maintenance costs. “It is almost as if we are working only to pay salaries, rent and royalties,” says one franchisee on condition of anonymity. 
 
Franchisees, we spoke to, disagree with NAA’s calculations of prices offset when input tax credit is denied; they also point out that, even if a couple of them have fudged numbers, you cannot tarnish all with the same brush. Unlike the multinationals or Patanjali, these are tiny entrepreneurs under a big brand name, struggling for survival and in no position to fight a slow and expensive legal battle, especially when courts ask them to deposit a chunk of the demand in CWF.
 
The situation is surreal. The FM described the COVID pandemic as an ‘act of God’; but there is no effort to get business back on their feet to boost employment and consumer spending which is crucial for the economy. Small and medium businesses, which contribute more to India’s economic growth, have got no help from the government at all, barring a short moratorium (with interest on interest), if they had borrowings. 
 
Why won’t the same government, that tacitly supported rampant profiteering in health-related products when people were gripped with panic, wake up to the suffering of small businesses even six month later? No consumer would condone the cornering of tax benefits; but those accused of cheating must have a fair chance to represent their case without coercive action. Not only is the GST rollout flawed, our investigation agencies are notorious for exaggerating tax demands; proving them wrong involves a huge cost and diversion of valuable time and resources which is not possible in this crisis.
 
India already has multiple agencies monitoring business—including the ministry of consumer affairs and the Legal Metrology Act, with wide powers of actionwithout letting loose another tool of harassment on business. The economic crisis triggered by an unprecedented pandemic may be a good enough reason to wind up NAA. It would signal that the government understands the need to revive businesses so that they boost employment and consumer spending. It does not require anything more than common sense to understand that, without income, there cannot be taxes and, surely, no tax targets.
 
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    COMMENTS

    mathurgcpta

    3 weeks ago

    NPPAI and NAA have proved un-business like regulators (short of saying they are the most anti consumers and close to corruption) and should be CBI probed or the Supreme Court probed. Enough of bad governance practices materials would be there if invited by the investigating authority.

    DIPANKAR CHAUDHURI

    4 weeks ago

    Respected Madam
    happy that I subscribed to this magazine. Reason is only you - one of the very few The \"spine\" in the spineless society.

    yerramr

    1 month ago

    In the name of CSR several companies distributed the Covid related kits with such huge prices. Two advantages are derived: one, apparent munificence and two income tax benefit.

    sudhanva

    1 month ago

    MONEYLIFE IS MONEY AND LIFE AND LIFE IS BIGGER THAN MONEY.

    suketu

    1 month ago

    moneylife has repeatedly said nota is a superb option for voting if political candidates are not good enough.people who have not voted nota shd not complaint.they get the govt they deserve.nota wl frce political parties to field better candidates.

    kuldip46

    1 month ago

    Was it Cicero who said, " The vicious thrive while the virtuous suffer."

    Kaliyuga has been around for a couple or so millennia.

    B. V. KRISHNAN

    1 month ago

    A good article, but I wonder how Moneylife readers would be interested in this. We, Monelife subscribers are looking for analytical articles on businesses, stocks and opportunities in the financial market. Moneylife was once a wonderful magazine, containing analytical articles on companies, and insightful articles from gurus like Balakrishnan, but slowly the activist orientation of the editors has pushed stock-related issues to the backstage. Please understand, the public is least interested in your sermonizing. What we look for in you is advice on money matters, that's what Moneylife used to stand for. I strongly advise you to revert to your core interest - otherwise the subscribers will look elsewhere for their needs.

    REPLY

    sucheta

    In Reply to B. V. KRISHNAN 1 month ago

    Mr Krishnan .. . as a paid subscriber you get a separate newsletter and would be fully aware of it. This free newsletter covers a wide variety of issues that are of interest to people at large and society in general - from court orders, to RTI, to sports and movies too. You can ignore what you do not want to read -- there is no compulsion. This applies not only to this FREE column but even to those behind a pay-wall. No subscriber can dictate each article that is published... do you make the same demand from you newspaper? Or when you subscribe to a television channel ? As for the topic not being of interest .... other publications as well as large consumer organisations are pursuing it. So I have no idea what you personal bias is based on

    m.prabhu.shankar

    In Reply to sucheta 1 month ago

    For people like me MoneyLife is like a University where I am fed with informations and details that affects my life directly as well as indirectly. Please continue to do the same. May God Bless the entire MoneyLife team

    sdaurabh

    In Reply to sucheta 1 month ago

    People cry for your help when they themselves are being harassed by agencies or institutions but cannot understand the pain of others. Bad governance, lax attitude of authorities will impact everyone in long run and those who think money will save them are just narrow thinkers.

    Money, health and society everything is interconnected and you are doing awesome work to cover all topics. Please ignore the noise.

    You are getting more evangelist for Moneylife with your work.

    Meenal Mamdani

    In Reply to B. V. KRISHNAN 1 month ago

    I disagree with your opinion.

    You are interested only in information that helps you to invest.
    But don't you have another duty too?
    If you are a member of the large investor sphere then does it make sense to only look at your own personal interest and ignore the situation of investors who have been duped by the various companies?

    You are a perfect example of a selfish Indian who does not want to put an iota of effort to clean up corruption and wrongdoing in the financial sphere as long as your own money is safe.

    Indians are lucky to have a NGO like MLFoundation and investigative journalists like Sucheta and Debashish who work hard to expose the rot in India's financial system.

    If you think that you don't need to subscribe to MLF, by all means leave. Many others will be eager to join.

    B. V. KRISHNAN

    In Reply to Meenal Mamdani 1 month ago

    I am a public spirited citizen and I dont want anybody's certificate for it. I am subscribing to newspapers and keep myself updated on all topics of public spirit by various other means. But the reason why I am subscribing to Moneylife is for information re: stocks and financial market and I am not ashamed to say so. If Moneylife doesn't want me, I am fine to leave. Don't sermonise me.

    Star Ratings: Tardy BEE testing floods markets with non-conforming ACs & refrigerators, says CAG
    The official audit of star rating system of electrical appliances has found serious flaws in the testing mechanism that resulted in inefficient and environmentally polluting refrigerators and air conditioners worth Rs 2,238 crore being sold in the market.
     
    The Comptroller and Auditor General's (CAG) audit report on economic ministries tabled in the Parliament on Tuesday found that the Bureau of Energy Efficiency (BEE) had not implemented its rating scheme for appliances and equipment effectively that resulted in negligible check testing (0.16 per cent) of registered models during 2012 to 2018.
     
    The CAG said though the first check testing of 63 per cent models failed, name of models and equipment were not published due to non-provision in the Energy Conservation Act and the same reached the market for sale.
     
    "The permittees had marketed 4,16,503 Room Air Conditioners (Room ACs) and 3,93,678 Frost-Free Refrigerators (FFRs) of these models at the estimated market value of 2,238 crore till December 2018 for models failed in 2013-14 and 2017-18," the CAG audit noted.
     
    Apart from faults in its testing mechanism, BEE also did not properly conduct star label verifications and QR code technology for ensuring that non-compliant models were not sold in the market.
     
    Star rating label of Bureau of Energy Efficiency (BEE) is a trusted government-backed symbol for energy efficiency of the models of appliances and equipment (products) which encourages consumers to save money and environment.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    DFHL’s Forensic Audit Exposing Massive Fraud and Cooking of Books Leads to SEBI Order Banning DHFL Promoters
    Market regulator Securities and Exchange Board of India (SEBI) has barred promoters and directors of Dewan Housing Finance Corporation Ltd (DHFL), including eight members from the Wadhawan family and four of their companies for issuing fraudulent statements  and cooking the books since 2006 and making corporate announcements based on this fraud.
     
    G Malalingam, whole-time member (WTM) of SEBI has issued an interim order barring 12 persons who were promoters of DHFL since 1 April 2006 to 31 March 2019. Those barred from market include: Kapil Wadhawan, chairman and managing director DHFL, Dheeraj Wadhawan, Rakesh Kumar Wadhawan, Sarang Wadhawan, Aruna Wadhawan, Malti Wadhawan, Anu S Wadhawan, Pooja D Wadhawan, as well as Wadhawan Holding Pvt Ltd, Wadhawan Consolidated Holding Pvt Ltd, Wadhawan Retail Venture Pvt Ltd and Wadhawan Global Capital Ltd (formerly known as Wadhawan Housing Pvt Ltd).
     
    The order refers to a forensic audit by Grant Thornton, which refers to 'the Bandra Books Entities' which were the crux of the large-scale fraud that was revealed before the National Company Law Tribunal (NCLT) as well. The findings of the audit report are astounding and reproduced by the SEBI order. It says, 
     
    “The company created a ‘logical partition’ in the Enterprise Resource Planning (ERP) Software used for bookkeeping and loan management purposes” to store data pertaining to only one branch – Bandra, which simply did not exist." It is referred to as a virtual branch. 
     
    The forensic audit says, a “parallel set of books of accounts (were) maintained by the Company” and all accounts in this module were fake. These accounts have been collectively called as ‘Bandra Books’. The totally fraudulent approvals and fund disbursal in respect of 'Bandra Book' accounts were provided by the Chairman and Managing Director of the DHFL- Kapil Wadhawan, personally. 
     
    The forensic report report states “that out of the Rs23,815 crores shown as disbursed to Bandra Book entities in the accounts of the Company, only Rs11,755.79 crores was actually disbursed” to 91 entities, but was portrayed as comprising 2,60,315 home loan accounts. “The closing balance outstanding in the books of the company towards such accounts as of 30 June 2019 was Rs14,046 crores.” 
     
    Further, the auditor “verified the financial statements of 50 of the said 91 entities, which accounted for 70% of the disbursals, and noted that 34 entities had invested a portion of the loan amount” back in DHFL linked companies – what is worse, they were weak companies with doubtful repayment capacity.
     
    What is worse, by charging lower interest to these entities, the company suffered a notional loss of Rs. 3,348 crore! According to SEBI, if the fictitious income from these Bandra entities were removed from the accounts then DHFL has been making losses “in all years except FY2018.”
     
    The SEBI order says: “The financial impact of the “fraudulent transactions” covered in the Application was disclosed by the Company in the aforementioned corporate announcement as under, - 
     
    (a)  Rs14,046 Crores, being the amount outstanding in the books of the Company as on 30 June 2019; 
     
    (b)  Rs3,348 Crores being amount considered as due and outstanding towards notional loss to the Company on account of fraudulently charging lower rate of interest to certain entities referred to in the Application as the Bandra Book Entities.” 
     
    As a result of this brazen fraud and fiction in the accounts, DHFL was able to raise a massive Rs24,000 crores through public issue of debt securities during this period, notes the SEBI order. 
     
    During the period of the fraud, which was FY06-07 to FY18-19 the following entities were listed as promoters:
     
     
    "Kapil Wadhawan and Rakesh Wadhawan, being the chairman and MD of the company for the past several years, were responsible for ensuring the integrity of DHFL’s accounting and financial reporting systems and based on the findings of the initial report, it appears that they were, prima facie, involved in the aforesaid manipulation or falsification in books of accounts and, thereby, misrepresented to the investors and other stakeholders the financial information pertaining to the company," the SEBI order says.
     
    Holding promoters of DHFL responsible for violations of SEBI regulations, Mr Mahalingam further says, "The investors in debt securities issued by the company and investors who dealt with the company’s equity shares during this period were induced into these transactions based on the untrue information disseminated by the company. The interest of investors who take the decision of investing in the securities of the company on the basis of financial position of the company and disclosures made in the financial statements have been, prima facie, affected adversely due to the aforesaid transactions entered into by the company and the consequent fraudulent misstatements in the financial statements of the company."
     
    Earlier this month, the Supreme Court on Thursday stayed default bail granted to Kapil and Dheeraj Wadhawan by Bombay High Court in the Yes Bank fraud case. Kapil Wadhawan, chairman and managing director of Dewan Housing Finance Ltd (DHFL), and Dheeraj Wadhawan, are being investigated in several cases of fraud and mismanagement. The Wadhawans, along with their beleaguered DHFL, are also co-accused in a cheating and money laundering case registered against Yes Bank co-founder, Rana Kapoor.    
     
     Last month, granting the Wadhawan brothers 'default' bail, Justice Bharati Dangre of the Bombay HC directed them to surrender their passports and deposit Rs1 lakh each as surety.
     
    The default bail was granted citing failure of Enforcement Directorate (ED) in filing charge-sheet against the Wadhawan brothers within the mandatory 60-day period after the arrest.
     
    The Wadhawans had moved the Bombay HC seeking bail on grounds that the ED failed to file the charge-sheet within the stipulated 60-day period after the ED arrested them on money-laundering charges on 14 May 2020.
     
    The Wadhawan brothers have contended before the HC that the ED had filed its charge-sheet a day after the deadline—on 15th July—against them as well as Yes Bank founder Rana Kapoor, his wife Bindu Kapoor and their daughters Roshni and Rekha, besides others.
     
    The ED launched its probe in the case after the Central Bureau of Investigation (CBI) filed its first information report (FIR) in the case on 7 March 2020 before the lock-down, over dubious loans granted by the Yes Bank and alleged quid pro quo between Kapoor and the Wadhawans.
     
    In its charge-sheet, the ED has claimed that Dheeraj Wadhawan, the then non-executive director of DHFL, owned 44 companies of the Wadhawan group and also managed the works of the real estate business of the Wadhawan group.
     
    The ED investigation into the Yes Bank-Rana Kapoor money-laundering probe had also found that Kapil Wadhawan, started his realty business in 2007-08, pursued it in United Arab Emirates (UAE) by forming Wadhawan International Investments Ltd (WIIL), and the company has some assets in Australia worth Rs1,000 crore.

     

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    COMMENTS

    i_sakarwala

    1 month ago

    Seal and confiscate all the moveable and immovable assets, property, cash and everything remotely related to the wadhwans, Rana kapoor , auditors and everyone connected to this scam. They have not only cheated the innocent investors but have committed crimes against our national interest. They should be charged for financial terrorism and also for acts which have caused deaths of so many innocent depositors due to the shock suffered by them.

    hudafshaikh

    1 month ago

    Such a huge fraud definitely involves most of the senior management, HO accounts / internal audit and IT teams - and especially, the external auditors.
    DHFL adminstrator should immediately suspend those who were involved in this fraud and request CBI/ED to immediately initiate criminal action against them.
    Further, he should initiate action against the external auditors who approved the accounts.

    bkochar1506

    1 month ago

    Shocking - in light of this, DHFL Adminstrator should immediately refund all the debentures issued thru public issues immediately.

    s5rwav

    1 month ago

    Fraudulent Accounts now Transferred to ICICI Bank Limited to Serve the DHFL Customers and the Investors of the Private Sector Bank - ICICI Bank Limited - to Pay the Price or the MD of ICICI Bank Limited is a Question. I am Babubhai Vaghela. Thanks.

    bsd5760

    1 month ago

    I don't know if investors, like me, will ever get back their money invested in DHFCL NCDS. May be if Government make some provision for refunding the investors' money by selling assets of DHFCL and its Directors .

    rajoluramam

    1 month ago

    DHFL-It is a demon in the country who swindled hard earned money of Indian public and banks. Every day some news about the WADWANS is disturbing the peace of the people of the country. Right from 2006, they are deceiving the people. No body or even the Government and its agencies have any doubt about the misdeeds of these fradusters. One wonders whether any business man in the country can be so greedy as these wadhwans. Definitely God punishes the entire famly with severest punishment.

    ganesanjaicare

    1 month ago

    HITTING THE DEAD SNAKE USELESS.WHAT IS THE POINT NOW AFTER THEY MANIPULATED AND CHEATED .NO USE

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