By calling CRR a waste, SBI chief questions banking history

Vivek Kaul
Duvvuri Subbarao, the governor of the Reserve Bank of India (RBI), has come in for criticism from all quarters for not acting as per the wishes of the government and cutting the repo rate. Repo rate is the interest rate at which the RBI lends to banks and sets the benchmark for interest rates charged by banks to its customers.
Nevertheless, Subbarao did cut the cash reserve ratio (CRR) by twenty five basis points (one basis point equals one hundredth of a percentage) to 4.25%. This will come into effect from November 3, 2012. Cash reserve ratio is the proportion of their deposits that the banks need to maintain with the RBI.  When the CRR is cut that means the banks have to place a lesser proportion of their deposits with the RBI. This releases more money into the financial system. The CRR cut of 25 basis points is expected to release Rs 17,500 crore into the financial system.
Reacting to this move Pratip Chaudhuri, the Chairman of the State Bank of India(SBI) said “I still hold that CRR is a waste for the economy.” For anyone who understands the basics of banking, and presuming that the chief of the largest bank in the country does, this is a statement that should not have been made. Let’s try and understand why.
Banks first appeared on the scene somewhere in the twelfth and thirteenth century in Italy. The earliest banks were essentially banks of deposits. The Italian cities were the biggest trade centres in the world and had merchants who were earning a lot of money. They needed safe institutions which could store this wealth. And that is how banks emerged.
Merchants deposited their money in the form of gold and silver coins and bars with these banks for safekeeping. The bank in return issued a receipt against this deposit. The receipt could be shown when the deposited coins or bars were to be withdrawn. Hence, the earliest banks were “banks of deposits” or “store houses of wealth”. Banks charged a certain fee for this service.
Gradually some of these banks developed a reputation for being honest in their dealings. Something very remarkable emerged from this. Earlier when a merchant had to pay another merchant, he had to go to the bank withdraw a portion of his deposited wealth and pay the other merchant. This was a time consuming activity.
Gradually, merchants who had deposited their wealth with these banks simply started transferring the receipts issued by these banks when they had payments to make instead of going to the bank showing their receipt and withdrawing their coins or bars to pay each other.
If the other merchant to whom the payment was being made immediately needed the money he could simply go to the bank, show the transferred receipt and withdraw that money. What had effectively happened was that these receipts issued by some of the earliest Italian banks had started functioning as “paper money”.
Evolution of banking did not stop at this and after sometime the next level emerged.  In sometime people running these banks also figured out that their depositors do not all come on the same day asking for their deposits back. So in the intermittent period they could lend this money out to others. This could be done by actually handing out gold and silver coins and bars that had been deposited or by simply printing fake receipts which looked exactly like original receipts and giving them to people who needed the money and charging a fee for doing so.  The fake receipts did not have any gold or silver backing them. The bankers were able to do this simply because all their customers did not arrive on the same day demanding their money back.
A similar trend seems to have played out in London in the seventeenth century where merchants took to depositing money with the goldsmiths. This happened after King Charles I seized around £130,000 in bullion, deposited by the city merchants at the Tower of London in 1640.
Like the Italian bankers the London goldsmiths also figured out that they could keep lending the gold that was deposited or simply issue fake receipts, and make more money in the process. As Hartley Withers writes in his all time classic The Meaning of Money:
The original goldsmith’s note was a receipt for metal deposited. It took the form of a promise to pay metal, and so passed as currency. Some ingenious goldsmith conceived the epoch-making notion of giving notes, not only to those who had deposited metal, but to those who came to borrow it, and so founded modern banking.
This is how banks which started just as banks of deposits got into the lending business as well. And this is how banks primarily operate to this day at their very basic level. Much of the money deposited in banks is lent out with a certain portion of the deposits being retained. This in technical terms is referred to as the fractional reserve banking system.
What the fractional reserve banking system also did was it allowed the banks to create money out of thin air. Let us try and understand how this happens through an example.
Rs 100 is deposited in a bank. The cash reserve ratio is assumed to be at 4.5%. This means that the bank will have to deposit Rs 4.5 with the central bank (i.e. the RBI in the Indian case) and the remaining Rs 95.5 can be lent out. It thus manages to create an asset from someone else’s money. And we also have a situation here were the money supply has increased by Rs 195.5 (Rs 100 money deposited with the bank + Rs 95.5 loan given by the bank).
The Rs 95.5 lent out is spent and again ends up being deposited into another bank. On this bank needs to maintain 4.5% of Rs 95.5 as a reserve and the remaining it can lend out. Hence Rs 4.2975 is deposited with the central bank and the remaining Rs 91.2025 (Rs 95.5 – 4.5% of Rs 95.5) is lent out.
The Rs 91.2025 is spent and ends up with another bank. This bank will now have to deposit 4.5% of this amount with the central bank and can lend out the remaining money. And so the cycle continues. So the banks can keep creating money out of thin air and the money supply can keep going up. In this very simple example, a Rs 100 deposit can lead to an increase in money supply of Rs 2222.22 (the loans evolve into a geometric series which can be summed).
When the central bank cuts the cash reserve ratio. It leads to two things. The banks need to maintain a lower amount with the RBI against the deposits they have already got. This releases more money into the financial system which banks can go ahead and lend.
Other than this the banks need to deposit a lower proportion of their future deposits with the central bank. So if the CRR is cut to 4.25% from 4.5%, a bank now needs to deposit only Rs 4.25 of every Rs 100 deposit that it gets, with the RBI. It had to deposit Rs 4.5 earlier. This in turn means it has a greater amount of money to lend.
And as can be understood from the above example it will also help banks to create more money out of thin air. At a CRR rate of 4.25%, the money supply can increase by Rs 2353, for every Rs 100 that is deposited with the banks, as per the example explained earlier. This is an increase of 5.88% from the Rs 2222.22 created earlier.
This is a very simple example but what it shows clearly is that for the central bank or the RBI in our case, the CRR is a tool which allows it to control the amount of money supply that it wants the banks to create. So when the RBI cuts the CRR like it did yesterday, the broader signal is that it wants a greater proportion of deposits to remain with the banks so that they can lend more and thus create money out of thin air.
But at the same time it has not cut the repo rate or the rate at which it lends to the banks. This is an indication that while it wants banks to lend more, it wants them to do so judiciously and not go hammer and tongs at it. Given this the statement made by the SBI chief that CRR does not matter is immature to say the least. It is one of the important tools that RBI has in its arsenal.
The article originally appeared on www.firstpost.com on October 31, 2012. http://www.firstpost.com/economy/by-calling-crr-a-waste-sbi-chief-questions-banking-history-509290.html
(Vivek Kaul is a writer. He can be reached at [email protected])

Every ‘young’ minister in new-look UPA govt is a dynast

Vivek Kaul
“It is a combination of youth and experience,” said Prime Minister Manmohan Singh after reshuffling his ministers yesterday. The reshuffle saw 17 new faces become ministers.
The average age of the 17 new ministers is 52.4 years, with the youngest Sachin Pilot having turned 35 in September this year, and the oldest Abu Hasem Khan Chowdhury will turn 75 in early January next year. Also Pilot is the only minister who is less than 40 years of age.
So the question is where is the youth that Manmohan Singh was talking about? Unless of course Dr Singh was referring to the old Bob Dylan number that went somewhat like this.
May God bless and keep you always
May your wishes all come true
May you always do for others
And let others do for you
May you build a ladder to the stars
And climb on every rung
May you stay forever young
Forever young, forever young
May you stay forever young
The bigger question though is does the Congress have young leaders who are not hereditary leaders i.e. they are in politics because their fathers and grandfathers were also in politics.
Sachin Pilot is the son of Rajesh Pilot who was a formidable Congress leader till he died in a car crash. He also happens to the son-in-law of Dr Farooq Abdullah, the Jammu and Kashmir strongman. His brother in law Omar is the current chief minister of Jammu and Kashmir.
The other so called young gun to be inducted as a minister is Jyotiraditya Scindia. He will turn 42 on January 1, 2013. He comes from a royal family and his grandmother Vijayaraje Scindia and father Madhavrao Scindia were both career politicians.
Patrick French in his book India: A Portrait released in early 2011 carried out a very interesting piece of research. As he pointed out “Every MP in the Lok Sabha under the age of 30 had in effect inherited a seat, and more than two-thirds of the 66 MPs aged 40 or under were hereditary MPs… Of the 38 youngest MPs, 33 had arrived with the help of mummy-daddy. Of the remaining five, one was Meenakshi Natarajan, the biochem graduate who had been hand-picked by Rahul, three appeared to be self-made politicians who had made it up the ranks of the BJP, BSP and CPI(M) respectively, and the fifth was a Lucknow University mafioso who had been taken on board by Mayawati: he was a “history-sheeter”—meaning numerous criminal chargesheets had been laid against him—who had been involved in shootouts and charged four times under the Gangsters Act.”
Of course the babalog also tend to start earlier than the ones who make it on their own. As French writes “In addition, this new wave of Indian lawmakers would have a decade’s advantage in politics over their peers, since the average MP who had benefited from family politics was almost 10 years younger than those who had arrived with ‘No Significant Family Background’… The average age of an MP with no significant family background was 58; for a hereditary MP it was 48.”
This trend is even more extreme in the Congress Party. “In the Congress, the situation was yet more extreme: every Congress MP under the age of 35 was a hereditary MP,” writes French.
So the point is that the Congress Party in particular and the Indian Parliament in general doesn’t have many young leaders who have made it on their own.
And if some recent biographies of Rahul Gandhi and some not recent ones of Sonia Gandhi are to be believed, this is the reason Rahul has stayed away from the government. He is trying to build internal democracy within the Congress party, so that a new genuine crop of younger leaders comes up.
As French writes quoting Rahul Gandhi “There are three-four ways of entering politics,” he said frankly to a gathering of students in Madhya Pradesh. “First, if one has money and power. Second, through family connections. I am an example of that. Third, if one knows somebody in politics. And fourth, by working hard for the people.” Unlike many of the other young hereditary MPs, he did not pretend otherwise. “Main apne pita, nani aur pardada ke bina us jagah par nahin pahunch sakta tha jahan main aaj hoon(Without my father, grandmother and great-grandfather, I could never have been in the place that I am now.)” This can be aptly titled the Rahul Gandhi syndrome.
Rahul Gandhi wants to set this right within the Congress and is thus trying to build an internal democratic structure within the Youth Congress and the National Students Union of India. As Aarthi Ramachandran writes in Decoding Rahul Gandhi “The Youth Congress decided it was ready to hold its first internal elections in mid-2008. The process was handled by an independent NGO, Foundation for Advanced Management of Elections (FAME), started by former election commissioners K J Rao, James Lyndogh N Gopalswami and T S Krishnamurthy.”
The first such election was held in Punjab. And what was the result? “Not everything went according to plan. Though Rahul himself camped in Amritsar to make sure the election lived up to the expectations of being the first free and fair one, the old Congress reared its head through the process. Ravneet Singh ‘Bittu’, the grandson of former Congress Chief minister, Beant Singh, became the first elected Punjab Youth Congress president. He had the backing of the former chief minister of Punjab, Captain Amrinder Singh. This raised questions about whether the elections had indeed ushered in internal democracy,” writes Ramachandran. Bittu when he was elected was 33.
This is a worrying trend. And even plays out in the context of elected women MPs in the Congress Party. As French writes “The Congress presently had 208 MPs, of whom 23 were women. This was the same as average, 11 per cent. So far so low; now comes the difference: 19 out of the 23 Congress women MPs were hereditary (and of these, four were hyperhereditary). This left only four Congress women MPs who appeared to have reached Parliament on their own merit: Meenakshi Natarajan, Annu Tandon, and two other stalwarts. Who were they? Dr Girija Vyas, the president of the National Commission for Women, and Chandresh Kumari Katoch, who turned out to be hereditary by another measure, being the daughter of Hanwant Singh, the maharaja of Jodhpur.”
Entry into politics in India has become like a family owned business where the sons(and now daughters) are destined to takeover irrespective of the fact whether they have the aptitude for the job or not. French puts it best when he says “If the trend continued, it was possible that most members of the Indian Parliament would be there by heredity alone, and the nation would be back to where it had started before the freedom struggle, with rule by a hereditary monarch and assorted Indian princelings.”
The article originally appeared on www.firstpost.com on October 29,2012. http://www.firstpost.com/politics/every-young-minister-in-new-look-upa-govt-is-a-dynast-506497.html#disqus_thread
(Vivek Kaul is a writer. He can be reached at [email protected])

‘Chance played a big role in the survival and success of Manchester United’


Paul Ormerod is the author of the bestselling The Death of Economics, Butterfly Economics and Why Most Things Fail. Most recently he has written Positive Linking – How Networks Can Revolutionise the World. “We are increasingly aware of the choices, decisions, behaviours and opinions of other people. Network effects – the fact that a person can and often does decide to change his or her behaviour simply on the basis of copying what others do – pervade the modern world,” writes Ormerod.In this interview he speaks to Vivek Kaul on why a small number of people can exercise a decisive influence on an eventual social or economic outcome, why copying others is a rational way to work in this world and why the football club Manchester United may have simply been lucky to get where they have.
What is positive linking?
It is basically the principle that ‘to him that hath, more shall be given’.  The fact, for example, that a particular brand of smart phone has been selected by one of your friends makes it more likely that you yourself will make the same choice.  It doesn’t mean that you will definitely make the same choice, but the more of your friends who have chosen the same phone, the more likely it is that you will. 
You suggest that a relatively small number of people can exercise a decisive influence on an eventual social or economic outcome. Could you explain that through examples?
This is one way in which positive linking can work.  It is by no means always the case that this the process by which people are influenced.  Often, the way in which behaviour spreads is through ‘friends of friends’ networks, in which no single person has a strong influence. Ideological or religious movements are ones in which a small number of people often exercise decisive influence.  Think, for example, of Hitler in Germany, or Osama bin Laden in our own times. But these ‘influentials’ can be found in other situations.  For example, Gene Stanley and colleagues at Boston University found that the distribution of the number of sexual partners across a sample of individuals essentially had this structure. Most people had relatively few, and a small number had very many indeed.   This latter group exercise a decisive influence on the spread of sexual diseases.
You write “we have inherently less control over situations in which network effects are important than we would like”. What is a network effect?
A network effect is a very important example of positive linking.  Network effects, the fact that a person can and often does decide to change his or her preferences simply on the basis of what others do, pervade the modern world. This concept is just as crucial for companies and markets as it is for people. In September 2008 Lehman Brothers went bankrupt, precipitating a crisis which almost led to a total collapse of the world economy and a repeat of the Great Depression of the 1930s. It was precisely because Lehman was connected via a network to other banks that made the situation so serious. Lehman’s failure could easily have led to a cascade of bankruptcies across the world financial network, first in those institutions to which Lehman owed money, then spreading wider and wider from these across the entire network.
Why does network effect lead to less control?
A key point about network effects is that there is inherent uncertainty about how far any given effect will spread.  We have some guidelines about what determines this. So, for example, if a person adopts a new product, and the people in his or her social circle are easily persuadable, it is likely that some of them will adopt it as well.  But if it is hard to get them to try new things, they will not.  In the former case, there is a chance that the product will get taken up on a large scale, in the latter it will not. But in any practical situation we simply cannot gather the incredibly detailed information which would be required in order to know for certain what the impact will be.  We need to know the exact structure of the relevant network, who influences whom.  And we need to know the degree of persuadeability of everyone in the network.  We can get approximations to these, but we cannot know them for certain.
What is preferential attachment ?
Preferential attachment describes a particular way in which a person might copy the choices which others have made.  Given a range of alternatives, he or she will choose between them with a probability equal to the proportion of times each alternative has been selected by others.  So you are more likely to select the most popular choice, simply because it is the most popular.
Could you elaborate on that?
The basic idea is straightforward. Suppose there are just three choices available to you, whatever these may be, and you are wondering which one to select yourself. One has been already chosen 6,000 times, one 3,000 and the final one just 1,000 times, making a total of 10,000 altogether. If we assume for purposes of illustration that the only rule of behaviour you are using when making your choice is that of preferential attachment, the rule says the following. You may actually choose any one of the three alternatives. But you are twice as likely to select the most popular rather than the second most popular, and six times as likely to choose this as the least popular.  You are paying no attention to the attributes, to the features of the three alternatives.
Any examples of this phenomenon?
Thetop three sites which are followed up on a Google search typically reflect exactly this pattern. The three of them get almost 100 per cent of the subsequent hits after the search, and the top one of them all gets 60 per cent of the total.
You say copying the best policy in this day and age. Why is that?
We are faced with a vast explosion of such information compared to the world of a century ago. We also have stupendously more products available to us from which to choose. Eric Beinhocker, formerly at McKinsey, considers the number of choices available to someone in New York alone: ‘The number of economic choices the average New Yorker has is staggering. The Wal-Mart near JFK Airport has over 100,000 different items in stock, there are over 200 television channels offered on cable TV, Barnes & Noble lists over 8 million titles, the local supermarket has 275 varieties of breakfast cereal, the typical department store offers 150 types of lipstick, and there are over 50,000 restaurants in New York City alone.’
That’s quite a lot…
He goes on to discuss stock-keeping units – SKUs – which are the level of brands, pack sizes and so on which retail firms themselves use in re-ordering and stocking their stores. So a particular brand of beer, say, might be available in a single tin, a single bottle, both in various sizes, or it might be offered in a pack of six or twelve. Each of these offers is an SKU. Beinhocker states, ‘The number of SKUs in the New Yorker’s economy is not precisely known, but using a variety of data sources, I very roughly estimate that it is on the order of tens of billions.’ Tens of billions!
So what does it tell us?
The customer has tens of billions of options to choose from. Compared to the world of 1900s the early twenty first century has seen a quantum leap in the number of choices available. And rather obviously the time taken to evaluate and choose rises with the number of choices. Many of the products available in the twenty-first century are highly sophisticated and are hard to evaluate even when information on their qualities is provide. Take the case of mobile tariffs that are available in the market. How many people can honestly say that they have any more than a rough idea of the maze of alternative tariffs which are available on these phones? The range and complexity of choice are so vast that the only way in which people can cope is by adopting behavioural rules which spectacularly reduce the scope of choices available to them. This is the key reason that ‘copying’ has become the rational way to behave, the rational way to make choices in the twenty first century. The word ‘copying’ is , I should stress being used as a shorthand description of the mode of behaviour in which your choice is influenced, altered, directly by the behaviour of others.
How much difference can the copying motive make to the outcome?
It can make a huge difference.  Duncan Watts, a professor at Columbia, ran some experiments in 2006 and published the results in Science, probably the world’s top scientific journal.  He set up an experiment where a student could listen to 48 songs, and download for free any which he or she wanted.  A number of students carried out this experiment.  The end result was that the most downloaded songs were about three times more popular then the least.  The experiment was repeated, with just one difference.  The student was told the number of previous downloads which each song had.  The impact was huge.  This time, the most popular songs were over 30 times more downloaded than the least popular.  A few songs got lots of downloads, most got very few. In addition, the connection between quality and success was very weak.  As Watts noted ‘The best songs rarely did poorly, and the worst rarely did well, but any other result was possible.’
You talk about economist Brian Arthur’s urn experiment. Could you tell our readers about it?? What is the practical significance of this experiment?
This seemingly abstract piece of work has great practical significance.  It is another way of illustrating why the Watts’ experiments have the outcomes which they do. Arthur’s initial work was on a highly abstract concept in non-linear probability theory, something called Polya urns. Imagine we have a very large urn containing an equal number of red and black balls. (The colours are immaterial.) A ball is chosen at random, and is replaced into the urn along with another ball of the same colour. The same process is repeatedly endlessly. Within this enormous urn, can we say anything about the eventual proportions of red and black balls which will emerge? They start off with a 50/50 split. Can we say how this split will evolve?
Can we?
Indeed we can. Arthur and his colleagues showed that as the process of choice and replacement unfolds, eventually the proportion of the two different colours will always – always – approach a split of 100/0. It will never quite get there, because at the start there are balls of each colour, but the urn will get closer and closer to containing balls all the same colour. The trouble is, we simply cannot say in advance whether this will be red or black. Arthur’s equations also show that the winner emerges at a very early stage of the whole process. Once one of the balls, by the random process of selection and replacement, gets ahead, it is very difficult to reverse.
So what is the practical implication of this?
Suppose a new technology emerges.  No one really knows how to evaluate the various products associated with it. The principle of copying seems entirely rational. Someone makes a choice. In the abstract model, this is the extraction at random of a ball from the urn. The fact that brand A has been chosen rather than brand B tilts ever so slightly the possibility that the next choice will also be A rather than B – this is the replacement rule in Arthur’s model. And so the process unfolds. In practice, of course, as one of the brands gains a lead over its rival, factors other than consumer copying will come into play and reinforce its dominance. There will be positive feedback, positive linking, so that success breeds further success. The more successful brand may be able to advertise more, for instance. Retailers will give more shelf space to it, and may even, in the splendid language of retailers, delist its rival, so that it becomes harder and harder to obtain. Technologies and offers which piggyback on the brands – think of apps and iPhones here – become increasingly designed to be compatible with the number-one brand.
You write “the most popular , the most successful, the biggest, does not stay there forever”.
Success is self-reinforcing, but it does not last forever.  Indeed, even as I write these words, the West’s press is full of speculation that Google may be about to go into decline. The most popular video on YouTube today is rarely the most popular tomorrow. The song which is at number 1 this week does not usually stay very long in this position. Over the entire period from 1952 to 2006, no fewer than 29,056 songs appeared in the Top 100 chart in the UK. Of these, 5,141 were in the chart for just a single week. Almost exactly a half stayed in for less than a month, so four weeks was the typical life span, as it were, of a song in the Top 100. In contrast, fifty-nine remained popular for more than six months. The typical life span at number 1 was just two weeks.
Any other example?
At the other extreme is the ranking of the world’s largest cities. Mike Batty, a distinguished spatial geographer at University College London, published an analysis of this in Nature in 2005. He begins his work with the largest US cities from 1790 to 2000. Over the 210-year period, 266 cities were at some stage in the top hundred. From 1840, when the number of cities first reached one hundred, only twenty-one remain in the top hundred of 2000. On average, it takes 105 years for 50 per cent of cities to appear or disappear from the top hundred, whilst the average change in rank order for a typical city in each ten-year period is seven ranks.
How important is the element of chance and randomness in any successful enterprise or outcome?
In a world where network effects, where positive linking exists, chance and randomness are important.  A lucky early break sets up positive feedback.  Once you or your product have been selected, it makes it more likely that you will be chosen again in future. It is easy to see now, for example, why Manchester United are so successful.  They possess global brand recognition and can attract massive sponsorship.  But this was not always the case.  Chance played a big role in their very survival, and in their subsequent success.
How was that?
Manchester United started life as essentially the works team of the Lancashire and Yorkshire Railway company, based in – and called – Newton Heath, then as now a poor district in the eastern part of the city.  Just over 100 years ago, Newton Heath were served with a winding-up order. A consortium of local businessmen paid what in today’s money is around £750,000 to rescue the club, and changed its name to Manchester United. Despite some fleeting success, the club languished. In 1931 they were effectively bankrupt again and were rescued even more cheaply than before: for some £400,000 in today’s money. Yet in 2011, the value of Manchester United is of the order of £1 billion!
And chance had a role to play in it?
Chance elements also played a role in United’s subsequent success. Just before the end of the Second World War, the club offered the position of manager to Matt Busby, a man who built not one, not two, but three extremely successful teams during the course of his career. But Busby’s appointment itself was to a considerable degree one of chance. Thirty miles to the west of Manchester lies its great rival, the city of Liverpool. The antipathy between Manchester United and Liverpool FC, the second most successful English team ever, is intense. No player has been transferred directly between the two since 1964. Yet Busby almost joined Liverpool, who had been courting him for some time. The clincher appears to have been that Busby was friendly with a member of the United board through their membership of the Manchester Catholic Sportsman’s Club.
The interview originally appeared in the Daily News and Analysis on October 29,2012. http://www.dnaindia.com/money/interview_chance-played-a-big-role-in-the-success-of-manchester-united_1757253
(Vivek Kaul is a writer. He can be reached at [email protected])

Robert Vadra's Midas touch is based on inside info


Vivek Kaul
Robert Vadra is a lucky man. A very lucky man indeed.
People sell land to him and do not demand money in exchange immediately. This is not money running into a few thousands or a few lakhs, but it’s more than a few crore.
In today’s edition of Business Standard N Sundaresha Subramanian explains how it all started for Vadra. How the son-in-law of the first family of Indian politics got into buying and selling land.
Onkareshwar Properties sold 3.5 acres of land in Shikhopur near Manesar to Vadra’s Sky Light Hospitality sometime in February 2008(as an earlier report in The Hindu suggested). Sky Light Hospitality as on March 31, 2008 had an issued capital of Rs 1 lakh. This was the money Vadra and his mother Maureen (who owned 0.2% of the company) had put into the company for business. The company had not taken any loans.
So the question is how did a company with Rs 1 lakh capital buy 3.5 acres of land? The sale deed for this land showed that it was bought by Sky Light Hospitality for Rs 7.5 crore. So how did a company which had Rs 1 lakh capital buy a piece of land which cost Rs 7.5 crore without taking on any loan?
Sky Light Hospitality’s balance sheet as on March 31, 2008 shows a book overdraft of Rs 7.94 crore in Corporation Bank Friends Colony, New Delhi. This basically means that a cheque was issued without enough funds being available in Sky Light Hospitality’s accounts. The cost of the land was Rs 7.5 crore. With a 6% stamp duty, the total would have worked out to Rs 7.95 crore (Rs 7.5 crore + 6% of Rs 7.5crore). And that is more or less the entry that sits on Vadra’s Sky Light Hospitality.
The question is how can a company issue a cheque without there being enough money in its accounts? This can only happen if the individual/company in whose name the cheque is being issued agrees not to deposit the cheque immediately.
And that’s what precisely seems to have happened in this case. As the Business Standard points out “Onkareshwar’s balance sheet as on March 31, 2008, showed an entry of Rs 7.95 crore under ‘sundry debtors’. This corresponds to the entry of Rs 7.94 crore book overdraft entered in Sky Light’s books.” So what this means is that Onkarshwar sold the land, accepted the cheque, did not deposit it immediately and also paid for the stamp duty in the meanwhile.
Vadra took this land and sold it to DLF sometime in June 2008. DLF valued this land for Rs 58 crore and gave Vadra an advance of Rs 50 crore against it. Vadra basically used this Rs 50 crore to go on a property buying spree in Haryana and Rajasthan. What this also meant was that Vadra bought land for Rs 7.5 crore and sold it for Rs 58 crore. And in the process made a profit of Rs 50.5 crore. All along he had invested only Rs 1 lakh of his own money in the deal.
Vadra got the advance of Rs 50 crore in three installments an earlier story in The Financial Express pointed out. The first of these instalments was paid on June 3, 2008, The Hindu had pointed out. It was this money that Vadra would have used to pay off Onkareshwar Properties. So what this means that Onkareshwar sold the property to Vadra in February 2008 and waited till June 2008 to be paid. That was a very considerate transaction in this day and age where every real estate company wants the money in advance.
A clear link has also started to emerge that the Haryana Chief Minister Bhupinder Singh Hooda may also have had a role to play in facilitating the deal between Onkareshwar and Vadra’s Sky Light Properties.
Satyanand Yajee owns 98% of Onkareshwar Properties. He is the general secretary of the All India Freedom Fighters Organisation (AIFFO), the Business Standard points out. “Satyanand Yajee, who turned Onkareshwar Properties, a company with capital of Rs 1 lakh, into a Rs 136-crore capital base behemoth, isn’t an obscure figure. He is an office bearer of the Delhi-based All India Freedom Fighters Organisation (AIFFO)…Haryana Chief Minister Bhupinder Singh Hooda, too, has strong ties to this organisation. Before his death in 2009, Ranbir Singh, Hooda’s father, was working president of AIFFO. And, Hooda is a founder-member and working president of AIFFO’s sister body, All India Freedom Fighters’ Successors’ Organisation(AIFFSO), according to his profile in the Haryana Vidhan Sabha website,” the paper writes.
And the link doesn’t end there. “Both Hooda and Yajee are sons of freedom fighters. While Satyanand’s father, the late Sheel Bhadra Yajee, hailed from Bihar and was said to be close to Subhash Chandra Bose, Ranbir Singh hailed from Rohtak and was irrigation minister of Punjab when the iconic Bhakra Nangal project was implemented. On a website in honour of Sheel Bhadra Yajee, the chief minister, with his father and son, Deepender Hooda, is quoted showering praises. Recently, AIFFO had spent lakhs of rupees in full-page advertisements praising Ranbir Singh’s contributions to the freedom struggle. ,” the Business Standard points out.
Given this it is not surprising that the Haryana government was in a hurry to give Vadra a clean chit on his property dealings in the state. Vadra’s real estate empire started with more than a little help from Hooda.
A part of the money that Vadra’s Sky Light Hospitality got from DLF was also used to buy plots of lands in Bikaner, as a DNA story reported a few days back. “In a flurry of deals between June 2009 and August 2011, Robert Vadra purchased at least 20 plots of land collectively measuring more than 770 hectares in Rajasthan’s Bikaner district, in a region that would see prices spiraling soon after. A clutch of investors, including Vadra, apparently privy to information on upcoming industrial projects (the Vavasi silicon chip project and the solar parks policy) in the vicinity, reaped huge profits with land values appreciating by up to 40 times since 2009,” the story pointed out.
In fact Vadra was willing to pay Rs 65,000 per hectare of land when the going rate was not more than Rs 30,000 a hectare. As the DNA wrote “Bikaner businessman and land investor Vineet Asopa, who sold among the largest plots to Vadra, was so surprised at the ease with which he demanded and received Rs65,000 a hectare when local prices were no more than Rs30,000 a hectare that he summoned contractors for an overnight survey of whether the land was rich in minerals.They dug 80 feet deep, found only rocky surface, and Asopa went ahead with the deal. He found out only two months later that the purchaser was Vadra, whose signature was on the cheques.”
This would not have happened unless Vadra was privy to information about the industrial projects coming up on the aird land he had been buying up. And this needed more than a little help from the government.
Ashutosh Varshney in a column in The Indian Express equates Vadra’s strategy of buying up land before anyone else does, to an honest graft. He quotes George W Plunkitt, a US state senator in the state of New York, in the late 1800s. “In a famous passage, George W. Plunkitt…said the following: “Everybody is talking these days about Tammany men growing rich on graft, but nobody thinks of drawing the distinction between honest graft and dishonest graft… Yes, many of our men have grown rich in politics. I have myself, but I’ve not gone in for dishonest graft — blackmailing gamblers, saloonkeepers, disorderly people, etc… There’s an honest graft… Let me explain by examples. My party’s in power in the city, and it’s going to undertake a lot of public improvements. Well, I’m tipped off, say, that they’re going to lay out a new park at a certain place. I see my opportunity and I take it. I go to that place and I buy up all the land I can in the neighbourhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particularly for before… Or supposing it’s a new bridge they’re going to build. I get tipped off and I buy as much property as I can that has to be taken for approaches. I sell at my own price later on and drop some more money in the bank… Wouldn’t you?” (William L. Riordan, Plunkitt of Tammany Hall).”
That’s what Vadra is doing as well. His mother in law’s party is in power. He is tipped off about a new project coming up in states the Congress party rules. He just happens to be buy land before anyone else does being privy to information. And once the information is made public the price of the land goes up many times over in the months and years to come, and he sells out. Wouldn’t you, dear reader, be doing the same thing, assuming you were privy to  information like Vadra is?
The article originally appeared on www.firstpost.com on October 27,2012. http://www.firstpost.com/economy/robert-vadras-midas-touch-is-based-on-inside-info-504707.html
(Vivek Kaul is a writer. He can be reached at [email protected])

Rajat Gupta may never have got convicted in India


Vivek Kaul
Rajat Gupta will be spending two years in prison, which will be followed by one year of supervised release (The supervised release starts after a person is released from prison. After the release the individual goes through a period of supervision in the community. You can read the complete definition here). Gupta will also have to pay a fine of $5million.
Gupta, a former managing director of management consultancy McKinsey & Company, who happened to marry the only girl in his IIT Delhi batch, and a member of the boards of Goldman Sachs and Proctor and Gamble, had been accused of passing on sensitive board room information to hedge fund manager Raj Rajaratnam. The information leaked by Gupta turned out to be enormously profitable stock tips for Rajaratnam. Rajaratnam is currently serving 11 years in jail for securities fraud.
The Securities and Exchange Commission (the stock market regulator in the United States) had filed an administrative civil complaint on March 1, 2011, against Gupta for insider trading with Rajaratnam who ran the Galleon Group of hedge funds. The case from start to finish lasted for a period of around twenty months. The dispensation of justice was fast and quick and it did not take a life time as it does in India.
Take the case of Lalit Narayan Mishra who was the Cabinet Minister for Railways. On January 2, 1975, Mishra was in Samastipur to declare open the broad gauge railway line between Samstipur and Muzaffarpur. A bomb exploded and he was seriously injured. He died the next day.
The case against the accused is still on, thirty seven years later. Eight people were accused in the case. One has of them has since died. As Gurcharan Das writes in India Grows At Night–A Liberal Case for a Strong State “The case against the accused dragged on for thirty-seven years…Meanwhile, thirty one of the thirty-nine witnesses for the defence had died gravely prejudging the case…No less than twenty-two different judges had heard the case over the years. The trial was still going in 2012.”
And there are other cases in which justice is delivered after a generation has passed in the meanwhile. In 1992, four teams of government officials landed up in the adivasi village of Vachathi in search of the sandalwood smuggler Veerapan. On not finding him there the government officials accused the villagers of harbouring Veerapan. The officials took 18 teenage girls from the village into the forest where they were stripped and raped. 133 villagers were arrested and put in jail as well.
Justice was delivered only 19 years later. As Das writes “On the sweltering afternoon of 29 September 2011, principal district judge S Kumarguru began to hand out sentences. There was a hushed silence in the packed courtroom in Dharmapuri, Tamil Nadu. He began at 3.30pm but could not finish until 4.40pm because he had to read aloud punishments awarded to 215 government officials. Among those convicted were 126 forest officials, 84 policemen and five revenue officials. Seventeen were convicted of rape and they received prison sentence from seven to seventeen years; others received from one to three years on counts of torture, unlawful restraint, looting and misuse of office.” Fifty four accused had died in the meanwhile.
Since delivery of justice takes so long, frivolous cases are filed to cut short promising careers. S Nambi Narayanan’s case is a very good example of the same. Narayanan was a senior official in charge of the cryogenics division of the Indian Space Research Organisation. In 1994, he was accused of espionage. The Central Bureau of Investigation (CBI) concluded as early as 1996 that the entire case was a fabrication. The National Human Rights Commission ordered an interim compensation of Rs 10 lakh for Narayanan in 2001. The Kerala government got a stay against this order. The stay was finally vacated by the high court on September 7, 2012. In the meanwhile a lifetime had passed. (You can read the complete details of the case here).
The system is also used to their advantage by those who do not like the idea of working. The famous case of Uttam Nakate a helper at Bharat Forge illustrates this point. Nakate was found sleeping at the workplace at 11.40am in the morning in early 1984. This was the fourth occasion this had happened. The company started proceedings against him under the Industrial Employment Act, 1946, found him guilty and dismissed him.
Nakate then appealed to the Maharashtra labour court and challenged his dismissal under the category of an unfair trade practice. The labour court directed that Nakate be taken back and at the same time also be given 50% of his wages. The company then appealed to an industrial tribunal which struck down the decision of the labour court. Nakate then went to the Bombay High Court which decided in his favour and also directed the company to pay him Rs 2.5 lakh. The case finally made its way to the Supreme Court which ruled in the company’s favour. The two judges on the case said “we cannot say the quantum of punishment imposed was wholly disproportionate to his act of misconduct”. If all this would have happened in a period of 20 months or so as it did in Gupta’s case in the US, things would have been fine. By the time the Supreme Court decision came in 2005, two decades had passed.
But the people who gain the most from the way our judicial system has evolved are the politicians. Take the case of former telecom minister Sukh Ram. In 1996, the CBI had seized Rs 3.6 crore from his official residence which he had collected as a bribe in awarding a telecom contract.  The case dragged on for years and Sukh Ram was finally found guilty in late 2011, nearly a decade and a half later. By this time Sukh Ram was 85 years old and in hospital.
“If this happened in the case of Cabinet ministers, where was the hope of justice for an ordinary person? But former chief justice of the Supreme Court J.S.Verma had a different take. He claimed that although Article 21 of the Constitution guaranteed a speedy trial to every citizen, in reality the status of the person did matter. A powerful person with connections or money could speed up or delay the justice system to suit his needs,” writes Das.
Look at what happened to the Ruchika Girhotra case. The accused SPS Rathore got out of the courtroom smiling in December 2009, after a six months sentence was announced and he got bail immediately.
The late Harshad Mehta is another brilliant example of the system gone wrong. The scam he was running on the Bombay Stock Exchange was revealed in 1992. He died of a heart attack in a Thane jail on the last day of 2001. When he died Mehta was facing trial in 28 cases but had been convicted only in one case which involved the use of funds to the tune of Rs 30 crore belonging to the Maruti Udyog being used in the stock market. All the other cases were pending.
The economist Bibek Debroy carried out a project for the government in the 1990s and found out that nearly 2.5 crore cases were pending in Indian courts. This number has gone up to 3.2 crore since then. Debroy found that it takes up to twenty years to settle a dispute. And it would take nearly 324 years to settle all the cases. Debroy further suggested that a major reason for the huge number of cases was the fact that a large number of laws were simply obsolete. As Das writes “He also concluded that 500 out of the 3500 central laws were obsolete and needed to be scrapped, and half of the 30,000 state laws as well.”
But this was not a major reason for the large number of cases in the Indian court. “The main culprit of the judicial delay was the government, which appealed all judgements automatically and proceeded to lose them again in the higher courts. This crowded out the private individual. The problem lay in the fact that the decision to litigate was made at the lowest level in the bureaucracy but the decision not to litigate was made at the highest level. If this process were simply reversed, government litigation would come down,” writes Das. So for the burden on the Indian judicial system to come down, the tendency of the government to litigate left, right and centre, also needs to come down.
Now let’s get back to Rajat Gupta. What would have happened to Rajat Gupta if he was accused of a similar wrong doing in India? Being at the position that he is he could have easily influenced the judicial system. The case would have dragged on for 20 years. And by the time it would have reached the Supreme Court, Rajat Gupta, like Sukhram now, would have been 85 years old by then and more or less lived his life. Gupta is around 64 years old now.
Of course all this would have happened only assuming that Gupta would have been taken to court for what he did. Passing on stock tips to fund managers isn’t really a big deal in an Indian context. Harshad Mehta who carried out a far bigger scam than what Gupta has been accused of in the United States (actually it’s not even a comparison) got convicted in only one case between 1992 and 2001. And even that wasn’t one of the main cases. And what ever happened to Ketan Parekh and his scams? Look at Sahara and the excuses it keeps coming up with for not paying back the Rs 24,000 crore it owes to its 3 crore investors, the latest one being that 90% of its investors do not have bank accounts. This, despite being directed by the Supreme Court to payback its investors. Even their latest excuse doesn’t quite work. When the Sahara collected the money even then their investors mustn’t have had bank accounts? So if it could collect the money, it should also be able to return it.
What all this tell us is that India is a weak state which cannot enforce things. Das summarises it best when he writes “Weak enforcement is at the heart of a weak state in which the most vulnerable and the weakest are its chief victims.”
The article originally appeared on www.firstpost.com on October 26, 2012. http://www.firstpost.com/business/rajat-gupta-may-never-have-got-convicted-in-india-503668.html
(Vivek Kaul is a writer. He can be reached at [email protected])