Tuesday, August 5, 2014

Everything you wanted to know about the Modi business family feud – and more

Everything you wanted to know about the Modi business family feud – and more



First Biz 5 Aug 2014
The Modi family is one of the country’s oldest business families. Interestingly, it was also one of the first business groups to witness a long painful split due to warring brothers. The group’s businesses ranged from chemicals to sugar, airlines to sponge iron. The companies under its fold included Modi Sugar Mills, Modi Vanaspati Manufacturing Company, Modi Industries Ltd, Modi Luft and Modi Rubber. Modi Industries had its headquarter at Modinagar in Delhi.
A new book, Business Battles: Family feuds that changed Indian industry, recounts the history of all famous family feuds that took place in the history of Indian business -- the Amabnis of Reliance Industries, the Singh family of Apollo Tyres, the Bajajs, BPL, the Chhabrias, the Kirloskars, Mafatlal, Ranbaxy, the Modis and the Shri Rams. Here is an excerpt on The Modi Warlords, from the book written by Shyamal Majumdar, Executive Editor, Business Standard.
AN EMPIRE IS BUILT
The story of this family—from its foundation to the split to the ultimate reunion—begins with the young heir of a business family from Patiala setting up a plant 40 km north-east of Delhi, which cost him Rs 11 lakh. That was in 1933. Gujarmal Modi, then aged 31, saw an opportunity in the government’s decision to encourage domestic production of sugar by increasing the import duty on it. The mill prospered, and subsequently diversified into vanaspati, rubber, paper, distillery, sponge iron, chemicals, rice mills and textiles.
By the late 1970s, Modinagar had earned a prominent place on India’s industrial map. During this period, the Modi Group was the country’s seventh largest conglomerate with assets of Rs 900 crore and annual sales of Rs 1,600 crore. By the time Gujarmal’s brother Kedar Nath joined the business, the Modi Group was already an established name. Kedar Nath, the son of their father’s fourth wife, was 19 years younger than Gujarmal. Gujarmal, born as Ram Prasad and named after his great grandfather, was the second child in the family of Multani Mal Modi, owner of a successful food grains mill in Patiala. Multani Mal earned the title ‘Rai Bahadur’ from the British for his contribution to public welfare.
The son shared the same trait, which is evident from the number of schools, colleges and hospitals that he set up during his lifetime. Multani Mal had a daughter from his first wife who died young. Bowing to his parents’ wishes that the family needed a son to carry forward its legacy, he married a second time. The joy of Gujarmal’s birth was, however, short-lived; his mother died just six days later.
He was brought up by Gujari, his foster mother, and was even nicknamed Gujar after her. As time passed, the name Gujar stuck and the child came to be known as Gujarmal. Meanwhile, his father married a third time, and then a fourth after the third wife also passed away—childless. Kedar Nath was the son of Multani Mal from his fourth wife and was born many years after Gujarmal.
Gujarmal joined his father’s business when he was in class 8, setting a tradition of sorts because his eldest son, KK, too joined his business very young, at the age of 19. By this time, KK’s step-uncle Kedar Nath had begun to have a considerable say in how the business ought to be expanded. Gujarmal died in 1976 without leaving behind a will, but his brother ensured that the family remained united and relations remained cordial. His five sons and six daughters, and Kedar Nath’s three sons, were married off into equally prosperous business families.
Modinagar was then a bustling township with as many as 35 factories and scores of educational institutions and healthcare facilities serving not only Modi Group employees but also people from all over India. Despite being stepbrothers, Gujarmal and Kedar Nath were close. Gujarmal brought him into the business and they both worked together for a long time. In fact, Kedar was quite content with letting his brother have the limelight. In any case, he was quite junior to him. After Gujarmal’s death, Kedar took over as head of the family and steered the empire quite competently until his sons grew up and joined the business.
FIRST RUMBLINGS
Around the mid-1980s, Kedar Nath started worrying about the future of his sons. He believed that they were of an age when they needed to carve out an independent identity and not remain content under the shadow of Gujarmal’s five sons. Since there was no clear line of ownership, an insecure Kedar Nath initiated action for a share of the pie for each of his three sons. This was resisted by his brother’s sons, who wanted to maintain status quo, stating that the group had been founded by their father.
And so, quarrelling over the family business began, leading to a steady decline of what was once a booming empire. Kedar Nath used his formidable connections in the then government to sharpen his attack on the family. It may be a coincidence, but soon anonymous letters began surfacing in the offices of the Enforcement Directorate (ED ) alleging wrongdoings in the Modi empire—violation of the Foreign Exchange Regulation Act (FERA), siphoning of money from group companies to fund new businesses, among others.
According to the case files, there was one letter that suggested over-invoicing of imported machinery, while another claimed the Modi brothers had no intention of paying back money to financial institutions (FIs) and, instead, preferred to shut down some of the companies. The outcome was as expected. The FIs, as shareholders, initially allied with Kedar Nath and began probing the group’s activities, demanding that more powers be given to him. Gujarmal’s sons blamed the uncle for these selective leaks. They too tried flexing their muscles, and when that did not work, removed their uncle as chairman of the group flagship, Modi Rubber, in 1988. All hell broke loose after that, and corporate India witnessed one of the most vicious family battles. The brothers sparred in public. Neither was willing to concede even an inch to the other.
The prolonged dispute hit Modinagar like a typhoon. Business was neglected which led to labour unrest, mismanagement, technological obsolescence and a host of other problems. The mills started shutting down one by one (at last count they were down from 30 to just 6), hitting Modinagar where it hurt the most. Alarmed, the FIs which had substantial stake in the companies stepped in. A compromise formula was worked out on 24 January 1989 at the instance of the institutions, under which the empire was to be divided in a 60:40 ratio.
Gujarmal’s five sons would get 60 per cent of the assets, and Kedar Nath’s three sons would get 40 per cent. Accordingly, Modi Rubber went to the Gujarmal faction, while Modi Mills came under the control of the KN Modi camp. The following year, Kedar Nath’s group rebranded itself as Modi Enterprises. The settlement, however, unsettled everything. Apart from the lack of trust between the brothers and cousins, what came in the way of reconciliation was the role and involvement of politicians and bureaucrats via the FIs.
‘My experience is that the Modi Group has suffered a lot because of some politicians, who made us fight and then became arbitrators,’ BK was to say at the family reunion in 2012. He may well be correct as institutions made full use of a rule that allowed them to convert 20 per cent of loan into equity. They behaved like a cartel, using their voting power to favour one section of the family over another and pitting brother against brother. Though it cannot be proved, it is believed that Kedar Nath was close to the Prime Minister’s Office (PMO) during Indira Gandhi’s tenure as PM, and this gave him considerable political clout.
What everyone misjudged was the difficulty that the group would have in disentangling the cross-holdings within its companies. Due to heavy taxes that were levied on industry and businesses in the 1970s and 1980s, the group’s shareholdings comprised a complex web of holding firms in which every brother had a stake and that made it virtually impossible for family members to go their own way, even if they wanted to. Modi Rubber, which went to the Gujarmal faction, had `250 crore worth of holdings in 13 group companies, including Godfrey Phillips, Gujarat Guardian and Bihar Sponge, which were owned by Kedar Nath’s sons.
For the FIs, the family battle served a double whammy. Not only were they stuck with a messy state of affairs within the companies, the Modis also refused to repay loans. They said that the cross-holdings of the various family factions were so complex that the liability of each of the brothers could not be fixed until the division of property was effected. So, the FIs blacklisted the entire group, complicating matters further.
It became a classic case of too many children bickering over a non-expanding pie. The terms of settlement stated that all disputes, clarifications, and so on, should be referred to the chairman of the Industrial Finance Corporation of India (IFCI) or his nominee, whose decisions would be final and binding on both groups. Meanwhile, the valuations that had been arrived at by Billimoria & Co left both factions of the family unhappy. They approached the IFCI chairman who, in turn, formed a committee of experts to assist him. Discussions were also held with the chairmen of the companies concerned, which went on until December 1995.
The matter did not end there as the IFCI chairman’s ‘final’ decision was dragged through numerous arbitration proceedings and courts, which, in turn, gave individual orders restraining the sale or transfer of shares held by one group company to another. The courts’ decisions made the process of division of assets impossible to implement. For example, one particular court restrained the sale or transfer of any stake held by the Gujarmal faction in Godfrey Phillips, owned by the KN Modi faction. Another judgement instructed that no meeting of the Modipon board should be held to consider any matter until further orders. The legal wrangling went on for six long years.
Business Battles: Family feuds that changed Indian industry
Shyamal Majumdar
BS Books

Jignesh Shah to Subrata Roy: Why more businessmen are going to jail than ever before


Jignesh Shah to Subrata Roy: Why more businessmen are going to jail than ever before

First Biz  R Jagannathan 4 Aug 2014

By any standard, the number of businessmen doing time in jail must have hit a new record in India over the last five years.
Yesterday (4 August), when the economic offences wing of the Mumbai police filed a 9,360-page charge-sheet against Jignesh Shah, Chairman of Financial Technologies India Ltd (FTIL), in connection with the Rs 5,574 crore default at the National Spot Exchange Ltd (NSEL), he was only the latest in a long list of businessmen put in the dock during the UPA regime for alleged wrongdoing.
At the time of the filing of the charge-sheet, Shah had already spent nearly 80 days in jail. Now that the charge-sheet has been filed, it is conceivable that he will get bail in the near future, but clearly the sheer number of businessmen who have been sent to jail is unprecedented in the annals of independent India.
Subrata Roy, boss of the controversial Sahara Group, has spent more than five months in Tihar jail, thanks to his extraordinary defiance of a Supreme Court verdict of 2012 in the illegal issue of optional fully convertible debentures by two shadowy companies in his group. He has to furnish Rs 10,000 crore to be out of jail, and is expected to use a conference room in Tihar to negotiate the sale or lease of his properties to find this amount.
Both Sahara and Jignesh Shah’s MCX are believed to have used political clout in the finance ministry to get their job done (read this letter from a former Sebi director to the PM to read the details).
Over the previous five years, we have seen several more businessmen and executives – Shahid Balwa of DB Realty, Sanjay Chandra of Unitech Wireless, Vinod Goenka of Swan Telecom, three senior executives of the Anil Ambani group, including group managing director Gautam Doshi, Sharad Kumar, CEO of Kalaignar TV, not to speak of B Ramalinga Raju and other executives of the fraud-hit Satyam group – have seen the insides of jails for the first time. And this list is by no means exhaustive. We have also left out the politicians and lower level business executives who went to the cooler along with their bosses and alleged partners in crime.
One way of describing this trend of so many businessmen going to jail is to link the phenomenon to growing public anger over egregious corruption – which the courts have taken note of and acted accordingly.
The other way of seeing it is to ask why: the glib answer of socialists is that crony capitalists are making hay as usual. The more likely answer is that corruption tends to peak whenever the state shifts decidedly leftwards and talks of redistributing wealth. When the poor, or some vaguely defined public interest, are used as justification for bad policy, it is crony socialism at work. When huge sums of money are earmarked for funnelling to the poor or national goals, lots of crony businessmen will turn up at the feeding trough. The UPA’s flagship scheme NREGA, and the Food Security Act, will lead to more corruption as leakages in these schemes are already enormous. (Read here and here)
The uptick in corruption during UPA-1 and UPA-2 marked the high noon of crony socialism.
The link between corruption and socialism emerges because politicians are the key decision-makers on where money is spent, where scarce resources have to be allocated, where contracts have to be awarded. When these things are done non-transparently – which was pretty much the case during UPA rule - you get crony socialism. When the state puts itself at the centre of economic activity – whether by an expansion of the public sector or by increasing spending recklessly on boondoggles – crony capitalism will spike.
Put another way, crony capitalism flowers best under socialistic practices. Hence it would be more right to call corruption as the other side of the socialist coin.
This does not mean corruption does not exist in societies that are more capitalist, but where markets decide winners and losers, the chances are lower. It is only when the state seeks to pick who gains or who loses, the scope for cronyism increases.
As I have noted before, “UPA has been joined at the hip with crony capitalists” precisely because it justified everything in the name of the poor.
When A Raja vicariously applied the first-come-first-served rule for the award of telecom and spectrum licences to his pals, he talked of making telecom services available at lower costs to the poor. He opened the door wide open to crony capitalism.
When coal blocks were awarded “free” to all comers in the name of keeping power tariffs down, which, in turn, was justified by the need to keep consumer and agricultural tariffs below cost, we got more cronyism.
When the late Congress Chief Minister, YS Rajasekhara Reddy, offered infrastructure projects to the Rajus of Maytas and Satyam, that was crony capitalism.
When GMR, which bagged the Delhi airport, managed to get its deal changed after the bid, and also got Rs 24,000 crore worth of land for Rs 31 lakh, that was also an indicator of crony dealing.
When Kingfisher Airlines got liberal loans even when it had shown only humongous losses for years, that was crony banking at work. When policies to allow higher foreign direct investment (FDI) in aviation were delayed endlessly to allow Kingfisher to sink, that too smacked of crony capitalism – this time to favour the survivors. If the FDI policy had come in 2010-11, Kingfisher could possibly have been saved.
And guess who is going to be the biggest beneficiary of the Congress party’s Land Acquisition Act, a.k.a. the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013?
Only companies with large land banks, and middlemen who will arrange for the aggregation of land banks, will benefit.
The Land Acquisition Act is the biggest incentive for political and business cronies to make a killing at the cost of India’s industrial growth.
The Act is supposed to be the UPA”s biggest pro-poor, pro-farmer legislation. It will give the biggest fillip to cronyism. If left unreformed, the Land Act will hollow out Indian industry, and neither Indian farmers nor business will benefit.
Crony socialism not only boosts corruption, but also kills jobs and growth.


RBI starts inspection in Syndicate Bank case

RBI starts inspection in Syndicate Bank case
The bribery episode at Syndicate Bank throws up ‘governance’ issues at some public sector banks, says Raghuram Rajan

Syndicate Bank chairman and managing director S.K. Jain was arrested by the CBI on Saturday for accepting bribes to extend credit facilities to companies. Photo: Bloomberg

Live mint 4 Aug 2014


The Reserve Bank of India (RBI) has initiated an inspection atSyndicate Bank Ltd following allegations that the chairman and managing director of the bank had taken bribes to sanction loans.
The bribery episode at Syndicate Bank throws up “governance” issues at some public sector banks, RBI governor Raghuram Rajan said on Tuesday. He, however, cautioned against “extrapolating” the incident to the whole public sector banking space.
“Inspection of Syndicate Bank is going on but one has to be careful about extrapolating it to other banks. It is important to ensure that a full investigation is done and the investigation agencies are doing it but a balance has to be maintained. While the culprits must be brought to book it does not have to be a witch hunt which impacts credit appraisals,” Rajan said in a post credit policy interaction with the media.
Syndicate Bank chairman and managing director (CMD) S.K. Jain was arrested by the Central Bureau of Investigation (CBI) on Saturday for accepting bribes to extend credit facilities to companies.
Responding to a question on whether the RBI needs to keep a stronger check on pricing of loans in order to ensure that discretionary powers of bankers are kept in check, Rajan said that, to some extent, bankers have to be allowed to make decisions based on judgement.
“We cannot take bankers out of the equation. Banking is such that bankers and borrowers have a certain chemistry. that is what relationship banking is all about. It helps bankers to understand whom to give how much loans and whom not to,” Rajan said.
“If we take bankers out of the equation we might as well have machines in their place like credit scores. It is hard for us to do. Banking is also about judgment. We have a lot of highly qualified and highly credible people working in public sector banks, we have to give them the space to work because they are working for the nation,” Rajan added.
On Monday, Jain who is in CBI custody, was suspended from the bank by the government. The bank’s stock had fallen 9% on Monday.
On Tuesday, the bank assured all its stakeholders that the fundamentals of the bank continue to be robust and bank is functioning normally.
At 1:53pm, Syndicate Bank was trading at Rs.134.40 on BSE, down 0.04% from previous close while India’s benchmark Sensex Index down 0.50% to 25,609.62 points.
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Syndicate Bank fallout: Others may go slow on corporate lending

BL Aug 5 ,2014
With CBI keeping an eye on senior officials, decision-making is likely to slow down
Bank lending to the corporate sector may slow down as fear grips officials at public sector banks following the crackdown on Syndicate Bank CMD Sudhir Kumar Jain this past weekend.
“Decision-making at public sector banks may slow down as this (Syndicate Bank incident) has happened despite the committee approach followed by these banks in recent years,” a chief executive of a PSB said. A committee-based approach involves a group of senior officials coming together to sanction credit.
The Central Bureau of Investigation (CBI) on Saturday arrested Jain for allegedly receiving bribe of ₹50 lakh for extending advances to steel companies Bhushan Steel and Prakash Industries, bypassing rules. Along with Jain, eleven others were also arrested by the investigating agency.
Moderation likely
“The immediate reaction, as and when such things happen, where top people are involved, is that banks stop lending,” said a banking analyst at a domestic brokerage. “There will be moderation in lending for large corporate accounts and incremental sanctions may take a hit,” the analyst added. It is estimated that corporates accounted for 40-50 per cent of the overall banking credit.
However, lending to micro, small and medium enterprises (MSMEs) and sectors such as retail and agriculture, which have been a focus area for PSBs, may remain unaffected as the loan amounts are usually small, the analyst added.
Also, the fact that CBI is keeping an eye on other senior officials of prominent public sector banks may prompt the banking officials to turn cautious, thereby impacting corporate lending.
However, not all are of the view that the Syndicate Bank incident will affect corporate lending.
“I don’t think it will adversely impact corporate lending. What happened is a one-off incident. Accidents do happen. It does not mean we should stop driving on the road or vehicles should stop plying,” said the chief executive of a public sector bank, who did not wish to be named.
Meanwhile, the scrips of Syndicate Bank, Bhushan Steel and Prakash Industries tanked on Monday. Syndicate Bank ended 7 per cent lower at ₹134.45, while Bhushan Steel closed 4.23 per cent lower at ₹378.15. The scrip of Prakash Industries shed the most to end 19.96 per cent lower at ₹89 on the BSE on Monday.
Syndicate Bank, meanwhile, informed the stock exchanges on the action against its CMD. “We would like to inform you that we have taken steps for smooth running of banking operations,” the bank said in a note to the exchanges.
(This article was published on August 4, 2014)

Syndicate Bank CMD suspended






BL 4 Aug 2014

The Department of Financial Services, Ministry of Finance, has placed Sudhir Kumar Jain, Chairman and Managing Director, Syndicate Bank, under suspension with effect from August 2, 2014, the bank said in a notice to the BSE. 

This action comes in the wake of the Central Bureau of Investigation registering a case against Jain for allegedly receiving a bribe of ₹50 lakh to grant credit extension to two private firms.

One cannot take out banker's discretion while lending: RBI Governor

Syndicate Bank bribery case: RBI Governor Raghuram Rajan (in picture) cautions against extrapolating the issue to the entire public sector banking system.

Syndicate Bank bribery case: RBI Governor Raghuram Rajan (in picture) cautions against 

extrapolating the issue to the entire public sector banking system.

BL 5 Aug 2014
The Reserve Bank of India Governor, Raghuram Rajan, said that one cannot take out banker’s discretion while lending, in reference to the recent Syndicate Bank issue where the Chariman of the bank has been arrested for allegedly asking for money to raise the loan limit for a few corporates.
Rajan also cautioned against extrapolating the issue to the entire public sector banking system.
“I would emphasise that one should not extrapolate from this for the entire public sector banking system and assume that the entire problem in the public sector banking system is because of criminality rather than because of other factors,” he added.
Pricing of loans
When asked if the RBI should come out with recommendations on pricing of loans to curb quid-pro-quo in lending, Rajan said that this would be tantamount to taking the banker out of the equation.
“The whole point of banking is taking risks and using discretion in taking those risks… When there is banker’s judgment, you have to be careful about what genuine banker judgment is and what non-genuine banker judgment is,” he added.
He added that the answer is not to make all loans uniform based on some observable characteristics because then you might make very very bad decisions because you are not using your intuition on the character of the borrower.
“So, we have to live with this. This episode that is alleged to have happened points to the fact that we have to look again at the governance of the public sector banks and understand the deficiencies there and try and improve it,” Rajan said.
(This article was published on August 5, 2014)