The battle for IFCI

Did Atul Kumar Rai pay the price of being close to Vinod Rai?

Finance ministry officials say that they were close -- like chacha and bhatija.

Marhowrah, a small town in Saran district of Bihar, had a brief tryst with fame some years ago. Lalu Prasad, when he was Union railways minister (2004 to 2009), had pushed hard for a diesel locomotive unit here in public-private partnership — Marhowrah fell in the middle of his constituency, Chapra. General Electric, Bombardier, Alstom, Siemens and Hyundai had shown interest. But the proposal never even made it to the drawing board. Now, Marhowrah, 49 km from Patna, is at the centre of a controversy that could potentially wipe out Rs 1,000 crore of stock-market wealth, and, in a throwback to the 1970s, lead to the government acquiring a perfectly healthy and profit-making financial institution after a confrontation with the company’s management.

Cawnpore Sugar Corporation, a public sector unit, owned a sick sugar mill in Marhowrah. It had shut down in 1997. In 2003, the Board for Industrial & Financial Reconstruction came out with a scheme wherein the Kanpur-based Jaiswal family would revive it by 2005-06. But, thanks to litigation by employees and their unions, the rehabilitation got delayed.

Then, in January 2007, the Jaiswals announced that they had distributed sugarcane saplings to farmers and the unit would go into production in November. The crops were ready in the fields by November, but there was no sign of the mill. The farmers were agitated. For Prasad and his Rashtriya Janata Dal, worsted in the state elections of 2005 by Nitish Kumar’s Janata Dal (United) and the Bharatiya Janata Party, this was too good an opportunity to miss. A procession of farmers, led by MLA Lalbabu Rai of RJD and accompanied by bullock carts laden with sugarcane, threatened to march to the state assembly in Patna.

BIFR, in July 2008, scrapped the old proposal and brought IFCI on board to sell the Marhowrah unit.

But progress was tardy. IFCI would later say that Marhowrah did not make available full details of its assets and liabilities, without which it couldn’t have invited bids.

On January 14, 2010, Rajya Sabha MP and BJP spokesperson Rajiv Pratap Rudy walked into the 18th floor office of IFCI Chief Executive & Managing Director Atul Kumar Rai to take up the cause of the sugarcane farmers around Marhowrah. Chapra is his backyard. He had contested the 2009 elections, unsuccessfully, from Chapra, against Prasad.

Rudy, now 50, is tall and lean. The high forehead and dark moustache give away his Rajput genes. He is often seen at society dos with wife Neelam, is a regular face on television and has a commercial pilot’s licence — during the National Democratic Alliance regime, he was minister for civil aviation. But, at the end of the day, he is a hardcore politician.

Rai’s office, located at IFCI Towers in south Delhi’s commercial district of Nehru Place, is big and well appointed. Rai talks with the authority of an achiever. Indeed, he has turned IFCI around since he took over in 2007: the net worth, which had turned negative, now stands at Rs 4,500 crore; the share price had tanked to below Re 1, but has now rebounded to over Rs 30.

What happened at that meeting is best known to Rudy and Rai. A former IFCI functionary remembers that the two men were shouting at each other. Rudy was accompanied by another man. The ex-functionary says that as soon as he heard the raised voices, this man began to tape the conversation on his mobile phone. Soon, Rudy stormed out of the office and filed a complaint with the police. “My simple point,” Rudy says almost two years after the unsavory incident, “was that payments to a lot of farmers were involved and people were getting affected. But Rai would oppose for no reason; he would scream and shout.”

The former minister didn’t stop at the police complaint — he next moved the Privileges Committee of the Rajya Sabha on Rai’s misbehaviour. According to Rudy’s submission to this committee, headed by K Rahman Khan of the Congress, “Rai was loud and argumentative in his conversation, made abusive gestures and said he will not tolerate such a person in his room.” Rudy alleged that Rai threatened to call his security guards and throw him out of the office.

Rai, on his part, told the committee that Rudy “was received with all courtesy and was treated with dignity and respect”, and that he didn’t utter a single word that was disrespectful. On the contrary, Rai said that he took all insults hurled at him by Rudy humbly and did nothing during the meeting to instigate his visitor.

The matter would perhaps have ended there had Rai not said in one of his depositions that IFCI wasn’t a government-owned company and that he wasn’t a government servant.

IFCI started life as the Industrial Finance Corporation of India in 1948, right after Independence, to provide medium- and long-term credit to corporations. Its share capital was held by the government, Reserve Bank of India and some banks. In 1964, the government and RBI transferred their shares to the Industrial Development Bank of India (now IDBI Bank). In 1993, IFCI got listed on the stock markets. Its current shareholders include 761,505 small investors (stakes worth Rs 1 lakh or less) and large institutions such as Barclays, Royal Bank of Scotland and Nippon Insurance.

But when Rai said that it wasn’t a government company, the committee was not convinced. Indeed, the government had a sizeable exposure of Rs 3,332.31 crore to IFCI: convertible debentures worth Rs 400 crore, optionally convertible debentures worth Rs 523 crore and the rest as “grant in aid”. In addition, the government had guaranteed bonds issued by IFCI. It also had two directors on the company’s board. The committee decided to get to the bottom of the matter.

In a deposition before the committee on August 9, 2010, R Gopalan, secretary, department of financial services, said the ministry of corporate affairs was of the opinion that under the provisions of the Companies Act, IFCI was not a state-owned entity and that the law ministry agreed with the view.

Meanwhile, in August 2010, the Comptroller & Auditor General, or CAG, came out with a draft report that pointed out huge irregularities in the allotment of inexpensive 2G spectrum to a clutch of companies after Andimuthu Raja took over as the telecom minister in 2007. The extent of the loss to the government, the CAG report said, could be as high as Rs 1.76 lakh crore. The nation gasped in disbelief. Vinod Rai, a 1972 batch IAS officer of the Kerala cadre, was the CAG when the report came out, as he is now. Earlier he had been Rai’s superior in the finance ministry.

This is when Rai’s case took a turn for the worse. The government did a volte face. Through submissions to the committee in October 2010 and January 2011, it said that IFCI was under the government’s control. These submissions were based on the opinion of the ministry of law which in turn had consulted the Attorney General on the issue. The committee expressed serious concern that despite financial packages running into several crores to IFCI, the ministry of finance did not have any control over the institution. “From the evidence tendered before it by officials of the department of financial services, the committee is constrained to observe that there is complete lack of interest in the ministry to monitor the functioning of IFCI and to exercise its supervisory control over it to the extent mandated under the Act of 1993.”

Did Rai pay the price of being close to Vinod Rai? The committee tried to find out if the two were related to each other but couldn’t come to any conclusion. But finance ministry officials say they were close — like chacha and bhatija (uncle and nephew). Before he became CAG, Vinod Rai was secretary (financial services) in the ministry of finance. Rai had joined his department as a director in November 2002. In this capacity, he dealt with all financial institutions, including IFCI. He even served as a government nominee on the company’s board of directors from August 21, 2005 to May 31, 2007. Vinod Rai did not respond to Business Standard’s queries on the issue.

The IFCI board, on November 28, 2006, constituted a subcommittee to select and recommend a suitable name for the post of CEO & managing director which had fallen vacant. This subcommittee received five nominations, including one from Rai. After reviewing all five, the board recommended Rai’s name. Rai then resigned his post in the finance ministry and was relieved with effect from May 31, 2007.

The Rajya Sabha’s privileges committee alleged that “necessary formalities to be fulfilled by Rai” were ignored, and that he made a “calculated move” to get the “lucrative offer”. Hence, his appointment should be investigated by the Central Bureau of Investigation. Rai did not respond to queries on his appointment. But he told the committee that he, while taking up the job of CEO & managing director of IFCI, “complied with all the rules, regulations and formalities required and that he neither suppressed nor misrepresented any fact”.

Rai had also offered to repay the debentures of Rs 523 crore with the government. This seems to have added fuel to fire. During Pranab Mukherjee’s tenure as finance minister, a committee had been formed under RS Gujral, then finance secretary, to look into the issues concerning IFCI and suggest a way forward. This committee gave its report in August, which said that the government should convert the debentures into shares. The Cabinet gave its nod to the proposal the same month.

Will the fight end soon? Rai is no quitter. In February 2012, a single judge of the Delhi High Court had passed a judgment holding Rai guilty of contempt of court in a case related to Koshika Telecom and awarded him one month’s imprisonment in addition to a fine of Rs 3.5 lakh to be deducted from his salary. However, in April, a divisional bench of the High Court set aside the earlier order.

Rai is also diplomatic. “IFCI acknowledges the support received from the government throughout its history including Rs 923 crore received in the form of OCDs and loans. The board of directors is seized of the government decision to convert the debentures into equity at par and is taking it forward. IFCI management has an approach of neutrality towards ownership issues,” he says in response to the current controversy. In an interaction with Business Standard earlier this month, after his term had been extended by five years, Rai had said: “Any entity which has majority shareholding in a company would be entitled to have a management of its choice. I cannot presume that I would be their choice.”

The conversion of the debentures at par could give the government a stake of 55 per cent. This will halve the earnings per share and drag the IFCI stock down proportionately. So, the shareholders of IFCI have demanded that the conversion should happen at the formula prescribed for preferential issues by the Securities and Exchange Board of India — this would ensure a fair deal for minority shareholders. The erosion of value by conversion at par will certainly affect Rai — according to company filings, he owned some 118,000 shares of the company on last December. (His salary and allowances added up to Rs 1.15 crore in 2011-12.)

The only glitch is that the government does not have the certificates for debentures worth Rs 523 crore.