Honour the rules

Market-based economies work best when they function with clearly defined rules, and when the rule-breakers are seen to pay the price for what they did. The alternative scenario is laid out in the recent film Guru, which portrays a system where the rules flout economic logic and in which one man exploits the distortion-filled system to script his success, and gets glorified for doing so. India has presented this latter picture for much of its post-Independence history; it is only in the last 16 years that the rules have been re-written to fall in line with economic logic""though the process is not complete. Nevertheless, it is time we made sure that we do have due process sorted out, especially when it comes to large contracts, and when those who flout the rules are seen to pay the price, as in a series of high-profile corporate cases in countries like the United States, because that is what establishes the legitimacy of the system and its rules. Otherwise, we might as well have more Gurus running riot in the system.

Two contemporary cases make the point relevant. One is the award of a large power project on the basis of documentation or certification that turns out to have been defective, and which therefore may have made the successful bidder ineligible to bid in the first place""in itself a matter of considerable embarrassment more than a decade after the Dabhol fiasco. Since the players concerned are mostly keeping their own counsel, it is not clear whether the acquisition of the successful bidder by a failed bidder is a second reason for disqualification""reminiscent of the "buy and quickly resell" controversy some years ago with regard to a privatised hotel property in Mumbai. While the full facts in the latest case are not known, it does seem to be the case that the bid has to be rendered null and void, and the award of the contract called off, and due process followed with regard to the next step""whether it is moving to the next lowest bidder or inviting a limited re-bid from those who had been pre-qualified in the last round. India should have sufficient experience with bids for large contracts to be able to deal with such a situation in a routine manner, and without the twists and turns that we saw in the case of the airport contracts for Delhi and Mumbai.

The second case concerns the sale of the overseas shareholding in a telecom company, where the rules specify that the limit is 74 per cent but where the structuring of some of the shareholding points to a higher level as the practical reality. The combination of company announcements with regard to the percentage of shareholding that has changed hands, the valuation put on the deal, and the consolidation of accounts for even that shareholding which is nominally a minority stake, all suggest a de facto breach of regulations. The fact that the nominal (resident, Indian) owners of some of the stock have more or less signed away their rights to any gain in stock price (because the overseas minority investor in their joint venture can invest in an unlimited number of new shares, at par value) suggests that the beneficial ownership of the stock really rests with the overseas party. The parties to this complicated scheme (and the details have come out because of an overseas listing, and questions raised by an NGO and by a couple of parliamentarians) may defend it on the basis of technicalities, but the underlying reality is hard to dispute. If the government takes its foreign ownership regulations seriously, it has its task cut out.