Insider trading was just one of his numerous shady deals, many in India, which have remained under the radar

Hearing the tape where Rajat Gupta tells the Galleon Fund boss, Raj Rajaratnam, that Goldman Sachs was likely to acquire a commercial bank like Wachovia or an insurance company like AIG, was the turning point. Until the tape was played on a business TV channel, the honchos of India Inc, mainly the power elite connected with the Indian School of Business (ISB), remained steadfast in their support for the former McKinsey & Co chief. They had hurriedly declared that he needn’t step down. Until then, those of us, who have wondered about many of Rajat Gupta’s strange affiliations and investments, didn’t dare to question someone with such phenomenal achievements and a seemingly impeccable reputation.

All that has changed. Maybe, Mr Gupta’s legal team will beat the insider trading charge; there may even be a settlement with the regulators. But one thing is certain—Mr Gupta has lost his demigod status. All his actions and deals will now be scrutinised and the government, which is being slammed by different scams everyday, will have to think twice about outsourcing, without scrutiny, the formulation of its health and education policies to opportunistic operators driven by the profit motive.

When it comes to Rajat Gupta, I have two questions. One is: Why? And two: Was his equation with Mr Rajaratnam really such a surprise? The answer to why would someone, who has reached the pinnacle of achievement, use his position to trade inside information, has been best analysed by the article, “When Rich People Do Stupid Things” (www.fool.com). It says: “When people like Gupta and Madoff (Bernie Madoff is serving a prison sentence for running a Ponzi scheme that went spectacularly bust in December 2008), who were already rich beyond belief, steal from others (indirectly or literally), you have to ask: What is the motive? Is it power? Maybe, but both already had layers of power before they misbehaved. Maybe they feel above the law?” The answer is probably that “For some reason, these people don’t feel like they have enough… How much is enough money? How much is enough success? There’s no right answer; everyone’s different.”

The answer to whether we should have been really surprised is more complex. Many of Rajat Gupta’s investments have been downright dubious, but his reputation acted like a Teflon shield. The fact that India’s prime minister (PM) and the Planning Commission (WikiLeaks has now told us how the US loves its chairman Dr Montek Singh Ahluwalia) invited Mr Gupta, a foreign national (US citizen since 1984) to frame our health and education policy ensured that his various investments and businesses partnerships in India were above question.

This remained so, despite reports that the SEC (Securities and Exchange Commission, the US market watchdog) was investigating Mr Gupta for insider trading, surfaced in early 2010. Yet, right until the SEC played the tape of his conversation in court, Mr Gupta did not resign his Indian directorships (except GVK EMRI (Emergency Management and Research Institute), a not-for-profit organisation based in Hyderabad). He resigned from his US directorships as soon as the SEC filed charges on 1 March 2011. Let us look at some of Mr Gupta’s investments, actions and connections that ought to have raised red flags.

•    Mr Gupta and Mr Rajaratnam have had a long personal and business relationship. In 2006, they had set up Taj Capital Partners. Mr Rajaratnam was also a trustee of Mr Gupta’s American India Foundation. His other pal and McKinsey colleague, Anil Kumar, has already pleaded guilty to securities fraud and profiting from supplying inside information to Mr Rajaratnam. Anil Kumar was a director of the ISB, Hyderabad, which was founded by Mr Gupta with support from the who’s who of Indian industry.

Mr Kumar had to resign ignominiously after the insider trading charge. Earlier ISB’s dean, M Rammohan Rao, resigned for failing to perform his fiduciary role as an independent director of the Satyam Computer Services.

•    Rajat Gupta along with Ramesh Vangal (former chief of PepsiCo and Seagram in India) was the promoter of Scandent Technologies. While Mr Vangal took the lead in that deal, Scandent entered a series of shady overseas deals with Dinesh Dalmia of the now defunct DSQ Software to acquire its most lucrative global software contracts. Once the contracts had moved to Scandent, DSQ Software was reduced to a shell. Dinesh Dalmia himself fled to the US but came scurrying back after duping a set of US companies for $150 million. He has been languishing without a trial in a Chennai jail for almost four years. Meanwhile, Scandent got listed through a reverse merger with a tiny Indian company and, within a few years, Mr Vangal had quit and moved on. So powerful were Scandent’s promoters that no Indian regulator or investigation agency asked any question, let alone act, although I reported extensively on the scam for several years in the Indian Express.

•    The Ramesh Vangal-Rajat Gupta  duo surfaced again in Tamilnad Mercantile Bank (TMB). They, with others, acquired a 25% stake in TMB from C Sivasankaran of the Sterling group. Mr Sivasankaran is not someone who is likely to be a nominee for corporate governance awards. In October 2009, a Reserve Bank of India (RBI) report said that Vangal-Gupta and others had ‘acted in concert’ to acquire a stake without getting RBI approval. This, too, did not dent Rajat Gupta’s aura nor diminish his ‘open door’ access to the Prime Minister’s Office.

•    Later, the Rajat Gupta-promoted private equity fund, New Silk Route, acquired shares in KS Oils, a company in which C Sivasankaran had an interest. An Intelligence Bureau report of December 2010 (available with us) reported massive price rigging and insider trading in KS Oils. The company has also been accused of tax evasion. So what did the philanthropic Mr Gupta find attractive about this investment?

Far from raising any red flags, the Indian government was so completely enamoured of Mr Gupta that it never once worried about potential conflict of interest in allowing him a key role in framing India’s health and education policy, or that his lucrative private sector investments may be the ultimate beneficiaries of these policies. Mr Gupta had the PM’s blessings and support as head of the prestigious Public Health Foundation of India (PHFI) which received over Rs100 crore (Rs65 crore+Rs36.15 crore in two years) in budgetary support. The PHFI, with a powerful group of supporters (including the Bill & Melinda Gates Foundation), wasn’t so much a public-private partnership as one between the government and a bunch of private and foreign institutions/entities. Little is known about the functioning of this Foundation launched in 2006 by the PM, despite worries that PHFI’s many investors and business partners (Fortis, Pfizer and Microsoft) will benefit from its policy decisions. Incidentally, Mr Gupta resigned from ISB Hyderabad, PHFI and New Silk Route only after 10th March.

The question now is: Are we, even today, attempting to put in place systems to ensure that there is no conflict between investments made through private equity funds by those who help the government draft policy? Unfortunately, no; we are not even bolting the     stable doors even after the horse has fled.

For more details on the PM’s largesse to Rajat Gupta please see:
http://kbforyou.blogspot.com/2011/03/manmohan-singhs-public-private.html

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at suchetadalal @yahoo.com