That industry is forced to pay protection money to militant groups in India to ensure the safety of their business and employees is not news. Neither are political pay-offs in return for business concessions or payments to investigation agencies to avoid harassment or suppress wrongdoing. But Kolkata-based IFB Agro Industries Ltd, a distillery, bottling and marine products company, has done something dangerously significant. It has formalised political pay-offs by way of subscription to electoral bonds, to avoid, what it sees is, extortion by the state excise department.
In what appeared to be an April Fool joke, IFB Agro notified stock exchanges that its board of directors and all stakeholders had approved a contribution of up to Rs40 crore through subscription to electoral bonds for 2022-23. More pertinently, it pointed out that this was in continuation of its earlier letters about excise-related issues faced by the company and that its decision about political contribution was in the context of ‘such issues’.
In West Bengal, where IFB Agro operates, politically-powerful ‘syndicates’ dictate business activity, including hiring of staff, contractors and suppliers and collect regular payments. The problem is not limited to that state. Even today, doing business in parts of ‘developed’ Maharashtra requires industry to buy protection from Maoist groups. In the 1990s and even later, tea estates in the north-east have had to make regular ‘ransom’ payments to secure the release of kidnapped employees. It was considered the cost of doing business in that region and is well documented.
The government is not able to offer the necessary protection or is hand-in-glove with such extortion in some states. Yet, when things go wrong, the government has not hesitated to get all righteous and allege that industry is funding terrorists. It happened to the much-venerated Tata group in the late-1990s. The Tatas were accused of paying the hospital bills of a member of the militant United Liberation Front of Assam (ULFA), sheltering a militant leader and even had three of its employees arrested by the Assam police. The group has always insisted that it has never paid ‘ransom money’ but admitted to providing some facilities after discussions with the Central government (https://en.wikipedia.org/wiki/Tata_Tapes_controversy) in order to ensure the safety of employees. The episode died a quiet death, over time.
While one may sympathise with IFB Agro’s predicament, there is something bizarre about the silence from government, regulators, investigation agencies and even our chambers of commerce and industry. IFB Agro’s disclosure appears to legitimise the payment of protection money by way of electoral bonds of avoid harassment. If this goes unchallenged, what are we saying here about the state of corporate governance and ability to do business legitimately in India? And, yet, barring a couple of news reports, most of the media made a perfunctory note of IFB Agro’s disclosures and moved on.
Let me provide a contrast. In the US, the Foreign Corrupt Practices Act (FCPA) of 1977 makes it a crime to make or authorise payments to any foreign official or politician with the corrupt intent of influencing decisions or to obtain/retain business.
We, in India, are legitimising the opposite—that it is okay to make significant payments to avoid harassment by government agencies at the behest of political parties, so long as it is approved by the board of directors and other stakeholders and is in the form of subscription to electoral bonds. So, it should be no surprise if large companies begin make such more such disclosures to stock exchanges. Hypothetically, we could soon see such disclosures:
‘Our company had its bank accounts suspended bringing all business activity to a halt because of a tax demand by the income-tax department which had disallowed significant payments to suppliers and contactors’. A second disclosure would follow to say, ‘in view of the foregoing tax issues our board of directors has decided to subscribe to electoral bonds worth Rs100 crore’.
Or, ‘Our company has failed to win our bids on XYZ mega project despite meeting technical and financial bid requirements’. This is to be followed by another notice to the exchanges to say, ‘in continuation of our earlier letters, the board of directors and stakeholders thought it was in the best interest of our company to approve contributions to political parties by way of subscription to electoral bonds to the tune of Rs200 crore’.
If this kind of formal disclosure is acceptable to the ministry of corporate affairs (MCA) and the Securities & Exchange Board of India (SEBI), then why bother with the red-tape of a corporate governance code and multiple board committees?
Let us look at the IFB Agro’s case more closely. Although its disclosure does not mention any political party, the subscription to electoral bonds, when juxtaposed with its excise problems, appears to be a case of payment under duress and part of an on-going issue. Does this really square with its code of conduct which claims to be “operating its business at the highest levels of business ethics”?
On 26 June 2020 and again on 22 December 2020, IFB Agro disclosed to stock exchanges that its distillery in south 24 Parganas was attacked by 150 armed goons. They forced the closure of its distillery, beating up employees and holding them hostage. Despite complaints to the police, no offender had been brought to book. It also said that its alcohol business was suffering because it was “singled out by certain excise officials for not succumbing to their illegal demands.” The company had complained to the chief minister (CM). The West Bengal governor had also called for a ‘deeper probe into such nefarious activities’ and sought a report (29 June 2020) from the state’s finance and excise division; but clearly his effort came to naught.
Soon after, on 7 October 2021, IFB Agro disclosed that the board of directors had decided that it was in the best interest of the company and all its stakeholders to make a political contribution by way of subscription to electoral bonds to the tune of Rs25 crore in 2021-2022.
IFB Agro’s annual report for the year 2020-21 elaborates the hardship faced by the company due to illegal demands by the excise department leading to a closure of its factories for several days and putting restrictions on its retailers.
While one is increasingly hearing about corporate India being arm-twisted by politicians on how to use their mandatory corporate social responsibility (CSR) spending, this is not more than 2% of net profit. In IFB Agro’s case, the amounts paid are shockingly higher. Its profit after tax for the year ended 31 March 2021 was Rs47 crore (before other income) and its subscription to electoral bonds is going to be Rs40 crore—almost the entire profit for the year.
Since IFB Agro’s problems relate to West Bengal, one would have assumed that the Centre would rush to support the company and gain political mileage from it. But the highest subscription to anonymous electoral bonds goes to the Bharatiya Janata Party (BJP) and such subscriptions are often in lieu of illegal business concessions or due to coercion.
The Association for Democratic Reforms (ADR), an advocacy body, has just released a report which says that donations to the top-5 political parties through electoral bonds have increased 143% since 2012 to a massive Rs921.95 crore in FY19-20. Of this, the BJP received the maximum donation of Rs720 crore. So, one assumes that the Centre doesn’t want to rock the boat of donations through electoral bonds.
Unless business and industry rally around IFB Agro and others facing similar threats, it is only a matter of time before such extortion hits other businesses and spreads to other states as well. Forget about ‘Ease of Doing Business’; this high and illegal cost of doing business will have a slow and debilitating impact on the economy and employment generation.
Indeed, extortion rackets by ruling political parties from the early 1970s were the sole reason for the continuous and steady decline of West Bengal, once among India’s most prosperous states.
It is true that this is a bad practice. But nothing can be done about it. Running a country is a complex job and fighting elections in a democracy is expensive. The only solution is to either fund those elections under the carpet or legitimize what is illegal. USA has been quoted here as a great example of democracy. It should not be forgotten that lobbying is legal in USA and corporations spend humongous sums of money on lobbying. In addition, loads of political payments are made just like in India. Trump is on record to assist those who gave him political donations (which are legal). How is any of that different. We will not get selfless saints to fight elections and run a democratic country where they get criticized for everything but get a pittance as a salary. And it is people to blame if we give votes based on who gives us liquor or cash as gifts during elections, not to forget the promise of freebies after elections. Why always just blame the politicians. This problem has no solution anywhere in the world. It is a cost of enjoying democracy. So while these practices are bad, there is no point losing sleep over it.
And oh yes, we shouldn't forget "speaking fees" and lucrative assignments that politicians in the US also get because of their "ability to get things done" while on paper, money is passed on as professional fees.
While the well written as usual article is appreciated, I wonder reg your statement of Maoist faction led extortion in developed Maharashtra. I almost laughed aloud. How much powerful is their presence in any industrial or business area? Leave that aside, every child in Mumbai knows which parties are the biggest extortionists.. esp in Mumbai… it’s an open secret that builders pay per sft rate for constructions and so on for each business… I doubt they pay it to maoists.
While what you write in the article is absolutely valid, the implementation of Foreign Corrupt Practices Act (FCPA) in itself is dubious.. US corporations big and small working all across the world find out "better ways" to circumvent the law. most US firms in India and other places use 3rd parties to pay off "settlements". Also the efficacy of any act is always found in the deterrence it creates and the number of corporations; from the biggest of them to the smaller ones, who have been charged under FCPA violations doesn't seem to suggest that FCPA deters them.
There is transparency in this disclosure and it is to be viewed critically by the professed central government speaking of eradicating corruption and only accusing other political parties of such practices. I do not feel it is not the case in instances where there is no such explicit disclosures.
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