Two sons-in-law! Two eras! Two entirely diverse results!

By the mid 1950s, Feroze Gandhi, the son-in-law of the then prime minister, Jawaharlal Nehru, was at the forefront to fight corruption in government. In 1956, he along with several others led the campaign to nationalise 245 private insurance companies, which were riddled with frauds, and consolidate them under the newly formed, state-owned Life Insurance Corporation (LIC). LIC was Feroze’s baby and also the ‘child of parliament’.

In 1958, he took on his father-in-law in parliament on another issue of corruption. He asked if LIC had invested Rs 1.24 crore to buy shares at higher-than-market prices in six companies owned by industrialist Haridas Mundhra. Feroze charged that money raised from over 50 lakh policyholders was used by the insurance firm to help the rich. Rocked by the scandal, Nehru’s image suffered a huge blow, and his finance minister TT Krishnamachari had to resign. 

Fifty-four years later, ironically, it is a Gandhi son-in-law, Robert Vadra, who finds himself in the dock over charges of crony capitalism and corruption. Arvind Kejriwal of India Against Corruption (IAC) has alleged that Vadra had shady business links with realtors like DLF, he built a Rs 500 crore real-estate empire within four years, and helped DLF to curry favours from Congress-governed states like Haryana. 

Unlike in the case of Feroze, when action was taken against the corrupt, in the media melee that followed the Vadra scandal coupled with Kejriwal’s hit-and-run guerrilla tactics, the truth became the biggest loser. Clearly, based on the evidence that is now in the public domain, there are several things that are wrong with Vadra’s real-estate businesses. But, at the same time, one can argue that several things are in line with corporate laws and existing business practices. 

Here is an attempt to separate the wheat from the chaff, and give an idea of what’s wrong and what’s right with Vadra’s financial dealings with DLF. 

How does one explain the phenomenal rise in Vadra’s net worth?

One of the major charges against Vadra is that although his six companies started with promoter’s capital of Rs 50 lakh, the real estate business grew to a mind-boggling Rs 500 crore within four years (2007-11). How is this possible? How can Rs 50 lakh multiply a 1,000 times in just four years? Would this have happened if Vadra had not been the India’s first family’s son-in-law? 

However, there is no connection between a company’s equity base, which can include promoters’ capital and money raised from other institutional and individual shareholders, and the annual revenues and asset base. Reliance Industries, the largest private sector firm in India, has an equity base of just over Rs 3,000 crore and its assets are worth Rs 3,00,000 crore, or a ratio of 1:100. Tata Steel’s share capital is less than Rs 1,000 crore but its annual revenues are Rs 1,00,000 crore, a ratio of 1:100. 

In case of investment companies, through which promoters generally hold their stakes in operational firms – like Tata Sons has in Tata Steel or Tata Motor – the ratios can be higher. Before it gave a huge 5:1 bonus issue recently, Tata Sons’ equity capital was just over Rs 40 crore. Its investments, mostly in other group companies were valued at over Rs 30,000 crore at cost price, or a ratio of 1:750. If the market prices of the shares it holds are taken into account, the ratio will be many times higher. 

The fact is that promoter’s capital or share capital is only one of the ways in which companies raise money for their businesses. They can access other sources like loans, debentures and advances. 

Where did Vadra get the money from? 

Another allegation against Vadra is that he got the money to buy properties from dubious sources, including a Rs 7.94 crore overdraft from Corporation Bank and several unsecured (not backed by an collateral) and interest-free loans from DLF, including two of Rs 50 crore and Rs 15 crore each. These were either favours doled out to the son-in-law, or black money shown as white through such transactions. Vadra had no money of his own. 

If Vadra’s exports companies, including Artex Exports, which had been in existence for several years before 2007, had dealings with the Corporation Bank, the latter would have happily given the overdraft to another group company to purchase real estate. Even if we want a loan to buy a flat, which is not yet ready, a bank pays the builder upfront and expects us to repay it in equal instalments over the next 10, 15 or 20 years. It is in a sense an overdraft given to us based on a sale deed between the buyer and builder for a flat that may be ready in the next two-three years. 

However, in this case, Corporation Bank has denied it gave an overdraft of Rs 7.94 crore to Vadra to pay the first instalment to buy 3.5-acre property (cost: Rs 15.58 crore) in Manesar, Haryana. It implies that the source of this money is suspicious and needs to be investigated further. 

DLF has said that the monies it gave to Vadra’s companies were not loans, but business advances. For example, the realtor advanced Rs 50 crore to purchase the 3.5-acre Manesar land, whose value it judged to be Rs 58 crore, and another Rs 15 crore for land Vadra owned in Faridabad. In the real estate sector, business advances are common; even we pay a bayana when we go to buy a property to show our intent and seriousness, and this can range between 5-50% of the total price. 

DLF has stated that such advances of thousands of crore of rupees were given to several parties in lieu of purchase of land. What indicates that Vadra deals were overboard is that he returned Rs 15 crore taken for the Faridabad property to DLF when that transaction fell through. But one can question whether DLF gave an unduly generous advance (of over 80% of the land price in the case of Manesar)? 

One has to remember that apart from the promoter’s capital of Rs 50 lakh, Vadra invested his own money in several real estate purchases. For example, Artex Exports and Carnival International Estates, which he owned, regularly lent a few crore of rupees to the real estate entities. Therefore, it was mix of share capital, overdraft, advances and intra-group loans that financed the property business. 

How can Vadra’s loss-making companies invest huge sums, and how come a debt-ridden company like DLF gave business advances? 

Yet again, it has to be said that there is no connection between losses that a company incurs, and its annual investments in existing or new businesses. In the early 2000s, several New Economy firms in India and abroad invested huge amounts despite their inability to earn any revenues and huge accumulated losses. They burned the money, but had access to fresh sources. If potential investors and banks see a value or future potential, they are likely to pump in money. 

In the same vein, a company saddled with a huge debt does not stop its ongoing business, or investment in future business. It just has to manage its funds well so that it does not default on loan and interest payments. It is akin to person who has three-four EMIs to pay: her life doesn’t come to a standstill, she still pays her other bills but manages the money so that she doesn’t default on EMIs. It is only when cash inflow are unable to finance loan payments that a company or individual gets into trouble. 

Didn’t DLF favour Vadra by selling flats in Aralias and Magnolia at cheap prices? 

The fact that DLF helped Vadra in many ways is sought to be proven by the manner in which the latter purchased several properties from the realtor at seemingly below-market prices. For example, Vadra paid a total of Rs 5.2 crore for seven apartments in Magnolia complex, while the market price for each is Rs 7-12 crore. Similarly, he paid an initial Rs 89 lakh for a flat in Aralias, which was later increased to over Rs 10 crore, although the current rate is Rs 20-25 crore. 

When it came to purchasing land from Vadra, DLF overpaid. The 3.5 acre land in Manesar, purchased for Rs 15.58 crore by the son-in-law, was sold to DLF at Rs 58 crore within a year. The combined effect of such deals resulted in a double benefit for Vadra – he paid less when he bought, and was paid higher when he sold. The resulting losses were absorbed by DLF. 

There are, however, several factors to reckon with during deals between a seller of property and the buyer, the realtor who builds a complex on the same land. In such cases, for instance, the seller is paid cash and also given apartments and offices at hugely discounted rates. This is standard practice in the real estate sector. In addition, the price paid by a buyer of an apartment can be paid in instalments as when the construction reaches certain pre-decided stages. 

Similarly, if the owner of a property manages to get the land use changed and approved by relevant authorities, the price can shoot up several times. In the case of the 3.5 acre land at Manesar, Vadra did get the permission to change the land use from agricultural to commercial and, therefore, the almost four time hike in its market rate may be justified. No one, till now, has accused that Vadra changed the land’s nomenclature in an illegal manner or that it wasn’t allowed under the master plan. 

What one can question is the speed in which the land use of 3.5 acre in Manesar was changed. Was it because of the son-in-law factor? But then one has to also consider that if DLF statements are to be believed, Vadra possibly overpaid for the apartments in Aralias and Magnolia. 

In November 2006, the price in Aralias was Rs 2,548 per square foot (psf) and Rs 5,898 psf in Magnolia, as per IPO documents filed by DLF. By March 2008, when Vadra bought the flats, he paid Rs 12,000 psf for Aralias and Rs 10,000 psf for Magnolia. Now how can prices rise by 370% and 70%, respectively, in the two complexes in less than two years? Even in the case of Manesar’s 3.5 acre it purchased, DLF maintained it made a profit as it paid Rs 2,100 psf and the market rate is Rs 2,500 psf today. 

Why did DLF make Vadra a 50% partner in its hotel and SEZ projects? 

These two issues constitute what one may call are dark grey areas. Despite being an exporter and more of a property dealer, who bought and sold land/flats, Vadra became a 50% partner in Saket Courtyard Hospitality, which owns the 114-bed Hilton Garden Hotel. In fact, DLF sold him the stake for Rs 31.7 crore, while retaining the other half of the shareholding with itself. 

Now, why would DLF have Vadra, who had no experience in hospitality, as an equal partner? 

At the same time, DLF and Vadra became equal shareholders, with each having 50%, in the SEZ project, for which DLF purchased 30 acres from East India Hotels (EIH; Oberoi Group). The sale of this property is controversial too. EIH got it from Haryana state in 1997 to build a hospital. It also told the original land owners/farmers that it will build a hotel management institute, where locals will either get jobs or allowed to pursue a course. In 2006, EIH sold the land to DLF for Rs 124.37 crore.