Question: how do you convert Rs.50 lakh
into Rs.1,600 crore? You won’t get an answer from any of the learned
professors at Harvard Business School. But you will if you hire a clever
Indian chartered accountant.
Here’s how it goes. You run a political party. You accept “donations” from the public. Your audited balance sheets show that, between 2004-05 and 2010-11, you received Rs. 2,008 crore in donations – officially. As a political party you are exempt from all taxes – income-tax, service tax, capital gains tax.
So you have a fairly healthy corpus of reserves which you are supposed to use – as per Election Commission (EC) guidelines – strictly for “political” purposes.
So what do you do? Why, you go right ahead and give an unsecured loan of Rs. 90 crore from your political party’s healthy fund reserves, built through public donations, to a defunct newspaper publishing company.
This company, by sheer coincidence, has a debt of Rs. 90 crore. The loan from your party extinguishes that debt and makes the defunct newspaper publishing company debt-free and employee-free.
But does the defunct newspaper publishing company have any value? Well, it owns, among other assets, a large building in the heart of Delhi on land specifically granted to newspaper publishing companies to publish newspapers. The estimated value of the building? Rs.1,600 crore.
So, here we have a defunct newspaper publishing company which does not publish anything, much less a newspaper, with zero debt, zero employees, near-zero sundry expenses – and a building worth Rs. 1,600 crore.
Now what? Your clever Indian chartered accountant, not all those learned professors at Harvard Business School, provides the answer: float a new non-profit company to buy up the defunct company’s shares for a token Rs. 50 lakh.
Kosher? Absolutely.
Laws broken? Perhaps.
But it will take a decade or more to prove they were – if they were – and public memory is conveniently short.
But, your spokesmen say, the political party made “no commercial gain” from the Rs. 90-crore loan transaction. Exactly. The political party in fact made a commercial loss of Rs. 90 crore (the unsecured loan). The commercial gain was made by the new non-profit company which now owns a building valued at Rs. 1,600 crore, having paid just Rs. 50 lakh to buy 100% shareholding in the defunct newspaper publishing company.
Interestingly, 76% of the shares of this new asset-rich but non-profit company belong to two senior leaders of the party. Since the defunct newspaper publishing company was owned by dozens of now-deceased shareholders of the grand old party, should not the shares of the new non-profit company belong to the party as a cooperative rather than to a few individuals? Ah, but this is no ordinary political party. It’s a family enterprise.
What next? No newspaper is being published from the building. All staff have left. The building is empty. The clever Indian chartered account regards this as a criminal waste of real estate.
Rent it out, he says, and you do. The income after all can always be set off against expenditure designated under the head “charitable purposes” so that your balance sheet shows no profit. That takes care of the letter, if not the spirit, of the law.
Is renting space in your building illegal? It may not be if your new company has as one of its objectives in its Articles of Association the business of renting real estate. And if it doesn’t, it can always be appended later by your clever chartered accountant.
If, on the other hand, you now restart the paper, under media and political duress, all floors of the building will be needed for operations. Hundreds of retrenched staff will have to be re-hired. The current income from rent will vanish. Expenditure will spiral. Daily newspapers can lose as much as Rs. 100 crore a year. Another Rs. 90 crore debt write-off may be required in the near future. So restarting a newspaper under duress is a poor option, your chartered accountant tells you.
But what would the Harvard Business School professor, having heard both sides of the story, recommend you do?
Simple. Reverse the entire transaction, he’d say. Return the Rs. 90-crore unsecured loan to your political party. Restore ownership of the Rs. 1,600-crore building to the original defunct newspaper publishing company by transfering back to it the 100% shareholding your new non-profit company bought from it for Rs. 50 lakh.
If you do that, this episode will become required reading as a Harvard Business School case study titled: “How to place public interest above private interest”.
And if you don’t? You might well lose the next general election and have to restart the newspaper after all.
Follow @minhazmerchant on twitter
Source: http://blogs.timesofindia.indiatimes.com/headon/what-they-don-t-teach-you-at-harvard-business-school/
Here’s how it goes. You run a political party. You accept “donations” from the public. Your audited balance sheets show that, between 2004-05 and 2010-11, you received Rs. 2,008 crore in donations – officially. As a political party you are exempt from all taxes – income-tax, service tax, capital gains tax.
So you have a fairly healthy corpus of reserves which you are supposed to use – as per Election Commission (EC) guidelines – strictly for “political” purposes.
So what do you do? Why, you go right ahead and give an unsecured loan of Rs. 90 crore from your political party’s healthy fund reserves, built through public donations, to a defunct newspaper publishing company.
This company, by sheer coincidence, has a debt of Rs. 90 crore. The loan from your party extinguishes that debt and makes the defunct newspaper publishing company debt-free and employee-free.
But does the defunct newspaper publishing company have any value? Well, it owns, among other assets, a large building in the heart of Delhi on land specifically granted to newspaper publishing companies to publish newspapers. The estimated value of the building? Rs.1,600 crore.
So, here we have a defunct newspaper publishing company which does not publish anything, much less a newspaper, with zero debt, zero employees, near-zero sundry expenses – and a building worth Rs. 1,600 crore.
Now what? Your clever Indian chartered accountant, not all those learned professors at Harvard Business School, provides the answer: float a new non-profit company to buy up the defunct company’s shares for a token Rs. 50 lakh.
Kosher? Absolutely.
Laws broken? Perhaps.
But it will take a decade or more to prove they were – if they were – and public memory is conveniently short.
But, your spokesmen say, the political party made “no commercial gain” from the Rs. 90-crore loan transaction. Exactly. The political party in fact made a commercial loss of Rs. 90 crore (the unsecured loan). The commercial gain was made by the new non-profit company which now owns a building valued at Rs. 1,600 crore, having paid just Rs. 50 lakh to buy 100% shareholding in the defunct newspaper publishing company.
Interestingly, 76% of the shares of this new asset-rich but non-profit company belong to two senior leaders of the party. Since the defunct newspaper publishing company was owned by dozens of now-deceased shareholders of the grand old party, should not the shares of the new non-profit company belong to the party as a cooperative rather than to a few individuals? Ah, but this is no ordinary political party. It’s a family enterprise.
What next? No newspaper is being published from the building. All staff have left. The building is empty. The clever Indian chartered account regards this as a criminal waste of real estate.
Rent it out, he says, and you do. The income after all can always be set off against expenditure designated under the head “charitable purposes” so that your balance sheet shows no profit. That takes care of the letter, if not the spirit, of the law.
Is renting space in your building illegal? It may not be if your new company has as one of its objectives in its Articles of Association the business of renting real estate. And if it doesn’t, it can always be appended later by your clever chartered accountant.
If, on the other hand, you now restart the paper, under media and political duress, all floors of the building will be needed for operations. Hundreds of retrenched staff will have to be re-hired. The current income from rent will vanish. Expenditure will spiral. Daily newspapers can lose as much as Rs. 100 crore a year. Another Rs. 90 crore debt write-off may be required in the near future. So restarting a newspaper under duress is a poor option, your chartered accountant tells you.
But what would the Harvard Business School professor, having heard both sides of the story, recommend you do?
Simple. Reverse the entire transaction, he’d say. Return the Rs. 90-crore unsecured loan to your political party. Restore ownership of the Rs. 1,600-crore building to the original defunct newspaper publishing company by transfering back to it the 100% shareholding your new non-profit company bought from it for Rs. 50 lakh.
If you do that, this episode will become required reading as a Harvard Business School case study titled: “How to place public interest above private interest”.
And if you don’t? You might well lose the next general election and have to restart the newspaper after all.
Follow @minhazmerchant on twitter
Source: http://blogs.timesofindia.indiatimes.com/headon/what-they-don-t-teach-you-at-harvard-business-school/
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