The fortunes of the Cosy Club

Rajat Gupta and Nitin Gadkari are like cheese and chalk, one might think. One is suave and sophisticated; the other a small-town politician catapulted to the big time with the backing of his mentors. One moves smoothly in the boardrooms and conference halls where the world’s biggest names gather, muttering a word in the ear of a President, exchanging a joke with the boss of a Fortune 500 company.

The other, though heading the second-biggest political party in India, is still ill at ease in the big time and finding it difficult even to establish his cred with his own colleagues. One is from the PLU (People Like Us) universe, with his degrees from the best institutions, the other won’t make it easily to PLU salons.
Yet, both have one thing that is common to them. Both have indulged in cronyism. Rajat Gupta has been found guilty of tipping his friend Raj Rajaratnam who then used the information to make huge profits through his hedge fund. Gupta was in possession of inside information thanks to his position on the board of Goldman Sachs, the world’s premier investment and securities firm. He was supposed to keep everything he heard a secret, but it turns out he didn’t. The judge who sentenced him called him a “good man” but said his actions were “disgusting”. Clearly, the United States frowns upon distortions in the capitalist system. Gupta himself lost money by investing in Rajaratnam’s schemes and, moreover, had an impeccable record of working with charities. But his crime was to try and use his privileged position for unfair advantage.
Gadkari has not yet been charged and tried, much less found guilty, but the accusations against him suggest that he grew his business empire by getting loans from his friends, while helping their organisations get lucrative contracts. Again, this still has to be proved, but stripped down of the details, what it amounts to is using privileged position — and information — for personal advancement and to help those close to you. In short, cronyism.
This is hardly new in India, or even in other parts of the world. A Robert Vadra does not get favours or loans from DLF because they are impressed with his business acumen. A Lavasa hill station project could not have gone this far without help from powerful political backing.
Often, there may not be direct corruption involved, in that no money may have changed hands. Cronyism is about controlling distribution of assets, resources and contracts to people who are considered close by people who have inside information and access to levers of control. This system ensures that others do not come anywhere close to getting that information and therefore are kept out of contention. A retired civil servant once explained to this writer why Mumbai’s roads would always have potholes, despite the outcry against the civic authorities year after year — good contractors never got access even to the forms for filing tenders, leave alone making a bid for road-building. This resulted in a skewed system wherein only those who were on the “inside” (i.e. had privileged information about everything from last dates to rules and regulations) could bid even if their performance was less than satisfactory. Indeed, they often formed informal cartels and distributed contracts among themselves to keep out the bigger and more efficient companies. Result — shoddy work year in and year out.
Cronyism is a disease that afflicts many countries. When the Soviet Union fell, those with powerful connections managed to get hold of state-owned companies and a new class of Russian oligarchs, with unbelievable financial muscle, were born. In China, relatives of top party bosses have a finger in all kinds of pies, again because they have access to information and power. Here in India, we know of politicians who have investments in real estate companies (and other corporations) and yet, year after year, file declarations showing a few lakhs as assets. (And why blame only politicians? Company bosses have been known to trade in shares with advance knowledge.)
The cozy club of the power elite everywhere trades in information and provides helpful access to cronies. Discussions are held and decisions are taken behind the scenes with total opacity. Every time this happens, the public at large is short-changed. As anyone who has been to a government office to get a document registered will know, without the help of an agent, one could be stuck there for hours, even days. The tout knows his way about and with some speed money, can get things moving rapidly. All because he has privileged information about processes and people.
Gupta passed on information that he gleaned in confidential meetings of the board of Goldman Sachs to his friend Rajaratnam who then acted on that information. The authorities saw this as an unfair advantage that deprived the ordinary investor of the same information at the same time. Normally, the information is released to the media and everyone has an equal chance to use it to make an investment decision. What Gupta did was cheating and the judge punished him for that.
The idea is not to get a sense of schadenfreude; it is indeed a misfortune that such a fine reputation has been ruined by this one lapse of judgment. But we could learn from the manner in which the US regulatory and legal authorities went about their task — first investigating, then accusing, then proving and finally sentencing — all in the space of a year or so. If Gupta was here — and assuming that he was ever charged with something like this — he could have gone about his normal life without any worry of being brought to justice. Which is why many of those accused in some very serious financial crimes here are sanguine that they will not be touched by the law. Many here have expressed regret at Gupta’s fate and of course there is no dearth of people who trot out bromides on how the “law must take its own course” but secretly they must be thanking their stars they live in India and not the US where they take their laws very seriously indeed.