BW Communities

Case Study: When The Lentils Don’t Cook

BW Online Bureau Nov 08, 2014

<div>Anant Deo’s resignation was shared by the regional president Riyaaz Akhtar in a joint email to senior management of Elszy India. He wrote: “In the last several weeks I have been sharing with David Dwight, family situations and circumstances that will need my personal attention to which I am committed. I will be spending the next few years attending to my sister who is ailing from....” Only a handful had been by Deo’s side last month as he sat late into the night in his office, holding his head. They had all been on that conference call. Rao had confessed to knowing that the work of Effort Little involved ‘clearing the road’ for legitimising a large tract of land that Elszy India was buying upon which it would then build its first ever factory in India. Elszy India was an American consumer products company which was until now only distributing its products in India. In 2012, plans were afoot to set up manufacturing facilities in India, large enough to also serve the Asian markets. Country head Anant Deo was a very dedicated and hardworking MBA from a good b-school, set upon making this his prime responsibility. Deo told his GM Sahil Wazir to do the ground work. Wazir in turn hired Effort Little India — a firm of consultants and legal advisors — to set the ball rolling. Effort had told Elszy India that it will not be a direct government allotted land and hence they should be patient till all the paperwork was completed. Deo, having handed over the work to Wazir and Effort, did not anticipate what followed. When the investigating team probed, they found that it was common for new companies to outsource this work as it was fraught with complications. These small ‘law firms’ did ‘stuff’ ranging from creating documents to changing land records, to ensure that there is no lien at a  later date. Further probing showed that Wazir, in haste and enthusiasm to get the prized land, on facing obstacle after obstacle to get a clear title to the land, had said in an innocent but practiced old style, “Yaar kuch bhi karo, clear title chahiye!” (Do anything but give me a clear title.) So the law firm did ‘anything’— they paid various people to buy comfort at every level and to be rid of their hold on the land. In short, it was completely and fully in contravention of everything that the Foreign Corrupt Practices Act (FCPA) declares an American company cannot do. To the probing teams, Wazir explained (not intending to justify): “You will not find even one piece of land with a clear title. Most of the registrations and documents are several decades old. Many are mortgaged, and most not backed by proper documentation. On need basis the local authorities would make another set of documents ... and add it to their manual records.” To Deo he had said, “Buying land with full white payment? Not possible. Every agent has told me ‘the lentils will not cook like this’ (an Indian idiom; here, ‘we do not have a context anymore if you cannot pay black’.)” But Anant had not for a moment thought that Wazir would seek to ‘handle’ it. For Anant, recounting this to his parent company was excruciating because he had clearly breached the rules. He himself had done nothing. But when Elszy USA questioned him, he was taken aback as he realised that he had signed many bearer cheques for Wazir to pay Effort, not alert to the implications. The shocker was that Anant’s reporting line led to David Dwight, the US business head for MEA countries, and he stood to be indicted too. Anyway, FCPA probes began. A shocked Dwight took some time to digest all this. News of Deo’s confession reached him as he shook his head. Deo was such a nice person! Today Dwight’s boss Alfred Crawley and another, who was likely taking over Dwight’s debris, Bradley Green, met the core team in India at the Connemara Hotel. Green, who had worked in India in the 1990s, knew that India was a great market, absolute delight of foreign players, the Indian consumer was a marketer’s delight. But India was not easy to do business in. He gathered through informal business forums online that India had a multitude of laws and statutes which were not administered efficiently or which were applied by many as a means to make money but not as a means of enforcing a legislation. For example, there were a number of statutes to protect the environment from pollution. “I have worked in India in the 90s up until the early 2002,” wrote one person. “But I have not seen any determination to enforce these. How effective have these laws been for the objective it seeks to serve? Is there anyone monitoring pollution itself to say if the purpose is served by the law? I think not.” Riyaaz Akhtar, an American Indian, was Dwight’s counterpart in Asia and keen on Elszy setting up the feeder plant in India. In a closed door meeting with the India team he said, “These laws which are meant to be strong fortifications to enable business, are unable to work for you the user of the law. It ends up being a weapon in the hands of those meant to administrate it, and they use it not for the advantage of the system, but against it! But I am of the belief that administration includes the users too...” Kushal: Meaning? Riyaaz: What Wazir did, what Deo did not do... refusing to be a part of the parallel economy is your role as a user! Jaideep Walia, Kushal Desai and Sridhar Iyer were three senior managers from the India business. The irony was they agreed with many of Crawley and Green’s observations but felt constrained from vehemently agreeing. As Crawley held one set of chats with Riyaz and Green, they spoke among themselves in Hindi, naturally.  </div><div>break-page-break</div><div> Kushal: It is such a difficult law; companies have to pay a lot of money to stay on the right side. The administration does not seem to want to reform it to what is doable; if anything it seems to be designed to stop me from being productive! Deo must be so frustrated! Jaideep: When I was with a beverage company, the pesticide level in Indian water was a big challenge. With huge investments we treated the water and levels reduced significantly. Yet we were asked to ensure standards that were more stringent than the European standards! Why would you make that demand of only the soft drink industry, when all around you, whether it is milk or vegetables, the pesticide level is higher? And as the economic and industrial environment evolves, shouldn’t your laws evolve too? But the laws not only contradict each other, they are also archaic! Sridhar: The foods company where I was, grappled a lot with irrelevant laws. The Factories’ Act 1948, for example, still has things like ‘compulsory spittoons’. You are laughing? If you don’t have spittoons at specified points in your factory, you are liable to imprisonment and fine! So while our workers were trained and committed to hygiene, and we had huge posters everywhere that forbade paan and gum, we also had spittoons everywhere! Then there is a provision that requires ‘a drinking water area with an attendant in uniform’! These goras used to tease us! Jaideep: Sadly breach of the law has become a source of harassment, so I can see why you had 44 spittoons... someone has to audit and ask are these laws relevant, needed, can they be honoured? So while spittoons are easy, the law on land acquisition — a maze when you operate at panchayat level — is draconian and nobody will adhere to it. In some cases, they would rather be in breach paying off the inspectors... what are the rates for breach in your experience? Sridhar: Not sure, but something like Rs 50 if you are in breach of a spittoon, and if you are in breach of a doctor, then you pay Rs 50,000. Riyaaz (turning to participate in their discussion): Those are fines, not bribes. The FCPA is very clear that we are not supposed to be bribing anybody. Very, very clear. We are not supposed to be getting any unfair advantage in doing business. Yes they want to take their products everywhere, but if to do so we have to resort to corrupt ways, then the US government, forbids that! Naturally then, doing business in India was tricky, because many acts demanded candy money for fulfilment. [Riyaaz recounted for them how a low level clerk had put out his hand for baksheesh adding, “Aapki bhaabhi khush hogi.” (Your sister-in-law (clerk’s wife) will be pleased.)] Kushal to Riyaaz: But in India you need to often pay look-the-other-way (LOW) money. Riyaaz: That is what makes it so darn difficult to be successful here. The US laws are tough. American companies have to report all penalties paid in their SEC filing, which means it becomes a public document. So it’s not like I will wilfully contravene the law, pay the fine and continue to do business because the consequent profit is still ill-gained profits for my business!  </div><div>break-page-break</div><div> Jaideep: Wazir probably thought he could cleverly tuck the bribe into sundry expenses. But their audit processes are so sharp,that even penalty or fine must be shown as penalty or fine. There is an audit process through which it goes and an SEC filing too. You cannot go wink- wink to your auditors and have them pretend they did not see it. The auditors have far greater liabilities upon them and jail is inevitable for any misdemeanour that the US government apprehends. So your chairman can go to jail if some plant of his anywhere in the world — no matter its local laws — uses child labour! Kushal: You mean, even if he was unaware? Riyaaz: Absolutely! The CEO is almost always culpable and answerable for any acts of felony done by the people working under him. Which is why Dwight and Deo are in trouble. See, the American industry was beginning to get a bad name in the 90s because wherever they went to in emerging markets they had to pay bribes to get business advantages. It was almost an accepted norm of doing business in some parts. But their competitors who had refused to bribe began to complain that unethical ways could not count as success, especially since both players paid the same taxes! Then the industry heads got together and questioned the price of doing business, the global spread of depraved business practices which finally would be reaped by today’s young!” Crawley had explained: “You must understand that governments are answerable to the people, to its businesses — if its foreign policy with regard to a country was influenced by its business relations! So it starts with the governance, the leadership; what he or she will not do, the businesses cannot do too. And what the businesses cannot do, he or she cannot do either.” So whether it was Enron, Andersen in India or XYZ in Indonesia or anywhere else, the call was for a closer look at American businesses and the US government’s relationship with the host countries. <img width="200" vspace="7" hspace="7" height="200" align="right" alt="" src="/image/image_gallery?uuid=e521b37f-d961-4cc6-96da-5a9f78ebfa2f&groupId=222852&t=1356168860622" />Crawley seemed to staunchly vote in favour of the FCPA. And they seemed to be saying, ‘if bribing is an offence within the US, how come you are turning a blind eye to what we are doing on foreign soil?’” Jaideep: American companies have been in India since 1993 at least. They would have done some due diligence on the country, to see how business is usually accomplishable here. Surely they would know... the risk of this kind...! Riyaaz: They do. In the end everyone will be given a brief to succeed and they will have to find legal and lawful solutions to succeed and stay successful. So it’s just that if India as a country is showing an 8 or 9 per cent GDP growth and the consumer surplus is growing, then there is a lot of incentive for foreign companies to come here and they will think it is worth the struggle and they will say , ‘Yeah.. it is a tough environment’; but the best they will do is step up your legal department from five to 50, because we know everything will go to court and nothing will get decided. But nothing more than that... Point is, India wants to do business and so does the US, except that American laws are very tough, unbending and unforgiving. Everybody knows where bribes are involved, the US even more so. Hence for Deo to cry foul is not pretty. All responsible US companies are very clear that you cannot have growth without governance, nor success, without compliance to law. And this is not a grey area at all.... either you are in breach or you are in compliance. There is nothing like ‘mostly in compliance’. So nobody in the US is going to give you leeway because you say ‘I tried so hard but one has to bribe...!’ Kushal: But Deo did not know.... Riyaaz: Like I told you, that does not work! If you are the CEO, along with the plush carpets comes the responsibility of knowing what your people are doing. “I did not know!” is not a valid script, which is why he is under the scanner now. Sridhar: So now what happens? Riyaaz: Maybe emerging markets are still figuring out the ethics of doing business with foreign partners... Dwight or Green will maybe spell out clearly what is accountability for a manager who is unable to sustain a business in India because of compliance reasons, especially in countries where LOW money is called for. Kushal: This is not a level playing field at all. They have tough laws, we do not have tough laws. It’s easy (for them) to shut shop and leave... but is is fair? We have worked so hard on building this business and now this had to happen! Somehow, we imbibed their style yaar, but not their unbending nature when it comes to law. Riyaaz: We must first copy their national pride! The guy who is stonewalling our land purchase in India, does not take ownership for his country’s success! He feels no national pride! So he will talk about uncooked lentils, ha! Jaideep: This was not about spittoons or water dispensers. This is serious... a new plant in a state. This impacts every damn thing — the employment level, hence health, consumer surpluses, literacy, happiness.... children grow up better, schools come up, careers are planned and all is gung ho. There should have been greater commitment! But how do I acquire land? Acquisition of land has become so difficult. I have to be willing to bribe every level of human being between Elszy and the land owner — they will probably forcibly evict all the peasants and hand over the land to me. They will probably give the peasants a tenth of what I pay, resettle them and everything will be gung ho. And I do not want to be party to this. But then I cannot grow either!” Everyone they talked to pointed to a hasty greed that had swept the country. “This is what is hampering growth,” said Jaideep. The same sentiments had increasingly taken form in numerous articles, books... They had found Green reading Gurcharan Das’s book, India Grows at Night. He had told them, “These are Indians talking about India. These are accomplished Indians in material and manner and mind. Yet they are not able to wrest the country out of the stranglehold of corrupt ways. Because as a people, you are very submissive; your inaction is mistakenly called ‘tolerance’. Read this man’s words, how succinctly he states the truth: ‘...the nation may be rising despite the state. India’s is a tale of private success and public failure. Prosperity is, indeed, spreading across the country even as governance failure pervades public life... wouldn’t it be wonderful if public policy supported private enterprise?” Riyaaz: The chips are loaded against us now. Earlier it was ‘India is this huge goldmine of growth and opportunity, the famous 250 million middle class whose private spending accounts for 60 per cent of the GDP, the glorious 8 per cent GDP growth etc. But is this an attractive destination anymore? I have sat through presentations globally and heard the disappointment. That 8 has dropped to 5; other countries such as Indonesia and South Africa are far better opportunities and are making it easier for business to be done. These countries are not exactly not corrupt, but they facilitate, things happen, people see reason, bribing may exist but not in all spheres... I don’t know but companies have found it easier to work there. “The broader point is we are not an attractive destination anymore because of the drop in growth. This combined with corruption, combined with the difficulty of doing business with archaic laws, simply means you are going the pre reforms era, pre liberalisation where nobody wants to touch you, and the rupee will touch 60, everything will become expensive.” Jaideep: The key thing is we have to drop the arrogance that we are the second largest power in the world after China. China has gotten so far ahead that it is a speck in the distance. There are other emerging markets. They are relatively clean, lean and hungry. So if we don’t want to be left behind as an investment destination and an economic activity group, we should smarten up our act really fast. As Crawley said over lunch, “It’s not that I am insensitive to how you feel; The choices are do I abide by the law and not do business or abide by my business needs and not worry about the law? But I also have the law of my country to adhere to, where law comes above all else.” Classroom Discussion For a land that is proud of its heritage, how may Brand India be relaunched? casestudymeera (at)gmail(dot)com Now, discuss case studies on Facebook (This story was published in Businessworld Issue Dated 31-12-2012)</div>