Outlast: How ESG Can Benefit Your Business

By Mukund Rajan and Col. Rajeev Kumar

Black-swan events, global warming, COVID-19 and a host of other natural and man-made disasters have tested the resilience of businesses across the world. Usually, blame for business failures is apportioned to external factors such as adverse business cycles, badly framed government regulations and lack of infrastructure. However, the causes often lie within -- short-term thinking, destruction of natural resources, exploitation of labour and poor management, to name a few.

To outlast their competition, build resilience, gain competitive advantage and achieve greater returns in the long run, businesses must improve their performance on material ESG metrics: Environmental impacts such as monitoring their consumption of natural resources, waste discharge and carbon emissions; Social factors such as ties with local communities, diversity and inclusion, and building a good reputation with stakeholders; and Governance, including board effectiveness protocols, approach to senior executive compensation and appropriate reliance on independent directors. The benefits from implementing ESG factors include more efficient use of resources, lower cost of operations, reduced risk, higher employee productivity and increased investor interest.

Outlast: How ESG Can Benefit Your Business is a clarion call to corporate leaders to follow the pathway of ESG. The authors, Mukund Rajan and Col. Rajeev Kumar, draw upon their considerable experience of working for some of India's largest organizations to present evidence and case studies that show that ESG is the mantra of the future. This is a timely must-read for all those who belong to, or aspire to be part of, the corporate world.

• Language: English
• Publisher: HarperBusiness
• Release date: Dec 7, 2021
• ISBN: 9789354892073

Mukund Rajan

Dr Mukund Rajan chairs a pioneering investment firm focused on catalysing Environment, Social and Governance (ESG) improvements. Previously, in a twenty-three-year career with India's largest corporate house, the Tata Group, he served as the Group's first Brand Custodian, Chief Ethics Officer, Chairman of the Tata Global Sustainability Council and Member of the Group Executive Council. A graduate from the Indian Institute of Technology (IIT) Delhi, Dr Rajan completed a Doctorate in International Relations on a Rhodes Scholarship at Oxford University. His previous books include Global Environmental Politics (1996) and The Brand Custodian: My Years with the Tatas (2019). 

Book preview

This book, completed during an unprecedented pandemic, is dedicated to our loving families, and to the indomitable human spirit that can build a world where people, planet and prosperity are in perfect balance.

Contents

List of Abbreviations

Introduction: The Age of Responsibility

1. The New Mantra of ESG

2. Embracing the ESG Agenda

3. The Influential Media

4. Corruption and the State

5. The Changing Climate

6. Dignity and Respect at the Workplace

7. Codifying Conduct

8. Shareholder Activism

Conclusion

Notes

Index

About the Book

About the Author

Copyright

LIST OF ABBREVIATIONS

ESG—Environment, Social and Governance

AAP—Aam Aadmi Party

ADAG—Anil Dhirubhai Ambani Group

AIFs—Alternate Investment Funds

AIGCC—Asia Investor Group on Climate Change

ARAI—Automotive Research Association of India

ASSOCHAM—Associated Chambers of Commerce (of India)

B2B—Business to Business

BJP—Bharatiya Janata Party

BRR—Business Responsibility Report

BRSR—Business Responsibility and Sustainability Report

BSE—Bombay Stock Exchange

CAA—Citizenship Amendment Act

CAG—Comptroller and Auditor General (of India)

CAGR—Compound Annual Growth Rate

CARE—Credit Analysis & Research Limited

CalPERS—California Public Employees Retirement System

CalSTRS—California State Teachers’ Retirement System

CBDR-RC—Common but Differentiated Responsibilities and Respective Capabilities

CBI—Central Bureau of Investigation

CDP—Carbon Disclosure Project

CEO—Chief Executive Officer

CII—Confederation of Indian Industry

CIL—Coal India Limited

CMS—Centre for Media Studies

CNG—Compressed Natural Gas

COAI—Cellular Operators Association of India

EESL—Energy Efficiency Services Limited

EIA—Environmental Impact Assessment

EPA—(United States) Environmental Protection Agency

EPR— Extended Producer Responsibility

ESOP—Employee Stock Option Plans

ETC—Energy Transitions Commission

FCA—False Claims Act

FCLT— Focusing Capital on the Long Term

FICCI—Federation of Indian Chambers of Commerce and Industry

GCF—Green Climate Fund

GISR— Global Initiative for Sustainability Ratings

GPIF—Global Pension Investment Fund

GRI—Global Reporting Initiative

GSIA—Global Sustainable Investment Alliance

HUL—Hindustan Unilever Limited

IAMAI— Internet & Mobile Association of India

IBBI—Insolvency and Bankruptcy Board of India

IBC—Insolvency and Bankruptcy Code

ICRA—(previously) Investment Information and Credit Rating Agency of India Limited

IFIN—IL&FS Financial Services Ltd

IIRC—International Integrated Reporting Council

IL&FS—Infrastructure Leasing and Financial Services

IiAS—Institutional Investor Advisory Services

ILO—International Labour Organization

IPCC—Intergovernmental Panel on Climate Change

IPS— Indian Police Service

IR—Integrated Reporting

IRDAI—Insurance Regulatory and Development Authority of India

IRENA—International Renewable Energy Agency

IRS—Indian Readership Survey

ISA— International Solar Alliance

ISO—International Standards Organization

LIC—Life Insurance Corporation of India

NCAP—National Clean Air Programme

NCLT— National Company Law Tribunal

NDC—Nationally Determined Contributions

NFRA—National Financial Reporting Authority

NGO—Non-Governmental Organization

NGRBC—National Guidelines on Responsible Business Conduct

NHRC—National Human Rights Commission

NPA—Non-Performing Asset

NSE—National Stock Exchange

NTPC—National Thermal Power Corporation

OECD—Organization for Economic Cooperation and Development

ORF—Observer Research Foundation

OSOWOG—One Sun One World One Grid

PAT—Perform-Achieve-Trade

PFRDA—Pension Fund Regulatory and Development Authority

PCGT—Public Concern for Governance Trust

PPP—Public-Private Partnership

R&D—Research and Development

RBI—Reserve Bank of India

RTI—Right to Information

SASB—Sustainability Accounting Standards Board

SDG—Sustainable Development Goal

SEBI—Securities and Exchange Board of India

SEC—Securities and Exchange Commission

SIAM—Society of Indian Automobile Manufacturers

TAAP—Tata Affirmative Action Programme

TBL—Triple Bottom Line

TCFD—Task Force on Climate-Related Financial Disclosures

TERI—The Energy and Resources Institute

TISS—Tata Institute of Social Sciences

TRAI—Telecom Regulatory Authority of India

UN—United Nations Organization

UNCHE—United Nations Conference on the Human Environment

UNEP—United Nations Environment Programme

UNFCCC—United Nations Framework Convention on Climate Change

UNPRI—United Nations Principles for Responsible Investment

USLP—Unilever Sustainable Living Plan

WEF—World Economic Forum

WHO—World Health Organization

WMO—World Meteorological Organization

WTO—World Trade Organization

VW—Volkswagen

INTRODUCTION

The Age of Responsibility

This book was completed in the shadow of the worldwide spread of COVID-19. From one infected patient in the city of Wuhan, China, in December 2019, the virus spread to over 1 million patients in over 180 countries within three months. By the time this manuscript was ready for publication, the virus had infected over 235 million people, and killed over 4.8 million people.

The rapid spread of COVID-19 illustrates how interconnected the world has become, with travellers unwittingly transmitting the virus from country to country. It has also revealed the fragile existence of numerous economic players, from microenterprises to national governments.

With strict lockdowns imposed across many countries, millions of small retailers, eateries, beauty salons, garages and travel agents unable to earn incomes have shut shop. At the other end of the spectrum, many countries—from small island nations that depend heavily on international tourism to Middle Eastern ones that rely on the sale of oil, the price of which crashed amidst the worldwide economic slump—are struggling to balance their books. Global economic growth has been negative in 2020, contracting by around 5 per cent as compared to the previous year.

At such a time of great economic stress, with collapsing customer demand, supply chain disruption, unemployment, economic recession and increased uncertainty, the values espoused by many in the corporate sector have come into question. The limited financial reserves of several companies and their inability to sustain overheads beyond a few weeks of the COVID-19 crisis have revealed their excessive short-term focus and weak long-term planning. Their decisions to cut jobs and dismiss casual labour, withdraw job offers and reduce the pay of their staffers during the crisis have raised questions about their concern for critical stakeholders such as their employees and workers.

This is the case in India as well. The grim sight of millions of migrant labourers walking hundreds of miles back to their homes, families in tow, without prospects and often without even being paid for their recent labour, has shaken the conscience of fellow citizens.¹

Economic growth for the 2020–21 fiscal has been negative in India, and tens of millions of Indians are likely to find themselves out of work for a fair length of time. With the largest poor population in the world, India can ill afford this.

Sadly, the COVID-19 catastrophe is a dress rehearsal for other major challenges that lie ahead, especially the climate change crisis. India’s long coastline, with its several hundred million residents, is physically threatened by the rise in sea levels that global warming will cause. The country already suffers some of the hottest summers across the globe, and rising temperatures caused by global warming will make outdoor work impossible during certain parts of the season.

Already buffeted by cycles of flood and drought, climate change will also alter precipitation and weather patterns in unpredictable ways in the subcontinent, causing more natural disasters and spreading more misery. With sufficient warnings of climate change available, concerned stakeholders demand to know how India Inc. is preparing to respond to this challenge.

Climate change adds an additional dimension to the many existing challenges Indian companies need to overcome to succeed and thrive in the future. These span their ability to deploy capital and resources in order to build engines of innovation and develop world-class products and services; their risk-taking capability and willingness to seek out new markets; their keenness to invest in quality improvement that will allow them to become valued parts of the supply chains of global majors; their determination to raise skill levels and ensure dignity of labour across their supply chains; their commitment to improving their standards of corporate governance and becoming well-respected value creators; and their intent to invest in local communities to become neighbours of choice.

Many Indian companies, however, have still not recognized the need to urgently address these multidimensional challenges. In significant measure, this represents the failure of corporate responsibility in these companies. While adverse business cycles, badly framed government policies, poor infrastructure and many other external problems can present sometimes insurmountable difficulties for Indian businesses, this book urges them to look inward at the problems that are often of their own making—for example, poor corporate governance, corruption, lack of diversity, an unwillingness to comprehend and prepare for crises, environmental destruction, appalling employee engagement and exploitation of communities.

The pages that follow outline the broad landscape of corporate responsibility that Indian businesses must familiarize themselves with and the critical measures they need to take in order to become successful economic participants and responsible corporate citizens in the markets of tomorrow. In particular, we focus on Environment, Social and Governance (ESG) performance.

ESG has entered the lexicon of investors, managers and other stakeholders in a major way over the past two years, and is seen as a surrogate for the assessment of the risks and resilience of enterprises. By identifying material ESG metrics and improving their performance on these, businesses can gain greater efficiency in the use of resources, a lower cost of operations, reduced risk and therefore cheaper insurance premia, minimized regulatory and legal interventions, greater employee productivity, lower cost of borrowing, increased analyst coverage and investor interest, and greater prospects for valuation rerating.²

As our book title suggests, in an uncertain, risky and volatile world, purpose-driven companies that align with ESG demands are more likely to outlast their competition.

As authors, we draw considerably in our analysis from our experience of working for the Tatas, India’s largest business group, which has consolidated annual revenues in excess of ₹750,000 crore ($100 billion). Founded by Jamsetji Tata in 1868, the Tata Group is an unusual capitalist organization, as it is majority-owned at the holding-company level by public charities. This unique ownership structure has embedded the notion that corporates have a responsibility to give back to society in the work of all Tata companies. It is also reflected in their mission statement: ‘To improve the quality of life of the communities we serve’. Dwelling on this, long-serving Tata Group Chairman J.R.D. Tata would say:

The wealth gathered by Jamsetji Tata and his sons in half a century of industrial pioneering formed but a minute fraction of the amount by which they enriched the nation. The whole of that wealth is held in trust for the people and used exclusively for their benefit. The cycle is thus complete; what came from the people has gone back to the people many times over.³

As we witnessed with the Tata Group, and as research increasingly shows, businesses can be rewarded in many ways when they act in a responsible manner. They gain legitimacy and a licence to operate, usually secure government support, enhance their brand equity, attract investment from socially responsible investors, avert crises through proactive issues management, draw environmentally and socially conscious consumers, attract talent and gain employee trust and loyalty—both of which contribute to employee morale and productivity.⁴

At the other end of the spectrum from the giant Tata Group in terms of size, a family-run business like Marico, with a consolidated turnover of just over ₹7500 crore ($1 billion), represents an Indian enterprise that has enjoyed great success in the past two decades and has emerged as a role model for corporate India through its dedicated focus on material ESG issues. Under the visionary leadership of Harsh Mariwala, Marico strengthened its corporate governance in the early 2000s with the induction of senior professional managers and the exit of family members from the board of directors.

Marico adopted a code of conduct for the first time in 2010, which it has tweaked subsequently on multiple occasions to preserve its relevance to the organization. To reduce its input costs and gain competitive advantage, as we will see later in this book, it closely analysed its reliance on its value chain partners, especially farmers producing safflower and coconut, investing in their operations through longer-term contracts to make them more sustainable and to reduce the risk of supply shocks (see pages 67-70). Senior managers at Marico now have their performance pay linked to ESG outcomes. As a result of these and other initiatives, they have come a long way since the time two decades earlier when Marico would typically trade on the bourses at around a tenth of the price-earnings ratio of a market leader like Hindustan Unilever. In recent years, there have been periods when Marico has outperformed Hindustan Unilever.

In this book, we will cite case material offered by enterprises like Tata, Marico and many others and outline the critical importance of embracing an ESG agenda to build resilience and competitive advantage. We seek to create greater awareness amongst current and future Indian business leaders and offer them guide rails in their quest for sustainable, profitable and responsible growth.

A major shift in thinking is called for in many Indian businesses in the immediate future if they are to cope with the challenges that lie ahead. The last precedent we have for such a major change in mindset dates back to 1991, when India moved from a protected, inward-looking economy to a more market-oriented construct. As happened then—something we reflect upon at greater length below—we believe the current shift will also take its toll on unprepared Indian corporates.

Economic Liberalization and Corporate Churn in India

The year 1991 saw a fundamental transformation in the economic paradigm that was in operation in India. The economic reforms programme launched by Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh set India on a path towards economic liberalization, openness to foreign investment and greater engagement with the global economy via increased trade. As Singh said in his landmark 1991 budget speech to the Indian Parliament, quoting Victor Hugo, ‘No power on earth can stop an idea whose time has come.’

From an economy committed through the 1976 Constitutional Amendment to ‘socialism’, the 1991 economic reforms pushed India on the path of free enterprise, lifting many of the shackles of the infamous ‘licence-quota-permit’ raj. Indian businesses were no longer obliged to rush to the government every time they saw the opportunity to increase production to address market demand. Quality standards that were often suspect in the era when India was a closed and protected economy started rising; Indian businesses were pushed to become more quality-conscious and competitive thanks to the entry of world-class foreign competition.

Indian consumers gained significantly. The move towards free enterprise filled the shelves of shops with a plethora of new products that the Indian consumer had not been exposed to before. From hi-tech running shoes to hi-fi music systems, from modern gym equipment to personal computers, and from new brands of potato crisps to breakfast cereals and juices, Indian consumers were suddenly spoilt for choice.

The automobile industry, a significant driver of industrial growth, offered a great example of the benefits of liberalization. From being essentially a three-player market where Maruti, Hindustan Motors and Premier Automobiles dominated the landscape with relatively dated designs and technology, consumers suddenly saw an influx of sleek new products from the stables of multinational enterprises like Ford, Daewoo Motors, Hyundai and Mercedes-Benz.

The benefits for Indian businesses, however, were decidedly mixed. When the liberalization programme was announced, some corporate leaders warned that the pace of change would be too rapid for many hitherto-sheltered Indian businesses to keep up with and make a successful transition. Labelled the ‘Bombay Club’, these leaders, including respected voices like Rahul Bajaj, Lala Bharat Ram, Lalit Mohan Thapar, Hari Shankar Singhania, M.V. Arunachalam, B.K. Modi, C.K. Birla and Jamshyd Godrej, urged the government to undertake carefully calibrated changes to existing policies.⁵ They wanted the government to open up the economy at a reasonable pace that would allow existing Indian businesses time to make the adjustments necessary to deal with foreign competition.

The Bombay Club’s argument was logical and acknowledged with seriousness by the government. Foreign companies operating in highly competitive open markets in the West had been able to develop modern business processes, intellectual property, new technologies and supply chains that allowed them to deliver products and services very efficiently to the end customer. Sub-scale Indian businesses would be no match for these companies if they were allowed to enter the Indian market unhindered.

Recognizing this, a number of conditions were imposed by the government on foreign companies desirous of entering the Indian market. These included the imposition of caps on the equity foreign players could hold in Indian companies. Besides, some sectors of the Indian economy were entirely shut to foreign investors.⁶

The Bombay Club’s concerns proved to be well-founded. By the end of the decade, many of India’s leading business groups from the beginning of the 1990s were no longer in positions of leadership. In the subsequent two decades, a number of these businesses closed down. The table on page 9 shows the shifting pattern of leadership by market capitalization over the last four decades in India and reflects the toll liberalization took on traditional Indian business groups.⁷

Many prominent Indian manufacturing enterprises, including a number of textile companies that featured within India’s top fifty companies in 1990, vanished or slipped out of the list over the next two decades. An entirely new set of leaders—companies like Infosys, HDFC Bank and Cipla—emerged from the ranks of the information technology, financial services and pharmaceutical industries.

By 1996, half of the constituents of the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) had been replaced. The index began to undergo frequent revisions owing to the dynamic nature of the now substantially more competitive Indian market. Currently, a firm can expect to remain on the index for only twelve years—one-fifth of the pre-liberalization expectation of sixty years.⁸

Amongst the victims of liberalization were a number of businesses that were clearly found wanting in terms of their managerial competence, and ability or willingness to improve their competitiveness. At the ones that survived, enormous efforts had to be made to remain competitive and defend the home market.

We were witness to the efforts at the Tatas to cope with the changes ushered in by liberalization. They improved quality-management systems, benchmarked against and shared global best practices within the Group, invested in brand building, developed and enforced a code of conduct, rightsized companies and began to compete overseas. Yet, many Tata businesses struggled to maintain their traditional leadership positions in sectors like automobile and power generation. The plight of smaller Indian businesses that lacked the resources of a giant like Tata can well be imagined.

Elder statesman of Indian industry, Maruti Suzuki Chairman R.C. Bhargava, argues that the pre-liberalization period of operating in a protected environment, with severe restrictions on the ability to grow, created a mindset among too many Indian entrepreneurs that action ‘to increase quality, reduce cost or to develop better products was unnecessary’. Further, he says, ‘The focus shifted on how to maximize personal wealth under the prevailing system without worrying about either the customer or the other stakeholders in the company. It is, perhaps, not surprising that even after 1991 not many industrialists thought about growing to global scales of operation.’⁹

Faced with weak domestic competition, a number of foreign companies entering India soon acquired leadership positions in the Indian market. They have come to dominate significant sectors of the Indian economy, ranging from consumer electronics (think companies like Samsung and LG), to smartphones (Xiaomi and Apple), computers (Dell and HP), passenger cars (Suzuki and Hyundai), and consumer goods (Unilever and Kellogg’s).

Meanwhile, a few relics from the period of strong socialist influence in India still survive and compete with the private sector. These include several hundred often heavily subsidized and protected public sector companies operating in industries like mining, aviation, telecoms, oil production and refining, and steel. They currently account for around 15 per cent of India’s gross domestic product (GDP).

Wedged between the state-owned enterprises and foreign players, the Indian private sector faces difficult challenges that impede its ability to compete successfully. The recent thrust on corporate responsibility and the associated upheaval in the economic firmament outlined below is taking a further heavy toll on a relatively unprepared Indian private sector, in much the same way that liberalization did.

The Crisis of Corporate Governance

Companies that wish to be successful in markets today must put in place strategies to develop innovative products and services that meet consumer needs and wants, take appropriate risks and work hard to improve their competitiveness. Sounds simple? Yet, far too many Indian firms fail to do so.

Evidence of the disproportionately large number of failed strategies of many Indian businesses is available from the number of bankruptcy cases that have emerged since the passage of the Insolvency and Bankruptcy Code 2016 Act. As of 31 December 2020, there were over 21,000 cases pending with National Company Law Tribunal (NCLT) benches.¹⁰ These cases account for a large proportion of the non-performing assets (NPAs) in the Indian banking system.¹¹

According to a report of the central bank, the Reserve Bank of India (RBI), India’s NPAs are the highest when compared with ten other emerging economies, and countries like Turkey, Philippines, Brazil, Indonesia as well as China. Indian NPAs of ₹9.36 lakh crore in 2018–19, 9.1 per cent of the total advances, compare very poorly with China’s at 1.8 per cent.¹² India’s financial regulatory institutions, including the RBI and the Securities and Exchange Board of India (SEBI), have been forced to periodically overhaul their protocols for bank and corporate oversight as system-wide abuses like the under-reporting of NPAs get revealed.

It is troubling to note that a large proportion of NPAs are accounted for by famous domestic brands from the recent past. The first tranche of twelve well-known companies identified by the RBI for immediate bankruptcy proceedings in October 2017 (see chart below) was estimated to account for 25 per cent of the total NPAs at the time.¹³ Since then, many other former industry leaders and famous brands like Jet Airways, Reliance Communications and Videocon Industries have also stumbled badly.

Source: PTI¹⁴

Weak corporate governance has played a big role in the slide in fortunes of many such companies. A number of them face prosecution for a variety of civil and criminal violations of the law. After losing an arbitration case against Daiichi Sankyo and being slapped with damages of $500 million, the Singh Brothers of Ranbaxy and Fortis fame were subsequently jailed pending the filing of charges on cases of cheating and embezzlement.¹⁵ The senior leadership team of Infrastructure Leasing and Financial Services (IL&FS), including former Chairman and Managing Director Ravi Parthasarathy, is being prosecuted on charges of cheating and fraud.¹⁶ Ratul Puri, once the poster child for entrepreneurship in India and the chief executive officer (CEO) of now bankrupt solar power firm Moser Baer, was briefly jailed in a case relating to fraud in defence purchases by the Government of India.¹⁷ Vijay Mallya, the promoter of Kingfisher Airlines, turned into a fugitive economic offender in 2016, was declared bankrupt as per UK law in July 2021 and is currently fighting extradition from the UK to India.¹⁸

Foreign companies operating in India have not been spared the depredations of managers seeking shortcuts to wealth. Reebok India, owned by parent company Adidas AG, alleged a ₹870 crore fraud by its former Managing Director Subhinder Singh Prem and former Chief Operating Officer Vishnu Bhagat, in a criminal complaint filed at the Gurgaon police’s Economic Offences Wing in May 2012. The two managers were accused of criminal conspiracy and fraudulent practices, including stealing products by setting up ‘secret warehouses’.¹⁹ In March 2013, Adidas announced a €153 million loss on account of the Reebok India episode.

Sadly, such cases demonstrate that for too many Indian enterprises and senior managers, cutting corners, breaking rules and violating the law are viewed as easier options to achieve commercial success than putting in the hard work required to improve productivity and make strategic investments behind innovation. Some even justify their actions to sidestep the law by pointing to India’s poor record on contract enforcement—the country ranks 163rd amongst 190 countries on the contract-enforcement criterion in the World Bank’s Doing Business 2020 report—and an overburdened judicial system where justice is often delayed.²⁰

But even when the law is not being broken, as R.C. Bhargava comments critically, ‘…promoters have generally managed their enterprises as if they were personal assets. Most felt free to use them for personal purposes. The interests of other stakeholders, including employees, minority shareholders, suppliers and dealers, were not considered while doing this.’²¹ The saga of NPAs and frauds consequently continues, with the central government revealing in February 2020 in Parliament that scheduled commercial banks and select financial institutions reported new frauds to the tune of ₹113,374 crore in the first half of the financial year 2019–20.²²

Perhaps some of the companies illustrated here found it difficult to shake off the past. Corrupt practices allowed a number of businesses to flourish during the pre-liberalization years of licence-quota-permit raj in India. Certainly, few would have expected that the government’s notoriously malleable investigative machinery and the ponderous Indian judicial system would actually crack down on egregious examples of crony capitalism.²³

A new normal in terms of stakeholder expectations of corporate conduct, however, was established by two events that took place in the period between 2010 and 2012: the unveiling of the so-called 2G scam and the coal scam. These were early precursors to many ongoing prosecutions of companies. Both have been cited as examples of crony capitalism at its worst in India. In both cases, access to valuable national resources was allegedly offered to corporate entities unfairly favoured by some bureaucrats and politicians in government. In both cases, failure of governance led to massive scams, huge losses to the exchequer and a decline of public trust in the government system.

The scams shook the public conscience because of the manner in which national wealth was sought to be appropriated by crony capitalists, fostering greater inequality in an already poor nation.²⁴

The 2G Scam

The 2G scam of 2008 essentially involved the sale of mobile telecom licences supported by 2G spectrum by the Indian government to well-connected companies on a first-come, first-served basis. The price of the 2G spectrum was linked to prices discovered in 2001, ostensibly to provide a level playing field for the newer entrants. Several of the new licencees then proceeded to sell stakes in their companies at a significant profit. For instance, Swan Telecom, a new company with few assets, bought licences for ₹15.4 billion ($317 million), and shortly thereafter, sold 45 per cent of the company to United Arab Emirates (UAE)-based telecom firm, Etisalat, for ₹42 billion ($866 million).

In total, the Indian telecom ministry led by Minister A. Raja granted 122 telecom licences to various companies. In its audit report for 2010–11, the Comptroller and Auditor General (CAG) of India concluded that the allocation of these licences was characterized by policy gaps and irregularities in procedure. Because market-based auction mechanisms were not adopted and instead licences were allocated by the administration at prices discovered in 2001, on the pretext of providing a level playing field with incumbent operators, the resultant loss of revenue to the government, as estimated by the CAG, was ₹1.76 lakh crore.

In the fracas that followed in Parliament, the government felt compelled to order an investigation by the Central Bureau of Investigation (CBI). Minister Raja was forced to resign from the Union cabinet in November 2010. Along with nine others, he was arrested in February 2011.²⁵ Several corporate leaders from companies like Unitech, DB Realty and the Anil Dhirubhai Ambani Group (ADAG) were also arrested.²⁶

The CBI then filed a charge sheet, in April 2011, against Raja and others for causing loss to the exchequer in the allocation of telecom licences. They were tried under the Prevention of Corruption Act for criminal conspiracy, cheating, forgery, abusing official position, criminal misconduct by a public servant and taking bribes.

In February 2012, the Supreme Court struck down the flawed first-come, first-served spectrum allocation policy. It described the allocation of licences by Raja as arbitrary and unconstitutional and cancelled the 122 licences allocated under him. The court directed that the spectrum linked with these licences be auctioned. The companies whose licences were scrapped included Uninor (a joint venture between Norway’s Telenor