Afterthoughts on the Mundhra Affair - Economic and Political Weekly

THE ECONOMIC WEEKLY SPECIAL NUMBER JULY 1959
<strong>Afterthoughts</strong> on the Mundhra Affair
Ashok H Desai
It is unfortunate that the sensation surrounding the transaction has led public interest towards
apportioning individual blame and away from the more important issues regarding the autonomy of public
corporations, and ministerial responsibility.
But autonomy and independence of a corporate body cannot be secured just by laying down the
law. It is clear from the reports that the Government tended to treat the Corporation merely as a Government
department instead of allowing it to function freely within the framework of its charter.
It is to be hoped that when the three reports are debated in Parliament there will be lesser concern
with allocation of blame and more attention will be paid to securing safeguards for the free functioning of
the autonomous public corporations. This question is of concern to all modem States which are tending to
be leviathans.
And it is of particular importance in our country where the politicians have only recently tasted
the heady wine of power, and where we have as yet no strong tradition of independent corporate bodies
which form the core of a pluralist society.
THE indiscreet investments made
by the Life Insurance Corporation
In the summer of 1957 in some
of the concerns of Shri Haridas
Mundhra have been critically examined
by three distinct bodies
the Chagla Commission, the Board
of Inquiry presided over by Mr
Justice Vivian Bose and the Union
Public Service Commission. The
evidence led before the Vivian Bose
Board of Inquiry has not been made
public. But it is clear from the
three reports that all the obscurity
surrounding the transactions in
June 1957 has not been dispelled
and that there is considerable variation
in the appreciation of evidence
by the three bodies.
The ambit of the three inquiries
were slightly different. Mr Justice
M C Chagla was appointed in January
1958 under the Commission of
Inquiry Act, 1952, to inquire into the
circumstances surrounding the impugned
transactions. The inquiry
conducted by this Commission was
held in public In form it resembled
a preliminary investigation or
a general inquisition (including
loudspeakers and appropriate homilies
from the chair) because there
were no parties to the proceedings
or charges in the formal manner.
The report was followed by a resolution
in Parliament in February
1958. Acting upon it the Government
constituted a Board of Inquiry
in May 1958 consisting of Mr Justice
Vivian Bose, Shri Sukumar Sen and
Shri W R S Sathianadhan to investigate
certain charges against Shri
H M Patel and Shri G R Kamat
under the All-India Service (Discipline
and Appeal) Rules, 1955,
The Life Insurance Corporation requested
the same board to conduct
an inquiry against Shri L S Vaidyanadhan.
The Vivian Bose Board
consolidated the three inquiries into
one proceeding. The Vivian Bose
Board brought the evidence led
before the Chagla Commission on
its record and further examined 25
witnesses "in camera". In the report
of the Vivian Bose Board which was
submitted in September 1958 it was
held that certain of the allegations
levelled against the three subjects
of inquiry were proved. After the
report the Government, as enjoined
in the Constitution, asked the Union
Public Service Commission for advice
on the charges and the penalty
proposed to be imposed. The Union
Public Service Commission reappreeiated
the evidence before the Vivian
Bose Board along with replies of
Shri Patel and Shri Kamat to the
"show cause" notices. It advised
the Government, with the dissent of
Shri J Sivashunmugam Pillai, that
Shri Patel should be exonerated of
the charges and, unanimously, that
Shri Kamat should be only censured.
The Government of India
accepted this advice by a resolution
dated 27th May 1959 which in the
admirable eclectic Indian style, accepts
something from each of the
reports including the "force in the
minute of dissent" of Shri J S
Pillai !
The Three Reports
It is unnecessary to recapitulate
at any length the findings of the
three reports. The conclusion of
the Chagla Commission that the
transaction was not in accordance
with business principles and was opposed
to propriety was accepted by
the Parliament in the resolution it
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adopted in February, 1958. The
Chagla Commission held that the
view of Shri Patel that "the Mundhra
drag" (the fear of a large
quantity of the shares of Shri Mundhra
being thrown on the market
at distress prices) had to be averted
to stave off a crisis in the Calcutta
market and hence the Corporation
should purchase the shares was unsound,
particularly in view of the
danger that Mundhra would manipulate
the market to get favourable
prices. The Chagla Commission
further held that the transaction
was undertaken by the Corporation
not on advice but on order or direction
of the Government and that
Shri T T Krishnamachari had acquiesced
in the dominant role of
Shri Patel and had approved the
transaction.
The Vivian Bose Board, after a
long inquiry (that often roams outside
its range) found Shri Patel
guilty of the following two charges:
1. That in June 1957 Shri Patel
abused his authority by causing
Shri Kamat and Shri Vaidyanadhan
to enter into a transaction
which was improper and
contrary to business principles
and practice and resulted in
investments which the Corporation
should not have made.
2. That in causing the above
transaction Shri Patel was negligent
inasmuch as he failed
to give a clear indication as to
the prices to be paid for the
various shares thereby causing
loss to the Corporation. The
Vivian Bose Board also found
that Shri Krishnamachari had
given only vague approval of
any deal with Mundhra along

SPECIAL NUMBER JULY 1959 THE ECONOMIC WEEKLY
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THE ECONOMIC WEEKLY SPECIAL NUMBER JULY 1959
"with a cautionary rider and
that Shri Patel's action was
not covered by ministerial approval
or authority.
The Union Public Service Commission,
on the other hand, held
that there was no basis for the
charge that Shri Patel abused his
authority for he could not have
"caused" Shri Kamat and Shri Vaidyanadhan
to enter into the transaction
nor was the transaction improper
as far Shri Patel was concerned.
The Commission also held
that the second .charge was also not
proved. Regarding Shri Kamat,
the Commission held that the charge
of impropriety and unbusinesslike
nature of the transaction was established
only in regard to the prices
fixed and the resulting loss to the
Corporation. It also held the other
allegation against Shri Kamat of
failure to discharge his duties as
Chairman of the Corporation proved,
inasmuch as due care and caution
were not exercised by Shri Kamat
in fixing the prices.
The Government has accepted the
advice of the Union Public Service
Commission and has dropped the
charges against Shri Patel and has
imposed the penalty of censure on
Shri Kamat. The Commission also
concluded that Shri Krishnamachari
was aware of the antecedents of
Mundhra. that in the context of this
knowledge Shri Patel had adequately
apprised the Minister about the
transaction and that Shri Patel
with good reasons honestly believed
that the Minister approved of the
deal being entered into.
Saddening Spectacle
In spite of the differences in the
assessment of evidence, some unhappy
features are noticed by all
the three reports. The first is the
manner in which the autonomy of
the Corporation was flouted with
the connivance of its highest officials.
The Chagla Commission described
the tendency on the part of the
Finance Ministry to look upon the
Corporation as a wing or branch of
that Ministry and to issue orders to
it in the belief that the Corporation
was bound to carry out those orders.
Another feature is the "amazing
manner" (Chagla Commission Report)
in which the price the Corporation
had to pay for the shares was
fixed and that decisions of the higheat
importance were taken in a
manner that indicated "gross negligence
or gross incompetence" (description
by the Vivian Bose Board).
But what stunned the public most
was the unedifying behaviour of the
dramatis personae when called forth
to justify their behaviour under
public scrutiny. The Vivian Bose
Board describes the saddening spectacle:
"We find some of the highest
officials in the land shirking responsibility
and hiding the truth. We
find each trying to wash his hands
of a matter that has evoked much
public criticism and each trying to
throw the blame on the other...We
have not been told the whole truth
and some at least of what we have
heard must be false."
Theory of Party Funds
—Not Sustained
It is in the light of these observations
that one must examine the
most remarkable conclusion of the
Vivian Bose Board—the conclusion
that permeates the report and establishes
that the main allegations
against Shri Patel are proved. The
Vivian Bose Board not only held
that there was no imminent danger
to the Calcutta market in June 1957
and that Shri Patel's theory about
the Mundhra drag' was unsound but
it arrived at the finding that the
drag theory was an afterthought and
a blind and that the transaction
was entered into to help Mundhra
The only motive that suggested itself
to the Board for this investment
of a crore and a quarter of public
money in the Mundhra concerns was
that this investment was a quid pro
quo for the donation of a lakh and
a half to the U P Congress Party,
one lakh to the Central Congress
Party and perhaps for the loss of
about 20 lakhs that would be sustained
by the philanthropic Mundhra
by recalling the closure notices relating
to the Kanpur Mills. The
conclusion is extremely damaging
(as Pandit Nehru painfully noticed)
and could be arrived at only on
clear and cogent evidence. Unfortunately,
on the record that is available,
it cannot be sustained. The
Vivian Bose Board itself arrived at
the conclusion by the process of reductio
ad absurdum legitimate in
logic but not in judicial reasoning.
The manner in which the transaction
was carried out was hasty,
improper, negligent and hence, in
the eyes of the Board, suspect.
The Board argued that if all defence
versions were suspect, it would have
to reject the 'drag' theory. Mundhra
in his evidence had referred to
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his donations to the Congress,
Hence the Board accepted this tenuous
link to arrive at a damning
conclusion without putting this case
to Shri Krishnamachari, Shri Patel
or any official of the Corporation.
Nor did the Board investigate in
what manner the wave of gratitude
was set off from the treasury of
the U P Congress and the coffers
of the Central Congress Party to
the whispering conversation (audible
only to a few of the participants!)
in the Reserve Bank of
India at Bombay. Unless there is
clear indication of such circumstances
like instructions given to Shri
Patel and Shri Kamat in order to
oblige Mundhra, the conclusion of
the Board is unwarranted just because
the Board finds it difficult to
believe the defence versions.
The Drag Theory
The whole essence of the 'drag'
theory is not whether there was in
fact an impending crisis in Calcutta
that could be resolved by the Corporation's
investment but (1) whether
Shri Pated genuinely believed
in such crisis and such a solution?
and (2) whether such a belief was
reasonable in view of the circumstances
known to Shri Patel? The
Union Public Service Commission has
answered both questions in the affirmative;
the Vivian Bose Board in the
negative. One feels that the answer
to the first question is 'yes'; to the
second 'no'. The evidence on record
is consistent with Shri Patel's
genuine belief in the crisis and its
solution but that such a belief was
not reasonable—the diagnosis and
prescription were indiscreet— for a
civil servant of Shri Patel's perception
and calibre.
It is really unnecessary to allege
malafides to explain the conduct of
the highest officials and ministers
concerned in the transaction. The
manner in which the autonomy of
the Corporation was disregarded
and the floundering, imprecise way
in which decisions of such magnitude
were fatten are indicative of
the confusion that gave rise to the
differing defence versions. The Vivian
Bose Board refers to the need
for "freedom of officials to act by
displaying responsibility, initiative
and vigour instead of sheltering
behind a set of inflexible rules".
"After all the battle of Trafalgar
was won because of Nelson's 'blind
eye'" observes the report. To one
person at least the confused and

SPECIAL NUMBER JULY 1959
conflicting versions of the principal
persons concerned in the transaction
are reminiscent of other military
scenes—the battles of Austerlitz
and Borodino, described by Tolstoy,
where the Generals were equally
confused, and uncertain as to what
orders were being given, without
anyone concerned displaying the
native wisdom of a Kutuzov.
Autonomy of Corporations
It is unfortunate that the sensation
surrounding the transaction has
led public interest towards apportioning
individual blame and away
from the more important issues regarding
the autonomy of public corporations,
and ministerial responsibility.
The expansion of the public
sector in this country is bound to
bring to the fore the problem of
the forms of corporate ownership
like nationalisation, autonomous
corporations, cooperatives and gramdan.
If the dangers of centralisation
and concentration of power (i e,
"statism" which is an ugly word)
are to be avoided, the efficient working
of autonomous corporations
established along functional and regional
lines will assume particular
importance. Life Insurance was
nationalised in January 1956 and in
September 1956 the Life Insurance
Corporation Act, 1956 came into
force amalgamating about 240 companies.
The Life Insurance Corporation
Act and rules lay down the
law for the regulation and control
of the business of the Corporation.
According to these, the Corporation
is an autonomous body which is enjoined
to act on business principles
and its officers are to act primarily
in the interests of the Corporation.
Section 21 of the Act provides that
"in the discharge of its functions
under this Act, the Corporation
shall be 'guided by such directives in
matters of policy involving' public
Interest as the Central Government
may give to it in writing." The section
circumscribes the power of the
Government to interfere in the day
to day working of the Corporation.
But autonomy and independence
of a corporate body cannot be secured
just by laying down the law.
It is clear from the reports that the
Government tended to treat the
Corporation merely as a Government
department instead of allowing it
to function freely within the framework
of its charter. The relations
between the Life Insurance Corporation
and the Government cannot
be excessively formal and bound
in red tape. The Government in its
resolution said that it does not feel
that its contact with the Corporation
should be confined merely to
THE ECONOMIC WEEKLY
giving statutory directions. But
the autonomy of a public corporation
will depend not just on the
elaborate law that regulates its existence
but on the respect the Government
is prepared to accord to its
independence and integrity.
The three inquiries had momenta
rily stripped the veil of secrecy that
shrouds decisions of importance in
public corporations. And the Government
has not come out with
much credit regarding the manner
in which it interpreted its relationship
with the autonomous corporation.
These revelations at this early
formative stage in the development
of autonomous corporations in India
provide a salutary warning, It is
to be hoped that when the reports
are debated in Parliament there will
be lesser concern with allocation of
blame and more attention will be
paid to securing safeguards for the
free functioning of the autonomous
public corporations. This question
is of concern to all modern States
which are tending to be leviathans.
And it is of particular importance
in our country where the politicians
have only recently tasted the heady
wine of power, and where we have
as yet no strong tradition of independent
corporate bodies which form
the core of a pluralist society.
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