Submission #11

Submission information
Submitted by Anonymous
26 February 2016 - 3:15pm
Swraj Paul, Escorts and DCM controversy

In November 1981, Finance Minister Venkataraman entered into negotiations with the International Monetary Fund (IMF) and borrowed a hefty SDR 5 billion to avert an impending balance of payments crisis. This was, till then, the highest amount a single country had ever borrowed from the IMF, and led to a huge controversy in Indian political circles…

On January 1982, R. Venkataraman was shifted to the Ministry of Defence, and I took over as Minister of Finance… I was to present my first budget in less than 2 months. Not only that, but as I took over from R. Venkataraman, the onus of responding in Parliament to the ensuing debate on the IMF loan fell on me… I was confident that the IMF loan would in no way harm the Indian economy. Having previously handled the trade and commerce portfolios, I was aware that exports were now on an upswing. I knew that our fundamentals were strong and exports would continue to grow, enhancing our foreign- exchange earnings and strengthening our position to negotiate.

And I was right. In light of the improvement of our payments position, the final instalment of the loan, amounting to SDR 1.1 billion, was not required, and we told the IMF that we didn’t need the money. Thus, India created history for the second time. After having taken the largest ever loan to any country from the IMF, it became the first borrowing country not to fully utilize the loan sanctioned.


When I heard the outcry against the IMF loan, I also started scouting for alternate sources of funding to add to our foreign exchange kitty.

I cast my mind back to my travels abroad as Commerce Minister, when I had had occasion to meet a large number of non-resident Indians (NRIs). During the course of varied interactions- with NRIs, the chambers of commerce individual investors and MPs- I realized that there was a substantial investable surplus at the disposal of the Indian community settled abroad. The then existing Foreign Currency Non-Resident (FCNR) Deposit Scheme was good but had proved inadequate in attracting significant investments from NRIs. I thus set out to explore the possibility of an investment window in the Indian market, buoyed by some estimates which indicated that USD 20-25 billion could easily be mobilized through this avenue.

I appointed a committee headed by R.N. Malhotra to look into the matter and, accepting all its recommendations, announced the following facilities for NRIs in my Budget:

Any investment, without repatriation rights, made by non-residents of Indian origin, so long as it is not for transactions in commercial property and land, will be treated on the same footing as investments of resident Indian nationals. They will be allowed to invest, with repatriation rights, in any new or existing company up to 40 per cent of the capital issued by such a company. They can now purchase shares of companies quoted on the stock exchanges subject to specified limits…

However, little did I realize then that the portfolio investment scheme contained in the Budget proposal would soon turn into a three-year-long battle between UK-based NRI businessman Lord Swraj  Paul and two of Delhi’s leading companies-DCM and Escorts…


On 14 April 1982, in accordance with the Budget proposals of 1982-83, the Reserve Bank of India (RBI) issued a circular laying out, among other things, the procedure through which NRIs could invest in the portfolio investment scheme. The circular stated that NRIs would be permitted to make portfolio investments in shares traded on the capital invested and income earned thereon, provided that the shares were purchased through a stock exchange and that the purchase of shares in any one company by each NRI did not exceed Rs 1 lakh in face value or 1 per cent of the paid-up equity capital, whichever was lower…

Subsequently, on 20 August 1982, the RBI issued another circular removing the limit of RS 1 lakh and leaving in place only the ceiling of 1 per cent of paid-up capital.


The portfolio investment scheme attracted the attention of Swraj Paul… He had strong business connections with Indian- his brothers were engaged in the hotel industry, plantations and trade. In early 1983, Paul began acquiring shares under the NRI portfolio investment scheme in Escorts, founded by H.P. Nanda, and DCM, founded by Lala Shri Ram. Though the majority shareholder in these companies was the Indian government (via state financial institutions), the management of both remained In the hands of promoters- a dominant pattern across large Indian companies at that time. The major shareholders in these two companies were six government owned financial institutions, namely, Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) and Industrial Credit and Investment Corporation of India (ICICI).

In order to get around the rule that limited the purchase of shares to 1 per cent of an Indian company’s shares, Paul used thirteen companies registered in the tax haven, the Isle of Man, to buy these shares. Soon, he had acquired 13 per cent of all DCM shares while the Shri Ram family jointly controlled only 10 per cent. Similarly, he acquired 7.5 per cent of Escorts’ holding while the Nandas controlled less than 5 per cent. The public financial institutions held 41.57 per cent and 52.01 per cent of the paid-up equity of DCM and Escorts Limited, respectively. Swraj Paul’s move caused consternation in the Indian business establishment. Fears of similar hostile takeovers of other companies abounded, particularly given that promoters held minority shareholdings in many companies at that time. A group from Federation of Indian Chambers of Commerce and Industry (FICCI), which included J.R.D. Tata, H.P. Nanda, Bharat Ram and a few others, called on me on 20 April 1983 and sought the government’s help in (a) preventing Swraj Paul from taking over DCM and Escorts and (b) amending the policy to ensure that established companies were not destabilized.

On 29 April 1983, Rajiv Gandhi, reacting to the Escorts-DCM- Swraj Paul controversy, said:

There is a danger that certain forces, not necessarily well meaning, can take over many of our industries under the present laws. The dangers are very real and unless our financial institutions are careful, we will have foreign agencies, through Indians abroad, taking over companies which are running well.

He suggested that while sticking to the policy of limiting individual NRI purchases to 1 per cent of the total shares of any company, the Indian government should limit the total NRI holdings in any given company to less than 2 or 3 per cent. Such a move would ensure that Indian companies would not have to face the threat of takeovers by an NRI consortium.

Taking into account the public debate over the issue and the concerns expressed by Indian industrialists, on 2 May 1983 I announced in the Lok Sabha that there would henceforth be an overall ceiling of 5 per cent of the paid-up capital of a company under the liberalized scheme of portfolio investment by NRIs…

Soon after the new ceiling on NRI investments was fixed, the Escorts board met to discuss the legality of the purchases made by Paul. The management argued that Paul had not only acquired 7.5 per cent of Escorts’ shares after the government had passed its new laws but had also not sought the permission of the RBI before making the purchase. They contended that on both counts the purchases made by Paul’s companies violated India’s foreign exchange and investments laws. Paul, in turn, strongly protested against this allegation, and accused the management and other Indian companies of operating under policies of protectionism and running their business like personal fiefdoms. Within a short time, the Escorts board made it clear that it considered the share purchases made by Paul’s company illegal and hence would not register them. Swraj Paul decided to fight it out and travelled around India giving speeches and interviews, and issuing statements. His argument was that large business interests were grossly misusing public money and the capital provided by unsuspecting shareholders.

In October 1983, Escorts filed a writ petition against the Union of India in the Bombay High Court, challenging the notification under which the Swraj Paul- controlled companies had sent shares for registration to Escorts. DCM supported Escorts from the outside, since its position in the matter was identical. On 9 November 1984, the Bombay High Court set aside the notification issued by the RBI in September 1983. The Union of India, represented by LIC, appealed in the Supreme Court, in December 1985, set aside the High Court judgment and concluded that the RBI notification was valid in law…

Finally, in early 1986m Finance Secretary S. Venkitaramanan; Additional Secretary in the PMO, Gopi Arora; and Minister of State for Defence (and a good friend of Rajiv’s), Arun Singh, mediated between the concerned parties and persuaded Swraj Paul to sell his shares back to the Shri Rams and the Nandas at a mutually agreed price.

(Excerpts from Pranab Mukherjee's 'The Turbulent Years 1980-1996)

Pranab Mukherjee

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