Why was the high-profile Pramod Mahajan 'demoted'?

Did this development have something to do with a controversial investment made by a central public sector undertaking in a multi-purpose irrigation project being executed by a Maharashtra government company?

Mahajan may believe he has not been demoted, but many think otherwise.

He believes he was moved from the post of minister for communications, information technology and parliamentary affairs and made general secretary of the Bharatiya Janata Party to strengthen the party in the run-up to a number of elections to state assemblies.

The media has speculated that Mahajan was removed from his position in the Cabinet and Council of Ministers on account of a variety of factors. Some of the reasons cited are as follows:

He is supposed to have not only played favourites in the telecom tussle by supporting the Reliance group, he is also said to have suggested that the late Dhirubhai Ambani be given the prestigious Bharat Ratna.

His open advocacy of the interests of the Reliance group may have alienated those in the corridors of power who are not overly inclined towards the Ambanis.

Mahajan had reportedly become too big for his boots. It is said that he was Prime Minister Atal Bihari Vajpayee's man and had not been sufficiently obsequious towards Deputy Prime Minister L K Advani, the real power behind the throne.

Then, of course, allegations had been raised that he was somehow connected with the gruesome murder of The Indian Express journalist Shivani Bhatnagar.

That's not all. Mahajan had justified the inclusion of a young lady on the board of directors of the public sector telephone services provider in Mumbai and New Delhi, Mahanagar Telephone Nigam Limited.

Even if these are some of the commonly cited reasons for the recent change in Mahajan's position, there is yet another rather unusual episode that has been held against him.

This episode pertains to a questionable Rs 250 crore (Rs 2.5 billion) investment made by MTNL in a state government undertaking, the Maharashtra Krishna Valley Development Corporation.

The MKVDC had issued bonds worth Rs 400 crore (Rs 4 billion) that had been subscribed to the extent of around Rs 150 crore (Rs 1.5 billion) over a period of nearly six months till early-May 2002.

In the middle of April, then Maharashtra chief minister Vilasrao Deshmukh and then state finance minister J N Patil wrote to Mahajan requesting him to urge companies under his ministry to invest in MKVDC bonds.

On April 15, the so-called 'independent' board of directors of MTNL decided to park Rs 250 crore (Rs 2.5 billion) of its surplus funds with MKVDC for a period of ten years subject to the concurrence of the Department of Public Enterprises and adherence to the guidelines, if any, issued by the ministry of finance.

MTNL Chairman and Managing Director N Sharma has gone on record saying there was 'no pressure' on him or the board to park the company's funds with MKVDC and that the board's decision was 'unanimous' (The Indian Express, October 9, 2002).

Two days later, the file was placed before Mahajan for his approval. Deshmukh wrote to Mahajan the following day (April 18).

On May 6, the MTNL board's decision was approved by Mahajan and the investment took place on May 10.

In between these decisions, then finance minister Yashwant Sinha told his officials that he had received a call from Mahajan asking him whether or not MTNL should invest in the bonds issued by MKVDC.

Finance ministry officials wrote on a file that the proposed investment would not appear to be in order as it would violate the conditions of a circular issued in 1996 by the Department of Public Enterprises.

The DPE circular had been issued in response to objections that had been raised by the Joint Parliamentary Committee that had inquired into the 1992 stock market scam in which Harshad Mehta was a key figure.

The circular stated that the surplus funds of central public sector undertakings could be parked only in the term deposits of nationalised banks and in very exceptional cases, in the commercial paper of other PSUs -- it was not specified whether these should be central or state PSUs -- provided such instruments had the highest credit rating certified by one of the three credit rating agencies, namely, ICRA, CRISIL or CARE.

Finance ministry officials had observed that since the bonds issued by MKVDC did not have the highest credit rating, MTNL should not park its funds in such bonds.

Despite advice to the contrary, then minister for heavy industry (who exercises administrative control over the DPE) Manohar Joshi noted in his own handwriting that the 1996 DPE guidelines 'may be waived' since MTNL's investment would be in the 'national interest.'

Joshi also noted that the finance minister had been 'consulted.'

Soon afterwards, Joshi was promoted to the position of Speaker of the Lok Sabha, and Jaswant Singh replaced Yashwant Sinha as finance minister.

Though the MKVDC bonds were guaranteed by the Maharashtra government, ICRA downgraded the bonds from LBB category to BBB in May 2002 and further to C category (or ‘non-investment grade') in January 2003.

It is also learnt that one reason why ICRA downgraded the MKVDC bonds was on account of delays in payment of interest to bondholders.

It is common knowledge that these bonds have been guaranteed by the Maharashtra government that is currently steeped in debt -- the state's total debt burden went up from around Rs 18,000 crore (Rs 180 billion) in March 1996 to over Rs 57,000 crore (Rs 570 billion) in March 2002 and is in the region of Rs 80,000 crore (Rs 800 billion) at present.

Meanwhile, the Bombay Telephone Users Association wrote a letter to the MTNL chairman and managing director alleging that three ministers of the Government of India had taken 'personal interest' in authorising MTNL to invest in MKVDC bonds.

Besides Mahajan, Joshi, Sinha and Deshmukh, it is learnt that one other important political personality took keen interest in the transaction. Mahajan's brother-in-law Gopinath Munde.

To return to the question raised right at the beginning of this column, what is allegedly being held against Mahajan is that the 'beneficiaries' of the MTNL-MKVDC deal included some of his political opponents.

Lest readers construe this article to be one-sided, let me state that besides talking to a number of government officials and market players on the topic and after consulting a published report in The Indian Express and its sister publication, the Financial Express, I talked to an important individual involved in the transaction who spoke to me on condition of anonymity.

I shall describe this person as a 'source close to Mahajan' and here is the substance of his responses (mainly, counter-questions) to the questions I raised in the course of a telephone conversation.

Why don't you speak on the record?

Why should I since none of your sources are willing to be quoted?

Why did MTNL choose MKVDC to park its surplus funds?

Why are you picking on MTNL? Why don't you include the 50-odd PSUs that purchased bonds issued by MKVDC?

Because none of the other PSUs placed the kind of money MTNL did…

So what?  The bonds have been guaranteed by the Maharashtra government and interest is being paid to bondholders.

But ICRA has downgraded the bonds to below investment grade…

So what? How does it matter? MTNL has surplus funds and it is helping in the development of Maharashtra so that more water from the Krishna River reaches farmers in the state. What's wrong in it?

As the then telecom minister, Pramod Mahajan had objected to the Tata group investing Rs 1,200 crore (Rs 120 billion) belonging to Videsh Sanchar Nigam Limited after it was privatised in Tata Teleservices. Is he not being hypocritical since he has allowed MTNL to invest in MKVDC?

The comparison is incorrect. In one case, the Tata group sought to invest money that belonged to the government in a group company. In the other case, a central government company is investing its surplus money in a state government undertaking.

The investment made by MTNL in MKVDC bonds violates the guidelines issued by the Department of Public Enterprises and Manohar Joshi wrote that the guidelines may be waived in the national interest. Why was this done?

You should ask Manohar Joshi this question. The guidelines can be waived in exceptional circumstances.

It is being said that Pramod Mahajan was demoted…

I don't agree that he has been demoted.

It is being claimed that his party bosses are unhappy that his political opponents made money out of the deal.

Let people say what they like.

Dear reader, I have placed all the facts I was able to gather before you. It is now up to you to decide who is telling the truth.

The author is Director, School of Convergence @ International Management Institute, New Delhi and a journalist with over 25 years of experience in various media – print, Internet, radio and television.