The National Herald (NH) Scam

The National Herald (NH) Scam in many ways epitomizes the ultimate nadir of the multi-scam hit Congress party and Nehru-Gandhi dynasty.  

Recently, a metropolitan magistrate court of Patiala issued summons after satisfying itself of having found prima facie evidence against the first family of its culpability in the NH Scam case.  The central charge is that assets worth Rs 2000 crores of Associated Journal Limited (AJPL; the AJPL is a non-profit media company that published the National Herald Newspaper) were misappropriated by the Nehru- Gandhi family.  This was done through an elaborately structured scheme with the Congress party acting in concert like a family firm.  If the charges are proved in the court, the prospect of incarceration now stares hard at those at the helm of the dynasty.

A Brief history of the National Herald paper

The National Herald was a national newspaper, established in 1938 by Jawaharlal Nehru.  During India’s freedom struggle the words ‘National Herald’ was evocative and redolent of patriotic fervor.  This is because Jawaharlal Nehru used the paper to spread awareness of social issues and miseries that plagued India. The paper was welcomed by both the elite and the plebian class. Nehru himself remained its editor until his elevation as Prime Minister. 

During the freedom struggle newspapers were known to take sides on social and political issues. The Statesman (published by Bennett & Coleman Company limited), for instance, staunchly toed the British side. In contrast the National Herald used to take the Indian side and was used by Nehru to mobilize Indian aspirations for ideas like self-governance and home rule.

Despite its illustrious beginning, over the years the paper ran into losses due of lack of modernizing its printing technology, failure to computerize, and general overstaffing, to name a few. The mounting losses were exacerbated by falling revenues and the emergence of new newspapers in India.  The Herald finally decided to stop operations in 2008 due to eroding net worth and cash losses.  At the time of its closure Associated Journal Limited was the publishing company for National Herald, which was also involved in running the newspaper’s operations. 

The Scam Unfolds

The NH scam unfolded November 2012 when the maverick BJP politician, Subramaniam  Swamy, filed a complaint at the magistrate court alleging fraud and land grabbing by Sonia Gandhi and Rahul Gandhi and alleging illegal acquisition of a non-profit newspaper company called Associated Journals through their own private company formed under section 25 of the Companies act called Young Indian 

At the heart of this issue is the control over Rs 2000 crore worth of assets owned by the Associated Journal, which is said to have been transferred to the first family in the process of take over.

So how was Rs 2000 crores of AJPL assets allegedly transferred to the Nehru-Gandhi family? As per the allegation made in the magisterial complaint (whose trial is yet to start), the first family is said to have obtained the assets in the following manner:

1.              Associated Journals Limited (‘AJL’) obtains an unsecured interest free loan of Rs 89 crore from the Congress Party in 2011.  It must be noted here that both the Income Tax Act and the Representation of the People Act prohibit any political party from advancing any loans to private limited company or related enterprise for commercial purposes.  This is because a registered political party like the Congress enjoys several income tax benefits.

2.              AJL, being a loss making company, is not in a position to repay its loans to the Congress. Its books of accounts do not reflect the market prices of its assets, as the financial statements by law are prepared on a historical cost basis.  So technically, it’s a company with a poor financial health as per its books of accounts with huge accumulated losses.

3.              Next, a a new company is floated called Young Indians in 2011 in which Sonia and Rahul have 76 per cent stake and rest of the shares 24 percent are controlled by Motilal Vora and Oscar Fernadez (both close to first family).  This new company has a capital of Rs 5 lacs as per records obtained from the office of the Registrar of Companies.

  

4.              In the next step, Young Indian , the company owned directly by the Gandhis wishes to unburden AJL of the loans due to the Congress party.  To do so, it transfers the liability to itself.   AJL is then taken over by Young Indian by transfer of shares to Young Indian for Rs 50 lakhs.

5.              The reasoning for the takeover seems to be that AJPL was not in a position to repay the loan to Congress, that it was a loss making company which had to be revived by the Young Indian and that therefore the Rahul-Sonia duo have taken over the company in ‘good faith’ and in ‘public interest’.   The valuation is done as per the book of accounts for settlement of consideration of Rs 50 lakhs (it must be noted that the account books represent the historical cost of the Assets and not its current market value).  The sensible counter argument is that why would AJPL which had assets of Rs 2000 crore market value chose to sell itself for a mere 50 lakhs when it could have raised much more than Rs 90 crore by mortgaging the assets?

6.              By this simple process, Young Indian, a company with mere five lakh rupees of capital, became the owner of Rs 2000 crore worth assets of AJPL which has assets in major cities like Delhi, Mumbai, Lucknow, Bhopal including the iconic Herald House.

7.              Swamy further notes that Rahul Gandhi was inducted as a shareholder in AJL in 2008 but failed to disclose this fact in his sworn affidavit filed as a candidate for Lok Sabha in 2009.

8.              Thus as per the scheme of arrangement the Rs 2000 crore worth of assets were transferred to the first family which includes the Rs 1,600-crore worth Herald House and other properties of National Herald newspaper in Delhi and UP.  Next, the Rs 90 crore obtained from AICC as an unsecured, zero-interest loan was written off by the Congress.

But whose paper was it anyway?

The Congress party could argue that the newspaper and it assets under the question were always and throughout history owned by the Nehru-Gandhi family or by either members or by friends of the Congress party.  It could argue that the founder of the newspaper was Jawaharlal Nehru and the fortunes of the newspaper have always been closely linked to the Congress and the paper was always operated by the Congress or its members.  So the party could argue where is the issue of propriety? After all, even the shareholders of the AJLhave not approached the court
to stop the transaction? The Board of Directors has ratified the transactions.

What problem does Swamy now have except political vendetta? The party could claim that none of the shareholders of AJPL have any objection to the scheme of arrangement and so how is any one prejudiced by this transaction?

Of Private profit and public losses

The answer to that argument is that though the AJPL was in part owned and controlled by the Nehru-Gandhi dynasty since the start, the concessions it enjoyed in the eyes of law were granted because it ostentatiously worked for public purposes and in public interest.  For example NH got land allotment at concessional rate because it was a newspaper or got bank loans at concessional rates because it was a non-profit company.  Also both the Congress and the newspaper enjoys many tax concessions which the private parties or private individuals are not eligible for like income tax benefits for donations.  In fact most of the assets of NH were purchased by public donations received by the non-profit company.  By taking over it, a non profit company (which under the eyes of law is technically a Section 25 company), it tantamount to taking over all the benefits and donations which a private firm was not eligible for in the first place in the eyes of the law.

The Future of National Herald

It is difficult to predict how the case will take shape in future.  Media reports show that the party would challenge the summons issued by the Metropolitan magistrate in the Delhi High Court. Clearly the Congress will not sit with folded hands and watch its leaders being prosecuted.   Further, the case is yet to start a trial and this trial is likely to be challenged repeatedly till it reaches the Supreme Court.  While theoretically an incarceration is possible in a criminal case like this, however the possibility of a negative order (with prosecution) does not appear to be very likely as both the Congress party and the shareholders and directors of AJPL (the seller) appear to be firmly behind the first family.   It is also possible that AJPL could submit a court statement stating that it has no objection in the transfer and the party could agree to bear any loss caused to exchequer in the process. 

In the end it is possible that the court may cancel the transaction and ask the parties to maintain status quo.  In other words the share transfer may be cancelled by the court if it feels that there has been undue benefits or unjust enrichment to Sonia Gandhi or Rahul Gandhi.   But that perhaps will take a few more years to come.