Why the Stayzilla arrest should concern us all

Arun Jain, the ex Chairman of Polaris Software, where I was the Group CFO at a certain point in my career, was arrested in Indonesia in 2002 during a meeting to resolve what appeared to be a pure business misunderstanding. Being a well respected entrepreneur in the fledgling IT sector of that time, the enormity of this event sent shock waves throughout the Indian industry. It also exposed the weakness in the contracting abilities of young IT companies and the twin questions of credit and fraud/corruption risk within the larger country risk basket.

Having worked in Jakarta on the Board of a major US MNC in the mid nineties, I was fully aware of the perils of "managing the environment" in the context of strict US laws and the realities on the ground in emerging economies like Indonesia. I had the luxury, though, of asserting, rather proudly to my multi national colleagues on the Board, that "such things do not happen in India". The reference was to corporate leaders being arrested on trumped up charges by the police, conveniently crossing the line between civil and criminal cases in genuine business disputes and personal use of the state enforcement bodies to settle arguments in blatant violation of the law by those entrusted with enforcing the law.

Regretably, it now seems that unscrupulous people in India are precisely using such tactics with alarming regularity in settling business disputes of various hues. Without having the benefit of knowing either party in the StayZilla row, and thus having the privilege of objectivity, Yogendra Vasupal’s desperation in his plea for justice reflects a depressing state of governance even in India’s most progressive cities of Bangalore and Chennai. The level of detail in the blog ( Help ! I need everybody), including video clips, and the sequence of events are chilling in its implications for the general public. It effectively demonstrates the ease with which a lowly police officer, with or without influence, can distort the investigative process by converting a civil dispute into a criminal one by the injudicious use of the three oft used sections of the IPC for this purpose : S 420 ( fraud ) S 506 ( criminal intimidation ) and S 406 ( criminal breach of trust ) without any prima facie evidence of either as what constitutes prima facie evidence is purely a matter of opinion of the investigative officer. How he decides when the fine line between genuine business failure and fraud is crossed is a moot point and an Achilles heel in our criminal justice system. Basic legal factors like lifting the corporate veil, and arresting the founder of the company for dues of the corporate entity, were not even in the vicinity of consideration. A mere complaint, without substantive, legally tenable proof, it would seem is enough to arrest any individual on just allegations of fraud or any perceived threat. The alacrity with which Yogendra Vasupal was then remanded to judicial custody after the magistrate heard the case very late at night, and whisked away to an unknown destination thereafter, reflects a treatment generally reserved only for terrorists or hardened criminals.

I must clarify though that advertising agencies, like Jigsaw Sales, operate on the economics of trust as applicable to any agent, and the business model is essentially one of a pass through of the client’s payments to the media house after deduction of the miniscule margins agreed. Hence, when a client like StayZilla defaults, the advertising agency is taken to the cleaners. As an advisor to some start ups this is why I insist, with the benefit of experience, on tempering the exuberance of the team by necessarily building credit risk management processes into any such extended credit arrangements provided to the client along with tightly written contracts and an arbitration clause. But, given the agency business model, it is perhaps grossly unethical for any client to withhold the entire payment due to poor services as the “services” component constitutes only the small agency media commission of between 2% - 4%.

I am sure Yogendra Vasupal will finally be released when the Courts intervene or if he succumbs to the pressure of the situation created to extract his compliance……but the larger issue is of the personal accountability of the concerned enforcement officers. Can a case of criminal intimidation be brought on them ? Perhaps not. And therein lies the bane in our existing system due to which India in 2017 is progressing the Indonesian way of the mid nineties with respect to this fundamental aspect of governance. If not addressed urgently, exploiting this systemic loophole may well become the norm. PM Modi is the most decisive leader we have ever had and his ever increasing political goodwill is simply enormous. He has shown determination and speed in dismantling many entrenched structures in the interest of the common man. I hope it would not be outside the realms of possibility to expect, in the interest of the mute ordinary citizen, some legislative and administrative changes in breaking this stranglehold (eg: through the long pending police and administrative reforms ) which some errant officials exercise over our basic freedom and constitutional rights.  

In the interest of the nation, that would be the best outcome to emanate from this chilling episode.

This appeared in The QUINT dated March 17, 2017 as an Op-Ed article under Opinion> Article

(PRABAL BASU ROY)

Prabal Basu Roy is a Sloan Fellow from the London Business School and a Chartered Accountant: the writer presently manages a PE fund and has formerly been a Director and Group CFO in various companies.

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