Are tougher penalties in offing for businesses as regulatory bodies step up probes?

An unprecedented ban on DLF, the country's largest real estate developer, from tapping capital markets has fuelled expectations of tougher penalties ahead, as regulatory bodies feel emboldened to take on even companies long sheltered by political connections.

The result has been a slide over the past week in shares of firms known to be under investigation - adding to what was already a year-long weakness in the stocks of companies seen as tied to the Congress party, which was ousted from power in May.

Cleaning up the country's grubby business climate is top of the agenda for both regulators and the new Prime Minister Narendra Modi-led government, which was elected in May partly on a promise to do just that. The country ranks 94th among 177 nations in the global corruption index published by Transparency International.

"If you are in a business which depends on government largesse, then questions will be asked," said Avinash Vazirani, a London-based manager with the Jupiter India Fund.

Shares of Jindal Steel and Power (JSPL), for example, have dropped 8.6 per cent since October 13, when market regulator Securities and Exchange Board of India (Sebi) announced its ban on the real estate giant DLF.

The media also reported that police are investigating the firm over accusations it paid bribes to secure coal blocks. JSPL's Chairman is a former member of the Congress party. The company did not immediately respond to a request for comment.

Other investigations of companies with ties to Congress include one into whether a former telecom minister Dayanidhi Maran allowed Malaysia's Maxis Group to take over mobile carrier Aircel in exchange for investments in Sun Group companies belonging to his brother Kalanithi Maran.

Shares of Sun Group Companies have fallen. Sun TV Network has dropped 5 per cent since the capital market regulator's ruling on DLF, while the broader index has been flat. Sun Group did not immediately respond to requests for comments.

DLF itself has slumped 17.4 per cent since the Sebi ruling.

The punishment doled out to DLF - for failing to provide key information on subsidiaries and pending legal cases at the time of its record breaking initial public offering (IPO) in 2007 - showed how painful the clean-up process could be, even for heavyweights with political ties.

It came weeks after the Supreme Court cancelled more than 200 coal mining licenses, citing the arbitrary and illegal allocation process of the previous government, which threw billions of dollars of investment into question.

The new government says it will auction the cancelled blocks, spurring hopes of more transparent allocations.

DLF - whose founder has traced his success back to a chance encounter with the Congress party's Rajiv Gandhi before he became prime minister - was already fighting the country's antitrust regulator in court. It is now appealing last week's Sebi ban.

The market watchdog did not respond to a request for comment.

Politics and business have long been closely connected in the country, especially in sectors such as coal and telecoms, which depend on large government contracts and are often funded by state-run banks. Political funding remains opaque at best.

MISSION CREEP

Investors have welcomed the effort to clean up domestic capital markets, but many caution that excessive zeal carries risks for both broom-wielding regulators and investors.

The Central Bureau of Investigation (CBI) sparked indignation after publicly announcing a probe into industrialist Kumar Mangalam Birla last December in relation to a coal block allocated to a company belonging to his Aditya Birla Group.

It dropped the case in August, citing a lack of evidence.

"There could be a risk of throwing out the baby with the bathwater - just because you have some political links doesn't mean you have done anything wrong," said Jupiter's Vazirani.

"If you look at this coal mining saga, a whole list of companies were investigated and cleared of wrongdoing. Despite that, the licenses were cancelled - because the government did not follow the law."

For others, this may be the end of the political connections that for so long oiled the wheels of business in the country.

Saurabh Mukherjea, head of institutional equities at Ambit Capital, maintains an index of 75 stocks whose core competitive advantage is political connectivity. The index has underperformed the benchmark Bombay Stock Exchange (BSE) Sensex since 2011, despite an improved performance in the run-up to the April-May general election.

PM Modi himself has not commented on regulatory investigations or legal cases. But he has not been shy about making political hay from accusations of Congress party sleaze, harping on DLF land transactions in the state of Haryana ahead of elections there last week. DLF has denied any wrongdoing.

(Reuters)