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Business Modeling the Regional Political Parties.

R.Vaidyanathan Professor of Finance IIMB

Some of the political analysts are forecasting that in the ensuing Parliamentary elections the two major political parties namely Congress and BJP put together may not cross the magic half way mark of 272 seats. In such a situation some suggest that both the parties should form a coalition a la German model wherein the Social Democrats and Christian Democrats did come together as a national imperative.

Already a petition has been filed in the Supreme Court to bar regional parties from contesting elections to Parliament. The Supreme Court has asked the Centre and the Election Commission to file their reply within six weeks to a public interest litigation (PIL) petition for a mandamus to them to permit only candidates of recognized national parties to contest the Lok Sabha polls.[ The Hindu 18-04-2008] Though the court dismissed the petition at the admission stage itself in May 2004, notice was issued in August that year after M.O. Kandasamy Singh, a Chennai-based advocate, filed a review petition. Subsequently he died and on Tuesday the court, after hearing senior counsel K. Subramanian permitted that advocate Elephant G. Rajendran substitute for the petitioner to pursue the case. Mr. Subramanian said an analysis of the results of the 2004 Lok Sabha elections showed that regional outfits put together obtained more seats than the national parties. Additional SolicitorGeneral Amarendra Saran, appearing for the Centre, and Meenakshi Arora, counsel for the Commission, agreed to file their response. Unincorporated Regional Satraps The important point is not about the national aspirations of these regional parties but the functioning of these regional parties and their control. Whether it is DMK or Shiv

2 Sena where the family battles have come in to open or that of Akali Dal or Janata Dal Secular or PMK or NCP where the heir apparent has been anointed or TDP or RJD where the entire family is tirelessly workingthe issue is the family business called political parties. Like in all businesses; it is required for us to delineate the nature of the business model adopted by these family enterprises in the cloak of regional parties /aspirations etc. It is important to mention that Tamil Nadu is the pioneer in this aspect where the interests of the state, party, government, language are all subsumed for the welfare of a family enterprise. In any business particularly corporate form and listed business Share Holders Wealth Maximization is the main objective. Unfortunately these regional parties are not listed on the stock exchanges and hence the correct market valuation may not be available. The total wealth declared by these leaders [including that of their wives!] during election time in the form of affidavits can be a guide of the net worth of the enterprises. But then it will be under-valuation since it does reflect only what can be declared and it also does not tell the future earning potential of the business. In this there are multiple stake holders other than the controlling family which plans, allocates and execute projects where the returns are shared. The pre-operative and preliminary expenses are related to rabble rousing on caste or language issues. Some initial investment in the form of cut-outs etc is needed. Another method is to promise largesse in the form of free power, free milk, free liquor free TV, free cinema, free rice [Why so far nobody has thought of free sex? is a mystery to me!] etc which are to be given from the state exchequer. In this model the actual business entity need not worry about operational expenses since post -power it is only revenue stream. Business Units: The family business have to conducted through departments called education, irrigation, urban development, PWD,power etc. Some of these business units are low volume high margin centres like say urban development or SEZ where one project can earn up to couple of crores .With Global companies locating in small towns the

3 opportunities are plenty. Other business units like elementary education which is a large-scale transfer industry is low margin but high volume business. Here every teacher transferred may provide in thousands of rupees but numbers are large. The family also needs to take care of the interest of other families which are sub-regional or other caste parties. Hence allocation of business units plays an important role. Sometimes there are differences within family like in any other business. The executives [government officials] are transferred according to the requirements of the family. Sometimes very senior officials become part of the family and integrate very well. In this model, note that the business expenses are that of the Government but revenues are all that of the family. It is an interesting win win model which does not have any comparable international situations. Competitors The competition can come from other families which are also having community of community shareholders. There are also dissidents from the current enterprises due to multiple wives or differences among children etc. The time frame for maximizing the family wealth after one election is specified and that differentiates it from the other regular business models. Due to short time span the family can and does become rapacious and they need to get continuous extraction of higher and higher bribes to meet the greed of the family and friends. The turnover and attrition among supporters is also high since their aspirations are also becoming larger. One minster may go or a leader may defect or create difficulties. [One can count many examples starting with EVK Sampath from DMK in the sixties to Narayan Rane [Shiva Sena]/ Siddaramiah [JDS] in the current decade. Hence the need to create powerful entry barriers as well as exit cost. Here the exit cost can sometimes be violent. There are practical difficulties for the national parties to adopt this model even though post Indira Gandhi period one observes that Congress is identified with a family. But India being a vast country trying to have the national market on a single family basis is difficult and we also observe that that party is shrinking in electoral terms. There is a secular [Pun not intended] decline in terms of its seat share in Parliament.

4 Land as scarce Resource: Will the business model of the regional parties or families meet its nemesis? One reason it will flourish for some more years is the increasing importance of land as a factor of production. In the sixties capital was scare and land was easily allotted. Now capital is available even from global sources but land is scarce and that is the strength of these families. Control of land and allotment of the same is the primary son [pun intended!] rise industry. To that extent the family business will flourish since land is gold and it has been understood by our regional political parties and it is a state subject. It is possible that this business model may fail due to sub regional parties coming on their own and fragmenting the business. Already we have a party for Vanniars and a party for Nadars in Tamil Nadu and a party for Malas in Andhra and of course for Yadavs in UP and Bihar and one for Kurmis and Dalits in UP and for Jat Sikhs in Punjab.etc. With further fragmentation of these groupings many family enterprises will be either on an M&A mode or on a small business-- smaller reach mode. In such situation some can go sick. Second is the greed of some of these families again due to pressure from multiple controlling interests [say many wives, many children etc] the margins demanded from projects may exceed the cost of the project. It has already creepingly increased from under ten percent to a respectable twenty percent in many states. The future of India is ironically linked with some forty/fifty families and their capability for rabble rousing along with their rapaciousness and greed. That is celebrating our grass root democracy! ____________________ The author is Professor of Finance, Indian Institute of Management-Bangalore, and can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his organization.