How NBFCs and Real Estate Developers Fund Indian Politicians
Unveiling the Enigmatic Nexus: NBFCs, often referred to as non-banking financial companies, extend an extensive array of financial services encompassing loans, credit, insurance, leasing, and investments, all without the mantle of a banking license. In contrast, real estate developers are entities entrenched in activities such as property acquisition, sales, construction, real estate development, or renovation, catering to both residential and commercial requirements. The intertwining bond between NBFCs and Indian real estate developers transcends mere financial support, with NBFCs emerging as significant and pivotal funding pillars for real estate ventures.
This entwined alliance further seeps into the political domain, as both NBFCs and real estate developers actively partake in contributing funds to Indian politicians and political parties. This article delves into the enigmatic labyrinth of how NBFCs and real estate developers financially bolster the political landscape in India, unravels the potential impact of such financing on Indian politics and democracy, and illuminates the challenges and opportunities that await future research in this captivating realm.
How do NBFCs fund politicians and political parties in India?
NBFCs fund politicians and political parties in India through various methods, such as:
Donations: Under Section 29B of the Representation of the People Act (RPA), 1951, NBFCs have the liberty to contribute any sum of money to any political party. Nevertheless, if their donations surpass 20,000 rupees, they are obligated to disclose such contributions as per Section 29C of the RPA. NBFCs can also donate money anonymously to any party through electoral bonds, which are an alternative to cash donations that can be purchased from a specified bank and encashed by the political party within 15 days. Electoral bonds do not require the disclosure of the identity of the donor or the recipient party.
Loans: NBFCs can provide loans to politicians and political parties at concessional rates or with flexible terms. In 2018, news surfaced about BJP leader Nitin Gadkari availing a loan of 65 crore rupees from Purti Power and Sugar Ltd., which happens to be an NBFC owned by him and his family. Similarly, in 2019, it came to light that Congress leader Rahul Gandhi had acquired a loan of 5.19 crore rupees from Dotex Merchandise Pvt. Ltd., an NBFC owned by his brother-in-law Robert Vadra.
Investments: NBFCs can invest in companies or assets owned by politicians or political parties. In 2017, there were allegations suggesting that Jay Shah, the son of BJP leader Amit Shah, obtained an unsecured loan amounting to 15.78 crore rupees from KIFS Financial Services Pvt. Ltd., an NBFC owned by Rajesh Khandwala, a close associate of Amit Shah. The loan was utilized to purchase shares in Kusum Finserve Pvt. Ltd., another company owned by Jay Shah.
What are the implications of NBFC funding for Indian politics?
NBFC funding for Indian politics has several implications, such as:
Influence: NBFC funding can influence the policies and decisions of politicians and political parties in favor of the interests of NBFCs and their clients. For instance, NBFCs may lobby for lower taxes, higher interest rates, relaxed regulations, or favorable land deals for themselves or their borrowers. This may compromise the public interest and accountability of the political system.
Corruption: NBFC funding can facilitate corruption and money laundering in the political system. For example, NBFCs may provide loans or donations to politicians or political parties as a quid pro quo for obtaining contracts, licenses, permits, or other benefits from the government. Alternatively, NBFCs may act as conduits for transferring black money or foreign funds to politicians or political parties through shell companies or electoral bonds.
Competition: NBFC funding can affect the level playing field and fairness of the electoral process. For instance, NBFCs may favor certain candidates or parties over others based on their ideological affinity, personal ties, or business interests. This scenario might pave the way for an imbalanced allocation of resources and disparate degrees of prominence among different political players.
What is the role of real estate developers in political funding in India?
Real estate developers play a significant role in political funding in India, as they are one of the major beneficiaries and contributors of NBFC funding. Real estate developers rely on NBFCs for financing their projects, especially when banks are reluctant to lend due to high risks or regulatory constraints. As per a study conducted by Knight Frank India, NBFCs constituted 56% of the overall lending to real estate developers in India during the fiscal year 2018-19. Apart from providing financial backing, real estate developers also involve themselves in supporting politicians and political parties through direct or indirect avenues, employing a diverse array of methods, including:
Donations: According to Section 29B of the Representation of the People Act (RPA), real estate developers enjoy the liberty to make unrestricted monetary contributions to any political party. Nonetheless, any donations surpassing 20,000 rupees must be disclosed by them as per Section 29C of the RPA. Real estate developers can also donate money anonymously to any party through electoral bonds.
Land deals: Real estate developers occasionally extend favors to politicians or political parties by offering land or properties at discounted prices or as gifts, stepping beyond the conventional path. In 2012, some reports indicated that BJP leader Sushma Swaraj had acquired a plot of land in Gurgaon from Ansal Buildwell Ltd., a real estate developer, at a significantly low cost of 31.45 lakh rupees, despite its market value being 1.6 crore rupees. Similarly, in 2014, it came to light that Congress leader Sonia Gandhi purchased a plot of land in Derabassi, Punjab, from Janta Land Promoters Ltd., another real estate developer, at a heavily discounted and meagre price of 24.47 lakh rupees, in comparison to its market value stood at 1.5 crore rupees.
Benami transactions: Real estate developers have the option to resort to benami transactions to obscure the ownership or funding sources when dealing with properties intended for politicians or political parties. In benami transactions, one person holds the property, while the payment is made by another individual who is the actual owner or beneficiary. For example, in 2016, there were allegations suggesting that BJP leader Eknath Khadse purchased a plot of land in Pune from a real estate developer named Abbas Ukani at a price of 3.75 crore rupees, significantly below its market value of 31 crore rupees. The transaction was carried out through a benami company called Mandakini Developers Pvt. Ltd., which was owned by Khadse’s wife and son-in-law. This allowed the true ownership and the actual payment source to be concealed from public scrutiny.
What is the impact of real estate developer funding on Indian democracy?
Real estate developer funding on Indian democracy has several impacts, such as:
Influence: Real estate developer funding can influence the policies and decisions of politicians and political parties in favor of the interests of real estate developers and their clients. For instance, real estate developers may lobby for lower taxes, higher floor space index (FSI), relaxed environmental norms, or favorable land acquisition policies for themselves or their buyers. This may compromise the public interest and accountability of the political system.
Corruption: Real estate developer funding can facilitate corruption and money laundering in the political system. Throughout history, real estate developers have exhibited certain practices, including the act of providing land or properties to politicians or political parties in return for contracts, licenses, permits, or other favorable treatment from the government, forming a quid pro quo agreement. Moreover, they have been known to act as intermediaries to channel illicit funds or foreign contributions to politicians or political entities, frequently utilizing shell companies or benami transactions to veil the sources and beneficiaries of these funds.
Competition: Real estate developer funding can affect the level playing field and fairness of the electoral process. Real estate developers might display preferences for specific candidates or political parties due to factors such as shared ideologies, personal connections, or business interests. Such favoritism can lead to disparities in the allocation of resources and levels of visibility among various political actors.
In conclusion, NBFCs and real estate developers are important actors in political funding in India. They fund politicians and political parties through various methods such as donations, loans, investments, land deals, and benami transactions. The financial support provided by NBFCs and real estate developers to politicians and political parties carries significant implications for Indian politics and democracy. It can lead to issues related to influence, corruption, and intensified competition. As a result, there is a pressing requirement for increased transparency, accountability, and stringent regulation of political funding in India. Future research on this topic should focus on exploring the sources, patterns, trends, and effects of NBFC and real estate developer funding on Indian politics and democracy. Moreover, readers should be aware of the role and impact of NBFCs and real estate developers in political funding in India and demand more reforms and safeguards to protect the integrity and quality of Indian democracy.
FAQs On NBFCs And Indian Economy Answered:
How do NBFC contribute to the Indian economy?
Non-Banking Financial Companies (NBFCs) stand as financial entities, extending a diverse array of services encompassing loans, advances, investments, insurance, leasing, and hire-purchase. They carve their niche by refraining from accepting public deposits. In India's economic tapestry, NBFCs emerge as pivotal players, extending credit and financial accessibility to the unorganized sector, small enterprises, rural hinterlands, and marginalized income brackets, frequently overlooked by conventional banking. Unveiling innovative and tailored offerings, NBFCs seamlessly address the distinct prerequisites and inclinations of their clientele. As catalysts of economic expansion, NBFCs have indelibly bolstered the nation's progress, bolstering sectors like infrastructure, microfinance, housing, education, and consumer durables. As per KPMG's findings, NBFCs constituted 19.2% of India's overall credit landscape by March 2020, marking a climb from 15.5% in March 2016.
What are the methods of fund raising adopted by NBFC in India?
NBFCs in India raise funds from various sources, both domestic and foreign. Some of the common methods of fund raising adopted by NBFCs are:
Bank finance: Banks extend their financial support to NBFCs through avenues such as term loans, working capital arrangements, overdrafts, and lines of credit. Within this framework, a single NBFC can receive lending up to 15% of a bank's capital funds, while the cumulative lending to all NBFCs is capped at 40% of the bank's capital funds.
Debentures: NBFCs can issue debentures or bonds to raise long-term funds from the public or institutional investors. Debentures can be secured or unsecured, redeemable or perpetual, convertible or non-convertible. Debentures are subject to certain regulations by the RBI and SEBI regarding their issuance, rating, listing, and disclosure.
Commercial paper: NBFCs can issue commercial paper (CP) to raise short-term funds from the money market. A short-term commitment, Commercial Paper (CP) takes the shape of an unsecured promissory note and reaches maturity within a year. This avenue is accessible to NBFCs that boast a net worth of at least Rs. 100 crore and hold a minimum credit rating of A3.
Foreign investment: NBFCs can attract foreign investment in the form of equity or debt under the automatic route or the approval route, depending on their activities and sectoral caps. Foreign investment in NBFCs is permitted up to 100% under the automatic route for most activities, subject to certain minimum capitalization norms and reporting requirements.
Private equity and venture capital: Innovative enterprises with potential often attract investment from private equity (PE) and venture capital (VC) entities, which NBFCs can tap into for funding. Beyond mere financial backing, these PE and VC firms bring strategic insights, operational assistance, and networking opportunities to their portfolio ventures. These investment players exhibit a keen interest in funding NBFCs that specialize in distinct sectors like fintech, microfinance, education finance, and consumer finance.
How do NBFC get funds?
NBFC get funds from various sources as mentioned above. In contrast to banks, NBFCs lack the advantage of obtaining economical public deposits, constraining their capacity to offer loans at competitive rates. Consequently, they must turn to alternate fund channels, often costlier and less stable than traditional deposits.Some of the challenges faced by NBFCs in getting funds are:
Regulatory restrictions: NBFCs have to comply with various regulations by the RBI and other authorities regarding their capital adequacy, liquidity, leverage, asset quality, governance, and disclosure. These regulations may limit their scope of operations, profitability, and growth potential.
Credit rating: NBFCs have to maintain a minimum credit rating to access funds from various sources such as banks, debentures, CPs, and foreign investors. A lower credit rating may increase their cost of borrowing and reduce their availability of funds.
Market conditions: NBFCs are exposed to market risks such as interest rate fluctuations, currency movements, liquidity crunches, and credit defaults. These risks may affect their ability to raise funds at optimal terms and conditions.
Competition: NBFCs face competition from banks and other financial institutions that offer similar or better products and services at lower rates. Rivalry emerges from fresh contenders like fintech enterprises, harnessing technology and innovation to upend the conventional financial landscape.
How have NBFCs contributed to the economic growth of the country?
The nation's economic progress owes much to NBFCs, as they have fostered growth by extending credit and financial access to demographics frequently marginalized or disregarded by traditional banking institutions. Several avenues through which NBFCs have nurtured economic advancement include:
Championing infrastructure advancement: NBFCs have assumed a pivotal stance in funding vital infrastructure endeavors encompassing roadways, energy, telecommunications, harbors, aviation hubs, and urban progress. NBFCs have provided long-term funds, flexible repayment options, and customized solutions to infrastructure developers and contractors. As per findings from ICRA, NBFCs commanded a substantial portion, accounting for 38% of India's overall infrastructure financing landscape by March 2019.
Promoting financial inclusion: Enabling financial inclusivity, NBFCs have ventured into rural and semi-urban regions, embracing the unbanked and underbanked populace. Through astute utilization of localized insights, customer rapport, and inventive distribution channels, NBFCs have extended budget-friendly and attainable financial solutions. These encompass microfinance, loans for small enterprises, housing, vehicles, and consumer needs. According to PwC's assessment, NBFCs commanded a substantial 70% stake in India's aggregate microfinance lending sphere by March 2019.
Fostering entrepreneurship and innovation: Fueling entrepreneurial spirit and novelty, NBFCs have infused capital into startups, SMEs, and MSMEs, entities ripe with exponential growth prospects yet hindered by insufficient collateral or credit lineage. Additionally, NBFCs have championed innovation by backing fintech enterprises employing technology to introduce enhanced financial offerings. According to KPMG's findings, NBFCs seized an 18% stake in India's comprehensive VC/PE investments landscape during the year 2019.
I trust this addresses your inquiries. Should you seek further information, don't hesitate to inquire. 😊