LIC-Mundhra Scam: Independent India’s First Mega Financial Scandal

The excitement and tension was palpable when Feroze Gandhi got up to speak in the Lok Sabha on 16th December 1957. He threw a quick glance around him and saw Finance Minister Tiruvellore Thattai Krishn­a­machari, popularly known as ‘TTK’, squirm in his seat. Gandhi’s father-in-law, Prime Minister Jawaharlal Nehru, sat impassively.

Feroze Gandhi was all set to speak on a special debate on what came to be known as the ‘LIC-Mundhra Scandal’, independent India’s biggest financial scam, although not its first. The scandal raised a lot of dirt on the Nehru government and led to the resignation of Finance Minister T T Krishnamachari.

As the debate began, Gandhi took a deep breath and began firing on all cylinders.

“There would be some sharp shooting and hard-hitting in the House today. Because when I hit, I hit hard,” Gandhi said. He looked at TTK and continued, “A fellow member has told me that the Finance Minister’s statement was well-fortified. Let me see if I can breach the ramparts at the very first shot.”

And he did breach TTK’s defence. During his long speech, Gandhi tore into the minister’s arguments. But there were few on the treasury benches who weren’t swayed by Gandhi’s powerful oratory and powerful arguments.

One Congress member challenged him, saying, “Your allegations are based on newspaper reports. Do you have evidence?” Gandhi’s response stunned the House. He said he had in his possession confidential correspondence between TTK and the Finance Ministry’s Principal Secretary H M Patel, and he was ready to put the letters on the table of the House.

Nehru didn’t want to believe Gandhi but he had little or no choice. Gandhi had the skill of a consummate investigative journalist to collect and analyse facts. His debating skills were extraordinary. And he was brutal and unsparing when he questioned people in power, including his father-in-law.

So convincing was Gandhi’s arguments that Nehru, while praising the “majesty of Parliament”, ordered a commission of inquiry headed by eminent jurist M C Chagla into the Mundhra affair.

The Mundhra scam, in a nutshell, was about how the Life Insurance Corporation of India (LIC) was manipulated into buying shares worth a little over Rs 1.26 crore (Rs 1,26,86,100), of companies owned by a Calcutta-based businessman Haridas Mundhra.

Mundhra was a nobody from nowhere but he had a very agile mind. He would manipulate the stock market to acquire control of British companies vulnerable for takeovers and then use the cash reserves of these companies to buy out the next company, bankrupting them one after the other.

He used Jessops Engineering’s money to buy shares in British-India Corporation, a Kanpur- based textile giant; then British-India Corporation shares to buy another Engineering firm, Richardson & Cruddas; and then Richardson & Cruddas shares to buy Turner Morrison & Co and so on. When his Ponzi scheme was running out, he looped in Congress bigwigs and the LIC to buy out his shares in companies he had already sucked dry.

Mundhra was eventually convicted of fraud and sentenced to 22 years in prison. Thanks to his political influence, he was released after just 3 years.

– The LIC-Mundhra scam was executed soon after the corporation was nationalised in 1956. The LIC had acquired Mundhra’s shares at a price higher than the market price.

Besides, the shares had not been purchased in the open market but in a private transaction. Even worse, the shares had changed hands on a day when both the Bombay and the Calcutta Stock Exchanges were closed.

It turned out that the Finance Ministry and LIC officials had met with Mundhra in a Delhi hotel on a Sunday to hurriedly finalise the deal. Mundhra artificially hiked the prices of his shares by 30 to 40 per cent, once he was assured that the LIC would invest in his companies.

News of the Scandal Breaks

The scandal came to light when The Statesman on 3rd August 1957 carried a report on the LIC’s investments in Mundhra’s companies. The matter, perhaps, wouldn’t have generated so much heat had two enterprising Congress MPs – first Dr Ram Subhag Singh and later Feroze Gandhi – not taken up the issue with the zeal of a crusader against what they felt was a brazen case of corruption.

On 4th September 1957, Ram Subhag Singh’s question on the LIC’s investment in the Mundhra firms came up in the Lok Sabha. It was an Unstarred Question, which is asked and answered only in writing and no supplementary questions are allowed.

Drawing the attention of the Finance Minister to The Statesman report, which said the LIC had invested a sum of over Rs 1 crore ‘in a private enterprise with its headquarters in Kanpur’, Singh wanted to know:

(a) The name of the private enterprise in which these (LIC) funds had been invested

(b) The total amount invested so far

(c) The reasons for investing the funds in a private enterprise

Deputy Finance Minister Bali Ram Bhagat answered the question, saying, “It is understood that the Life Insurance Corporation has not invested, as stated in the report referred to, Rs 1 crore in any single private enterprise with headquarters in Kanpur.”

The minister was intentionally vague in his response. As it often happens, the answers to MPs’ questions are prepared by the relevant ministries, which use technical loopholes to offer vague replies to uncomfortable queries, to save the government from embarrassment.

The fact was that the LIC had invested over Rs 1.25 crore in several Mundhra’s companies and only one of the companies had its headquarters in Kanpur. The minister was technically correct, as the LIC had invested in several companies, not just one. Since no supplementary was put, the minister got away with the misleading reply.

– What the Finance Minister didn’t take into account was that the MPs on the scent of the scandal were some of the best parliamentarians of all time.

Singh, an MP from Bihar, had a PhD in Journalism from the Missouri School of Journalism. He was joined by Feroze Gandhi, who had exposed several cases of corruption, in and outside Parliament.

Gandhi’s painstaking investigation had exposed the prominent industrialist Ramakrishna Dalmia’s involvement in siphoning off funds collected as a premium for his insurance company. Dalmia was later sentenced to jail.

In dogged pursuit, Singh asked a fresh question on 29th November 1957. He and Gandhi had come well prepared to grill the minister. Swedish journalist and author Bertil Falk in his book Feroze: The Forgotten Gandhi (2016) has mentioned how Gandhi’s interest in the Mundhra scandal began.

As Ram Subhag Singh was grilling the Finance Minister, Gandhi, sitting on a bench behind, noticed that TTK’s legs began to shake while he answered the question.

Gandhi whispered to H C Heda, a Congress MP from Andhra Pradesh, who sat near him across the aisle.

Gandhi (to Heda): Why are TTK’s legs shaking?

Heda: I can’t see his legs, but it could be that this is a deal where something has happened.

Gandhi: Some scandal is there. Let us take interest!

During his answer to the Lok Sabha special debate, TTK conceded the LIC had invested in firms owned by Mundhra. However, he claimed that all investment decisions were taken by a LIC committee and the government had no role to play. Gandhi demanded that the government put all relevant matters on the table of the House, to which the minister agreed.

Web of Lies Exposed

The appointment of the Chagla Commission was a major victory for Gandhi and Singh, who had pursued the LIC-Mundhra deal to its logical end. The Commission’s findings nailed the alleged lies of the Finance Minister and exposed the politics-business nexus at the highest levels in the government.

The Commission said in its report: ‘It would be clearly wrong for the corporation (LIC) to utilise its funds to help an individual or the concerns of an individual. It would be even more wrong for the corporation to deal with an individual who was suspected to be a lawbreaker and possessed a doubtful financial reputation and whose antecedents were of a most questionable character.”

Indicting Mundhra further, the Chagla Commission said, “Mundhra is a man who has a flamboyant personality and is a financial adventurer whose only ambition is to build up an industrial empire by dubious methods. He is not an industrialist in the real sense of the term. His interest does not lie in developing or enlarging the industrial output of the country, but his interest lies in being a financial wizard who can swallow up concern after concern. The record makes it perfectly clear that all that I have just said about Mundhra and more was known to the finance ministry.”

The Commission’s report also noted that TTK, who was earlier Union Commerce Minister, had himself warned previous Finance Minister C D Deshmukh about the dubious activities of Mundhra and had called for tightening of the Companies Act.

D L Mazumdar, Secretary, Ministry of Finance, Company Law Administration, told the Commission that the government had information about Mundhra’s activities from 1954 onwards. Nehru too knew about Mundhra, had warned the commerce and finance ministers about him, and asked them to examine what this “new star” was up to.

The Chagla Commission noted that, constitutionally, the minister was responsible for the action of his secretary with regard to the LIC transactions. “It is clear that the minister must take responsibility for actions done by his subordinates. He cannot take shelter behind them, nor can he disown his actions.”

– Following the Chagla Commission’s report, TTK submitted his resignation on 18th February 1958. The Finance Ministry’s Principal Secretary H M Patel and LIC Chairperson K R Kamath also resigned.

Mundhra was arrested from his luxury hotel suite at The Claridges in New Delhi.

Congress In Quid Pro Quo?

In 1958, the government appointed a Board of Enquiry headed by Justice Vivian Bose to investigate the charges against Finance Ministry officials. Justice Bose made a startling disclosure, that LIC’s investments were made in return for Mundhra having donated Rs 1.5 lakh to the Uttar Pradesh Congress and Rs 1 lakh to the central Congress party on the eve of the 1957 elections.

Ridiculing the findings, Nehru questioned the “intelligence” of Justice Bose, which led to a furore, forcing the Prime Minister to tender an apology.

Nehru was unhappy with TTK’s resignation. He wrote to TTK saying, “Despite the clear findings of the Commission so far as you are concerned, I am most convinced that your part in this matter was the smallest and that you did not even know what was done.”

Strangely, a confidential inquiry conducted by Intelligence Bureau chief B N Mallik gave a clean chit to TTK, and Nehru reappointed him as Finance Minister in 1962. Ironically, and in another twist, H M Patel was appointed as the Finance Minister in the Janata Party government headed by Morarji Desai in 1977.

In times when scams running into billions of rupees are dime a dozen, the Mundhra scandal involving a relatively tiny sum of Rs.1.26 crore appears quite insignificant. But it was not the sum that determined the enormity of the fraud. This Nehru-era scam was independent India’s first major financial fraud and one involved senior bureaucrats and politicians. It was also the forerunner of the mega-scams of later years.

Mundhra’s calculated plan to manipulate the stock market, high-level bureaucracy and top politicians to bail him out of financial problems at the expense of the taxpayer bears an uncanny resemblance to financial scams of later years. Haridas Mundhra had a meteoric rise. He built a network of companies within a matter of years in the 1950s, using his contacts in the Congress party and in the top echelons of the government. He was a corporate raider of the 1950s.

The Mundhra scandal is also a lesson for students of contemporary parliamentary politics. Ruling party MPs today wouldn’t dare ask embarrassing questions of the government, let alone expose wrongdoings within the establishment.

During the Nehru era, there was a culture in the Congress that gave ruling party members the freedom to freely and fearlessly question the government not seen since. Feroze Gandhi was the epitome of that culture. And Mundhra was an early symptom of the malaise that continues to corrode the financial system and the polity.

This article is part of our special series the ‘Making of Modern India’ through which we are focussing on the period between 1900-2000. This century saw the birth and transformation of India. This series aims to chronicle India’s exciting journey and is a special feature brought to you by LHI Foundation.