The All India Congress Committee (AICC) has, in effect, paid Rs 89.5 crore to Young Indian, a Section 25 company (meaning a not-for-profit one) controlled by party president Sonia Gandhi and her son, party general secretary Rahul Gandhi.

From the notes of accounts, it appears this sum has effectively given the mother-son duo control over real estate assets running into several hundred crores of rupees.

Sonia and Rahul own 38 per cent each in Young Indian; party seniors Motilal Vora and Oscar Fernandes own 12 per cent each.

FAMILY PARTY Associated Journals is a limited company, having shareholders. Motilal Vora, treasurer of the All India Congress Committee, is chairman;

Firm is formally in the business of publishing newspapers;

AICC had loaned Rs 90 crore to Associated, without interest. When it did so isn’t clear;

Young Indian was established as Sec 25 firm on November 23, 2010. Motilal Vora is also a board member of Young Indian, holding 12%

Associated’s board approved assignment of loan given by AICC on December 12, less than a month after Young Indian was registered, and by shareholders on January 21, 2011, a month after board approval and two months after Young India was incorporated;

It appears the shareholders, at the same EGM (Jan 21, 2011) had approved allottment of 90.2 million shares at Rs 10/share;

Board of AJ allotted 90.2 million shares to Young Indian on Feb 26, 2011. Resolution dated Feb 26 shows shareholders approved transfer of loan, as also issue of shares by extinguishment of loan, on same day;

Notes to accounts of Young Indian states objective of Young Indian. This does not include publishing a newspaper. Also, it says AJ is in the process of altering its object to align with the objects of Young Indian;

Shares worth Rs 5 lakh issued by Young Indian in 2011-12;

AICC accepted compromise for loan at Rs 50 lakh against the Rs 90 crore given, an effective writeoff of Rs 89.5 crore, but it seems AICC was not lucky even to get Rs 50 lakh cash from Young Indian, as latter is shown as having capital of Rs 5 lakh and loans of Rs 1 crore. Was there some benefactor who gave loan of Rs 1 crore or did AICC give loan to Young Indian to help pay off its own loan?

The notes to accounts for the year ended March 31, 2012, filed by Young Indian auditor Pradeep Shah and signed by directors Suman Dubey and Motilal Vora this April, give some clues on the actual structure of the transaction. “In pursuit of its objects, the company has acquired loan owed of Rs 90,21,68,980 by the Associated Journals, presently engaged in achieving a recast of its activities so as to have its main object congruent to the main object of the company, for a consideration of Rs 50 lakh,” the note said.

Thus, this transaction effectively has the effect of cleaning up the books of The Associated Journals (publishers of the now defunct National Herald daily, founded by Jawaharlal Nehru), wherein the entire liability is taken over by Young Indian.

Explanations

When asked, party general secretary Janardan Dwivedi (also the party spokesman) said, “Congress gave a loan to revive National Herald; it was launched in the fight against the British. It was the nation’s paper. The loan was not given to earn profit. Reviving the paper was an emotional issue for the Congress.”

Explaining the second and crucial leg of the transaction, the note added, “As part of the restructuring exercise of the said company (Associated Journals), the said loan was converted into 9,02,16,898 ordinary shares of Rs 10 each, fully paid up.”

Thus, effectively, Young Indian got shares worth Rs 90.2 crore by paying a meagre Rs 50 lakh.

By virtue of this shareholding, Associated Journals becomes a subsidiary of Young Indian.

The liabilities were paid out as an “interest-free loan” from the AICC.

On Sunday, Dwivedi claimed 700 employees had got their pay arrears due to the loan. By Janata Party president Subramanian Swamy’s estimates, even a firesale of Associated’s real estate assets would have covered the Rs 90 crore liability in the books several times over, settled all employees and still have given the shareholders of Associated handsome returns.

But, the directors of Associated thought it fit to use these resources for development of the objects of Young Indian.

Dwivedi’s reiterated defence on the “interest-free loan” to Associated Journals was: “It is an emotional issue for us...only Congress will decide what is political activity for it and no other party.”

While helping employees and getting emotional is permissible, the accounting treatment of the transactions is a little unusual, said experts. Ideally, both the liability acquired and the value of the shares would reflect in the books of Young Indian. This treatment is a bit different.

The books of Young Indian show the 90.2 million shares it owns in Associated Journals under the investments column. But it does not show any value against this. There is just a dash in the value column.

The notes to accounts explains this treatment as follows: “Since the said acquisition is treated as application on the objects of the company(and accordingly, treated in the financial statements of the company), the same has not been as an investment in shares.”

The note goes on to add: “Besides, even if these shares were to be treated as an asset (investment), having regard to the fact that the net worth of the said company is negative, recognising the entire cost as diminution in value would result in an equivalent charge in income and expenditure account.”

Elsewhere, the note says, “Any outflow designed to fulfill the objects of the company, whether or not represented by an asset, is treated as application on the objects of the company.”

Issues

What are these “objects” of Young Indian that the notes refers to again and again? There is an answer to this, too.

“The company is engaged in activities to inculcate in the mind of India’s youth commitment to the ideal of a democratic and secular society and provides for application of its profits or income in pursuit thereof.”

But somehow the objects skips the original object of Associated Journals — that of publishing newspapers. Was that intentional? Or was it just an emotional slip?

What’s a Section 25 company?

A Section 25 company is a not-for-profit entity registered with a specific objective. These are companies formed with the only purpose of promoting commerce, art, science, religion, charity or any other useful objective.

The ministry of corporate affairs’ website maintains a list of Section 25 companies, which at present are estimated at 3,350.

A Section 25 company has to be granted a licence by the Registrar of Companies. It does not have to pay any dividend to its shareholders. Any surplus from its operations is ploughed back into the company and deployed towards achievement of stated objectives.

Some of the common Section 25 companies are non-government organisations (NGOs) and entities engaged in CSR activities.

Section 25 companies cannot be listed on exchanges, as there is no profit or dividend.

Section 25 companies also enjoy several exemptions. Unlike the minimum capital requirement of Rs 1 lakh for private companies and Rs 5 lakh for public companies, a Section 25 company does not have to meet any minimum capital requirement. It also pays lower registration fees. Nor does it pay stamp duty and a company can be a member of a Section 25 company.

Section 25 companies are also exempted either fully or partially from the requirement of voting methods for resolutions, retirement of directors by rotation and government approval for increasing the number of directors beyond12.

Such companies cannot obtain foreign contributions without seeking a certificate of registration under the Foreign Contribution (Regulation) Act (FCRA) from the Home Ministry. They are required to use foreign contributions only for the purpose for which they are received. Norms for foreign investment in Section 25 companies are governed under the Foreign Exchange Management Act and FCRA.

The income of a Section 25 company is taxable and it generally enjoys all the advantages of a limited company under the Companies Act.