Exclusive: De La Rue recovery suit shows Modi govt took more than a year to flag concerns

The case in which former finance secretary Arvind Mayaram has been served a 'show-cause' by the Department of Personnel and Training is likely to put both UPA and NDA governments in the dock.

While the UPA appears to have given a Rs 11 crore contract to the tainted British firm, De La Rue in 2013, NDA waited for more than a year before flagging concerns over the supplied product's quality in 2016.

Earlier this year, the Union government's Security Paper Mill (SPM) in Madhya Pradesh's Hoshangabad had slapped De La Rue with a recovery suit worth over Rs 11 crore and a future interest at 16.75% per annum.

The suit concerned the supply by De La Rue of a key security component for use in Indian currency notes. The component, “exclusive India specific, color shift clear text Security Thread for use in Indian bank note paper”, was allegedly faulty.

According to the suit, a copy of which is with Catch, SPM found two major defects -

• Missing text on the thread – the text “RBI Bharat” was missing or “not written completely”.

• Red Color strips of around 50mm length could be seen at the “back side” of the security thread, which should not have been there.

The time-line of the case indicates that the agreement for the order was signed during UPA's tenure in October 2013, the order itself was placed in December 2013 and the supply received in three installments over eight months stretching across the UPA's last days and the NDA's early months.

The shipments were received in April, August and December 2014.

De La Rue admitted defect, denied liability

SPM conveyed the defects to De La Rue in February 2016 following which the firm's technicians visited the SPM, inspected the security thread and acknowledged the defects. However, a week later the firm outright denied any liability on its part. Several rounds of communication took place between the two parties and the resistance shown by De La Rue made the SPM eventually order for further inspection of “the remaining goods”. Two more major defects were identified –

• “The metallic coating was missing and brown/black patches were seen at places on the reverse side of the security thread.”

• “Significant deteriorations were observed with respect to fluorescence under UV light when the threads were treated with prescribed lab chemicals.”

After this was conveyed to De La Rue, the firm sent representatives to SPM again in August 2016.

Upon inspection, they admitted that the defects were from their side and that the storage conditions at SPM were not at fault. However, the firm once again wrote to SPM in October attempting to shrug off its liability.

Cornered, De La Rue made an offer to SPM

In its letter dated 3 October 2016, De La Rue allegedly offered to supply “a quantity of the thread free of charge” as a 'goodwill gesture'.

However, SPM turned the offer down, calling it “unacceptable” and evidence of the firm's “malafide intention to circumvent the payment of refund”. SPM eventually filed a legal notice against the firm on 7 February 7, 2017, calling for a refund.

De La Rue replied to the notice about two weeks later and repeated its arguments, forcing SPM to eventually file a recovery suit in the court of the Hoshangabad District Judge.

The prayer in the suit was to order the firm to pay SPM a sum of Rs 11,14,68,300 and/or future interest on that amount until the litigation goes on and cost of the proceedings and litigation charges.

Questions for UPA

A question asked by a CPI(M) MP in Rajya Sabha in 2011 had made the UPA government reveal that De La Rue had been denied security clearance in 2010.

The then Minister of State in the Finance Ministry, Namo Narain Meena, had told the MP, P Rajeev, that “during July-August 2010, it came to the notice that the paper being supplied by De La Rue was not conforming to some of the prescribed specifications. The supply of the paper was 'suspended' and security clearance was denied to De La Rue',” Meena added.

If the Union government denied security clearance to De La Rue in 2010, how is it that an arm of the same government entered to an agreement with the same firm in 2013?

Was the denial of clearance only for notes and not for any other product like security thread?

If the latter is the case, how did the UPA government justify the same?

It is quite likely that Mayaram has been served the show-cause to explain exactly these queries.

Questions for NDA

If the SPM received the last of three shipments of the security thread in December 2014, how is it that the mill flagged defects only in February 2016, over a year later?

This is one of the critical arguments made by De La Rue in defence of its decision to reject the reimbursement demand. In the company's response to SPM's legal notice, sent on 28 February 2017, its lawyer clearly states that the terms and conditions of sale had made it clear that “any claims arising from the goods must...reach De La Rue within sixty days of delivery”.

Since SPM did not raise any concerns within the stipulated period, the firm denied any liability for any claims.

Since the signatory to the original agreement was the Reserve Bank Of India, it will also be interesting to look at the role of the RBI Governor throughout this period, Raghuram Rajan. Rajan was in office from September 2013 to September 2016.

Edited by Jhinuk Sen