Companies-Act

This article is written by Gautam Badlani. It provides a detailed analysis of the National Herald case. This article explains all the legal developments concerning the National Herald case, along with the timeline. The article also explains all the provisions of the Companies Act and the Code of Civil Procedure that are relevant to the National Herald case. 

It has been published by Rachit Garg.

Introduction

Corruption in public and government offices has become very rampant in the past few decades. It has become difficult to keep a check on these corrupt activities. Public money is circulated through fraudulent transactions and it is transferred through various modes so that the original source becomes untraceable. 

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Many corruption scams have come to light in the past few years which shook the conscience of the country. Even when the scams are uncovered, the authorities and courts are helpless as they are unable to trace back the misappropriated funds. Political parties engage in finger-pointing and try to shift the blame for the incompetence in the system to each other. One such scam is the National Herald case. 

Background of the case

The Associated Journals Limited published three newspapers. The National Herald was published in English, Navjeevan in Hindi and Quami Awaz in Urdu. The National Herald was started in 1938 by the former Prime Minister Jawaharlal Nehru and it became a mouthpiece of the Congress Party against British Rule.

The newspaper was widely read by the Indians and due to its popularity, it was banned by the Britishers during the Quit India Movement. Even after independence, the newspaper served as the mouthpiece of Congress leaders such as former Prime Minister Indira Gandhi. 

However, Associated Journals stopped publishing the National Herald in 2008 due to financial losses. The publication of other 2 newspapers was also stopped. The company entered into a read estate business and acquired properties in Lucknow, Mumbai and Delhi. 

Attempts were made by the Congress party to revive the newspapers. The Congress extended interest free loans to the company out of the party funds. Around 90 crores were lent to the company. Young India, a private company, was incorporated by Congress leader Rahul Gandhi in the year 2010. Young India bought the loan granted to Associated Journals. After purchasing the loan, Young India demanded equity shares of Associated Journals for settlement. Subsequently, a resolution was passed by the Congress Committee for the allotment of equity shares of Associate Journals to Young India. 

However, the allotment of equity shares became controversial because the Associated Journals had assets worth more than 90 crores and the loan could have been paid off by selling the assets. There was no need to allot the equity shares. It was alleged that the equity shares and ownership of Associated Journals was sold to Young India at a very low price. 

Another issue that arose out of the deal was that the Congress Party, being a political party, is legally prohibited from entering into commercial transactions. Political parties are governed by the provisions of Representation of the People Act, 1951 which clearly stipulates that a political party cannot offer interest-free loans to any commercial enterprise. However, the Congress defended the transactions by stating that the transactions were merely for the revival of the historical newspaper and were not meant for commercial gains. 

An overview of Associated Journals Limited (AJL)

Associated Journals Limited, a non-governmental agency, was incorporated in 1937. It is engaged in the business of publishing and printing and also manufactures various types of paper products. It is a not for profit company and does not pay any dividends to its shareholders. 

The registered office of the company is situated in Delhi. The office is situated at Herald House, New Delhi. The AJL was started by around 5000 freedom fighters to be a mouthpiece of the freedom movement. These freedom fighters were the first shareholders of the company. Former Prime Minister Jawaharlal Nehru had signed the Memorandum of Association of AJL. The company publishes the National Herald in English, the Navjeevan newspaper in Hindi and the Quami Awaz in Urdu

Young India 

Young India, a private company incorporated in the year 2010 by Rahul Gandhi, is a company limited by guarantee. Rahul Gandhi became a Director of the company in 2010 while Sonia Gandhi joined the Board of Directors in 2011. Collectively, the Gandhis own nearly 76% of the company’s shares and the remaining 24% are held by Oscar Fernandex and Moti Lal Vohra. Both own 12 percent shares. The Directors have often defended Young India’s transactions with AJL by stating that the company is a not-for-profit company and the transactions undertaken by it did not have any commercial purpose. 

Section 8 of the Companies Act 

Young India was incorporated under Section 25 of the Companies Act, 1956. Section 8 of the Companies Act, 2013 is the corresponding provision of Section 25 of the 1956 Act. 

Section 8 governs incorporation of companies for charitable purposes and states that any persons or group of persons can register as a company  under this section if it fulfils the following conditions: 

  • It promotes art, commerce, science, sports, social welfare or any other similar purpose or
  • It uses its income for the promotion of such purposes
  • It prohibits the payment of dividends to its shareholders. 

A company incorporated under Section 8 enjoys the same privileges and powers which are vested in a limited company. However, a Section 8 company cannot amend or modify its Memorandum of Association without the prior permission of the Central Government. 

It is pertinent to note that a company which is registered under Section 8 can only merge or amalgamate with another company registered under this Section. If a company registered under Section 8 fails to fulfil the obligations enumerated in this Section, then such a company can be punished with a fine of 1 crores. Moreover, the Directors of such defaulting companies can be punished with a fine of 25 lakhs. 

An existing company may also register under Section 8 if the Central Government is satisfied that the company fulfils the conditions of registration under Section 8. In such cases the Central Government facilitated the registration of the existing company by granting a licence of registration under Section 8. The Central Government may also revoke the licence or registration granted under Section 8 if the company contravenes or fails to fulfil the obligations provided under this Section. Moreover, the licence may also be revoked if the affairs of the company are conducted in a manner which is prejudicial to the interests of the general public. 

Allegations of corruption and the investigation 

In 2012, allegations of corruption were made by Subramaniam Swamy against the leaders and officials of Young India and Indian National Congress. Subramaniam Swamy is a Member of Parliament and a political leader. He alleged that properties worth 2000 crores belonging to AJL were transferred for a nominal amount of 50 lakhs. He pleaded that the transfer was made at the behest of the Directors of Young India. Swamy alleged that the Gandhis, who are the major shareholders of Young India, used Young India to fraudulently acquire the assets and properties of AJL. 

The All India Congress Committee authorised Rs. 90 crore loan to be written off for the equity transaction of 50 lakhs. Swamy contended that the loan was written off for such a disproportionate transfer because the assets of AJL had been misappropriated under the veil of the equity transaction. Allegations of corruption were made against the Gandhis, Sam Pitroda and Saman Dubey. They were accused of cheating, criminal breach of trust and misappropriation of funds. 

The Income Tax Department initiated investigation against the accused persons on the basis of the complaint by Swamy. The Department found that Rahul Gandhi had not disclosed that he was the Director of Young India during the 2011-12 income tax assessment. Thus, he concealed his real income from the Department. The Income Tax Department could not assess the actual liabilities of the Gandhis due to the non-disclosure of material facts relating to Young India. 

The Enforcement Directorate (ED) also started investigation against the Gandhis on the basis of the complaint filed by Swamy. The ED was investigating financial irregularities in the management of Young India. Proceedings were initiated under the Prevention of Money Laundering (PMLA) Act of 2002 against the Gandhis and other officials of Young India. The ED also issued summons to the Gandhis. 

In the course of its investigation, the ED sealed multiple offices of Young India located in Delhi, Mumbai and Lucknow. The ED also attached National Herald’s properties located in Gurugram. The Gurugram properties were worth nearly Rs. 64 crore. The properties were attached under the provisions of the PMLA Act. In 2020, the ED attached the Mumbai properties of National Herald which are worth nearly Rs. 16 crores. 

Criminal litigation

Income Tax Act

The All India Congress Committee had given a loan to Young India. It is pertinent to note that, as per the Income Tax Act, 1961, a political party cannot enter into a financial transaction with a third party. One of the contentions raised by Subramaniam Swamy was that the All India Congress Committee had violated the provisions of the Representation of People Act, 1951, and the Income Tax Act, 1961, by advancing the loan to Young India. 

Section 13A of the Income Tax Act provides that a political party can only receive voluntary contributions. Section 29A of the Representation of People Act defines a political party as any group or association of persons identifying as a political party and registered with the Election Commission of India. 

Accused persons

The persons accused of corruption and fraud in the National Herald case include Rahul Gandhi and Sonia Gandhi, who jointly own 76% of Young India’s shares. Besides the Gandhis, Motilal Vohra, who was the treasurer of the Congress party at the time when the stock of AJL was transferred to Young India, was also charged with corruption and criminal misappropriation. Motilal Vohra was also the managing director of AJL in 2003. Other accused persons include Oscar Fernandes and Saman Dubey. 

Court proceedings

Trial Court

On the basis of the complaint filed by Subramaniam Swamy, the Delhi Metropolitan Magistrate summoned the witnesses and recorded the arguments. The Court took on record the evidence produced by both the sides and issued summons to Sonia Gandhi and Rahul Gandhi.  

On the basis of Swamy’s complaint, an investigation was also initiated by ED. The Patiala House Court, Delhi granted unconditional bail to all the accused in the Herald case in 2015.

Subsequently, in 2018, Swamy filed an application requesting the Court to take additional evidence on record. The application was filed under Section 91 of the Code of Criminal Procedure, 1973. Section 91 empowers the Courts and officers in charge of police stations to summon witnesses and direct them to produce documents. It thus regulates the power of the Courts to take evidence on record. 

In 2021, another application was filed by Swamy before the Trial Court praying for the admission of additional evidence. This application was also rejected. Swamy approached the Delhi High Court against the decision and pleaded that he was entitled to submit additional evidence under Section 244 of the Code of Criminal Procedure (CrPC). Section 244 deals with the power of the Magistrate to take on record the evidence produced by the prospection. 

High Court 

The summons issued against the Gandhis by the ED were stayed by the High Court in July 2014. The Gandhis had filed a suit before the Delhi High Court praying for the quashing of the proceedings initiated against them by the ED. While the High Court stayed the summons, it refused to quash the proceedings against them. The High Court observed that the investigation by the ED did not appear to be politically motivated. Thus, the Trial Court continued with the proceedings. 

The High Court, while refusing to quash the proceedings, also made certain observations on the merits of the case. The Court pointed that the allegations prima facie indicated towards fraudulent transactions and should be carefully examined. The Court found that there were certain elements of misappropriation present in the financial deals between Associated Journals Limited and Young India. 

Supreme Court

After the High Court refused to quash the proceedings, the Gandhis filed a petition before the Supreme Court of India, praying for the quashing of the proceedings. 

The Supreme Court refused to quash the proceedings against the Gandhis and 5 other political leaders. The Court asked the political leaders to raise their contentions before the Trial Court. 

The Court, however, did grant some relief to the Gandhis. It expunged the observations made by the Delhi High Court on the factual matrix of the case. The High Court’s view regarding the criminal intent of the accused was also expunged. Moreover, the Supreme Court also exempted the accused from making personal appearances before the Magistrate. 

Eviction of AJL published 

In 2018, the Land and Development Office passed an order for the eviction of AJL from the ITO office in Delhi under the Public Premises Act, 1971. The Land and Development Office stated that since no press had been functioning in the office for the past 10 years, the AJL was to be evicted from the premises. The premises were being used by AJL for commercial purposes, which was a violation of the terms of the lease deed. The perpetual lease had been granted to AJL in 1962. The Central Government issued an order revoking the lease granted to AJL. 

AJL approached the Delhi High Court against the eviction order. In February 2019, the High Court dismissed the petition and refused to stay the eviction order. The decision of the single bench was upheld by the division bench. The High Court was of the view that the acquisition of AJL’s shares by Young India was a surreptitious transfer made to serve the lucrative interests of Young India. 

Subsequently, AJL approached the Supreme Court. AJL pleaded that the ITO premises were being used for publishing the digital version of National Herald, Navjivan and Qaumi Awaz. In April 2019, the Supreme Court stayed the eviction order. The Court also stayed further proceedings against AJL under the Public Premises Act. The Court stated that it will have to examine whether the transfer of shares of AJL to Young India constituted a violation of the lease terms and it could uphold the eviction order only after the issue was determined. 

Charges framed

The Delhi Metropolitan Magistrate had found that seven persons were prima facie guilty of offences under Sections 403, 406, 420 and 120B of the Indian Penal Code (IPC). 1860. Young India was also one of the seven accused. The Court had found that these persons had taken part in a criminal conspiracy to unlawfully acquire the property of AJL. 

Section 403 of the IPC deals with dishonest misappropriation of property. If a person dishonestly misappropriates any moveable property or dishonestly converts such property to his own use, then he can be punished with up to 2 years of imprisonment and/or fine. The accused persons had allegedly misappropriated the property of AJL.

Section 406 of the IPC provides that a person committing a criminal breach of trust shall be punished with up to 3 years of imprisonment and/or with a fine. When any person is entrusted with a property or any other thing and the person converts or uses the property in a dishonest and unlawful manner, it is known as a criminal breach of trust. 

Section 420 of the IPC deals with cheating. It provides that if a person cheats and dishonestly induces another person to transfer, or to destroy or alter any valuable thing, he would be punishable with up to 7 years of imprisonment and with a fine. It is pertinent to note that Section 420 is more stringent than Sections 403 and 406. Section 420 mandates both imprisonment as well as a fine for the offender, while Sections 403 and 406 leave it at the discretion of the court to impose either imprisonment or a fine or both, depending on the circumstances of the case. 

Section 120B of the IPC deals with the offence of criminal conspiracy. It provides that a person who criminally conspires to commit any offence punishable with death or with imprisonment for 2 years or more, including imprisonment for life, shall be punished as if he abetted the offence. For conspiring to commit any other offence, the conspirator shall be punishable with up to 6 months of imprisonment, a fine or both. 

Attachment of properties by ED

In November 2023, the Enforcement Directorate attached properties worth Rs. 751 crores in connection with the National Herald case. The ED had issued a provisional order against AJL and Young India. The National Herald’s office premises in Delhi, the Herald House in Mumbai and Nehru Bhawan near Kaiserbagh in Lucknow were attached by the ED. 

Claims made by ED

The ED claimed that Young India possessed proceeds of crime worth more than 90 crores in the form of equity investments in AJL. The ED claimed that first properties worth crores were given to AJL at concessional rates for the purpose of publishing its newspapers. However, in 2008, AJL stopped the publication of the newspaper and used the land for commercial purposes. 

AJL owed a loan of over 90 crores to the All India Congress Committee but this was treated as non-recoverable and the loan was sold by the Committee to Young India for a mere sum of Rs 50 lakhs. The ED claimed that this sale was illegal as Young India did not have any source of income from which it could pay 50 lakh rupees to the All India Congress Committee (AICC). Through the sale, the office bearers of AJL and the AICC had cheated the shareholder of AJL. 

After the sale of the loan, Young India demanded that either the loan be repaid by AJL or the shares of AJL be issued to Young India. Subsequently, AJL passed a resolution increasing its share capital. The resolution was passed at an extraordinary meeting. Shares of AJL were issued to Young India and AJL became a subsidiary of Young India. 

Questions over the attachment 

Several questions were raised about the legitimacy of the attachment made by the ED. The attachment was made on the basis of a provisional order made by the ED under the provisions of the Prevention of Money Laundering Act. However, under the Money Laundering Act, ED can act only on the basis of a predicate offence. However, since the alleged proceeds of crime were not established to be in Young India’s possession, a predicate offence was not clearly made out. 

Stand of Congress Party

The Congress Party denied all the allegations made by the ED. It stated that the transactions between Young India and AJL were mere commercial transactions, and there was no cheating or fraud involved in them. 

The party also questioned the locus standi of Subramaniam Swamy to file the complaint against Young India. The ED had acted on the basis of the process initiated on Subramaniam Swamy’s complaint. However, the party stated that Subramaniam Swamy was not aggrieved by the transaction in any manner and allegations of fraud and cheating could only be raised by an aggrieved person. 

Conclusion

The National Herald case has been heard at various forums including the High Court and the Supreme Court. However, no proper remedy has been provided to the shareholders of AJL. The aggrieved shareholders have been waiting for years to recover their money. Evidence is being recorded by the Trial Court and it is still unsure whether Swamy has the locus standi to challenge the legality of the transactions between AJL and Young India. 

Such inordinate delays shake the foundation of the public trust in the administration of justice. Special courts should be set up to investigate large-scale scams involving public funds and corporate frauds. The Special Courts should be presided over by experts in the field of corporate and commercial transactions. 

Frequently Asked Questions (FAQs)

What are some of the biggest corruption scams in India?

Some of the biggest corruption scams are

  • 2G Spectrum case: In this case, the 2G Spectrum was allotted to selected private corporations at very low prices. The allotment price was below the market price. In Union of India v. Centre (2012), the Supreme Court of India held that the 2G Spectrum allocation had several irregularities and thus was illegal. The Comptroller and Auditor General of India reported that the value of the 2G Spectrum was more than 1.7 crores. This scam was widely reported by national and international media. 
  • Coal scam: In this scam, various irregularities were discovered in the allotment of Coal blocks by the government. The Central Bureau of Investigation was entrusted to investigate the case and it framed charges against the public officials under the Prevention of Corruption Act. A Special CBI Court conducted the trial and found the former coal secretary to be guilty. The coal secretary was sentenced to 3 years of imprisonment. 

The coal scam had major repercussions for the Indian coal industries. Due to the scam, investors were unwilling to invest in the Indian coal industry. Resultantly, the dependence on coal imports increased and the domestic industry suffered heavy loses. 

Who published the National Herald Newspaper?

The National Herald newspaper was published by Associated Journals Limited. However, the company stopped publishing the newspaper in 2008 due to losses. Attempts were made to revive the newspaper by starting digital publication in 2016. 

References

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