Experience tells us that once the Joint Parliamentary Committee (JPC) submits its report, the investigation into irregularities fizzles out. And although a scam investigation leads to some regulatory changes, key individuals invariably manage to get away unscathed. The Action Taken Report (ATR) released last week proves this. It also shows that regulators are increasingly confident that nobody will read the ATR and that members of Parliament are far too fragmented and biased to pursue their inaction, fudging and sleight of hand.
But let’s look at all that has been achieved in the last six months. The Securities and Exchange Board of India (Sebi) and the Department of Company Affairs (DCA) have initiated prosecution against brokers, vanishing companies, and companies owned by Ketan Parekh (KP) and Sebi has debarred scores of individuals and intermediaries from the capital market.
The DCA has shocked the corporate sector by going beyond the recommendations of the Naresh Chandra and other committees in trying to protect investors through the Companies Act (Amendment) Bill 2003. This has led to predictable yelps of protest from the corporate sector, but full marks to the DCA for its effort to cut the misuse of funds through subsidiaries, price manipulation etc. Also, like with the Sebi Act, violations of the Companies Act will lead to stiffer penalties and prison terms. What we need to see is whether DCA has the courage to complete investigations in time and actually punish powerful corporate offenders.
Having said that, the ATR 2003 is a strange document. It is an amalgam of reports submitted by different regulators and investigative agencies, without any effort by the finance ministry to evaluate their claims. All the regulators have simply glossed over the JPC’s indictment of their supervisory failure. While Sebi has at least agreed to investigate the role of its officials in the Calcutta Stock Exchange (CSE) payment crisis, the Reserve Bank of India (RBI) seems to think that its supervision is adequate and is not meant to detect deliberate fraud by bankers and intermediaries.
It is glaringly obvious that the ATR takes its cue from the JPC, which avoided investigating the role of companies. Regulators have come up with remarkable explanations for letting off all companies that were in cahoots with KP, with the most brazen sleight of hand to avoid indicting companies comes from Sebi.
The JPC had recorded 15 companies and their promoters as ‘suspected’ of having links with KP or involved in price manipulation. They were: Zee Telefilms, Himachal Futuristic, Global Telesystems, Global Trust Bank, DSQ Group, Silverline Technologies, SSI Ltd, Satyam Computers, Aftek Infosys, Ranbaxy, Lupin Laboratories, Pentamedia Graphics, Shonkh Technologies, Padmini Technologies and Adani Exports. Sebi’s reports to the JPC mentioned Maars Technologies, Mascon Global, Mukta Arts, Tips Industries, Balaji Telefilms, Kopran, Nirma and the Cadilla group.
The JPC has said that it has “valid reasons to believe that corporate house-broker-bank-FII nexus played havoc in the Indian capital market for quite sometime now through fraudulent manipulations of prices at the cost of the small investors”. It also said that this issue was particularly significant because it had also figured in the JPC report of 1992. The ATR’s response is a bland — “Sebi is looking into the matter”.
Worse yet is its reaction to the JPC observation that “Sebi has not been able to investigate the fund flows and the extent of involvement of corporate houses, even though NSE had emphasised it in its reports forwarded to Sebi on 18.8.2000”. Sebi’s audacious reply is to repeat the NSE’s comments and its statement that “no apparent connections could be established between the broker, client, and the company in the cases of HFCL, Global Tele, Pentamedia, Satyam, Silverline and Zee Telefilms”.
Sebi has given all these corporate houses a clean chit. In the ATR, it says “These observations do not indicate anything adverse in nature and do not provide any indication of irregularity. Besides fund flow examination is not necessarily done in all cases of investigation and is done in cases where there is a prima facie reason or complaint referring fund flow examination or examination of trading details indicate that there is need for a fund flow examination”.
If Sebi is allowed to get away with such a cavalier attitude then its regulation itself is meaningless. Since Sebi’s top investigation officials have changed, it is probably necessary to refresh its regulatory memory. These companies were identified because of their prima facie perceived nexus with KP. Sebi itself had detected several hundred crores of rupees transferred by many of these companies to Parekh and the ATR mentions (para 7.4) that the misuse of Sec 372A for such transfers is being tightened.
The NSE had pointed out to Sebi that there is only so much that individual stock exchanges can do in terms of tracking funds flow and hence it was unable to find links to KP. It had in fact written to Sebi so that the regulator could involve the RBI as well as other stock exchanges in tracking the flow of funds. Yet, Sebi claims that there isn’t enough reason to conduct a fund flow examination because there is no indication of irregularity. That the Finmin has merely parroted Sebi’s claim in the ATR and submitted it to Parliament only makes a mockery of the JPC itself.
But companies are not the only ones to get away. Powerful individuals such as the former chairman of Sebi and Unit Trust of India (UTI) are clearly being let off. While UTI reports plenty of progress on several investigations, it avoids indicting the former chairman. Similarly, Sebi’s response to the question of why it did not act on deficiencies detected at the CSE nearly a decade ago is dismissed with the cryptic comment that “the matter is under consideration of Sebi”. In both cases, the incumbent chairmen are clearly reluctant to pursue investigations against their predecessors and the Finmin is happy with that.
At the CII’s annual session last month, several captains of industry argued that regulators ought not to succumb to pressure from corporate houses and must punish those who broke the law. The ATR demonstrates that it is easier said than done. Indian businesses are never forced to admit to any wrongdoing, and never ever cough up even a part of their ill-gotten wealth.
-- Sucheta Dalal