Cracking Down On Corporate Crime (14 October 2002)
When the Joint Parliamentary Committee (JPC) submits its report on the 2001 securities scam, it would probably be a bulkier version of the 127-page United States Senate Government Affairs committee report, which recently said that the Securities and Exchange Commission (SEC) didn’t do a very good job of rooting out financial fraud in the 90s. The JPC may say much the same thing.
Just as the Senate report blamed credit-rating agencies for failing in their roles as watchdogs, the JPC too will blame several institutions and organisations such as stock exchanges, regulators, brokers and overseas corporate bodies. Like the Senate report, the JPC too will ask the Securities and Exchange Board of India (Sebi) “to do a better job monitoring the securities industry”.
And like the Senate committee, the JPC too will see no irony in the fact that a bunch of politicians — who helped companies break rules, fudge accounts, borrow recklessly and enrich themselves — will act outraged and preach morality and ethics to the corporate sector and regulators.
In America, senator Joe Lieberman, who chaired the committee that produced the Senate report, was one of the biggest foes of the SEC when it tried to undertake corporate reforms, most notably the expensing of stock options. Former SEC chairman Arthur Levitt, who fought a long and unsuccessful battle to make accounts more transparent, has openly blamed Lieberman for blocking reform in a new book titled: Take on the Street: What Wall Street and Corporate America Don’t Want You to Know.
In India, the JPC is crammed with former friends of scamsters and those corporate houses who ramped stock prices, diverted funds borrowed from banks, dumped expensive stock on the Unit Trust of India (UTI) and hastened its collapse and ‘influenced’ the media. They have now embarked on a slow and meandering investigation that shows no signs of completion.
In fact, the similarities and flaws of our two democratic systems are apparent in how we deal with corporate crime. Despite continuous and often stupefying scandal in both countries, our politicians are working harder to sabotage serious reform than to punish the guilty. In the US, which has larger public participation in demanding change, consumer activists such as Ralph Nader have launched a massive nationwide campaign to press for corporate reform. In fact, some of his demands suggest that the reform and liberalisation pendulum is threatening to swing to the other extreme. Nader, in fact, has questioned many reforms that have been quoted by capital market intermediaries in India to hector us about international business practices. While India was typically slow to change, American investors and activists are seeking a rollback of reforms.
For instance, Ralph Nader and many ordinary Americans want electricity deregulation to be rolled back after investigations have revealed giant electricity companies created deliberate shortages to drive up prices. Nader also wants a repeal of the Private Securities Litigation Reform Act (1995) and the Securities Litigation Uniform Standards Act (1998), which capped liability in cases of securities fraud; and a restoration of the Glass-Steagal Act, which forced Chinese walls between conflicting business of banks and finance companies. Nader has also targeted derivatives trading. He says that international derivatives trading is not as strictly regulated as stocks, needs no margins and has been used by companies such as Enron for reckless manipulation, tax avoidance and fudging accounts.
Next on Nader’s list is a call to “slow the revolving door between business and government”. We in India are constantly told by industry associations that government should follow the American model of appointing ‘corporate practitioners’ to head regulatory bodies. We were told how an unscrupulous speculator like Joe Kennedy (father of JFK) launched a vicious clean-up drive against his former cronies once he got himself appointed as SEC chairman.
But Harvey Pitt is apparently no Joe Kennedy. He had to recuse himself at least 29 times from SEC decisions during his first year in office because they involved former clients. Pitt’s reluctance to get tough with corporate criminals and accountants is so apparent that there is a growing demand for his ouster. Hopefully, India will learn from the Pitt experience and not experiment with the American model.
Apart from the rollbacks that I have mentioned, many of the demands made by Nader and other activists are common to both countries. They include: tougher punishment for corporate crime and crooked corporations; the seizure and return of ill-gotten gains of corrupt corporate insiders to the victims of corporate crime; and protection for whistle blowers through regulation or legislation in order to encourage individuals to report corporate fraud. The Scam of 2001 has already seem two whistle blowers victimised by their organisations: Atul Tirodkar, a director of the Bombay Stock Exchange who was sacked for doing his duty, and Ramesh of the Stock Holding Corporation of India who is allegedly being victimised for preparing a forthright report on the goings-on in the corporation.
One of the most important demands of Nader in the US, which needs to be pursued by Indian investors, is the creation of a publicly available, online national corporate crime database, which includes liability for damages or remedial action, as well as all out-of-court settlements in which the corporation agrees to restitution. While Nader wants the Federal Bureau of Investigation to maintain the database, in India, it could easily be funded and maintained under the Investor Education and Protection Fund (IEPF). The IEPF, which was set up under Sec 205 C of the Companies Act, will soon have a large corpus of funds in the form of unpaid dividends and share application money, which will otherwise find its way into the Consolidated Fund of India.
The database would gather information from all the regulators (Department of Company Affairs, Sebi, the Reserve Bank, Central Bureau of Investigation, Directorate of Revenue Intelligence and the Enforcement Directorate) through a clear information gathering mechanism. It would be a source of valuable information for investors on corporate crime and also keep regulatory and investigative bodies on their toes.
Such easily accessible information will encourage investor activism in India and provide an effective counterpoint to industry associations and lobbyists who monopolise the debate on corporate reform and legislation to their advantage. Whether the government sets up the database would be a litmus test of the seriousness of corporate reform -- Sucheta Dalal