Sucheta Dalal :The more things changeR30;
Sucheta Dalal

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The more things change…  

August 8, 2001

Last week's fracas in the Parliament which passed off as a debate over the Unit Trust of India debacle proves that politicians neither understand financial issues, nor are they seriously interested in protecting investors.

Instead of discussion systemic changes or how to improve accountability at government institutions, there were shrill allegations about telephone calls from the Prime Minister's Office (PMO) to the former UTI chairman P S Subramanyam by our members of Parliament.

Astonishingly, one of the main demands of the opposition was to set up another Joint Parliamentary Committee to investigate UTI. This would presumably have run parallel to the existing JPC which is already investigating Scam 2001 and the fact that its terms of reference would overlap did not bother politicians.

The government's reaction was also street-smart. Anticipating that the opposition's fire had no substance, the finance minister resorted to a shocking defence. He simply picked on another dubious deal of 1994 (the purchase of Rs 10 billion-plus worth of Reliance Industries shares with a five year lock-in) and slapped it back at the Congress Party.

The tactic worked. The opposition not only caved in, but it forgot all about the other financial issues, which ought to have been debated by the Parliament with as much vehemence. These were: the bailout of Madhavpura Mercantile Cooperative Bank and IFCI; the third bailout of Indian Bank; the bailout request of UTI; the steady erosion in profits of the still headless Industrial Development Bank of India and galloping bad loans of all financial institutions. All these are going to cost the exchequer almost Rs 50 billion but they did not even merit a mention.

What is more worrying is the facile demand for setting up a JPC every time there is a scandal. Our MPs, without exception, either do not understand the financial transactions, or are invariably pursuing a personal agenda and the futility of JPC investigations needs a national debate.

JPC 1992 relegated most specific allegations to "notes" attached to the report, which were promptly ignored. Also, the systemic changes that followed the 1992 scam, did not lead to an increase in accountability and supervision standards.

JPC 2001, set up this March, did not even include the UTI in its terms of reference until last week's hubbub in Parliament. The question is can we afford to allow highly complex financial dealings to be investigated by a band of 30 politicians?

There is irrefutable evidence that both Harshad Mehta in 1992 and Ketan Parekh in 2000, succeeded at their market manipulation because of their nexus with large corporate houses. These companies, in cahoots with the brokers had borrowed from the financial system and diverted the money to manipulate stock prices. Moreover, politicians have always been the third angle to the broker-corporate nexus, but have invariably got away. An investigation by JPC only allows them to act as judge and jury too.

Will politicians, especially in a multi-party JPC, ever allow corporate houses to be punished? After all, industry greases the wheels of politics and it stands to reason that they will remain untouched and will go on to find another Harshad or Ketan, when the scandal blows away.

From Haridas Mundhra in 1957 to Harshad in 1992 and Ketan in 2001, this has been the recurring theme. JPC 1992, indicted a few companies, but they were not punished. In 2001, Securities and Exchange Board of India indicted and penalised three companies -- BPL, Videocon and Sterlite - for colluding with Harshad Mehta in his comeback attempt in 1998 leading to a shameful collapse and bailout.

Yet, Raj Kumar Dhoot of Videocon was appointed as a government nominee on the IDBI board. Sanjay Lalbhai of Arvind used to be a director of ICICI and is the beneficiary of huge write-offs. So it was with Kulwant Rai of the Usha Group who used to be on IDBI's board. If it is not the industrialists themselves who find berths on board of banks and institutions, it is their consultants, lawyers or auditors who are placed there to espouse their cause. All these are government nominees.

But let us stick to the present JPC which is already investigating Scam 2001, whose mandate has been extended to include UTI and compare it with the Haridas Mundhra scandal of 1957 which marked the beginning of the manipulation of newly nationalised government institutions by our politicians.

The Mundhra scandal was the first and last successful trial of a financial scandal in independent India. The legendary Justice M C Chagla - a man of unimpeachable ability and integrity, headed the investigation.

The facts were as follows: Life Insurance Corporation of India had bypassed its investment committee and purchased Rs 12.4 million worth of shares in six companies belonging to Calcutta industrialist Haridas Mundhra in order to bail him out under pressure from the government. An explosive disclosure of the surreptitious deal in Parliament by Prime Minister Nehru's son-in-law Feroze Gandhi, in 1958, led to a nationwide furore and forced the government to appoint a one-man commission headed by Justice Chagla.

He conducted a swift and transparent 24-day public inquiry, which led to the resignation of the then Finance Minister T T Krishnamachari and punishment of the guilty in less than two years. Unlike the JPC hearings, which are confidential (except for a press briefing by the chairman every evening), Justice Chagla decided that "a public inquiry is a very important safeguard for ensuring that the decision will be fair and impartial. The public is entitled to know on what evidence the decision is based".

Large crowds thronged the public hearings and included legends such as J R D Tata. Those who deposed before the committee with hard-hitting evidence and expert testimony were equally illustrious.

The story was that the six Mundhra companies -- Richardson Cruddas, Jessop's, Smith Stanistreet, Osler Lamps, Agnelo Brothers and British India Corporation, whose shares were purchased by LIC, were in a bad shape and Mundhra had been bleeding them even as he manipulated their prices.

When he could not hold up prices anymore, LIC was forced to buy out the shares and the deal was justified as a purchase done to "to remove a drag on the market" and keep it from collapsing. Sounds familiar? Isn't it ironical that Indian scamsters over the years have simply copied Mundhra's modus operandi, fully confident that the same old political interference will protect them again.

The difference between 1957 and 2001 were people who deposed against Mundhra: H T Parekh, as member of the LIC Committee had objected to the deal in writing; K R P Shroff, renowned president of the Bombay Stock Exchange said that had LIC consulted the investment committee, he would "certainly not advise them to touch it (the Mundhra shares)". Bhagwandas Govardhandas, a leading broker and also member of the LIC investment committee went a step further and told the Chagla Commission that not only were the Mundhra shares worthless, but the BSE had, as far back as August 1956 put up a notice to warn investors that "some of the shares, being hawked by Mundhra, were forged". He said that left to himself he would not touch them "with a pair of tongs".

Finally there was A D Shroff (AD), a maverick 'financial wizard' from the house of Tatas (he was chairman of New India Insurance Company and Bank of India), who told Justice Chagla that his investigations into the Mundhra companies had "staggered" him. Saying that Mundhra had been chasing him for a long time to buy his shares AD told the commission: "He (Mundhra) had an infinite capacity for not telling the truth. From my long experience, I have learnt that when a man is in difficulties, if he comes to you, he will never disclose the truth about himself."

When Justice Chagla asked AD whether he thought that LIC made the investments to "remove a drag in the Calcutta market", AD replied, "If you allow me, Sir, this is a cock-and-bull story. I would like to know who was interested in the Mundhra shares. The general public was not interested in them; of the ten million shares held by Shri Mundra, a majority were pledged to various banks while the rest were held by brokers. I can't see how these shares could be a drag on the market."

Can we expect any of our financial chiefs to depose before the (barring maybe the former SEBI chief G V Ramakrishna who was called by the JPC for an expert briefing) JPC with the same forcefulness and credibility?

There were other parallels between Mundhra and our present day scamsters too. For instance, a calm and self assured Mundhra projected himself as an earnest businessman, trying hard to make a success of his business who was victimised by a bunch of brokers and had suffered because he lacked connections in the media and among bankers to espouse his cause. Does this not sound exactly like the allegations by Harshad Mehta in 1992 and Ketan Parekh (or his cronies) in 2001 that a "bear cartel" brought about their downfall?

The only difference between the Mundhra scandal and the two scams of the last decade are the manner in which they ended. Unlike Finance Minister Yashwant Sinha who seems to have got away by tossing the blame back to 1994, Justice Chagla's report held the then Finance Minister T T Krishnamachari morally responsible for the episode and he was forced to resign in 1958. Like Sinha, T T Krishnamachari, in his deposition had tried to distance himself from LIC's decision and the actions of his finance secretary, which had led the judge to conclude that the minister is constitutionally responsible for the action taken by his secretary and he cannot take shelter behind them nor can he disown their actions.

Justice Chagla went so far as to establish seven principles out of the inquiry:

  • That the government should not interfere with the working of autonomous statutory corporations and if it does, it should not shirk responsibility for directions given.
  • That chairmen of organisations such as LIC which deal with investments in a large way should be appointed from persons who have business and financial experience and are familiar with stock exchanges.
  • That executive officers of the corporation owe their first responsibility to the corporation and should not surrender their judgement to the influence of government officials.
  • The funds of LIC should only be used for the benefit of policyholders and not for any extraneous purpose other than the larger good of the country.
  • In a parliamentary form of government, Parliament should be taken into confidence at the earliest stage to avoid embarrassment from other sources of information.
  • The minister must take full responsibility for the actions of his subordinates and cannot be permitted to say that they did not reflect his policy or acted contrary to his directions.
  • The government should immediately apply to the corporation Sec 27-A of the LIC Act of 1938 modified as required to carry out the solemn assurance given in the LIC Act.

The judge said: "The inquiry has been an education for the public. It should also act as a corrective to administrators all over the country, because in future they will act with the consciousness that their actions may be subjected to public scrutiny." In fact, the seven principles have been ignored and the public is unconcerned even when their money is at stake.

The securities scandals of 1992 and 2001 have seen our politicians quickly get together to set up JPCs which do no conduct public hearings. Their daily briefing to the press has often not reflected the important depositions of the day. The public (including government officials, brokers and investors), which would otherwise have come forward with evidence is kept out of the investigation and their final reports have failed to nail the guilty or force substantial changes in the system.

Also, documents submitted to the JPC are leaked to the press within days of submission, making a mockery of the JPC's insistence on closed-door hearings.

If government, no matter which party is in power, gets away with hoodwinking the public, it is only because we the people let them get away by offering no protest

-- Sucheta Dalal