Sucheta Dalal :Are monetary fines a better punishment? (22 Dec 2003)
Sucheta Dalal

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You are here: Home » Column Topics » Indian Express - Cheques & Balances » Are monetary fines a better punishment? (22 Dec 2003)
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Are monetary fines a better punishment? (22 Dec 2003)  

Last week, the Securities and Exchange Board of India (Sebi) sentenced scamster Ketan Parekh to 14 years of exile. Around the same time, the Central Bureau of Investigation (CBI) filed yet another case against him in the Madhavpura Mercantile Cooperative Bank (MCCB) for overdrawing Rs 1,024 crore in collusion with bank officials and cronies and bringing the bank to the verge of closure.

In the same week, it was announced that the Income Tax department (IT) had discovered an ‘undisclosed’ income of Rs 1,993.26 crore with the Ketan Parekh group and the IT has raised a tax liability of Rs 1,357.37 crore from him. The actions against Ketan Parekh mean little to investors, ordinary citizens and the regulatory system. The government spends a lot of taxpayers’ money on the investigation and trial of scamsters, while the scamsters always seem to have plenty of money stashed away to hire the best legal brains in the country to defend them.

It happened with Harshad Mehta and it will happen again with Ketan Parekh — the trial will last for decades and the administrative system will spend more good money on the scamsters and recover nothing. In the absence of a regulatory system that imposes crippling monetary damages on white-collar criminals, the investigation and prosecution process, riddled as it is with corruption, is a no-win situation.

Contrast this with what happened in the famous Wall Street scandal involving Ivan Boesky and Michael Milken in the mid 1980s. Apart from being sentenced to 10 years in a low security prison, Milken paid $600 million as part of a criminal settlement. This amount was higher than the entire annual budget of the Securities Exchange Commission (SEC) at that time. The total fines, including those paid by other employees of Drexel Burnham Lambert gave the US authorities a hefty $1.3 billion. This did not include the $100 million collected from Ivan Boesky, the insider trader who delivered the famous ‘‘greed is good’’ speech made famous by the movie Wall Street.

Contrast this with India. The process of auctioning the late Harshad Mehta’s securities took over a decade and that of auctioning his assets is still incomplete. Meanwhile, the scamsters suffer a bigger punishment by spending most of their lives making the rounds of the Special Court and the Supreme Court and paying their lawyers, with no end in sight. Ketan Parekh’s 14-year vanvas too will be meaningless, if absurd IT demands lead to never ending and expansive litigation instead of sensible settlement and fine, with some real recovery. This is not to suggest that a Ketan Parekh should be allowed to simply pay up a fine and get back into the market to resume his price manipulation. But a deal that combines disgorgement of ill-gotten wealth with a negotiated plea allows the government to at least cover the cost of investigation and trial.

The US system operates on the simple understanding that if monetary penalties are much larger than the profit from financial crime, it acts as a bigger deterrent to scamming. Also, as long as the scamsters are brokers or individual fund managers, it is easy enough to insist on prison terms. But there is rarely any punishment for large organisations whose lax systems or greed for profit has them turning a blind eye to wrong-doing.

In 1992, the Reserve Bank of India (RBI) slapped piffling fines on Indian and foreign banks involved in the scam. In 2000, the RBI was even more relaxed. The best example of its benign supervision is the news report that the son of Ramesh Gelli, promoter of Global Trust Bank is set to join the board. If true, it would mean that the bank has virtually gone unpunished for its brazen collusion with Ketan Parekh and its reckless money transfers on behalf of the broker. The need for a system of stiff monetary fines is not limited to major scams. A few weeks ago, investors who applied to the Initial Public Offerings (IPOs) by United Commercial Bank and Indian Overseas Bank were wrongly allotted physical shares when they had sought electronic allotment. As a result, a substantial chunk of investors missed an opportunity to sellout and book profits on their investment in the initial days after listing when prices were higher. Sebi has conducted a detailed inspection of the registrars operations — Karvy Consultants and Cameo Corporate Services — which is understood to have established problems with the allotment process. Karvy Consultants, which was a registrar to the UCO Bank issue even paid out a compensation of Rs 10,000 and Rs 5,000 respectively to a couple of investors. Would it make better sense to punish these registrars by suspending their license or by imposing a stiff monetary fine? The obvious answer is the latter.

Financial damages will force them to clean up their act and ensure that the mischief is not repeated. As it happens, amendments to the Sebi Act now empower it to impose steep penalties on offenders, but these powers have yet to be effectively used by the regulator. There may also be another advantage to financial retribution; it is that law breakers may prefer closure to long litigation. If a company can pay a fine, correct its systems, clean up its act and move on, it may prefer that to litigation and appeals which only enrich the legal community.

Ideally, the money collected through fines should be available to the regulator for investment in staff, training, technology and improving its surveillance and supervisory system. Making good investors’ losses should also be an important goal, but it is not always easy and works best in class-action situations. Whenever possible, punishment should be by way of forcing companies to do restitution and payback investors with interest, costs and damages. Clearly, what we need urgently is a change in mindset on the part of the regulators and the judiciary in favour crippling penalties along with other punishment, rather than a mere ban on trading which is notoriously difficult to enforce.

-- Sucheta Dalal