Sucheta Dalal :Laying the ground for new scamsters
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Financial Express » Laying the ground for new scamsters
                       Previous           Next

Laying the ground for new scamsters  

Dec 27, 2004

This is what happens when brokers who owe the system are not punished

When the BJP-led government set up a second Joint Parliamentary Committee (JPC) in 2001 to investigate what is called the Ketan Parekh scam, the Congress Party was in the opposition. Congress members of the JPC such as Mani Shankar Aiyar and Kapil Sibal hauled the BJP-led government over the coals for inadequate action taken in the 1992 scam before they allowed any discussion over the latest one.

Well, the Congress is in power today and has the job of completing the 2001 investigations and ensuring that action is taken against those who manipulated the capital market. But its record is already fairly patchy. On the one hand, it seems determined to move against Ketan Parekh, whose reckless trading caused a loss of over Rs 888.25 crore at Madhavpura Mercantile Cooperative Bank (MMCB) and cost thousands of small depositors their savings. His cronies Mukesh Babu and Shirish Maniar and owe another Rs 225.63 crore and Rs 19 crore respectively to MMCB. In addition, Parekh owes Rs 124 crore to Bank of India (BOI), Rs 267 crore to the defunct Global Trust Bank and probably Rs 1,000 crore to various friendly companies.

Yet, there is a clear unwillingness to pursue the scamster. The CBI has been dragging its feet over a non-bailable warrant issued against Parekh over a week ago by the special CBI court. It is almost as though regulatory and investigative agencies are getting signals from the government that the scam investigation is not important. For instance, the Securities and Exchange Board of India (Sebi) is also doing its bit to bungle investigations relating to Scam 2001. It recently lost the case against First Global Securities mainly because it failed to complete its investigation and pass final orders within a specified time. The Securities Appellate Tribunal (SAT) did not even go into the merits of several serious charges against the firm.

A 1999 case of a preferential allotment of Himachal Futuristic Communications Ltd (HFCL) with clean loans from Global Trust Bank to First Global was detailed in the JPC report but never pursued. Last week, BJP leader Arun Jaitley told Parliament that the Congress Party president had asked the finance minister to help First Global. This seems to have happened before the SAT judgement cleared First Global. Now, Sebi is dragging its feet over filing an appeal before the Supreme Court and has sought legal opinion before deciding its course of action.

This lethargy is in sharp contrast to the alacrity with which it pursued another bungled investigation, against fund manager Samir Arora (formerly of Alliance Mutual Fund), where again Sebi’s action was thrown out by SAT. Another case where Sebi has been curiously reluctant to initiate action is that of Ketan Parekh’s crony Mukesh Babu Securities. Sebi acted against the firm only after this newspaper reported that the firm, which had made no repayments to Madhavpura Mercantile Bank, continued to operate as an empanelled broker for institutions such as UTI. But Sebi’s belated action against the firm has also not been able to stand the test of SAT appeal and its action has been stayed in the GTB case. The firm still owes a couple of hundred crore rupees to MMCB and the bank depositors are still living in the hope that they will some day recover their savings.

• While in power the Congress appears complacent about regulatory slackness

• As if on cue, signals are out that scam investigations are not important

Ironically, the law seems to operate with deadly efficiency against inconsequential officials involved in the 1992 scam. A couple of weeks ago, the special court in Mumbai ordered the auction of a flat belonging to R Sitaraman, a junior manager of SBI, who had colluded with the late Harshad Mehta in 1992 and allowed him to divert Rs 500 crore from the bank’s government securities portfolio. After 12 years of litigation, Sitaram is a shattered man, but the law is merciless for people like him — even though unlike Harshad Mehta, his brothers or Ketan Parekh, officials like Sitaraman have never tried to return to the capital market or manipulate stock prices.

While being in power the Congress may be complacent about regulatory slackness. We are in the middle of another powerful bull run. While there is no sign of a scam today, the FII buying has created the right sentiment for tricksters to turn the small and mid-cap segments into their happy hunting ground. Each time Sebi mishandles an investigation or the appellate body creates a precedent by letting off brokers who owe the system, it is laying the ground for creating new scamsters who have even less to fear from investigative agencies.

-- Sucheta Dalal