Sucheta Dalal :One man's scam is another's ... (21 October 2001)
Sucheta Dalal

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One man's scam is another's ... (21 October 2001)  

One of the first tasks Finance Minister Sinha ought to assign his newly constituted eight-member expert committee is to find an efficient way of dealing with financial scams and to wind up the investigation and punishment process in a time-bound manner.

Since both the RBI and SEBI — having failed in their supervisory functions — have been quibbling over what constitutes a scam, this committee can start by fixing the definition of what a scam is. They could create a sort of Richter Scale if you will, which would eliminate the current ridiculous efforts of RBI and SEBI to create fine classifications such as scam, fraud, and ‘irregularity’.

Once classified, a clear action plan should be in place, with a formal and pre-defined process of co-ordination between the regulators, the Department of Company Affairs (DCA), and the enforcement machinery of the government such as the DRI, the Enforcement Directorate and the Income Tax department. Hopefully the committee will recommend that scams should be investigated by a Judicial Commission rather than a Joint Parliamentary Committee whose members have no financial expertise. If co-ordination between the RBI, SEBI and DCA is formalised in the first stage itself it will eliminate several scams and cover-ups.

For instance, even as SEBI is rushing around gathering data on the price movements of 200-odd companies and the Advanced Lending and Borrowing Mechanism of National Stock Exchange, other issues remain in limbo. The ED has made little headway with regard to Foreign Institutional Investors (FIIs) and Overseas Corporate Bodies (OCBs), of which the latter were apparently under the RBI’s supervisory purview. Well after the OCBs had transferred out several thousand crores rupees, the RBI has dumped the investigation onto the ED.

In the meanwhile the Income Tax department follows its own course. It makes huge assessments and absurd tax demands which it holds fast to until kingdom come. None of the IT officers are accountable for their original statements and every year they simply slap an additional penal interest on the original assessment. Meanwhile scamsters go about finding innovative ways to beat the system.

Let us look at a case of Scam 2001 that threatens to fall in this category. A couple of months ago, Triumph International Finance India Ltd. a listed company controlled by Ketan Parekh began to send out letters to newspapers distancing itself from him. This is the same company which, of course, had issued no denials when the Economic Times gushed as follows in 2000: ‘At the forthcoming shareholders’ meet of Triumph he (Ketan Parekh) would be officially declared its co-promoter. Triumph is the only publicly listed company where the mighty bull has agreed to accept a seat on the board. Though officially he and his family control around 20 per cent stake in the company, knowledgeable people believe he has a much lager interest in it.’ The paper had gone on to make a laughable but scandalous comparison between Triumph (the paper described it as a ‘gem’) and Warren Buffett’s Berkshire Hathaway and slobbered about Parekh ‘enthusiasm’ and ‘big dreams’ for Triumph.

Cut to October 2001 and look at the contrast. Triumph not only distances itself from Ketan Parekh (KP), but we are told that the two are even ‘squabbling’ over dues and payments. That’s a joke. Triumph has made a claim of Rs 238 crores against Parekh and his family. They then set up a team of three arbitrators who have ruled in record time that after various claims and counter-claims were disallowed, that KP owes Triumph Rs 171 crores. This is apparently to be paid in seven quarterly installments starting at the end of June 2004. Interestingly, though Triumph is a listed company its balance sheet has not been filed. Triumph was even planning to seek a tax refund from the Income Tax department against losses caused by KP’s liabilities!

A Mauritius based Overseas Corporate Body (OCB) — European Investments Ltd, which has been identified by SEBI as a KP company has in turn made a claim of Rs 71 crores against Triumph International. This is just one of the seven odd OCBs identified as KP fronts and among the few that can show a positive inward remittance of funds. Most of these companies have a capital of $10 and have no known sources of funding.

What is one supposed to make of all the hectic claims and counter-claims by KP companies? Are they really sorting out their accounts or are they taking advantage of the slow, often corrupt and careless functioning of government departments to create grounds for a tangle of litigation that stalls the investigation and penalty? It is difficult to say. Fortunately however, in this case the government has moved to stop the fiddling with accounts. The revenue department has decided that none of the entities under investigation after March 2, 2001 will be allowed to make any changes in their accounts without the prior clearance of the Income Tax Department.

But that may be just one stray loophole plugged. There are several others. For instance, the OCBs themselves operated with blithe freedom because the RBI granted their approval but SEBI was expected to keep them from creating mischief in the market. Will the RBI be pulled up for bungling on this count? Unlikely. What can be done however, is to formalise a process whereby regulatory and supervisory issues involving multiple regulators are identified and decided when the permission is granted. One cannot keep discovering issues of lack of co-ordination after a scam.

-- Sucheta Dalal