Sucheta Dalal :Who Leaked the Policy?
Sucheta Dalal

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Who Leaked the Policy?  

May 9, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL

Who Leaked the Policy?


On the evening of 30th April, officials of the Reserve Bank of India (RBI) were in a tizzy -  not over the credit policy announcement that only the CRR (cash reserve ratio) of banks would be hiked and not interest rates. The big hullabaloo was over the apparent leak of the credit policy provisions in time for some gilt traders to cream off well over Rs1,000 crore in extraordinary profits. Apparently, somebody knew what was coming an hour before the announcement and a European Bank was suspected to be the big beneficiary. Will the source of the leak be identified? In my 23 years of covering India’s financial world, I can confidently say that such leaks are not new and nobody is ever punished, unless it can be pinned to the lowest levels of officialdom. Bringing in transparency, eliminating the drama about policy announcements and releasing the operative parts of the policy in a staccato manner before trading begins will bring in transparency and kill the scope for such miserable leaks. Will the RBI listen?


Trust Betrayed


As we reported last time, the Zee group is among the big corporates that got away with a mere warning from the SEBI whole-time member, TC Nair, for its role in the Ketan Parekh scam, despite copious evidence of its extraordinary fund transfers through accounts in Global Trust Bank (GTB). We now learn that the Zee group had actually indicated to SEBI officials that they would be willing to pay up to Rs five crore under a consent arrangement. Instead, Mr Nair’s generous order was a jackpot for Zee.


But look at what is happening to the shareholders of Oriental Bank of Commerce (OBC) after its shotgun wedding with GTB arranged by the RBI. OBC declared a loss in the fourth quarter ending March 2008 and a 39% decline in post-tax profit because of a crippling Rs242 crore write-off for amortisation of losses on account of the merger with GTB. The total loss due to GTB was Rs1,220 crore. Until it was burdened with the merger, OBC was among the best banks in India with the lowest percentage of bad loans. The contrasting fate of OBC and the Zee group in relation to GTB’s seamy operations underlines one simple fact: no matter what regulations the government puts in place, powerful corporates with excellent media and political connections are never punished. Instead, their mess is distributed across a few million small and tiny shareholders or depositors.


Realty Rules


After years of inaction, capital market regulator, the Securities and Exchange Board of India (SEBI), finally announced its rules for real estate mutual funds (REMFs) just when the US is in the midst of economic turmoil triggered largely by excesses in the realty business. SEBI regulations sound tough on paper. Only companies that have been in the realty business for at least five years can set up REMFs, that too if they have the right staff. The funds must be close-ended, net asset values (NAVs) have to be announced everyday, 35% of the net assets must be in actual realty assets and 75% of the funds must be in realty or realty-related securities including mortgage-backed securities. Every 90 days, the assets must be valued by two valuers accredited by a rating agency and the lower of the two values will be used for NAV computation. There will also be caps on investment in single projects and restriction on investment in projects of the sponsors and associates or in which they hold lease or tenancy rights. Also, realty assets cannot be transferred between schemes. REMFs cannot undertake lending or housing finance activities.


Well, it is not too difficult to write the rules; after all you can pick and choose from international regulation. The concern is the ability to regulate the investments, given that real estate rules for land ownership and titles are different in each state. Besides, property rates are not based on carpet area and, often, nearly 50% of the price is paid in unaccounted cash. Land records are a nightmare all over India, which politicians are unwilling to set right, because they are the biggest beneficiaries of defective titles and disputes. Construction costs include large chunks of speed money paid to petty officials with the ability to create trouble and protection money to the underworld. Can two valuers wade through these issues to declare a valuation report every 90 days?


Also, given that super ratings by credit rating agencies to CDO (collateralised debt obligations) were at the centre of the subprime housing loan scandal in the US, is it safe to rely on ratings alone in the absence of benchmarks? We are today at the height of a realty price bubble and it may be best to stay away from synthetic realty investment until the government makes an effort to set up some nationwide benchmarks and regulation for the real estate sector.


Non-consenting Officials


On 17th April, SEBI issued a consent order on the application submitted by one Raajeev Kasat, a dealer of UTI Securities, regarding trading in Ballarpur Industries’ scrip. The dealer was accused of passing on information about large sales by an institutional client to certain individuals who, in turn, short-sold the scrip in large quantities prior to the institutional sale. Raajeev Kasat was accused of ‘customised front-running’ under the Fraudulent and Unfair Trade Practices Regulations. Well, Kasat is not the first trader to leak such information, so what makes this case special? It is the order that is different. This is probably the first consent order that spells out in detail the charges against Kasat. It then narrates the specific regulations that he violated and the action taken in this regard, including the penalty offered.


Here, too, the penalty is just a slap on the wrist, but an investor dealing with Kasat has a clear idea about the charges against him, whether or not he admits to any wrongdoing. In the past, every consent order posted on SEBI’s website has been a brief jumble of regulation numbers that actually hid the precise wrongdoing by the applicant. The reason for the difference this time is probably the fact that the order was passed by chairman CB Bhave along with whole-time member TC Nair.

But investors would be wrong to think that detailed consent orders would be the norm in future. The next two orders were back to being uninformative. On 30 April 2008, adjudicating officer, S Baiju, passed an order in the case of

SMC Global Securities, which was charged for dealing with unregistered sub-brokers, not segregating clients’ funds from proprietary funds, discrepancies in the Know Your Client forms, irregularities in keeping records and changing its constitution without prior permission from SEBI.


The order does not indicate how widespread the violations were; it merely documents the Rs five lakh price that the firm was willing to put on its wrongdoing while filing a consent application without admission or denial of guilt. The order does not even mention whether SMC Global has cleaned up its act and is now fully compliant with SEBI regulations.


In fact, a reading of the order suggests that the regulator was happy to grab the Rs five lakh and close the case. If the chairman had hoped to lead by example, the next three orders issued by SEBI indicate that no lessons have been learnt.


-- Sucheta Dalal