Powerful corporates, weak regulators (17 February 2002)  

In one of his many exit interviews Sebi Chairman D.R. Mehta expressed grave disquiet over the fact that ‘corporations have become very powerful’. He said: ‘They are powerful in terms of their sheer size. The moment you start taking some action, they jump on you.’ We always knew that politicians exerted tremendous pressure (rarely in public interest) on officials, regulators, bureaucrats and investigators.

Mehta’s statement had initially set off speculation about whether he had a specific corporation in mind when he referred to ‘sheer size’ or was making a general observation.

For investors, it is unnerving to hear a regulator whine about pressure at the end of a long tenure of seven year, that too after he admits in the same interview that, ‘one of the biggest mistakes I made in my life is that I sought (emphasis ours) an extension.’

Mehta ‘sought’ an extension and got it. This happened after he had assured a court during the public interest litigation against his extended tenure that he would not seek an extension. At the same time, equally deserving candidates who were shunted to other regulatory bodies were told that the Sebi chief’s post was not available. Who is answerable for this decision? Was the government, specifically the Prime Minister’s Office, which cleared the two-year extension so happy with Mehta’s performance, or were there other pressures and influences?

This makes you wonder whether the long delay in punishing promoters of vanishing companies and scamsters such as C.R. Bhansali, who robbed investors of several thousand crores of rupees, is because of corporates who ‘jumped’ on the regulator. The brazen manner in which Gujarat Ambuja acquired ACC by buying 14 per cent of the Tata holding at a hefty premium to the market price, and got away without making an open offer to retail investors could also be part of Mehta’s lament.

The precedent set by the ACC case seems to have been repeated in the Grasim acquisition of L&T shares. In this case, Reliance picked up as much as 6.17 per cent of the equity from the market in a matter of weeks and sold it to Grasim along with its holding at a huge premium.

The quid pro quo between the two corporate houses was that the Ambani brothers would step down from the L&T board and that Reliance, along with its associates would promise not dabble in L&T stock for five years.

But the Ambani stake had already dropped to 3.92 per cent and, logically, a vigilant L&T management could have asked the Ambanis to step down anyway. Instead, the L&T management seems party to the Reliance-Grasim deal because it quickly took two Birlas directors on board, with just a 10 per cent stake and very little debate. It is a moot question whether the Birlas would have paid such a high premium for the L&T if they were not assured board representation.

What better proof does one need about the influence of corporates than the fact that a group holding just 3.92 percent of the equity can exert such influence over two managements.

But let us not blame Sebi alone for succumbing to the influence of corporate houses. The multi-party JPC is not free from their influence either. Why else would the JPC, which is so aggressive with regulators, bankers and brokers, have refused to call industrialists for interrogation or examination?

Three sets of Sebi reports have clearly indicated that at least a dozen corporate houses were involved in price manipulation with Ketan Parekh. The JPC is unconcerned that these companies brazenly diverted funds borrowed from banks or raised from the public for stock market speculation. It is on the strength of these funds that Parekh could speculate heavily until, as he says in his submission to the JPC, he ‘crossed the principles of risk management and failed miserably.’

Contrast this with the Enron hearings by the US Congress, being beamed live into our living rooms everyday. The USA has no problems exposing the interrogation of its business leaders to world television networks. It also gives Americans a chance to judge whether their Congressmen and women do their homework, understand issues and are capable of protecting their interests.

But the next time you gleefully watch a Kenneth Lay or a Jeff Skilling squirm under persistent cross-examination by US politicians, don’t forget to compare the hearings with our situations. We do not even have the right to proper information at the height of various financial scandals.

Despite the horse-trading that occurred during JPC of 1992, the media and public are barred from the hearings of JPC 2000. Few know that barely 12 to 15 members even bother to attend the session on any given day. Also, the media briefing this time are far more sketchy and superficial and often do not even reflect the importance of various submissions that occur during the hearings.

Compare also the speed of the Enron hearings with the meandering investigations being conducted by JPC-2000. If one goes by JPC briefing alone, one is not even quite sure if the members believe that a serious scam has occurred. Obviously, the enormous clout of ‘corporations’ is bad news for investors and the public.

It is also bad news for the financial system, because the cost of these frequent scam, debacles and corporate defaults is financed through frequent bailouts of bankrupt institutions by the exchequer. This pre-empts money from developmental activity and hurts the economy. It also damages the capital market’s role in providing effective financial intermediation, turning it into a gambling den.