Sucheta Dalal :When Right Moves Mean Further Delays (22 July 2002)
Sucheta Dalal

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When Right Moves Mean Further Delays (22 July 2002)  

It is indeed a pity that D K Tyagi was not appointed as Custodian under the Special Courts Act, right after the securities scam of 1992. In just over a year, Mr Tyagi has probably done more systematic work than any of his predecessors had managed in the entire decade after a Custodian was appointed to take charge of assets recovered from various scam-accused. In the process, he has managed to create a great deal of controversy.

For starters, he suddenly notified a set of people who probably ought to have been notified in 1992 and froze their bank accounts. In February and March this year, he caused even more panic by cancelling several contracts between leading banks and brokers pertaining to 1991 and 1992. Mr Tyagi sent out a series of show cause notices last year to Citibank, Andhra Bank and a host of other banks. Each of these notices was based on the findings of special audits ordered by the Reserve Bank of India after the scam. The notices pertained to cases where banks were unable to prove the authenticity of certain contract between them and various scam accused; or contracts where banks were unable to prove that they delivered securities after having received payments for certain deals from various scam-accused especially Hiten Dalal. After a detailed hearing, the Custodian has issued reasoned orders cancelling several of those contracts that were not genuine and ordered the banks to pay the principal sum with simple interest of 24 per cent from 1992 to the Custodian.

Citibank alone has had at least 11 contracts cancelled, when it probably believed that it had put the events of 1992 behind it. These include a Rs 2.3 crore deal for Damodar Valley Corporation bonds, a Rs 61.75 lakh deal for Hindalco shares, a Rs 10 lakh contract for MTNL bonds, a Rs 1.15 crore contract for Glaxo shares, a Rs 2.4 crore contract for GE shipping shares, a Rs 5.6 crore contract for Madras Cement shares and a Rs 1.3 crore contract for Essar Shipping shares. While the individual transactions are not huge, they add up to a tidy packet when you add a 24 per cent simple interest over the last decade. Now, it is well known that banks too resorted to large scale fudging to cover their tracks after the scam. Citibank and other American banks had to cover up any violation of the Glass Steagall Act of the US as well as RBI’s restrictions on the Portfolio Management Scheme.

The Janakiraman Committee had established that Citibank had been merrily flouting the PMS rules. It could well be that Citibank is unable to prove delivery because transactions that Tyagi is investigating were cover-up entries to cover other arrangements. Citibank is so rattled by the Custodian’s action that it has chosen to attack the Special Courts Act itself. In a writ petition (No. 1596 of 2002) filed on June 27 before the Bombay High Court, it argues that the Act suffers from “procedural infirmities” and is unjust and unfair. It claims that there are no guidelines for the exercise of power by the Custodian and that its actions are ultra vires the Constitution and it is violative of Article 14 for the Custodian to be a judge in his own case. It says that there is no provision for cross examination of witnesses, that such transactions can only be set aside by a civil court and that the law of limitations ought to apply to this Act too.

On the face of it, it would be laughable for Citibank or those hurt by the Custodian’s belated action to attack the Act an entire decade after it came into existence. One could also argue that Citibank and others had so far benefited because the RBI’s ignoring the reports of its own special audits — the holes that auditors appointed by it had picked in the banks claims. That almost all of Mr Tyagi’s predecessors seem to have slept on the job, also have benefited all the scam accused individuals and banks so far. But Citibank does raise some serious questions that need to be answered, before the scam investigation is allowed to suck in large chunks of taxpayers money into a further morass of mindless litigation.

Assuming D K Tyagi is entirely correct in his assessment and is merely doing his job very diligently — the end result of these actions do raise some pertinent questions. Citibank points out that the Custodian is recovering money from banks and financial institutions for the benefit of notified parties (scam-accused brokers). But the money will not be used to settle their other liabilities but to pay income tax, because the tax authority claims absolute priority in recovering its dues.

The tax liabilities of all the scam accused were exaggerated to begin with; with interest being added over the years they have ballooned, in some cases, to a few thousand crores each. In fact, the tax claims have been the biggest disincentive for banks or brokers to come to any kind of settlement in the cases against them. Although Citibank has argued that the Custodian is unfairly extracting money from them on behalf of the scam-accused, that is a little difficult to accept. In 1991-92, Indian and foreign banks and their subsidiaries were as much a part of the large-scale fraud and violations as any of the scam-accused brokers. In fact, the banks as legal entities managed to distance themselves from the fraud by blaming it on specific employees and sacking them.

The Custodian’s actions have only opened up at least another decade worth of litigation, which will clog our courts, gobble up public funds in litigation and enrich the lawyer community. The effort now should be to force settlements rather than follow a procedural bean-counter approach to the scam litigation. Had the RBI or a special multi-disciplinary group been allowed to follow up on the Janakiraman findings and special audit reports in 1992, they could have sorted out the various claims and counter claims and closed many of the disputes.

It is still not too late to scrap the present process and set up such a small-empowered committee comprising experienced persons of integrity to force a timely settlement of all civil disputes. Such a group should be empowered to impose stiff penalties and recommend criminal action when required. Far too much money has already been wasted on unending litigation, which threatens to carry on for the next few decades. Let us stop it right here and free the courts to try other scams.

-- Sucheta Dalal