Sucheta Dalal :From Harshad to Home Trade (12 May 2002)
Sucheta Dalal

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From Harshad to Home Trade (12 May 2002)  

There is a depressing sense of deja vu in watching another securities scam unfold. Exactly ten years after the 1992 Securities scam, almost to the date, newspapers reported the hole in Nagpur Cooperative Bank’s Government Securities (G-Sec) portfolio.

Exactly like 1992, the scam has exposed the dealings of scores of co-operative banks in Maharashtra, Gujarat and even West Bengal. And the siphoning of funds, which has created a hole in Provident Funds provides another dimension to the same problem.

Harshad Mehta has been replaced by an equally high-profile Home Trade who seems to have masterminded the involvement of corrupt bankers across co-operative banking spectrum in its trades.

As in 1992, it got away with raiding banks for funds because the RBI was sleeping on its supervisory duties. The process of duping co-operative banks, in most cases, was in complete connivance with bank officials and made possible due to the outdated trading and transfer systems of the RBI. RBI allowed gilts to be traded in a non-transparent telephone market, where time and price of transactions are neither recorded immediately nor are transparently accessible on a single screen.

It permitted physical trades in G-Secs and failed to reform the transfer procedure. This allowed Home Trade and other brokers to delay delivery of G-Secs purchased for banks.

Given these similarities, it’s easy to predict how the scam will unfold. As the involvement of more co-op banks becomes public and individuals investors begin to agitate, investigations will be handed over the to the CBI. MPs will seek a piece of the action and demand a JPC.

Fortunately the 30 member JPC set up to examine Ketan Parekh’s manipulations remains in existence, so a new one may not be demanded. Once a show of investigation and action has been established, and a few people arrested, the matter will simmer down and go into limbo.

No attempt will be made to recover the money, follow its trail or repay investors. Instead everybody will spend more money in filing and fighting litigation to recover what they have lost. Ten years later, we will revisit this column in the context of another scam that would have occurred then.

If this sounds cynical, remember that the exact scenario has been played out several times in the last decade. Lack of individual accountability on the part of decision-makers, bureaucrats and regulators is the bane of this country.

Yet, there will always be those like Ashok Chowgule (industrialist and VHP activist) who would blame the media for missing the signals and not doing ‘the necessary investigation of the company (Home Trade)’. It is fashionable to blame the media these days, but difficult to make that charge stick.

Let us examine the securities scam of 2002 — which is not so much about Home Trade as the failure of supervision.

In 1992, a top Citibanker had famously said if one keeps jewellry in the house and sleeps with the doors and windows open, one should expect to be robbed. What happened with co-operative banks was worse. They were laying out a red-carpet and sending out invitations to be robbed. The only condition was that the thieves paid kick-backs to those in charge.

It is common knowledge that co-operative bank chiefs routinely called securities brokers and offered them a free run of their gilt-portfolio so long as they agreed to pay huge commissions of upto Rs three on a Rs 100 face value.

Like in 1992, where Standard Chartered Bank allowed Hiten Dalal to run its treasury for a 15 per cent return, brokers were running co-operative banks’ operations.

Things were even worse in the Provident Fund market where small-time chartered accountants and brokers managed the funds and also credited money and received cheques in their own account. The huge mess in this sector is yet to surface.

Isn’t this the same as in 1992 when broker received cheques in their names.

It may be argued, that the media ought to have done the RBI’s job and sent it a dossier (that may not have helped either; in 1992, RBI was found to have buried the Augustine Kurias’ reports which had detailed the Securities scam in 1989) with specific bank-wise and fund-wise details.

Yet, the RBI’s lethargic supervision, the dangers of a non-transparent telephone market in gilts, its sluggishness in introducing a nation-wide electronic fund transfer have all been written about in these columns. We have also written about the lack of transparency in the investment and accounting of provident funds (PF) and the dangers of the hectic lobbying by the financial sector to permit PFs to invest in equities.

Moreover, 1992 is different in one important respect. The secondary capital market was virtually a den of thieves in 1992. All that has been cleaned up almost five years ago. If the capital market, which deals with millions of individual investors, could get its act together, move to automated, price-stamped, paperless trades and fast transfers, why is it too much to expect the same from the RBI? Why cannot specific individuals be held responsible for delaying the automation process? Why should the head of supervision be allowed to get away in 2002, just as the Deputy Governor in charge (for over 10 years) had got away with negligence and breach of fiduciary responsibility in 1992?

The system will not change until individual regulators, policy makers and bureaucrats in responsible positions are made personally liable and accountable for deliberate lapses, negligence and failing in their fiduciary duties.

-- Sucheta Dalal