Sucheta Dalal :Escaping Through Cracks (26 May 2003)
Sucheta Dalal

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Escaping Through Cracks (26 May 2003)  

Last week the Bombay Stock Exchange suspended a senior executive called G L Gera and charged him with financial mismanagement and worse. BSE sources allege that Mr Gera was tapping the telephone lines of key surveillance officials and the Executive Director.

The seriousness of this charge shows that nothing much has changed at the BSE after the ugly exit of former President Anand Rathi, for seeking price sensitive information. That Mr Gera, as alleged, had tapped phone lines with impunity in a high-security building dealing with sensitive financial information reflects a dangerous malaise. It is a belief that all kinds of sloth, corruption and incompetence will go unpunished, because if one is crooked enough, there is always a way to beat the rap.

The problem starts at the top. When the personal assistant of a minister of state sets up a desk within the finance ministry to sell transfers and postings, government officials naturally become brazen and complacent.

When some of them join investigation departments of regulatory bodies, they let off wrong doers. Take for instance Mukesh Babu Securities. The proprietor of this low profile firm, made news in connection with his links with Ketan Parekh and Madhavpura Mercantile Cooperative Bank(MMCB). The same one which is in the Deputy Prime Minister’s constituency and whose chairman allowed Ketan Parekh to help himself to Rs 888.25 crore without security. Mukesh Babu, a close associate of Parekh got Rs 225.63 crore from the bank.

Yet, Mukesh Babu seems to have got away scot-free. Neither the Securities and Exchange Board of India nor the Reserve Bank of India have initiated action against him, even though the Joint Parliamentary Committee (JPC) Report [p 22,para 9 (i)] says that he admitted a liability of Rs 225.63 crore to Sebi.

Still, the National Stock Exchange (NSE) has certified that he has no liabilities to the exchange (since Sebi has not flagged him as being under investigation). Unit Trust of India (UTI) and other leading financial institutions have empanelled him as a broker and are giving him substantial chunks of business.

I asked the UTI chairman why Mukesh Babu was getting business from UTI. He said that his vigilance department had found no investigation pending against him. He was also under the impression that Mukesh Babu’s name did not figure in the JPC report. That was a surprise. On checking, one discovered that apart from varying allusions to his liabilities, the regulators have made no effort to file charges against him or recover MMCB’s money.

Moreover, there seems to be a deliberate effort to dilute his role and references to him. For instance, p 27, para 4.35 notes under an asterisk that Ketan Parekh owes Mukesh Babu Rs 100 crore, but not that he in turn owes it to MMCB.

Curiously, the RBI report to the JPC has a lower estimate of what Mukesh Babu owes, and it doesn’t even bother to quantify it. The JPC report [p 56, para 5.9 (xiv)] says that MMCB in blatant violation of credit exposure norms had “disbursed amounts ranging from Rs 39.26 crore on February 28,2001 in the account of M/s.Mukesh Babu Securities to Rs 154.57 crore on 1.3.2001 in the account of M/s.Panther Fincap P.Ltd. respectively”.

How and why is RBI’s estimate of Mukesh Babu debt so much lower than his self-confessed liability? And why is there no effort to recover the money when Mukesh Babu still gets loads of institutional business?

Well, don’t look for answers in the Action Taken Report submitted to Parliament recently. Because by then, references to M/s Mukesh Babu have been dropped entirely. While, this is one example that I have discovered, there may be others who have been deliberately allowed to fall between the cracks and escape action. Can Mukesh Babu’s hefty liability of Rs 225.63 crore vanish due to oversight? Aren’t the regulators party to letting him get back in business as an empanelled institutional broker? It is difficult to believe otherwise.

Such brazen manipulation of facts is not restricted to brokers. Look at another example. Prabodh Artha Sanchay Pvt Ltd, (PAS) a Pune based Trust that was investigated for possible links with Arvind Johari, the infamous promoter of Cyberspace Infosys. The trustees of Prabodh Artha Sanchay were foolishly hoping to make a lot of money by churning speculative scrips during the 2000 bubble. After the scam, the Trust spent the two years struggling to establish that it has no connection with Johari and to salvage its investment. Over time, various investigators cleared PAS. Sebi’s interim report on Scam 2000 stated that no apparent link was found between the Trust and Johari. Later the NSE and more recently the BSE also cleared it. On May 20, the Sebi chairman’s signed order that stated “PAS cannot be charged with market manipulation in the scrip of CCL”. It further said, “In the absence of a valid evidence, I cannot conclude that M/s PAS has acted in a manner so as to create an artificial market and disturb the market equilibrium in the scrip of CCL... I, therefore, find that this is not a fit case to impose any penalty” and asked it to be careful in future.

But, Sebi press release stated exactly the opposite. It stated: “It was found, inter-alia, that M/s Prabodh Artha Sanchay Pvt. Ltd. was acting in concert with Shri Arvind Johari to support the price of the scrip and create an artificial market in the scrip”. But that the chairman had let if off by directing it to “be careful in future...”.

After some furore, Sebi issued a clarification of sorts on 23 May 2003. It sought to blame the confusion on this paper (which had reported Sebi’s order) and clarified that following due process “it was concluded that it was not a fit case for imposition of penalty”.

Clearly, the reluctant clarification is far cry from the actual order (on Sebi’s website). Is this a genuine mistake or dangerous mischief? Can the regulator afford such embarrassing lapses? Will anyone be held responsible for it? If BSE officials are unconcerned with the investigations into Scam 2000 and Sebi officials let off shady brokers and dangerously misreport the Chairman’s orders, is this merely sloth and incompetence? Or is there something more sinister at work here?

-- Sucheta Dalal