Sucheta Dalal :Which scam is the JPC investigating? Take action for 2001 scam (18 June 2001)
Sucheta Dalal

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Which scam is the JPC investigating? Take action for 2001 scam (18 June, 2001)  

Last week, the Joint Parliamentary Committee (JPC) Members turned the heat on an entire line up of investigative and regulatory agencies and government departments. The focus of their attention and their ire was the Action Taken Report (ATR) based on the Joint Parliamentary Committee’s findings of 1992. 

The Department of Company Affairs got the worst drubbing for its failure to act against companies who had a clear nexus with brokers. The Income Tax department was also pulled up for having originally made a claim of over Rs 11,000 crores against the Harshad Mehta group, later scaling it down to Rs 2000 plus crores and finally recovering just Rs 245 crore. The Central Bureau of Investigation (CBI) and Reserve Bank of India (RBI) were also pulled up for the tardy progress of scam related cases in connection with the previous scam.
All this is indeed very welcome and suggests that JPC is probably serious about cleaning up the system and punishing the guilty. But enough of the past already. The JPC of 2001 has been set up to investigate the present scam and that should be its priority. Instead, the committee has been keeping all the regulators and enforcement agencies busy poring over the previous action taken report and scrambling to complete actions pending from 1992 to the exclusion of all other activity. Consequently, those involved in the present not only look set to go scot-free but are also on the offensive to ensure that the heat is off them. This impression is only heightened by the large number of pointless briefings that the 30-member committee seems to need.

Over two months after the payment crisis has erupted, the committee has still to look at the present issues. There is a single case filed by the CBI against Ketan Parekh, some action by RBI in connection with Madhavpura Cooperative bank and a few knee jerk actions by the Securities and Exchange Board of India (SEBI). In the meanwhile, individuals and firms involved in the scam are busy closing down their businesses and stripping their personal and corporate assets, so that any move to impound their assets will yield nothing of any significance.

It is indeed true that the regulators have ignored large chunks of the previous JPC’s recommendations. But to be fair to them, it is not entirely their fault. In the last nine years, every political party has been in some ruling coalition at one time or another, or has supported the ruling coalition. Each of these parties will have to figure out and answer why they did nothing to pursue the securities scam when they were in power. Moreover, even today, the JPC is not touching upon important and practical issues like cutting down the meandering litigation, at least with respect to civil disputes and financial transactions. There were many mistakes made last time, which the JPC ought to examine and correct, but only after it provides some direction to the current investigation.

The Scam of 2001 is relatively simple as compared to complex transactions and multiple strands of 1992. Broken down, Scam 2001 is as follows. One, the speculator-banker/fund-corporate nexus in pushing up certain stocks and the role played by each of them in diverting funds to bail out the speculator in February-March this year. Two, the broker-Foreign Institutional Investor nexus, role of FII sub-accounts and Overseas Corporate Bodies. Three, the role of Unit Trust of India in providing exits to Ketan Parekh and bench marking his speculative placements. Four, massive default at the Calcutta Stock Exchange (CSE) and its cover-up. Five unravelling the rampant unofficial market at CSE and closing it down. Six, sundry irregularities such as whether the short selling around budget day was based on inside information on trading positions, nailing brokers who duped investors through fake badla contracts etc.

The consequences of JPC spending inordinate time on Scam ‘92 and its failure to focus on the present scam is there for all to see. It is apparent in the audacious stance taken by several of the leading personalities in this scam and the regulators. Ketan Parekh, emerged from 55 days of custody threatening to file a Rs 5000 crore defamation suit against Bank of India (BOI) and the Central Bureau of Investigation (CBI) for daring to act against him. In his first interview after his exit he says that “cheque bouncing or defaults are routine in day-to-day commercial dealings and you cannot arrest a person for something which is of a civil nature”.

It is almost as though the Ketan Parekh’s involvement in the scam is restricted to the Rs 137-crore pay order given by him to BOI which bounced. The rest of it--the Rs. 2900 crore repatriated through OCBs, the Rs. 1000 crore-plus which was transferred to Kolkata brokers, the losses in the unofficial markets there, Rs. 2000 crore diverted from companies and banks as part of a close nexus with corporate houses whose share have been rigged up–is yet to be taken up by regulatory agencies.

Shankar Sharma of First Global is another example. It is not only Income Tax officials that he threatens, but journalists too. He holds press conferences and issues belligerent press releases to amplify SEBI’s minor mistakes while keeping mum of many other substantive issues. Anybody who dares to disagree with his position is immediately treated to abuse. Though many of SEBI’s findings have little to do with Sharma’s financing of, his constant refrain is that he is “victimised by SEBI which is acting on behalf of a totalitarian regime”.

While some of SEBI’s actions have been knee-jerk, at the same time it has unearthed significant evidence with respect to Foreign Institutional Investors, avoidance of margins, the corporate-broker nexus and other issues. Yet, since its preliminary inspection report, SEBI has done precious little to probe the scam further.

The JPC needs to focus on quickly completing the present investigation and to direct the enforcement agencies, CBI, RBI and SEBI to take specific action. Secondly, it needs to concentrate on systemic changes to prevent the recurrence of scams, direct the closure of multiple stock exchanges, hastening the implementation of electronic cheque clearance systems. Finally, will it introduce what is really lacking in India: the concept of quick action and imposing sharp deterrent penalties on those who violate investors trust or loot their money. Without a system of exemplary punishment there will be no real cleanup.

-- Sucheta Dalal