Sucheta Dalal :Unfinished Tasks Of The JPC (5 August 2002)
Sucheta Dalal

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Unfinished Tasks Of The JPC (5 August 2002)  

What information the Joint Parliamentary Committee gets, depends on the questions that it asks. And what it finally says, will depend on the horse-trading that will precede the final report. Those of us who covered Scam 1992 know the drill well, so one is only happy that the JPC Secretariat’s alleged “jottings” were widely leaked to the media. Since we now know what the JPC has found out and jotted down, it will also be clear, what it omits or dilutes from the final recommendations.

In this connection, the JPC’s contrasting experience with two private banks is worth a serious look. The top management of both banks was in cahoots with two different sets of stockbrokers who helped themselves to bank funds and played the market with impunity before year 2000. The RBI either remained a silent spectator or actively suppressed facts from its own inspection reports. The banks are: The Calicut-based Nedungadi Bank which was in the grip stock broker-operator Rajendra Banthia and Global Trust Bank, set up by Ramesh Gelli, a former Vysya Bank employee, whose access to large personal capital has never troubled the regulator.

In the Nedungadi case, it was common knowledge that Rajendra Banthia, a close crony of the late Harshad Mehta had a free run of the bank. Incidentally, Banthia was Vice President of the Bombay Stock Exchange in 1998, when it had notoriously opened the trading system in the middle of the night to enter fictitious trades and avoid a default. He was also responsible for inducting a former BSE President and public representative on the Nedungadi board.

In fact, he has been under investigation since 1992 (in connection with the OIDB case relating to former petroleum minister B Shankaranand) and in 1998 in connection with the BSE episode (curiously, the Securities and Exchange Board of India has consistently failed to pursue Banthia’s role in the matter). The press has openly reported all of this over the years; but the RBI representative on the Nedungadi Board saw no cause for alarm — not even when Banthia was officially inducted on the board in December 2000.

It was only after the scam surfaced that RBI’s inspection unearthed illegal arbitrage trading worth Rs 1,352 crore through three firms connected with Banthia, which had caused a loss of Rs 95 crore to Nedungadi Bank. The arbitrage was nothing but a license to indulge in rampant churning of stock without leaving any open positions and the bank board knew that all three firms allowed to conduct such trades belonged to Banthia. Following hectic recovery efforts, Banthia coughed up some of the losses, but still owes the bank Rs 34 crore. The JPC is now told that he holds over 45-50 per cent of the banks equity, although only 20 per cent is officially held.

Given the extent of complicity that has been unearthed, let us see what the JPC’s “jottings” say by way of punitive action. It recommends criminal proceedings to be initiated against Nedungadi’s ex-chairman and senior manager of the investment cell, with action to recover the losses from them. It wants action against the bank’s auditor and a censure and investigation into the role of the RBI nominee on the board, who it says “failed to discharge its regulatory function and remained a silent spectator”. Significantly enough, there is no mention of any criminal action against Rajendra Banthia and his cronies — the real actors and not mere spectators. The draft also does not say if he will be forced to sell his 50 per cent stake in Nedungadi Bank to recover the money that he owes it. Was this an oversight? Or is the JPC also planning to shield the broker? Only the final report will clarify the picture.

Interestingly, the draft also accuses the RBI representative deposing before the JPC of not placing the correct facts before it and took serious note of his claim that the central bank had no knowledge of the arbitrage dealings by the bank. In fact, Nedungadi had officially applied for permission for such dealings. Although no permission was granted, the application itself should have rung alarm bells and triggered an inspection of all private banks to prevent such trades.

The Global Trust Bank raises similar questions about the seriousness of RBI’s supervision and its inaction, but there is a big difference. In this case, the RBI annual inspection for the year 2000 had in fact exposed the entire dubious nexus between then chairman Ramesh Gelli and a cabal of brokers. Everybody from Ketan Parekh to Shankar Sharma of First Global had shady dealings with the bank, which were clearly identified in the report, but much of it still remains suppressed. In fact, it is yet another case where the JPC has probably been given only part of the findings. The RBI’s annual financial inspection report comprises two parts — a main report and a confidential section. While the main report, which also has significant findings has been submitted to the JPC, the crucial confidential section has apparently not. Among other things, this confidential section had reported stock market transactions conducted by the former CMD, Ramesh Gelli through 16 different firms promoted by him and his relatives.

It is pertinent for the JPC to ask what role the RBI played in delaying the inspection report for four long months and helping GTB to suppress Non Performing Assets to under 3 per cent so that it would qualify for an insurance license. Did the confidential section make any reference to the bank’s auditors and was any action initiated?

What about the Rs 40 crore loan to a company called PEPCO? Why did the bank fail to initiate criminal action or report the matter to the Enforcement Directorate although PEPCO had remitted money abroad and failed to import any machinery? Why was the loan written off in such a rush? Where did the PEPCO money go? Similarly, did Ketan Parekh’s transactions come up for discussion at a meeting with GTB at Hyderabad in 2000? How was it that although Parekh’s name was deleted from the minutes, the GTB chairman had offered an explanation about the matter? Was the confidential section of the RBI report (which is not sent to the bank) leaked to him?

Obviously many questions remain unasked. The JPC needs to ask them and needs to make regulators more accountable, otherwise the names of the scamsters would change every year but the scams will continue with monotonous regularity.

-- Sucheta Dalal