It terms of reform and development, the Indian capital market and financial sector have been the fastest to grab every opportunity presented by the paradigm shift in India’s economic policy. Their furious developmental activities have put the two top Indian bourses almost on par with the best in the world, in terms of their structure, systems and regulation. But for all the development efforts, the capital market remains seriously flawed because three key ingredients are still missing. They are adequate supervision, strict accountability, and appropriate punishment.

As a result, the markets have remained shallow and stunted and have lurched from one financial scandal to another over the last decade. Every policy change in the liberalisation process was pounced upon by unscrupulous companies, who aided by a retinue of investment bankers and consultants diverted thousands of crores of rupees to themselves. In the process, retail investors have been the biggest losers and the effect of their disenchantment is visible in the slow growth of India’s investor population. China has over 25 million investors, while India, with all its rapid development and its 130- year old stock exchange culture has only 19 million investors.

A simple roll-call of the scams of the last decade tells the story of why Indian investors are so frustrated.

·       The Securities Scam of 1992: This was the mother of all Indian financial scandals. It exposed the utter lawlessness and absence of supervision in the money markets; it allowed funds to be transferred with impunity from banks and corporate houses into the equity markets; and saw thousands of crores of bank funds to move in and out of brokers’ bank accounts in what was later claimed as a “accepted market practice”. A Special Court under a separate act of parliament was set up and over 70 cases were filed by the CBI but not a single scamster has been finally convicted by the excruciatingly slow judicial system. Instead, their repeated attempts to re-enter the market with the same bag of tricks have caused further losses to investors. More significantly, the Reserve Bank of India which was guilty of gross negligence and was discovered to have deliberately buried supervision reports was let off scot-free with just a couple of officials reprimanded.

·       The IPO bubble: The entry of Foreign Institutional investors led to a massive bull run, which saw the secondary market recover from the scam even though badla was banned. Soon thereafter, the Control over Capital Issues was abolished with a one-line order and it opened the floodgates for a massive scam in the primary market (or Initial public offerings). This scam had two parts – the first was perpetrated by existing companies which ramped up their prices in order to raise money at hugely inflated premia to fund greenfield projects and mindless diversifications, most of which have either failed to take off or are languishing. The other half of the scam had a multitude of small traders, chartered accountants and businessmen, who teamed up with bankers and investment bankers to float new companies and raise public funds. The botched up M. S. Shoes case, exemplifies the first type of scam while the second type, which caused losses of several thousand crores of rupees is known as the vanishing companies scandal. The IPO bubble which lasted three years from 1993 to 96 finally burst when prices of listed companies began to crash. So huge was investors’ disappointment that the primary market remained dead for the next two years, almost until the beginning of 1999.

·        Preferential Allotment rip-off: This was an offshoot of the rampant price rigging on the secondary market. Apart from raising fresh funds, promoters of Indian companies who thought that prices would never come down, quickly orchestrated general body clearances to allot shares to themselves on a preferential basis and at a substantial discount to the market. Multinational companies such as Colgate and Castrol started the trend and it led to a benefit of nearly Rs 5000 crores (in relation to market prices at that time) to retail investors before the Securities and Exchange Board of India (SEBI) put in place a set of rules to block the practice. A public interest litigation filed at that time drags on in court.

·       CRB’s house of cards: Chain Roop Bhansali’s (CRB) cardboard empire is only the biggest and most audacious of many that were built and disappeared in the new ‘liberalised’ milieu of the mid-1990s. His Rs 1000 crore financial conglomerate comprised of a mutual fund, fixed deposit collection (with hefty cash kick backs), a merchant bank (he even lobbied hard to head the Association of Merchant Bankers of India) and a provisional banking license. Many of these licenses required adequate scrutiny by SEBI and the RBI, and that fact that they passed muster is another reflection of supervisory lethargy. Armed with these and favourable credit ratings and audit reports, CRB created a pyramid based on high cost financing which finally collapsed. The winner: C. R. Bhansali, who, after a brief spot of trouble with the authorities moved on to the dotcom business and the regulators who were never held accountable. The losers: millions of small investors who lost through fixed deposits or the mutual fund. The CRB collapse caused a run on other finance companies causing a huge systemic problem and further losses to investors.

·       Plantation companies’ puffery: These followed the same strategy as vanishing companies, and since they were subject to no regulation, could get away with wild profit projections. They positioned themselves as part mutual fund, part IPO and promised the most incredible returns – over 1000 per cent at least in seven years. High profile television campaigns, full-page advertisments and glossy brochures had the investors flocking for more. Almost all these project, with barely any exception have vanished. The cost: Rs 8000 crores plus.

·       Mutual Funds disaster: The biggest post-liberalisation joke on investors is the suggestion that small investors should invest in the market through Mutual Funds. Yet, over the decade, a string of government owned mutual funds have failed to earn enough to pay the returns ‘assured’ to investors. Starting with the scam-hit Canstar scheme, most mutual funds had to be bailed out by their sponsor banks, or parent institutions. The came the big bail out of Unit Trust of India. Since UTI is set up under its own act, it was the tax- payers who paid for the Rs 4800 crore bailout in 1999. Just three years later, it was back buying recklessly into the Ketan Parekh manipulated scrips and suffering big losses in the process. The record of the private mutual funds has also been patchy – after hitting a purple patch in 1999-2000, many of the sector specific funds are down in the dumps. It will be a long time indeed before small investors consider mutual funds a reasonably safe investment.

·       The 1998 collapse: What could be a bigger indicator of the ineffectiveness of the regulatory system and the moral bankruptcy in the country than the return of Harshad Mehta? In 1998, the scamster, who was the villain of 1992, made a comeback by floating a website to hand out stock tips and writing columns in several newspapers who were told that his column would push up their circulation figures. His relentless rigging of BPL, Videocon and Sterlite shares ended with the inevitable collapse and a cover up operation involving an illegal opening of the trading system in the middle of the night by the Bombay Stock Exchange officials. It cost the BSE President and Executive Director their jobs, but the broker and the companies have got away so far.

·       The K-10 gimmick: This too is already on the way to be hushed up even before it is fully investigated. Though everybody knows this as a Ketan Parekh scandal, but if one examines the selective leak of the SEBI investigation report to the media, it would seem as though only three operators caused the problem by hammering down prices. The government promised stringent action not only against Ketan Parekh and the brokers who hammered down prices, but also the regulators who slept over their job and companies/banks which colluded with them to divert funds to the market. Yet, within a month, the pressure for action is off and the momentum has been lost.