At the beginning of 2018, all 17 offices
of the insurance ombudsman were headless; even today, nine posts
remain vacant. The Securities Appellate Tribunal (SAT) has over 400 cases pending because the government has not bothered to make appointments; left with only one out of three members and no presiding officer, SAT can only issue temporary orders that too on urgent matters. Many public sector banks (PSBs) continue be headless. Although we have two finance ministers, of whom one is busy with blog posts and tweets, the finance ministry hasn’t found time to make these crucial appointments.
Now, contrast this with two statutory bodies created in 1992 in the wake of the Harshad Mehta scam. They were supposed to be wound up after taking charge of the assets of all scam-accused and distributing the proceeds after the expeditious hearing of cases was complete. But our judicial system is so broken that both, the special court and the custodian, have almost become permanent establishments funded by the Central government. They have been around for a quarter century and may survive another 25 years, going by the pace at which the cases are being tried with over 120 civil cases still pending.
After the Rs5,000-crore securities scam of 1992 engulfed the entire financial system, the government first passed the Special Court (Trial of Offences Relating to Transaction in Securities) Ordinance in 1992 for speedy trial of cases. It was amended in 1994 to include civil cases. A special court was set up in Mumbai to ensure faster trial of cases, with an appeal only to the Supreme Court. Importantly, these cases were limited to securities transactions in a small period—from 1 April 1991 to 6 June 1992. The office of a custodian was set up under the Act, to take charge of scam-related assets and to ‘notify’ the scam-accused. It seized all assets of the notified persons without any distinction between income from legitimate business or income of the persons notified and the scam.
Every year, the Union Budget allocates Rs13 crore for running this office; it is strangely located in Delhi and not Mumbai which is the scene of action. It also has an office in Bengaluru, probably because Canara Bank, one of the two biggest litigants, is located there. Over 26 years, the government has spent Rs338 crore on the custodian’s existence. The way scam cases have dragged would have been a national embarrassment, but for the fact that most people have long forgotten it and/or are uninterested.
On 14 May 2017, the Times of India reported that the custodian had “disbursed more than Rs6,000 crore to banks and the income-tax (I-T) department by selling assets of the Harshad Mehta’s family alone and identified another Rs200 crore to be auctioned.” The Harshad Mehta group’s involvement in the scam was probably under Rs2,000 crore; but assets of over Rs6,000 crore have reportedly been recovered from them. The main assets with the custodian belong to stockbrokers whose businesses were shut down and tiny amounts from some individuals. There is, obviously, little to be recovered from other equally complicit institutions such as State Bank of India, Canara Bank and its associates, UCO Bank, Standard Chartered Bank (SCB), Citi Bank, HSBC, Fairgrowth Financial Services, ANZ Grindlays, Andhra Bank as well as several private and public sector companies.
The case for winding up the 1992 scam investigation becomes even more compelling when you compare it with the spate of recent scams and the loot of PSBs by large industrial houses. Nirav Modi (Rs11,400 crore plus), Mehul Choksi (Gitanjali Gems over Rs6,000 crore) and Jatin Mehta (Winsome Diamonds over Rs7,000 crore) had fled the country after dumping huge losses on banks. Vikram Kothari of Rotomac could defraud banks of Rs3,700 crore in a ballpoint pen company. And the humungous bad debts—of Essar, Videocon, Bhushan Steel, Electrosteel and many others—are going to inflict damages running into several lakh crore of rupees, mainly on PSBs even if bankruptcy proceedings lead to a change in ownership.
Isn’t there a clear case for a pragmatic decision to wind up and settle cases against some of the 1992 scam and stop it clogging up our courts? But who has the political courage to do it?
Let us look at why the securities scam investigation had been so messed up. The 1992 scam was sensibly handled initially through a multi-disciplinary committee headed by R Janakiraman (former deputy governor of the Reserve Bank of India). The committee included the central bureau of investigation (CBI) and the I-T department, which ought to have ensured that they worked as a team to recover the money and punish the guilty as well.
The committee published six detailed reports that laid bare what had gone wrong and who was accountable. It also formed the basis of the Joint Parliamentary Committee (JPC) report, although that, by its very composition, ensured that it had a political spin. Unfortunately, the Supreme Court decided that the Janakiraman report and the JPC report had no evidentiary value and could not be used in Court.
That, in itself, was not such a setback; because the basic work of joining the dots and understanding banking and financial issues and violations was already done. Here’s why things didn't work out that way. Nobody put CBI on the clock or ensured that with the basic groundwork already done, it would have to show some speed as well. CBI took three years to file charge-sheets, some even later.
As many as 45 cases criminal cases were filed including some in cases where banks were unwilling to complain and said they had not lost any money. The cases continue to drag on and one, involving Fairgrowth Financial Services, was decided last week.
The Special Courts Act gave the first preference to I-T dues which set the stage for a huge problem. The I-T department came up with demands totalling over Rs30,000 crore (including interest and penalty) which was a ridiculously large multiple of the scam itself. Unless the tax authorities put a stop to such exaggerated claims, no dispute or recovery will ever be complete or closed in India.
The custodian’s office acts as a sort of recovery agent for the tax department and is managed by government employees on ‘deputation’ from other departments. It has neither the mandate nor the capability of managing assets that it has seized after ‘notifying’ scam accused, although ensuring this was imperative. It took decades for the custodian to get shares held by various scam-accused transferred in its own name and ensure that benefits such as dividends, bonuses, etc, were correctly received. As recently as last year, it was harassing ordinary, innocent investors unconnected with the scam. It sent out demand notices, asking investors to submit dividends and bonuses earned with interest, going back to 1992 on the grounds that they belonged to Harshad Mehta.
This mis-management is especially unfair because the liability of the scam-accused is constantly increasing, since they are held responsible for interest payments. And, yet, their assets are seized; their stock portfolio is not properly managed. Many of the shares held by the Mehta group have seen a dramatic increase in value over the years. Some others with the custodian would have fetched a good return if sold at the right time. Similarly, the value of properties and physical assets has also gone up considerably; but the tax demands with interest compounded will continue to run ahead of this valuation creating an impossible situation.
The NDA (National Democratic Alliance) government has been quick to adopt Americanisms such as ‘grandfathering’ and ‘sunset clauses’ for tax laws. Wouldn’t it be in line with its promise of maximum governance and minimum government to set up a ‘credible’ structure to wind up the special court after winding down the cases, de-notify the accused and get the tax department to come with a sane assessment which will actually bring some revenue to the exchequer? Instead, what we have is a meandering litigation that is a drain on PSBs’ resources, pain for those who have got dragged into it and enriches only the legal community.