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The Nine-Year Itch

It's feared that the JPC meant to probe the recent stocks scam could end the way of its earlier avatar—in a whimper

The Nine-Year Itch
Abhijit Bhatlekar
The Nine-Year Itch
Nine years may come in between the financial scams of 1992 and 2001 but read the fine print and the misadventures of the two Big Bulls seem uncannily analogous.

Harshad Mehta and Ketan Parekh were more than just two Mumbai-based Gujarati stockbrokers who had their gala at the bourses while the regulators sleepwalked. Dissect the facts carefully and you'll discover that the two are co-accused in an alleged plot to defraud a mutual fund in 1992.

On both occasions, their schemes got busted right after the Budget and the skeletons tumbled out of the closets when the scanner fell on two relatively inconspicuous banks—Bank of Karad in '92 and Madhavpura Mercantile Cooperative Bank in 2001.

And now in a bizarre rerun of events, even the postscripts are aping each other. The government has approved a 30-member joint parliamentary committee (jpc) to probe the market irregularities. Nine years ago, Congressman Ram Niwas Mirdha had headed such a "high-powered" panel on the securities scam. This time around, the onus is on the bjp's Prakash Mani Tripathi.

Lofty intentions aside, the move actually highlights the Centre's inconsistency while opting for a jpc. On the one hand, it forcefully scuttles a jpc on Tehelka but in the same breath it sanctions the capital market probe. This, feels the Opposition, "reeks of political opportunism". Says Jaipal Reddy, Congress spokesperson and member of both the jpcs: "Tehelka was much more sensitive with wider political ramifications."

However, Reddy is confident about this jpc's validity and negates any possibility of it working at cross-purposes with investigating agencies that already are on the job. "We'll work concurrently. It will be a mutually reinforcing process and the recommendations will have enormous persuasive value." This sentiment transcends party lines as even the bjp's Tripathi and S.S. Ahluwalia are sure of a successful post-mortem.

Market observers, however, remain outright dismissive of this "parliamentary circus" and feel that this jpc report will be "out of sync with ground realities".

Surjit Bhalla, MD, Oxus Fund Management, calls it a mess and a political scam in itself which will only delay stockmarket reforms. "The capital market is a crazy animal. Do the jpc members understand its intricacies?" he asks, adding: "This is why the jpc will fail to churn out anything exclusive."

Agrees a member of the 1992 jpc: "This panel will be dysfunctional since clueless members will seek assistance from the same rbi and sebi officials who want to conceal the truth in the first place." Adds another informed source: "The politicians will never expose the truth since that would be unsettling. Do you think Amar Singh, who is in the jpc, will be comfortable if the uti-Vinay Maloo-Ketan Parekh links are probed?"

According to former sebi chairman G.V. Ramakrishna, "Real-time market surveillance is necessary. Post-event inquiries like jpcs are a waste of time." He says every evening sebi should have sufficient inputs on broker dealings, volume and value of trades in the top scrips. Such monitoring will act as a psychological check. Bhalla says the jpc must ideally identify the features of a modern and transparent market and move towards it. "Why aren't we going to the roots of the recurring accidents?"

To be honest, though, there are some like Gul Teckchandani, cio, Sun f&c Mutual Fund, who don't subscribe to such extreme views. He feels: "Multiplicity doesn't reduce integrity.In fact, since parliamentarians represent the masses, their participation becomes imperative in order to rekindle small investor interests."

A moot point that crops up here deals with the issue of consensus among the motley crew as Bhalla inquires: "When was the last time 30 parliamentarians actually agreed on something?" Others go a step further and claim, "Consensus among an ignorant lot will be even more lethal". Although in theory jpcs stand free of politicking and work in accordance to a specific brief, a flashback will reveal that the 1992 report was preceded by bickerings.

The current jpc has not yet met but the commission has already been plagued by rampant mudslinging with key members including Amar Singh, rjd MP Prem Gupta, ncp's Praful Patel, and bjp's Kirit Somaiya and Harin Pathak coming under attack from colleagues for their alleged proximity to key players suspected of skulduggery. Moreover, members in private have started questioning the credibility of the chairperson.

Although the "tainted" members deny the allegations as baseless and Singh in a written missive has suo motu declared his corporate links, a few jpc members feel that it's just not enough. "The transparency of our jpc will always be questioned. "Already, the market is agog with rumours that 40 per cent of the panel is comprised of the tainted guys," said a senior member. Cautions Ahluwalia: "Remember, one foul smelling fish can spoil the entire fish market."

The most significant issue in the whole fracas will of course be the actual implementation of the jpc suggestions. With the benefit of hindsight, it will be fruitful to examine the ground reality post the 1992 commission recommendations.

In July 1994, six months after the submission of the jpc report, the government presented the action taken report (atr) which fully accepted 87 out of the 107 key recommendations. But subsequently, it had to submit a revised atr following opposition.

One of the highly controversial points in the initial atr was the responsibility of the finance minister. Although the jpc report held him accountable, the first atr clarified that "it was not humanly possible for the FM to personally supervise all entities". However, further criticism eventually led to the revised atr accepting the jpc's stand. Naturally, this time, the position of the FM will be closely monitored.

jpc 1992 members are, however, not very optimistic as Mirdha has himself come on record saying "despite our recommendations, the financial systems are still prone to fraud," adding, "Nick Leeson was sentenced within weeks, not Harshad Mehta."

Incidentally, a decade before the securities scam, Mirdha had actually written a letter to then finance minister Pranab Mukherjee warning him about the loopholes in the market. Strangely enough, the same lacunae have been responsible for the meteoric rise of both Harshad Mehta and KP.

Gurudas Dasgupta, another ex-member, is even more disgruntled. "Most of our unanimous decisions were rejected at the behest of senior finance ministry officials. Badla hasn't been banned nor was any effort made to further probe Goldstar, which was linked to Narasimha Rao's son. The government also refused to track the flow of money, rejected our demand of an independent audit of the banks and financial institutions. Moreover, no harsh action was taken against the foreign banks. Even the revised atr is a whitewash."

Equally uninspired are senior market players who feel that the atr is a mere statement of intent."What do you do if a witness refuses to divulge details?" they ask. Says an insider: "In an rbi meeting during the 1992 investigation, Citibank officials flatly declined to produce transaction documents claiming short notice. They were supposed to get back which they never did and are still operating freely. An internal memo of Citibank specifically mentioned that the rbi regulations are mere directives not rules."

"The lack of sufficient deterrent and enforcement of law are the main evil. Hence in both scams, cooperative banks, corporates and bigtime speculators are involved," an informed source told Outlook.

It is this time-consuming process of punishment that rankles analyst Paranjoy Guha Thakurta. "The markets have matured but they still remain volatile. Similarly, sebi has been given some teeth but even now it's more bark than bite." Nine years ago, sebi called bse a "closed club of brokers", but only in March 2001 did it specify the responsibilities of its directors. Such delays roll on and the recent sebi ban on Videocon, Sterlite and bpl is another case in point. Meanwhile, the National Housing Bank and anz Grindlays are still hornlocked in a 1992 financial dispute.

The ineffectiveness of the jpc, feels Ramakrishna, is because the recommendations are not binding on anybody. But others feel that politicians may not actually be interested in solutions. "Who has talked about regulating and privatising uti?" asks an analyst. "We are divesting in aluminium factories but not stockmarket investments by a government-owned body." Odd.

Arijit Barman With Vatsala Kamath in Chennai
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