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JPC Report

A Clean Chit?

Should the ex-Finance Minister Yashwant Sinha own at least moral responsibility for the JPC report into the stock market scam indicting his then ministry for various lapses of omission and commission? Mo

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A Clean Chit?

REPORT: JOINT COMMITTEE ON STOCK MARKET SCAM AND MATTERS RELATING THERETO (THIRTEENTH LOK SABHA) (VOLUME I – REPORT ) Presented to Lok Sabha on 19 December, 2002 Laid on the Table of Rajya Sabha on 19 December, 2002 Full Text of: 


The Ministry of Finance (MoF) is vested with the overall responsibility for the entire formulation, presentation to the Cabinet, adoption and subsequent implementation of the fiscal, economic and monetary policies of the Government. As part of its implementational responsibility, it oversees the working of the country's financial systems, including the financial institutions, all NBFC companies, capital market and its health. The policy for taxation (direct and indirect), tax collection and distribution, international negotiations, exchange rates, management of balance payments are also amongst the diverse responsibilities of this Ministry. It has the following departments:

1. Department of Economic Affairs 
2. Department of Revenue 
3. Department of Expenditure

Lately, the Department of Company Affairs, earlier part of Ministry of Law and Justice, has been attached to the Ministry of Finance.

13.2 Different aspects relating to overall responsibility of Ministry of Finance have been dealt with under relevant chapters of this Report. This Chapter relates to the overall responsibilities of the Ministry of Finance towards stock market scam. The role of Ministry of Finance towards the problems of the Unit Trust of India has been separately dealt with in Part II of this report. The earlier JPC of 1992 which enquired into irregularities in securities and banking transactions, in para 16.62 and 16.63 of their report regarding the responsibilities of the Ministry of Finance had observed as under:--

"16.62 The FM has raised a point to which the Committee feel it should react. In his written submission the Minister has stated:

"As regards the functions of the FM, he oversees the work of the Ministry and provides overall policy guidance to the officials. Revenue and Expenditure decisions are the direct responsibility of the Finance Ministry. As such FM has more direct responsibility in these areas. He is also responsible for broad policy decisions affecting the financial system where the Finance Ministry is involved. However, FM cannot be held responsible for administrative failures or management deficiencies in the case of individual banks and other financial institutions."

The Committee feel that such a distinction cannot be sustained by the constitutional jurisprudence under which the parliamentary system works.

16.63 The principle of constructive ministerial responsibility is equally applicable to other Departments and Ministries where acts of omission and commission have taken place in the discharge of function and duties at different levels." 

13.3 The Committee are agreed that ministerial responsibility in regard to this Report flows from these principles. 


13.4 In pursuance of the recommendation of the earlier JPC of 1992 and with SEBI coming in as the major regulator of the stock market, the Stock Exchange Division of the Ministry was done away with. The total workload was given to the Capital Market Division which formed part of the Department of Economic Affairs.

13.5 Speaking on the role of CM Division in the Ministry of Finance, Shri Ajit Kumar, the then Finance Secretary stated as under:--

"I just wanted to mention very broadly that in 1947, the Controller of Capital Issues Act had been promulgated and under that, we used to have an officer called the Controller of Capital Issues, and it was his job and that of his office to allow all the capital issues --  how many are to be allowed, at what price and so on and so forth. Till 1992, this was the position. In between, before that, the Securities Contracts Regulation Act was in position in 1956. Then, when SEBI came into existence, this office of Controller of Capital Issues was abolished and all the functions, which this office used to perform, were given over to the SEBI as the regulator."

13.6 The Capital Market Division deals with broad policy matters, legislative business relating to any amendment required in Securities Contract Regulation Act or other connected Acts, answering parliamentary questions, coordinating various aspects, servicing the High Level Coordination Committee on Financial & Capital Markets (HLCCFCM) which has been set up under the chairmanship of the Governor of the RBI. This Division deals with organizational matters relating to UTI and SEBI and Securities Appellate Tribunal (SAT) including appointment of Chairman and Members of the SEBI Board.


13.7 Within the broad framework explained above prominent functions of the Banking Division of direct relevance to the subjects under examination of the JPC include, inter-alia:

--  Processing of appointments of Chief Executives of banks and financial institutions and other official and non-official directors on their boards;

--  Supervision and appraisal of the overall performance of all public sector banks; --  Policy relating to private banks, foreign banks and NBFCs; --  Policy matters relating to credit; --  Resolving disputes between various departments of Government, PSUs and the banks; --  Nominations of CVOs in public sector banks in consultation with the CVC; --  Vigilance Surveillance over Chief Executives of public sector banks and financial institutions; and

--  Studies in Preventive intelligence.


13.8 SEBI is governed by SEBI Act, 1992 and is accountable to the Parliament through the Ministry of Finance. The SEBI is required to furnish an annual report and annual statement of  accounts giving a true and full account of its activities, policies, programmes and finances to the Central Government which are laid before each House of Parliament. It is through this method that Parliament becomes aware of the functioning of SEBI every year. SEBI is entrusted with the task of protecting the interests of investors in securities and to promote the development and regulation of the securities market through appropriate measures. Under Section 4 of the SEBI Act, the Board of members of SEBI consists of a Chairman, two members from amongst the officials of the Ministries of the Central Government dealing with Finance and Law, one member from the Reserve Bank of India, two other members appointed by the Central Government, who are professionals and interalia have experience or special knowledge relating to securities market. In practice, however, the senior level positions in SEBI have been held predominantly from Income Tax Department/ Indian Administrative Service on deputation basis.

13.9 The Government representatives on the SEBI Board were expected to maintain flow of information between the Ministry of Finance and SEBI as also to project the Government policy on the SEBI Board. However, as the functioning of SEBI reached a level of maturity, the Government expected to give more and more autonomy to that institution. The Board of SEBI was meant to be autonomous regulatory body and this fact has always been recognized. Final decision on any issue within the ambit of the SEBI Act vests with the Board.

13.10 Speaking on the issue of importance of autonomy and distancing politics from economic decision making, Dr. E. A. S. Sarma, former Secretary, Department of Economic Affairs during his deposition before the Committee submitted that the procedures regarding appointment to the top positions in organizations like SEBI, UTI and Banks are not very transparent. He suggested for a Search Committee or a Professional Group which should search professionals for appointment to top level positions. He further suggested that such Search Committeeís composition must be defined and the recommendations of the Search Committee should be binding on the government. Constitution of such a committee should be provided in the relevant statute of an organization. On being asked by the Committee what could be the composition of such Search Committee, he suggested that it may comprise Prime Minister, the Leader of the Opposition and the Chief Justice of India so that nobody could question the integrity of the Committee.


13.11 In 1999, the Capital Market witnessed an increase in the Sensex which continued in early 2000. The BSE Sensex which was 3740 on 31.3.1999 rose to 5001 in 31.3.2000 and declined to 3604 on 30.3.2001. From mid-2000 the stock prices showed a declining trend which was gradual but steady. From March 2001 the Sensex fell sharply and can be construed as a crash in the stock market.

13.12 The rise in the Sensex over a period of more than nine months from July 1999 to March 2000 was unprecedented by Indian standards. The graph generally matched the rise of stock market prices in the international markets. The pattern of rise and fall in the international stock market gets generally reflected with minor variations in the Indian stock market also. However, the rise in Indian markets was associated with a massive increase in the daily turn over in stock markets from a few hundred crore to Rs. 12000 crore and more. It is normal for stock market to rise and fall. By themselves, such fluctuations do not constitute a scam. However, if the volatility is unusual, the need for enquiring into such market behaviour is imperative. In that context, a question arises as to whether the unusual rise in the prices of shares of certain Information, Communication and Entertainment (ICE) companies was not fueled by irregular flow of money into the stock market. If this was so, then is it not a failure of SEBI and was not the Ministry of Finance duty-bound to ask serious questions about this trend? 

13.13 In this regard the Ministry of Finance has stated that while fluctuations are normal in stock markets and should not be a matter of undue concern, the market regulator and stock exchanges concerned need to be vigilant with regard to the systemic risk or movements driven by any form of manipulation. The objective of the Government and the market regulator is to ensure efficiency and integrity in the functioning of the capital markets. As per statutory provisions, surveillance functions over the capital market operations have been assigned to SEBI and the statute does not envisage direct interference by the Government in operations of the capital markets and stock exchanges. However, regular periodic reports are received from SEBI and suitable enquiries are made regarding the functioning of the markets. Successive Ministers of Finance since the commencement of liberalization have testified before the Committee that they kept themselves informed of market developments and enquired, or caused enquiries to be made about reasons for unusual volatility when this occurred. The Hon'ble Shri Yashwant Sinha, vouchsafed the Committee that when the Sensex crossed the 6000 mark in February, 2000, the SEBI chairman even interrupted a Budget meeting to telephonically inform Finance Minister of his concern and Finance Minister asked him to take steps to cool the market. Key steps taken by SEBI in this regard have been elaborated in the chapter on SEBI.

13.14 As per the documents received from the Ministry, taking note of the high degree of volatility in the capital market, the Secretary, Department of Economic Affairs in his letter addressed to SEBI on 26.4.2000 expressed concern about the scope for market manipulation by unscrupulous players in the market. A note was also forwarded containing the following suggestions for bringing improvements in the equity market:--

(i) Moving all scrips to the rolling settlement mode as soon as possible. (ii) Simplification of the margin system and strict implementation of margin requirements that can be verified through an electronic surveillance system so that requirements do not have to be changed frequently.

(iii) Reviewing the 8% share specific, circuit breaker system already under consideration of SEBI be expedited.

(iv) The index futures market may be started as soon as possible. This will give market participants access to an additional hedging instrument. This could be followed up, after completing due diligence with the stock exchanges, by initiating a stock options market.

(v) It is understood that some brokers continue to trade on the telephone well after the stock exchanges have shut for the day. It is also heard that there is substantial "kerb" badla market in Calcutta outside the stock exchange. SEBI may like to take a close look at the market manipulation ramifications, if any.

(vi) In some equity markets of the developed countries short selling is not permitted when there is excessive volatility on the "downtick". SEBI may like to look into the possibility of introducing a similar restriction in our markets. There is a feeling amongst market functionaries in India that such a restriction would reduce the possibility of panic selling.

13.15 The copies of correspondence held by the Ministry of Finance with SEBI on the systemic reforms from April 2000 were made available to the Committee. It is observed therefrom that the Ministry has been repeatedly emphasizing the need for expeditious corrective measures for effective regulation and controlling high degree of volatility in the stock market.

13.16 During deposition before the Committee, the representative of the Capital Market Division submitted that the Government was aware of the sharp rise in the stock market indices  and that prices of specific stocks had gone up. He informed the Committee that the Government was in touch with SEBI suggesting them to watch out issues like rolling settlement, badla and investor education. A number of questions on this subject were asked in the both Houses of Parliament. The Capital Market Division of the Ministry of Finance was in touch with SEBI "at that point of time." They were also watching NASDAQ and while "that was not necessarily the full explanation of what was going on in this market but we saw that the Information, Communication and Entertainment (ICE) companies, their share prices were relatively going even higher." The representative of the Capital Market Division further stated that "SEBI has got back to us saying that they have repeatedly issued signals through a variety of ways to the investors to be careful given the fact that stock valuations are very high."

13.17 In the statement by Shri D. R. Mehta, the then Chairman, SEBI submitted to the Committee during his deposition on 13.9.2001, it was stated that:

"On three different occasions, SEBI issued press releases cautioning small investors to exercise utmost caution and diligence including verification of fundamentals while transacting in securities."

13.18 The Capital Market Division representative also mentioned that they were informed by SEBI that the SEBI has repeatedly issued signals through a variety of ways to investors to be careful to invest in the companies which have low floating stocks and in which there might be already some issues under investigation by SEBI.

13.19 However, there was inadequate monitoring by SEBI as to whether its directives for investor protection were being assiduously implemented. Moreover, there was tardy reporting of compliance by Stock Exchanges, and neither SEBI's nominees directors nor SEBI itself cross-checked the reassuring reports received from Stock Exchanges against the concerns of the SEBI and the Ministry of Finance which led to the SEBI's circulars. Nor there were any concerted efforts by the regulators or the Ministry to monitor or investigate the exponential rise in the flow of money into the stock market from domestic and international sources. Therefore, there was inadequacy in action taken to identify issues relating to the integrity of markets and the protection of investor interests calling for corrective action through the strengthening of regulatory framework. The regulatory framework has now been considerably strengthened but only after the crash of March-April, 2001.

13.20 It is thus observed that the Ministry of Finance have been repeatedly emphasizing the need for expeditious corrective measures for effective regulation and controlling the high degree of volatility in stock market. Actions taken by Ministry of Finance and SEBI to warn investors during the rise of stock prices have been noted by the Committee. It has also been noted by the Committee that there was a feel good factor and feeling that India had arrived on the IT scene. Although actions have been taken by the Ministry of Finance and SEBI during the period when the stock market was rising unusually, the Committee are of the considered view that both these should have been more proactive and vigilant.

13.21 The Finance Minister while giving his statement in the Parliament on the extreme volatility in the stock market on 13.3.2001 stated that SEBI had already started its investigation as far as price manipulation was concerned and he announced following measures to improve institutional mechanisms and trading practices in the stock market:

(a) Corporatisation of stock exchanges by which ownership, management, and trading membership would be segregated from each other. This would help towards professionalisation of the management of exchanges, enhancing the ability of stock exchanges to raise funds from the market to modernise exchanges and providing better investor service;

(b) Extension of rolling settlement to 200 category "A" stocks in Modified Carry Forward Scheme, Automated Lending and Borrowing Mechanism and Borrowing and Lending Securities Scheme by July, 2001;

(c) Legislative changes to further strengthen provisions in the SEBI Act, 1992 to promote investor protection.

13.22 Regarding the implementation of the aforesaid measures so announced by the Finance Minister, it has been mentioned in the annual report for the year 2001-2002 of the Ministry of Finance that:

"As regards coporatisation/ demutualisation of stock exchanges, there have been consultations between Ministry of Finance, SEBI, Ministry of Law, Department of Company Affairs and stock exchanges. SEBI Board, in its meeting dated 28.12.2001 decided that no broker member of the stock exchanges shall be an office bearer of an exchange i. e. hold the position of President, Vice President, Treasurer etc. and that no SEBI official would be nominated on the Board of stock exchanges. Following this, SEBI has issued an order dated January 10, 2002, under Section 8 of the Securities Contracts (Regulation) Act, 1956, directing all the recognised stock exchanges to suitably amend its Rules, Articles etc. within a period of two months to give effect to SEBI Board's decision. The other administrative and legal modalities for demutualisation of stock exchanges are being worked out. In case of 11 stock exchanges, which failed to amend Articles or Rules to comply with the above referred SEBI Directive, the Articles or Rules of these exchanges were amended by SEBI through a notification. The other complex administrative and legal modalities for demutualisation of stock exchanges are being worked out. A Committee, under the Chairmanship of Justice Kania was constituted by SEBI to provide a definite road map for the early completion of the process of demutulisation.

Further the rolling settlement was extended to 251 category "A" stocks in Modified Carry Forward Scheme, Automated Lending and Borrowing Mechanism and Borrowing and Lending Securities Scheme on 2.7.2001. From 31.11.2001 rolling settlement has been extended to all scrips on all stock exchanges. All deferral products have been discontinued from 2/ 7/ 2001. Legislative changes for amending the SEBI Act 1992 to make SEBI a more effective body for regulation and development of capital market and for protection of investors are being proposed by the Government."

13.23 The Committee underline the necessity for early implementation of corporatisation/ demutualisation of Stock Exchanges process.

13.24 Commenting on the accountability of the regulatory authorities and the accountability of the Ministry of Finance to Parliament on the lapses on the part of regulators, the Secretary, Department of Economic Affairs, submitted:

" ... The general approach of the Government has been to try to instil into the regulators professionalism. The general approach is also to have systems, to have people who are knowledgeable in their respective sectors, who can run these regulatory bodies as professionals and frame regulations which are in line with the best practices insofar as regulation of their respective financial sector instruments are concerned. The Government, I think, does want to give maximum managerial, functional autonomy to the regulators so that they can perform their functions in a professional manner without any back-seat type of driving in its day to day operations by the Government. ÉBut obviously autonomy cannot be divorced from accountability. The dividing line of accountability, in a very micro sense, is the day to day reporting or monthly reporting, weekly reporting; how many cases they have done etc. The other thing is a macro type of an accountability, getting annuals reports, half-yearly reports and overall performance. ÉBut certainly I would not say that the solution would be more micro type of interference or accountability to Government on a day to day basis."

13.25 With respect to giving more powers to SEBI to enable it to have a better regulatory control over the Capital Market, the Secretary, Department of Economic Affairs stated :

"We have done a fairly detailed study of the powers of SEBI and the powers which are there with regulators of capital market in other countries, and we have also come to this conclusion that we do need to vest SEBI with certain more powers for doing better investigation. Today, it cannot have easy access to various documents and other things which are needed for doing effective investigation. Its powers to impose penalties are also not deterrent enough. So, regarding the investigative powers of SEBI and powers to impose penalties, on the basis of study of powers which are there with other regulatory entities which are doing similar jobs in other countries, we have formulated proposals for vesting SEBI with more powers, which are currently under consideration in the Government and which the Cabinet would be discussing soon. If they are cleared then, we would be placing the Bill for consideration of Parliament also. But we have also agreed with SEBI that it does need to be given some more teeth in that sense."

13.26 The Ministry of Finance had submitted that the Government has initiated examination of possible legislative changes aimed at further strengthening the SEBI Act, 1992 for investor protection and to make SEBI a more effective body for regulation and development of capital markets. The Ministry of Law and Justice (Legislative Department) notified Ordinance (No. 6 of 2002) on 29.10.2002 to further amend the SEBI Act, 1992. According to this Ordinance, the number of members on the SEBI Board has been increased from the existing 6 members to 9 members including the Chairman. In addition to this, additional powers as detailed in the chapter "Powers of SEBI" have now been conferred on SEBI to give it more teeth. These enhanced powers would enable SEBI for carrying out effective investigation by having easy access to various documents, impose enhanced penalties and also conferring on it the power of search & seizure etc. Further, under the Ordinance the Securities Appellate Tribunal has now been made a multi-member body.


13.27 The functions and responsibilities of the Banking Division in the Department of Economic Affairs of the Ministry of Finance is given at Para 13.7 ante. Thus, the Banking Division monitors the overall functioning of public sector banks, UCBs and rural cooperative banks in the country. It also reviews all circulars/ directions issued by RBI to cover banks/ cooperative banks and non-banking financial companies and gives necessary advice to RBI in this regard. The Banking Division is not concerned with operation of individual banks for loaning and investment including capital market operations. This function is carried out according to the decisions and policies laid down by the Board of the respective banks under the guidance of the RBI.

13.28 As per the provisions of RBI Act 1938, the general superintendence and directions of the affairs and business of the banks has been entrusted to the Central Board of Directors of RBI. While the Central Government has powers to give such directions to the banks as it considers necessary, after consultation with the Governor of RBI, it has been the endeavour of the Finance Ministry not to interfere in the day to day affairs of the banks. The Government has a nominee on the Board of RBI. Government of India also does not directly monitor the performance of the banks. This function has been entrusted to the Reserve Bank of India who is regulator of the banking sector. If any adverse feature about the working of any bank is brought to the notice of the Government by the Reserve Bank of India, the Government takes necessary remedial measures as are necessary.

13.29 The Ministry of Finance in their reply to a question regarding comparison between the 1992 scam and the present scam regarding the role of the banks, submitted that the irregularities in securities transactions uncovered in 1992 involved complex and interconnected transactions between public sector banks, private sector banks, foreign banks, co-operative banks and financial institutions. The major contributing factor of these irregularities was that transactions in Government securities were undertaken in physical form and not in dematerialized form. Based on the recommendations of the earlier JPC (1992), a number of measures have been taken by the Government of India and the Reserve Bank of India (RBI) to address the systemic deficiencies, which contributed to the irregularities. The measures so taken had insulated to a large extent the Government Securities market from the irregularities observed earlier. The irregularities observed in 2001 are mainly of a fraudulent nature undertaken by a few small private sector banks and co-operative banks in collusion with the stockbrokers. The irregularities noticed now have not so far revealed any systemic deficiencies but are basically violations of RBI instructions.

13.30 The SEBI informed the Committee that it has been concerned with the need for having a centralized monitoring mechanism for the flow of funds from the banking sector into stock markets. This matter was discussed as agenda item No. 3 in the High Level Coordination Committee on Financial & Capital Markets (HLCCFCM) on 16.8.2001. The specific suggestion made by SEBI was that there is a need for a central authority to monitor the flow of funds into the stock markets, brokers should be required to disclose the source of their funds to a centralized authority for trading in excess of a certain limit and these requirements should be made applicable to clients also. After considering this agenda point, the High Level Coordination Committee observed that as per the SEBI's preliminary investigation into the current market crisis an observation was made on the procurement of large funds from the banks by some broker entities involved in market manipulation. It was found that apart from funding by promoter groups to the brokers, substantial funds were given by certain banks to the broking entities associated with Ketan Parekh. The pattern of acquiring substantial funds from the banking system leading to the arrest of Ketan Parekh by CBI in connection with Pay-order fraud suggests misuse of the banking system.

13.31 A number of legislative proposals have been initiated by RBI and have been discussed in detail under the chapter "Reserve Bank of India" of this report. The Committee are constrained to observe that there have been serious delays at both the regulators' end and in the Ministry of Finance and other Ministries concerned in processing legislative proposals for strengthening the regulators and endowing them with more punitive powers. The Committee deplore the delays in Government in processing the legislative changes proposed by the RBI with the dispatch that they deserve. 

13.32 Regarding the implementation of recommendation of the earlier JPC of 1992 securities scam that statutory provision be made with regard to bouncing of SGL transfer forms as penal offence as in the case of cheques, the Ministry have informed that the same has been accepted and accordingly, the Public Debt Act, 1944 is being repealed and enabling provisions have been proposed in the Government Securities Bill. Further, a new section has been inserted for levy of penalties. According to the Ministry, the enactment of the proposed new legislation can be done after passing of the requisite Resolutions by the State Legislatures. In this regard, the  Ministry has informed that the concurrence of all State Legislatures has since been obtained and accordingly, a Draft Cabinet Note alongwith draft of the proposed Government Securities Bill approved by Finance Minister has been sent to Department of Legal Affairs for comments/ concurrence on 11.2.2002. The matter was further discussed with that Department by concerned officers of the Ministry of Finance and RBI in a meeting held on 21.5.2002. In order to expedite concurrence of the Department of Legal Affairs, a reminder was issued vide D. O. letter dated 21.6.2002. The file was received back on 29.7.2002 from Department of Legal Affairs, for some clarifications. It is expected that the Bill will be introduced in the winter session (2002) of the Parliament.


13.33 This Committee was constituted for ensuring greater coordination among the regulatory agencies in the financial and capital markets and to meet regularly to review the position regarding financial/ capital markets. The functions of HLCC as reported by the Ministry of Finance to Parliament in its ATRs of 1994 are as follows:

"In May 1992 the Finance Ministry set up a High Level Coordination Committee on Financial and Capital Markets under the Chairmanship of Governor, Reserve Bank of India and including Chairman, SEBI and Secretary, Department of Economic Affairs as members. This Committee has been set up for ensuring greater coordination among regulatory agencies in the Financial and Capital Markets and meet regularly to review the position regarding financial/ capital markets."

13.34 The Committee has been meeting at regular intervals since May, 1992 under the Chairmanship of Governor, RBI with Secretary, Economic Affairs and Chairman, SEBI as members. In October 2000, Chairman, Insurance Regulatory Development Agency was included as member of the Committee. The Capital Market Division in the Ministry of Finance functions as the Secretariat of this Committee. A Standing Committee on Capital Market has been constituted by the HLCC to examine capital market policy issues as required, put up the agenda for HLCC meetings and follow up on its decisions. The members of the Committee are an Executive Director each from SEBI and RBI.

13.35 At a recent meeting on 27.5.2002, HLCC recommended to the Government that: 

"HLCC is not a monitoring body but only coordinate issues as and when required. The Committee would meet as and when required to resolve policy issues at regulator's level

--  Wherever a specific regulator feels that an issue requires inter-agency consultation. 

--  Any other issue which in the opinion of the Ministry of Finance requires consultation with the regulators".

Until government takes a view on this recommendation, the terms of reference of HLCC remain as set out in the 1994 ATRs submitted to Parliament.

13.36 In response to the Committee pointing out that HLCC appears to have played almost no role in checking the behaviour of the stock market during the period 1998-2002 and to know whether HLCC had functioned as a forum in which the regulatory authorities of different kinds and authorities responsible to Parliament actually coordinated their work, the response of the Secretary, Department of Economic Affairs was:

"Frankly HLCC is as it is presently constituted, my understanding is that it has not been given the responsibility of advising Government or looking into macro policy type of issues. The role of this HLCC is just the coordination amongst the activities of different regulators in the financial sectors, and to the extent there is an interface with the Ministry of Finance with the regulators. This is more a forum where regulators sit among themselves and exchange information, where there is an overlapping of the regulating regime of one regulator and another regulator."

13.37 Since the issue of 1992 scam report, the meetings of the HLCC were held as under:-- 


Year  Name of the Chairman   (Governor, RBI) No. of sittings held
1993  Shri C. Rangarajan
1994  Shri C. Rangarajan  3
1995 Shri C. Rangarajan   6
1996 Shri C. Rangarajan  2
1997 Shri C. Rangarajan  2
1997 Dr. Bimal Jalan 1
1998 Dr. Bimal Jalan 2
1999 Dr. Bimal Jalan 1
2000 Dr. Bimal Jalan 3
2001 Dr. Bimal Jalan 3
2002 Dr. Bimal Jalan 1  (As on 27.5.2002)


13.38 A perusal of the working of the HLCC indicates that this Committee concerned itself with the co-ordination aspects only. The Committee did not go into the general situation of the economy or the stock market and did not make any recommendations excepting those that related to actions to coordinate activities of various regulators like RBI, SEBI, DCA etc.


13.39 The Government of India decided to introduce a package of measures to facilitate remittances of investments by NRIs/ persons of Indian origins which was announced by the Finance Minister in his Budget Speech on 27.2.1982. The Portfolio Investments Scheme (PIS) for NRIs/ OCBs formed a part of the package measures. In formulating the PIS scheme at that time, the Government had three considerations:--

(a) As much flexibility as possible should be available to non-residents for bringing foreign exchange into India and the concern should be the purpose of investments rather than legal entity of the non-resident investor of Indian origin,

(b) It was to be ensured that the benefits of the scheme should not be available to non-resident persons or overseas bodies other than those of Indian nationality/ origin, and

(c) The investment of funds under the scheme should not lead to take over of existing companies through operations in the stock market.

13.40 In April, 1982 the PIS was extended to OCBs and in September, 1983, the definition of OCBs was modified by the Government and extended to cover even indirect ownership to the extent of at least 60% by NRIs. In June, 1998 the scheme was modified by the Government to enhance the individual and aggregate portfolio investment ceiling for NRIs/ OCBs. Individual investment limit was raised from 1 per cent to 5 per cent and aggregate limit was raised from 5 percent to 10 percent of the paid up equity capital of the Indian company. Further, in order to provide a greater margin of flexibility for NRIs/ OCBs, the scheme was, simultaneously, modified to provide for an exclusive aggregate investment limit for NRIs/ OCBs and a separate aggregate portfolio investment ceiling for FIIs.

13.41 A convention for avoidance of double taxation and prevention of fiscal evasion with respect to taxes of Income and Capital Gains was entered into between India and Mauritius on 6.12.1983. In August 1993, CCIT Mumbai brought it to the notice of the CBDT that some asset management companies were using the treaty with Mauritius for preferential treatment and accordingly the matter was taken up with Mauritian authorities to ensure that the benefits of bilateral tax treaty were not allowed to be misused. Then, in March 1994 a clarificatory circular was issued laying down that any resident of Mauritius deriving income from alienation of shares of Indian companies would be liable to capital gains tax only in Mauritius and will not have any capital gains tax liability in India. Then again on 13.4.2000 another circular was issued by CBDT to its assessing officers inter-alia clarifying that a certificate from Mauritian authorities would be a sufficient proof that a taxpayer was resident in Mauritius, which was struck down by the Delhi High Court on the ground that an administrative circular could not abridge the rights granted to an assessing officer under the Income Tax Act to investigate further the true residence of a taxpayer. The SLP filed by the Government has been admitted by the Supreme Court and the order of Delhi High Court has been stayed.

13.42 As regards FIIs, the Ministry have submitted that FIIs were allowed to invest in Indian Capital Market in terms of Government of India guidelines for Foreign Institutional Investors (FII) dated 14.9.1992, stipulating overall ceiling of 24% on the investment by FIIs together with NRI/ OCB investment in the secondary market, in the total issued and paid up capital of an Indian company. Further, SEBI came out with the SEBI( FII) Regulations in November, 1995 which covered exhaustively various aspects such as eligible categories, securities in which FIIs can invest, ceilings on their investment and procedure for making applications for obtaining permission under FERA from RBI and registration with SEBI.

13.43 As regards the misuse of Portfolio Investments by NRI/ OCBs, it has been decided by RBI notification dated 29.11.2001 that, henceforth, Overseas Corporate Bodies (OCBs) shall not be permitted to invest under the Portfolio Investments Scheme (PIS) in India. OCBs will however continue to enjoy the facilities of opening non-resident accounts and making direct investment as permitted so far. Further, the OCBs that have already made investment under the PIS, may continue to hold such shares/ debentures till these are sold on the Stock Exchange.

13.44 The various issues concerning the misuse of PIS by OCBs and regarding investments by FIIs and OCBs in the Indian securities market using the tax free Mauritius Route have been extensively dealt with in the chapters on "OCBs and FIIs Sub-account" and "CBDT" of this report.

13.45 The Ministry of Finance is the nodal authority and co-ordinates the functions of all the departments/ organisations working under its administrative control. Regulators are accountable to the Ministry of Finance which, in turn, is responsible to Parliament. All the policy making powers also vest with the Ministry. SEBI, as the independent statutory Regulator, has been endowed with powers to autonomously regulate capital markets. According to the Ministry, the general approach of the Government has been to instil professionalism by having the people who are knowledgeable in their respective fields. The Committee find that SEBI which was set up as a statutory body through an Act of Parliament in 1992 was hitherto being managed at the senior level not by the professionals but by the persons taken mostly from the Income Tax Department/ Indian Administrative Service on deputation basis. Besides, as per the provisions of SEBI Act, 1992, the SEBI Board consists of 5 members besides the Chairman. The Board is largely dominated by the Government nominees as the Chairman and 2 members are nominated by the Central Government from amongst the officials of Ministry of Finance and Ministry of Law, while one member is nominated by the RBI. The Ministry of Finance have made legislative changes for amending the SEBI Act through an Ordinance in order to give it more teeth for regulating and development of capital market. The Committee are of the view that in order to give true autonomy to the market regulator, there should be complete transparency in the appointment of the Chairman and the members of the Board. In this regard, the Committee agree with the suggestion of the former Secretary of the Department of Economic Affairs that for appointment to the top positions in such organizations including the banks, there should be a Search Committee, whose recommendations should be final and mandatory. In order to give such body a legal sanctity, it is essential that its constitution is well defined and provided under the relevant statute. The Committee therefore, recommend that while amending the SEBI Act, this aspect should also be given serious consideration.

13.46 While accepting that managerial and functional accountability is required to be vested in statutory independent Regulators so that they can perform their functions effectively and without undue interference, the Committee stress that accountability must go hand-in-hand with autonomy and the principles governing the responsibility of the Minister to Parliament in terms of the constitutional jurisprudence under which the parliamentary system works. The Ministry should also evolve appropriate checks and balances to overcome the systematic shortcomings in the present system which has resulted in this scam. The Committee feel that the approach of the Ministry of Finance should be to progressively make SEBI a very effective and efficient regulator of capital market which can inspire confidence amongst various players. The Committee note that recent legislation has now endowed SEBI with the required powers to moderate stock market volatility and inspire investor confidence. 13.47 The Committee recall that the 1992 JPC had drawn attention in paragraph 2.8 of its Report to the "very damaging approach (which) seems to pervade, that of transferring responsibility downwards. This distressing lack of fibre in the apparatus of governance can only debilitate the state." Regrettably, notwithstanding the passage of nearly a decade since that Report, nothing seems to have changed. The culture of governance continues to be pervaded by attempts at transferring responsibility elsewhere. Therefore, the Committee recommend that there must be a clear demarcation of responsibilities between the Regulators and the executive so that there is transparency in the system of accountability.

13.48 The Ministry of Finance, being the financial custodian of the country, is duty bound to protect the interests of the small investors. SEBI has now been endowed with statutory powers under the amended SEBI Act to secure redressal of investor grievances and entitle investors to seek compensation, the award of damages etc. Besides this, Professor L. N. Mitra in his report to SEBI on this issue has also suggested for a separate Act for investors protection, as detailed in Chapter XIV of this Report. The Committee recommend expeditious action on this proposal. Further, in order to deal with vanishing companies and collective investment schemes, SEBI has suggested that Securities Appellate Tribunal (SAT) be empowered to attach properties of such defaulters. The Government has reconstituted the SAT to be a multi-member body which should help in expeditious disposal of cases.

13.49 Regarding demutualisation and corporatisation of the stock exchanges, the SEBI constituted a Committee under the Chairmanship of Justice Kania to provide definite road map for the early completion of the process, which has since submitted its Report. The Committee recommend that the Government must ensure expeditious implementation of the demutualisation and corporatisation process so as to improve management of the exchanges and enabling smooth conduct of business in a fair and non-partisan manner. 

13.50 It is imperative that the question of coordination between various Regulators among themselves and with the Government be seriously addressed to by the Ministry of Finance. The Government in their revised Action Taken Report on the implementation of recommendations of the earlier JPC on Securities Scam which was tabled in Parliament in December 1994 had inter alia submitted that the HLCC constituted by the Ministry of Finance in May 1992 had been set up for ensuring greater co-ordination among the regulatory agencies in the financial and capital markets and meet regularly to review the position regarding financial/ capital markets. The Committee note that HLCC has not carried out the latter portion of their mandate viz. "regularly review the position regarding financial/ capital market." The Committee consider this an unfortunate omission. The Ministry of Finance on its part and in relation to the assurance given by it to the Parliament in its revised ATR has not referred such crucial issues to the HLCC which was supposed to review the position regarding financial/ capital markets. Had these issues been taken up by the HLCC periodically, it would have definitely helped in minimizing, if not preventing altogether the irregularities which have surfaced in the present scam.

13.51 Although there is need for better and closer coordination amongst the multiple agencies which are actively involved in our financial system, the Committee are of the considered view that a super regulator is not the answer to the problem. This task can be handled by HLCC and to this end HLCC should be serviced by an efficient secretariat. In addition to its present functions, HLCC should also be mandated to ensure the expeditious implementation of ATRs arising out of JPC recommendations. The Committee also stress the importance of elaborating and detailing the functions of HLCC with regard to undertaking "regular review of position regarding the financial/ capital market."

13.52 The Committee note that while the Banking Division monitors the overall functioning of public sector banks and rural cooperative banking system in the country besides reviewing circulars/ instructions issued by RBI, it is not concerned with individual operations of the banks as the same are carried out in accordance with the guidelines of the RBI. As per the provisions of the RBI Act, the general superintendence and direction of the affairs of the Banks has been entrusted to the Central Board of Directors of RBI on which the Government has a nominee (generally Finance Secretary). Further, before taking a decision in a matter of larger public interest, RBI consults the Government. However, the Banking Division is responsible for legislative framework relating to the Banking Sector which includes RBI Act, 1934, Banking Regulation Act, 1949, SBI Act, 1955, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/ 1980, Regional Rural Banks Act, 1976, Public Debt Act, 1944 etc. The Committee however note that a large number of legislative proposals with respect to the Commercial and urban co-operative banks mooted by the RBI are pending consideration in the Ministry. The details of the proposals have already been mentioned in the Chapter on the Reserve Bank of India of this report. The Committee recommend that the Ministry should expeditiously finalise the proposed amendments in the Banking Regulation Act, 1949 and introduce the amended legislation in the Parliament at the earliest. 

13.53 The Committee express their concern at the inordinate delay of almost 8 years by the Government in implementing the recommendations of the earlier JPC of 1992 on Securities Scam regarding the framing of statutory provisions with regard to making the bouncing of SGL transfer forms as penal offence as in the case of cheques. Although the said recommendation was accepted by the Government way back in 1994, but so far the Government Securities Bill, in which the statutory provision is proposed to be incorporated is yet to be enacted and the Bill is expected to be introduced in Parliament only during the Winter Session of 2002. As the matter has already been inordinately delayed, the Committee recommend that the Government should expeditiously repeal the Public Debt Act, 1944 and enact the new legislation without further loss of time. 

13.54 To contextualise the period in which the present scam surfaced, resulting ultimately in the crash of the stock market from March 2001 onwards, the Committee reviewed the implementation of the recommendations of the 1992-93 Joint Parliamentary Committee which had enquired into "irregularities in securities and banking transactions and found a number of areas in which the recommendations had not been taken seriously. The process of economic liberalization vis-a-vis banking transactions and innovative portfolio management schemes had started almost concurrently with the proceedings of the earlier JPC. Although through the 1982 Budget speech of the then Finance Minister, OCBs had been given the same status as NRIs and PIOs and allowed to invest in India, and in 1992 through the Budget speech of the then Finance Minister, FIIs were allowed to enter the Indian capital market. Modifications in the regulations relating to OCBs since 1982 and FIIs between 1992 and 1999 have not put sufficient risk-hedging regulatory measures in place. Therefore, systemic deficiencies caused by insufficient risk-hedging regulatory measures opened windows of opportunity for brokers, ALMB/ BLESS/ MCFS players, OCBs/ FIIs etc. Therefore, it is these regulatory lapses which were part of the problem and need focused attention. 

13.55 According to the Banking Division, based on the recommendations of the earlier JPC on Securities Scam, a number of measures have been taken by the Government and the RBI to address systematic deficiencies which contributed to the irregularities. However, the steps taken thus far have not forestalled irregularities which have led to large amounts of money being pumped into the stock market and its consequent misuse by certain entities, as detailed in this Report.

13.56 As discussed elsewhere in this report, the Committee are concerned to note that there has been no regulatory framework to monitor the activities of OCBs as these are neither registered nor regulated by SEBI and also are not under the regulatory framework of RBI. The Ministry of Finance being the main policy making body, has not applied their mind in this regard. The Committee note that this issue has currently been addressed by banning OCBs from making any fresh portfolio investment in the securities markets. The Committee are of the view that this may not be a permanent solution and recommend that the Ministry of Finance needs to lay down clear policy guidelines for monitoring the operations of OCBs. 

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