THE repeated crisis of the financial system in the country is a consequence of the particular policy trajectory that the union government is presently following. Earlier, development was the key objective. This was the Nehruvian model and helped Indian capital to grow into industrial capital from its mercantile and usurious origins. The current liberalisation regime seeks to convert the Indian economy back to a trading and speculative one. A systemic crisis is inherent in this trajectory in which speculative capital has the primacy. This is not specific to India alone.

All countries, which have adopted globalisation, liberalisation and privatisation as the new age mantra, have seen similar consequences. The Indian case is, however, unique in that it has much higher levels of speculation than any other economy in a similar state of development. The Indian stock exchanges are rapidly emerging as global casinos, with the Mauritius route as a major source of speculation in its stock market. Its anonymous character allows tax evasion, black money and money with criminal origin to flow in and out of the country at will.

The Indian stock market is one of the most volatile markets in the world, second only to NASDAQ (the technology stock exchange in the US and known to be much more volatile than the New York stock exchange). The monthly turnover to market capitalisation is of the order 29 per cent for India, 33 per cent for NASDAQ and about 14 and 8 per cent respectively for London and New York stock exchanges. The volatility of the emerging markets --- Mexico, South Korea, Malaysia --- is even lower, less than 5 per cent. This shows the enormous speculative pressure in the Indian stock market.

The finance ministry, instead of worrying about the health of the economy and de-industrialisation under the current WTO regime, is only worried about the health of the stock exchange. However, simple measures such as a nominal transaction tax --- similar to the Tobin Tax --- that can dampen speculation is not being considered. As in the earlier Harshad Mehta scam, foreign institutional investors (FIIs) have been deeply involved in illegal stock market manipulations and siphoning money out of India.

There have been two major scams in the 1990s --- the "reform" decade --- and both have brought the financial sector to the brink of collapse. This time, the crisis has engulfed not only banks such as Madhavpura, but also the UTI, IFCI and IDBI. It is now becoming clear the crisis goes well beyond --- into other financial institutions (FIs) such as the IFCI and IDBI --- and is symptomatic of a much bigger malaise.

The Unit Trust of India (UTI) scam, leading to the near collapse of its flagship scheme US-64, is a fraud unprecedented in independent India, and warrants the union finance minister’s immediate resignation. Alongside, an enquiry must be conducted into the manner in which unscrupulous politicians, bureaucrats and businessmen manipulated the system. This is necessary not only to bring the guilty to book but also to cleanse the system and set in place mechanisms to prevent any such occurrence in future.

A merciless loot of the Indian people has taken place, to the tune of nearly Rs 6,000 crore. The manner in which this happened, displays the worst type of crony capitalism, whose high points are corruption and nepotism. The list of companies whose shares the UTI bought runs like a "who's who" of RSS-BJP sympathisers. Clearly, the finance ministry has been directing the UTI to siphon public money, the hard-earned savings of over two crore middle-class small investors, into such dubious companies. These companies, in turn, have simply pocketed the money.

Taxpayers’ money to the tune of Rs 1,800 crore has already been pumped into Madhavpura Mercantile Cooperative Bank and the IFCI (Rs 800 crore for Madhavpura and Rs 1,000 crore for IFCI); presumably the UTI and IDBI will also receive bailout packages. Meanwhile, the small investors have lost heavily, with the current loss in UTI alone due to the lowered redemption rate being of the order of 40 per cent.

The stock market index --- the Sensex --- stood at 6,000 in February 2000. Today, it stands at 3,310. The loss in market capitalisation is about Rs 2 lakh crore. The last three months have brought out clearly the basic contours of the stock market manipulations and its effect on public financial institutions like the UTI. A set of brokers --- Ketan Parekh being the key person here --- worked in collusion with a set of promoters to boost artificially the share prices of companies such as Zee Telefilms, Global Tele, DSQ Software, Himachal Futuristics, Aftek Infosys, Lupin Laboratories, etc, referred popularly as the K-10 stocks. In addition, Ketan Parekh also rigged the price of Global Trust Bank’s (GTB) scrip in league with its promoters before the announcement of the decision to merge GTB with UTI Bank. SEBI has now identified clear evidence of insider trading, price rigging and circular trading in the stock exchanges. While a part of the money came from the promoters and brokers, a larger part was derived from illegally diverting depositors’ money from banks such as the Madhavpura Bank.

The second dimension of this scam was the collusion of Ketan Parekh and his cronies with the top management of the UTI. UTI, which has a huge corpus of funds at its disposal (the investible fund is about Rs 75,000 crore), can influence the markets heavily. UTI’s investments in the K-10 stocks were designed to help Ketan Parekh in his bull-run on the market. Once the bull operators had made their money, the market was allowed to fall, with another set of brokers, the bear operators, hammering the market, particularly the K-10 stocks. The Securities & Exchange Board of India (SEBI) has identified Nirmal Bang and his associates as the key bear operator. SEBI evidence shows that the bear operators also rigged the market through price fixing and circular trading. This was the period in which UTI continued to invest in K-10 stocks, allowing the bull operators to liquidate most of their positions. For example, UTI bought 13,30,000 shares of DSQ Software at Rs 189 each, which stood at Rs 34 before being banned for further transactions. Similarly, in March it bought large amounts of stocks of HFCL, Zee Telefilms, Global Tele, etc. The stock market went into a free fall after that with small investors and UTI left holding the bag. UTI was clearly placing at the disposal of stock market scamsters and dubious RSS-BJP affiliated companies the hard-earned savings of the Indian people.

The third dimension of the current scam is the huge funds flowing out of the country via the Mauritius route. There is now clear evidence that Ketan Parekh used certain Overseas Corporate Bodies (OCBs) --- Brentfield Holding, Kensington Investments, Wakefield Holdings, European Investments, Far East Investments located in Mauritius --- to siphon the funds out of the country. The money came in and went out through the Mauritius route, the net difference between the inflows and the outflows being of the order of Rs 2,900 crore. The paid-up capital of all these companies is a paltry total of 16,720 US dollars. The CPI(M) had argued earlier that the Mauritius Double Taxation Avoidance Treaty is being used by the FIIs, Indian corporate houses and other speculators to avoid paying taxes in the country. It was at the instance of Yashwant Sinha that the Mauritius route was kept open, even though the income tax authorities had given notice to a number of FIIs for using this route fraudulently to avoid paying legitimate taxes in India. Not only did the finance ministry protect the tax-dodging FIIs, it also "clarified" further that this would apply to all investments routed through Mauritius. It is now clear that Mauritius is emerging as a vital hub in the speculative activities in the Indian stock market and the finance minister is an active accomplice.

The SEBI has found the Credite Suisse First Boston (CSFB), a FII, involved very closely with Ketan Parekh and his market manipulations. It lent him money, involved itself in circular trading to artificially boost share prices, and allowed the OCBs linked to Ketan Parekh to use its account. The SEBI has found that the CSFB helped Ketan Parekh operate through its FII sub-accounts such as Kallar Kahar Investment. Sucheta Dalal has reported in her column in The Indian Express (April 29) that CSFB’s K R Bharat is one of seven Citibankers asked to leave during the 1992 scam. CSFB’s global track record in stock market scams is well known. CSFB was deemed to have broken New Zealand stock exchange rules and in America, it is presently undergoing investigations linked to rigged, initial public offerings. Incidentally, Credit Suisse is the company that the government chose as one of its advisors in the VSNL disinvestment.

In May this year, the corporate investors withdrew (i e, sold back US-64 units) over Rs.4,000 crore. This confirms the nexus between the UTI and the corporate sector which had inside information about the impending crash of US-64. It is reported that the Reliance group alone reduced its holding of US-64 units from over Rs 800 crore to just Rs 13 lakh over the last few years. When the corporate sector withdrew its investments in May, the units were selling at Rs 14.55. Today, the government is offering to buy back not more than 3,000 units from the small investors in US-64 at Rs 10 per unit.

In this background, it is outright dishonesty on the part of the finance minister to claim that he had no knowledge of UTI developments. If the corporate sector knew, it is ludicrous to believe that the finance minister did not. Under the UTI Act, the government has well defined responsibilities, more so as the UTI is not under SEBI regulations.

It is now known that there was a sharp about-turn in private placement of Cyberspace Infosys shares to the UTI. On July 17, 2000, UTI had taken a decision to turn down the offer of private placement of Cyberspace shares after its equity research cell advised against it. Within a scant four days of this decision, UTI reversed its decision and invested Rs 32 crore in Cyberspace. The Cyberspace scandal involves not only UTI, but reportedly the LIC and GIC too. Did all this happen without any intervention from the PMO or the finance ministry?

The finance minister is arguing that neither NDA nor his ministry has any responsibility for the events that is taking the entire financial sector in the country towards bankruptcy. His argument is that the financial institutions --- UTI, IFCI, IDBI, etc --- are all autonomous, and the ministry does not interfere in their running. If this is so, these must be the only public sector bodies in the country in which the government does not interfere! Evidence of phone calls made by senior finance ministry and PMO officials to UTI ex-chairman Subramanyam is now surfacing. Even if we accept the argument that the ministry does not interfere in investment decisions of the FIs, are we to believe that the ministry keeps its eyes closed to the state of their net worth or whether they are following the government guidelines and policies? If the ministry and the finance minister does not monitor the state of the Rs 75,000 crore corpus of the UTI, the entire lot needs to be sacked and sacked immediately. The minister’s excuses and refusal to accept any responsibility shows the complete lack of accountability that has been the NDA’s hallmark.

The UTI is India's pre-eminent financial and savings institution. It had a unit capital of Rs 57,500 crore in December 2000. The US-64 had a unit capital of Rs 12,778 crore as on June 30, 2001. UTI had reserves of Rs 3,000 crore in June 2000. Reportedly, in the last 12 months, UTI has run through its entire reserve, which is now negative. Out of the 1,426 companies the UTI invested in, only 81 have shown appreciation, 654 are non-traceable or not tradable. The investments on these companies have depreciated by about 50 per cent. Between July 2000 and April 2001, UTI picked up 81 lakh shares of Jindal Vijayanagar Steel, at a time the steel industry is in recession. UTI and other public FIs already have large exposure in the steel industry --- in Jindals, Essar (Ruias) and Mittals, and Loyd Steels.

It is now emerging that the investments and loans to the private steel sector companies and the independent power producers (IPPs) are going to saddle the public FIs with huge non-performing assets. The private steel companies (Jindals, Ispat, Essar and Lloyds) account for a hefty 10 per cent of all the NPAs of the FIs. Even though the promoters are defaulters in one company, a group is given loans for other projects. For example, while Essar Power has defaulted on its loans to the FIs in spite of making profits for two years, it is being considered for a Rs 2,500 crore loan package to fund their Vadinar refinery project.

The exposure of the Indian FIs in the IPPs is not far behind. For Enron alone, it is 1.3 billion dollars as loans and another 600 million dollars to US Exim, Japanese Exim, Belgian Exim, etc. as guarantees for foreign loans. Currently, public FIs are considering loans and investments in a number of IPP projects that have the same characteristic as Enron. Power Finance Corporation is providing loans for S Kumar’s Maheshwar hydel project that has a rate of power higher than even Dabhol. Other FIs such as IDBI are also considering the Maheshwar project for loans and investments. PPN power project in Tamil Nadu has just completed its construction with loan from Japan, again with guarantees by Indian financial institutions. Similar projects are proposed for many states, five coming for Andhra alone --- Konaseema EPS Oakwell (469 MW CCPP), NCC-Satyam (469 MW CCPP), Vemagiri (340 MW CCPP), BPL Ramagundam (500 MW CCPP, coal fired plant), GVK (220 MW CCPP, expansion project). In all these projects, the public FIs will have the major exposure either through direct lending or by the way of providing guarantees for foreign loans. The IPP exposure, if Dabhol is any indicator, is likely to lead to huge increase of NPAs for the FIs. All this is the result of the government forcing the FIs to extend their core sector lending programme to private capital.

One of the problems for the small investor in India is the nexus between the brokers and stock exchange officials. SEBI has very poor staff strength, and is not able to regulate the stock market effectively. Even worse, it relies on the stock exchange officials regarding insider trading, when the brokers are really running the exchanges. SEBI's procedures are opaque; its reports are not public and the common investor has no interface with the regulator. SEBI has no public accountability. This is unlike any regulatory agency in the country. It is quite surprising that all the SEBI reports are supposedly confidential and not open to the public. It is not surprising therefore that the small investor is wary of the stock market. The tragedy is that even safe saving instruments such as US-64 are falling prey to the machinations of the stock market speculators.

Yashwant Sinha has sought to put the blame of the current crisis on previous governments, particularly the private placement of Reliance Industries shares worth Rs 1073 crore with UTI in 1994. It is true that this was an indefensible deal. The Ambanis paid only Rs 61 per share for which the UTI paid Rs 389, an over-payment of Rs 705 crore. This was a fraud on the investors in UTI, and on the small investors who subsequently bought the Reliance Industry shares. However, this can neither explain why UTI, after a bailout in 1998 of Rs 3,300 crore, has again got into a crisis. Nor can it explain why Sinha kept quiet about it for the last three years.

Instead of hiding behind others’ misdeeds, Yashwant Sinha needs to answer the following questions:

• Why did UTI increase its equity holdings to 74 per cent, from 66 per cent when the Deepak Parekh had explicitly recommended that it be brought down to less than 40 per cent within 3 years?
• Why did the finance ministry sleep for the last two years over this curious reversal of government directives to UTI?
• Did the government ask the UTI to shore up the share market in order to make Yashwant Sinha’s budget of 2001 look good?

• How did the UTI continue with private placement of shares, particularly shares of companies such as Cyberspace Infosys?
• Did the political establishment --- key RSS functionaries’ involvement has been noted in the Cyberspace fraud --- not play any role in reversal of the UTI’s decision to invest in ventures of Johri brothers?

• How did UTI build up such large holdings in companies such as Ispat, Essar, etc?
• Why did the finance ministry not ask the UTI to freeze redemption of units when the stock market fell sharply in March? It is now reported that major corporate houses (Reliance, Tatas, Birlas, etc) had redeemed their units worth Rs 4,000 crore at a price of Rs 14.55 per unit in April and May. Contrast this with the Rs 10.00 that the small investors are getting today, that too on only 3,000 units.
• Why has the finance ministry made no attempt to plug the Mauritius route, which has become a constant source of speculation and tax evasion? Compensating Mauritius for its loss will be a small price to pay compared to the losses that the Indian economy is suffering currently.
• Is it an accident that a major section of the promoters of the K-10 companies have close links with the BJP?

1. The presiding deity of such a system, that institutionalises the loot of gigantic proportions, is the finance minister. There is no way he can absolve himself of the responsibility for creating this crisis and ruining the lives of millions. He must quit.
2. The Mauritius route must be plugged immediately.
3. The guilty men in the financial institutions, PMO and the finance ministry must be brought to book.
4. SEBI must be provided with adequate staff and have penalties that are effective. Its procedures must also be transparent and its reports public. SEBI needs to be revamped to be an effective regulatory agency.
5. The stock exchanges must be run professionally and freed from the stranglehold of the brokers.
6. US-64 must be re-oriented as a debt instrument and primarily for the small investors.
7. All funding for IPPs from FIs should be stopped till their current exposure is properly evaluated.
8. A nominal transaction tax on all stock exchange transactions must be imposed.