People's Democracy

Part I Appeared in the January 19 Issue

JPC REPORT

Accountability Is Not Vajpayee Govt's Forte -- II 

Nilotpal Basu 

THE pertinent question, however, is how did the scam take place. The JPC has explained this - "In the present enquiry 'scam' has to be considered predominately in the context of the stock/capital market. Individual cases of financial fraud in themselves may not constitute a scam. But persistent and pervasive misappropriation of public funds falling under the purview of statutory regulators and involving issues of governance become a scam." (Para - 2.7)

In its further prognosis of the scam, the JPC has pointed out "Concerted mutual interaction between government and the regulators, especially through the institutional mechanism of HLCC, could have signally contributed to effective pre-emptive and corrective action to forestall or moderate the scam by the early detection of wrong-doing." (Para 2.8)

But could such "early detection of wrong-doing' be effected. The entire establishment was gung-ho over the surge of the sensex over the period spanning almost the entire 1999 and early 2000. The 'business media', the industry - CII and FICCI - and more importantly mandarins of the North Block, finance minister included, were talking with unconcealed glee about the markets reflecting the 'feel good factor' of the economy.

The JPC has, therefore, brought up this issue and has put it in the right perspective - "One of the major concerns of the committee was to look at the trading practices and procedures adopted in the stock market. Stock Exchanges, brokers and regulators play a very important role in determining the transparency of procedures and practices in the stock markets. … In practice, the system did not function efficiently or in a transparent manner. When stock markets were rising, there was general lack of concern to see that such a rise should be in consonance with the integrity of the market and not the consequence of manipulation or other malpractice. On the other hand, when the markets went into a steep fall, there was concern all over. ... This committee did not concern itself with either the rise or fall of the market but specifically with manipulations or irregularities that caused unusual rise and fall". (Para 2.12)

The JPC has gone on further to establish the role of the 'key player' - "The committee noted that Ketan Parekh who emerged as a key player in this scam received large sums of money from the banks as well as from the corporate bodies during the period when the sensex was falling rapidly. This led the committee to believe that there was a nexus between Ketan Parekh, banks and the corporate houses.  The committee recommends that this nexus be further investigated by SEBI or Department of Company Affairs expeditiously". (Para 2.15)

FAILURE OF THE GOVT.

While doing so the JPC has reminded the government about the context and the responsibility it failed do discharge - "The process of liberalisation of the economy has continued apace and it is market forces that will increasingly determine economic trends in the country.  With liberalisation, the role of the government as a direct player in the financial market will diminish. This makes it all the more necessary that the procedures and guidelines laid down for the creation and perpetuation of fair and transparent financial markets and institutions like stock exchanges and banks have to be more specific, and effective mechanisms have to be put in place to ensure that they are regularly followed.  That job will have to be done by the regulatory authorities; viz., SEBI, RBI and DCA in liaison with investigative agencies like the Income Tax Department, Enforcement Directorate and the Central Bureau of Investigation.  Coordination with government on policy issues will, however, continue to be central to good governance as there can be no escaping government's responsibility to parliament and the country.  Therefore, government must recognise that transactions in the market will be insulated from scams only if the relinquishment of government control over the economy is accompanied by strong and effective regulatory bodies.  This point had also been underlined by the  earlier JPC Report, 1993 in irregularities in securities and banking transactions". (Para 2.16)

From all these, it is amply clear that the government, and particularly, the finance ministry, was so absolutely blind by its conviction (which in retrospect proves to be completely misplaced) that it never asked this question: Was not the boom not only unusual, but also artificial, if not manipulated?  And such introspection could have been most logical because nothing fundamentally positive was happening in the economy, which could explain a 'boom' in the market.

But that was not to be. Instead of introspection, the finance minister was drawing satisfaction from the fact that Indian markets are replicating the global, and more particularly, the US market trends.  This approach continued as late as March 13, 2001 when the finance minister rejected the opposition demands for JPC inquiry into the scam.  With the sordid facts about the Enron collapse or the WorldCom manipulation coming to light, the government found itself completely on the back foot and in the dock and this is what the JPC has brought out - "This scam is basically the manipulation of the capital market to benefit market operators, brokers, corporate entities and their promoters and managements. Certain banks, notably private and co-operative banks, stock exchanges, overseas corporate bodies and financial institutions were willing facilitators in this exercise. The scam lies not in the rise and fall of prices in the stock market, but in large scale manipulations like the diversion of funds, fraudulent use of bank funds, use of public funds by institutions like the Unit Trust of India (UTI), violation of risk norms on the stock exchanges and banks, and use of funds coming through overseas corporate bodies to transfer stock holdings and stock market profits out of the country. These activities went largely unnoticed. While the stock market was rising, there was inadequate attempt to ensure this was not due to manipulations and malpractices. In contrast, during the precipitous fall in March 2001 the regulators had showed greater concern.  Another aspect of concern has been the emergence of a practice of non-accountability in our financial system." (Para 2.20)

SERIOUS FLAW IN THE REPORT

The JPC report however suffers from a very serious weakness. This weakness pertains to the failure to establish the contribution of the nexus between brokers, bankers and most importantly corporate entities. Not that the JPC was unaware of this serious lacuna in their findings. It states candidly -  "This Committee holds that even as there are valid reasons to believe that the corporate house-broker-bank-FII nexus played havoc in the Indian capital market through fraudulent manipulations of prices at the cost of the small investors, this Committee were severely handicapped in the matter of making any purposeful recommendations because of non-availability of required support from concerned regulatory and other bodies with necessary material. This issue acquires added importance in view of the recommendations of the 1992 JPC regarding the urgent need to go into this unhealthy nexus of corporate entities-brokers-banks and others".  (Para 7.54)

Having generally stated that such nexus does exist, the Committee could not make out a clear cut case. This weakness also stems from the nature of powers that a JPC is vested with. Since JPC assumes the powers of the parliament, it does not have executive power.

Therefore, as and when the Committee felt the overriding need for investigating, it had to route its request to the investigating bodies through the government. Therefore, unlike the last JPC where the government had referred the issues related to securities scam on an omnibus basis to the CBI and was benefited by the crucial bits of information regarding corporate involvement, this JPC found itself disadvantaged due to the deliberate approach of the present government.

So far as the enquiry by the regulators, the Committee had to make good with the manner in which these regulatory bodies were conducting their enquiries.  This has been noted with anguish by the Committee - "SEBI furnished four sets of interim reports inclusive of its investigation regarding scrips of certain corporate bodies. The Committee's insistence for SEBI's final findings regarding the role of promoters/corporate bodies in the price manipulation of the scripts yielded yet another set of reports most of which were again of interim nature and were received as late as in November 2002. Due to non-availability of final report from SEBI, the Committee could not have the opportunity to take oral evidence of these corporate bodies".  (Para 7.51)

INDIFFERENT REGULATORS

The experience of the Committee was even more shocking when it attempted to probe the alleged irregularities of the corporates. The Department of Company Affairs, which is the regulator for the activities of the corporate sector in the stock market, came up with outrageous indifference. This is evident from the following account: Regional Directors (RDs) and Registrar of Companies (ROCs) are nominated by SEBI on the Governing Board of stock exchanges. Pointing out this fact, the Committee asked whether RDs and ROCs could take any action if there is any unreasonable speculation in the market. In response, the secretary, DCA said that, "each time there is a movement in the stock market if you rush to a company and invade it, that kind of tendency is not the right kind of stance to adopt. It should be based on some solid information". The Committee emphasized that when the price of a company's scrip increased abnormally, it should ring alarm bells that something was going wrong with the company and DCA should initiate inspection. In response, the Secretary DCA said: "we are contemplating on your observation that when we are there in the stock market, why do we not take action. There is a lot of truth in what you are saying. We will keep that in mind". (Para 11.11)

Additionally, the DCA also suffered an unacceptable shortage of manpower and infrastructure. As regards the present scam, the DCA has reportedly referred to the Institute of Chartered Accountants of India (ICAI) eight cases, where there was some shortfall or some error on the part of chartered accountants. But nothing much has happened till date. To a query by the Committee, the secretary, DCA admitted that though they have powers to prosecute chartered accountants, it has hardly been used. They cite the shortage of qualified manpower as a reason for this.

That is why the JPC found itself that it is with very little information and even less evidence with incomplete investigation by the regulators SEBI, RBI, DCA. The JPC's experience to find out corporate involvement through the route of Overseas Corporate Bodies (OCBs) and sub-account of FIIs was even more shocking. It is observed by the JPC thus: "It is transpired during Committee's examination that there has been no regulatory framework to keep an eye on the activities of OCBs. The OCBs were neither registered nor regulated by SEBI. The former SEBI chairman has gone on record saying that OCBs were not SEBI's responsibility. On the other hand, RBI contented that OCBs were not under its regulatory framework. RBI, however, held that if policy framework is laid down by the government, RBI would be in a position to monitor OCBs. The Committee's persistent query as to which authority is responsible for OCBs has not yielded any specific reply.

“The Committee notes with concern that the Ministry of Finance did not adequately address itself to issues relating to the Mauritius route, notwithstanding the growing impact of this Mauritius route on our capital market over several years. The Ministry of Finance needs to lay clear policy guidelines about the responsibility to monitor OCBs".  (Para 8.79)

One is inclined to believe that the JPC's failure in finding out the corporate involvement stemmed from the constraint it was faced with, and which was imposed by the inadequacy of proper regulatory intervention and follow up.  The regulators' failure in their turn arose out of the permissive regime of financial liberalisation without adequate regulatory safeguards put in place by the government. Buoyed by the 'feel good factor' that the boom in the stock market generated, and which had no relation to the primary activity in the economy, the government never entertained the possibility of the bust, nor the subsequent loss it would inflict on millions of small investors.  The government must answer for this criminal complacency and it is in this context that one has to understand the weakness of the JPC report.  Perhaps, a little more emphasis on 'corporate governance' and evolving specific process to ensure this and a little less obsession with 'labour reform' would have done the national economy a world of good.

VENDETTA AGAINST TEHELKA

Another sinister design of the government that has been exposed by the JPC report pertains to the vendetta which they have unleashed against Tehelka.  The government's anger with the website is understandable, as their expose 'Operation Westend' highlighted the corruption in the corridors of power in defence  procurement.  Shanker Sharma  and his company First Global had investments in Buffalo Networks, which owns the Tehelka website.  In fact, the government in its affidavit to the Venkatswamy commission had contended that the expose on defence procurement was intended to destabilize, and bring down the government.  This according to them was in furtherance of Shanker Sharma's financial interest in the share market.  Therefore, the government and the regulators like SEBI and investigative agencies like ED were being used to   prove that Shankar Sharma and his companies were trying to manipulatively hammer down the prices in the market.  The JPC, however, has concluded - "SEBI has not so far provided conclusive evidence to substantiate its conclusions in regard to the brokers/groups mentioned in section 3 above.  Accordingly, the committee recommends further investigations in this regard". (Para 4.117)  (The sub section A under section 3 referred to in Para 4.117 refers to First Global group).

So, this is yet another proof that the inquiry by the regulators at the instance of the government has often being directed to suit the government's political agenda rather than finding out the actual truth. 

In conclusion, the JPC report has brought to the fore certain very fundamental issues connected with liberalisation of the financial markets and globalisation.  Globalisation, as our experience has shown and the data that has been made available by the multilateral global institutional themselves have proven, has not brought about any increase in the actual trade in goods and services at a global level.  What globalisation has actually triggered off is an intense surge in the flow of finances, often speculative in its nature. Therefore, financial markets - particularly capital market are prone to be affected by such flows. 

The JPCs findings on OCBs, Mauritus route and FII sub accounts have shown how our regulators had no control over the activities of these speculative capital which had their major impact on the engineering of the scam. Our government's preference for liberalisation and globalisation are, therefore, replete with dangers of our capital markets being affected in the future.  A government which is not alive to the possibilities of the dangerous portents of financial globalisation, will expose its capital market to shock waves as has been evidenced during the present scam, thereby making millions of our small investors vulnerable to forces and processes over which they have no control.

(Concluded)