An exercise in evasion

The JPC inquiries into the March 2001 stock market meltdown were, by all accounts, clouded by a wilful desire to mystify rather than illuminate.

IN a report that is not distinguished by particularly sharp insights, the Joint Parliamentary Committee (JPC) which conducted a prolonged inquiry into the stock market meltdown of March 2001, provides one useful nugget. The scandal that rocked the markets in 1992, it observes, was one of great depth and intensity, in which a relatively small number of people were involved. The March 2001 episode, in comparison, was one of great width and expanse. It involved a large cast of characters, though none was as deeply implicated as the key players of 1992.

The observation comes exactly nine years after a predecessor body submitted a voluminous report on the 1992 scam and recommended a number of remedial measures. When Harshad Mehta, Bhupen Dalal and various others fought their epic battles on the bourses in 1992, liberally dipping into bank treasuries for ammunition, the government had a number of alibis available: the Reserve Bank of India (RBI) was burdened by an outmoded system of overseeing the integrity of funds management by banks, the Securities and Exchange Board of India (SEBI), though in existence for four years, was not armed with statutory powers to check abuses in the stock markets, and the government for its part had mistakenly been looking at the options available in controlling the financial sector rather than in governing it.

The institutional lacunae were bridged within months. The RBI had a fully automated audit system in place before 1992 had run its course and SEBI was invested with the requisite statutory powers by an act of Parliament. The philosophical problem of altering the outlook of the government was also addressed in substance over the decade, with the respect for the free play of market forces becoming entrenched within official circles.

How then did 2001 bring a virtual replay of the 1992 scam, with perhaps more damaging long-term consequences? This is a question the more recent JPC fails to address seriously, rendering its report an exercise in evasion. The JPC observes, rather portentously, that all its findings and recommendations would be futile if the implementation process were to falter. And to ensure that its recommendations are put into practice, the JPC chose to examine what was the fate of the recommendations of its predecessor body in 1993. And the record here is fairly dismal.

The JPC found that inspections by the RBI, when they were conducted, were cursory. There was "a lack of concern" and "strict action" was taken only when matters "went out of hand". SEBI for its part seemed absent without leave when its presence was most required. The JPC's inquiries revealed that SEBI's nominee directors on the Calcutta Stock Exchange (CSE) Board established a record of sorts in absenting themselves from supervisory meetings. In the period preceding the payments crisis that paralysed the CSE in March 2001, one of the SEBI nominees had not attended even one of the 26 meetings held during his tenure; another attended a mere three out of 13, though the third nominee had a more respectable record of attending 25 of 62 meetings.

SEBI's record of absence is considered crucial by the JPC, since, in its narrow reading, the CSE crisis was a direct outcome of the failure to enforce margin money requirements on share transactions. SEBI's negligence was compounded by the deliberate design of a cabal of brokers on the CSE. But this is an aspect that the JPC chooses not to probe too deeply.

What could possibly account for the impunity with which brokers operate, and where could they be obtaining the funds and the guidance for their periodic speculative rampages through the bourses? There are several junctures at which the JPC points towards the nexus between big business houses and the broker community. But having broached the subject, it retreats into extreme diffidence, unwilling to get tangled up in the issue.

The JPC reveals that following the recommendations of its predecessor body, a "special cell" was set up in Mumbai, headed by the Director-General of Income Tax, Mumbai, and comprising representatives from the RBI, the Department of Company Affairs (DCA) and the Central Bureau of Investigation (CBI), to examine and monitor the role of big business houses in the stock markets. The cell died an early death. The SEBI Chairman was the first to spurn it, arguing that no useful purpose would be served by nominating a SEBI representative to serve on it. In May 1995, after the cell had met precisely five times in a life of 17 months, it sent a representation to the Central Board of Direct Taxes (CBDT), seeking the deployment of adequate manpower to fulfil its mission. The CBDT replied that given its limited mandate, the cell could function with the available manpower. There was no further meeting of the cell until March 2001, when a newly minted broker coterie unfurled its own re-enactment of 1992 on the nation's bourses.

As it went about its inquiries, the JPC asked the Director-General of Income Tax, Mumbai, to examine afresh the possibility of collusion between the broker lobby and big business houses. The reply was perfunctory: there was no reason in the prevalent circumstances, said the official concerned, to believe that there was any such nexus. "No cases were found," the JPC records, "where funds were placed by industrial houses directly with the brokers enabling them to play... (the market) with a view to create artificial booms or depressions so as to book abnormal profits to the detriment of the common investor."

As a body with wide-ranging powers of summoning evidence, the JPC could not obviously remain content with this evasion of reality. But its own inquiries were, by all accounts, clouded by a wilful desire to mystify rather than illuminate. After identifying no fewer than 727 scrips which witnessed rapid and unexplained rises in values in the months preceding March 2001, and 199 which witnessed a rapid fall in prices following the discovery of the scam, the JPC asked SEBI for detailed explanations. The outcome was inconclusive: the JPC has identified no fewer than 15 companies where there is evidence to believe that the collusive nexus between brokers and promoters could have had a serious impact on market behaviour. These include well-known companies like Zee Telefilms, Ranbaxy and Lupin Laboratories, as well as companies that have deservedly entered the annals of infamy, like Cyberspace Infosys, Himachal Futuristic and DSQ Software.

MOST revealingly, the JPC has virtually disowned its responsibility to ascertain the true picture, offering an alibi that must seem rather lame. As the JPC explains in the rather tortured syntax that its report is suffused with: "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 scrips yielded yet another set of reports, most of which were again of interim nature and were received as late as 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. The Committee urge SEBI, the Department of Company Affairs and other investigative agencies to expedite and complete their investigations..."

This must seem a rather disappointing abdication of responsibility by the JPC, especially since it is followed by the definitive finding that "there are valid reasons to believe that the corporate house-broker-bank-FIIs (foreign institutional investor) nexus played havoc in the Indian capital market quite sometime (sic) now through fraudulent manipulations of prices at the cost of the small investors". But there is also a telling admission thrown in that the abdication of responsibility is a direct consequence of the JPC's failure to exercise its powers appropriately: "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."

By any criterion, this admission of helplessness by a committee of Parliament, which has endowed the regulatory authorities with all their powers, must seem extraordinary. And by any reasonable evaluation, the material that the JPC had to draw its inferences from was nowhere near as meagre as it has made out. SEBI had submitted a series of voluminous reports early in 2002, which went into a microscopic examination of the many dubious transactions that culminated in the short-lived bull run in the markets after the Union Budget was presented in February 2001. The picture it drew was fairly clear: though the Budget in itself provided rather a scant basis for a broad-based investment fervour, a small cartel of bull operators sought to utilise the momentary euphoria it had engendered to drive up prices and liquidate the long exposures they had taken. It was a self-defeating exercise since a rival cartel of bear operators knew from prolonged observation, just where the vulnerabilities of the bulls lay. Shrewd short-selling in the expectation of profits to be made on the downside of the markets, rapidly pushed prices down.

But the bulls had by then gone too far out on a limb. In a climactic contest between bulls and bears, stock markets nationwide plunged into an acute payments crisis, necessitating their closure for an extended period. The JPC concludes that Ketan Parekh, "big bull" reincarnate and the acknowledged kingpin of the buying frenzy, "was a key person involved in all dimensions of the stockmarket scam... as also in payments problem in the CSE and the crash of Madhavpura Mercantile Cooperative Bank".

Parekh created "various layers" in his transactions, making it "difficult to link the source of fund (sic) with the actual user of fund". He admitted during testimony before the JPC, "that his entities did build huge positions in the market in select scrips (and) grossly over committed themselves to the market".

The estimated loss suffered by Parekh was underwritten entirely by banks and the corporate bodies that he had mulcted for funds. And even if the corporate bodies were party to his wrongdoing and have no entitlement to compensation on this account, the JPC urged that "expeditious action" be taken to recover the money owed to the banks. The task will not be easy by any reckoning. Inquiries by the CBI have revealed the wide dispersal of Parekh's illicitly earned monies, from Switzerland to the Bahamas. The whole process of issuing letters rogatory through the Indian judiciary has only just begun.

Putting the entire burden of blame on one person would obviously do little for the credibility of the JPC. Yet its understanding of the role of the regulatory authorities and the Finance Ministry is almost laughably naive. SEBI for instance has been faulted for being blind to rampant price-rigging in the markets, but this is an offence of little else than negligence in the JPC's estimation. The figures here are revealing. Resource mobilisation in domestic capital markets through public issues of shares peaked in 1994-95 at Rs.30,800 crores. The figure has since been falling rapidly, registering no more than Rs.7,111 crores in 2001-02. In the same period, the funds raised through private placement of shares in the primary market have surged, from a modest Rs.11,174 crores in 1994-95, to Rs.64,950 crores in 2001-02. Secondary market turnover however, has been the real growth area, from Rs.162,905 crores in 1994-95 to an astounding Rs.2,880,990 crores in 2000-01. Once the scam was discovered the figure plummeted rapidly, to Rs.895,826 crores in 2001-02.

In this context, SEBI's actions have been perfunctory or worse. The number of cases it has taken up for investigation in any one year has remained broadly the same 60 in 1995-96 and 68 in 2000-01, though there was an unexplained increase in 1996-97 to 122. The number of cases it has completed investigations in, has fluctuated between 18 and 60 in these years. And the number of cases in which it has imposed sanctions has cumulatively been 181, with a mere 18 being registered in 2000-01, when the abuses were rising to a crescendo.

The JPC passes over this record of default or even possible complicity with a formulaic stricture: "The track record of SEBI in punishing the wrongdoers in stock market (sic) has been unsatisfactory. During the last ten years, SEBI could initiate prosecution proceedings on insider trading in only one case and on fradulent and unfair trade practices in just seven cases. Its record of taking action against violators has been equally unimpressive.... Though SEBI's plea for more powers to strengthen its effectiveness cannot be faulted, the Committee got an impression that SEBI was not fully enforcing the powers already vested with it."

ALL this, in the context of the magnitude of the crisis that the stock markets went through, must seem rather ritualistic. There has obviously been a strong urge at work to protect the regulators whose actions presumably are conditioned by signals sent by the political establishment. When the country's largest mutual fund, the Unit Trust of India, has abused its trusteeship function for public savings and partaken in an unwholesome fashion in the stock market scam, the costs of this political evasion would inevitably be a loss of credibility and legitimacy.

Since July 2001, when the UTI suspended redemptions under its flagship US 64 scheme, the Finance Ministry has announced a major overhaul of the mutual fund and infused fresh funds in an effort to restore its financial health. But these schemes, which are essentially being enforced with tax-payers' money, remain partial in their scope and halting in their effect. And the stakes involved here are substantial. As the Deepak Parekh committee, which went into the UTI's functioning in less turbulent times, observed: "With over two crore unit holders, public confidence in US 64 is a virtual proxy of public confidence in the Indian financial system."

After over a year of mulling over the findings of the S.S. Tarapore committee, which went into the US 64 debacle in fair detail, the JPC has managed to come out with conclusions that must seem ludicrous. M.P. Subramanian and M.M. Kapur, respectively the Chairman and Executive Director of the fund during the troubles, have been severely indicted. And even though criminal proceedings have been launched against them, the JPC has also recommended departmental action against others within the organisation.

THESE apart, the JPC has managed little else than a mild reprimand, couched in ambivalent and circumlocutory language, of the Finance Ministry, only naming the then Finance Secretary Ajit Kumar. The main burden of negligence is placed on UTI's principal promoter, the Industrial Development Bank of India. Although the JPC urges the institution of criminal proceedings against the predatory operators who managed to strip UTI of its funds for short-term speculative gain, it glosses over the fact that many of them have put themselves at a safe distance from the reach of the Indian judicial process. The small investor and the senior citizen whose entire sustenance was dependent on UTI schemes, could well ask what the purpose of the entire JPC exercise was. It has not enforced accountability, it has failed to evolve new norms for those charged with the custody of public funds, and quietly acquiesced in placing the burden for the revival of UTI on the tax-payer. An exercise to safeguard public funds against future depredators has ended up as another waste of public money.