By M D Nalapat
‘Banks and exchanges being hollowed out by mega scamsters.’
Economic Advisor to the Ministry of Finance, Arvind Subramanian, who gained fame in the United States by calling for harsh sanctions against India over pharma policy just before he landed as a high powered resident in the Lutyens Zone, seems to be auditioning for an enhanced role in what he clearly expects will be a new government by end-May 2019. He is suddenly waxing eloquent on the pitfalls of both GST as well as DeMo. Several others in the bureaucracy are also getting back in touch, albeit more silently, with their old masters, ready to serve the nation post poll.(1) Economic growth (2) cleanup of corruption and (3) protecting national security; these are the three reasons why the Narendra Modi-led BJP secured a majority in the Lok Sabha in 2014. Since then, growth has been good, but below Modi-fied expectations, while not a single UPA-era VVIP has been prosecuted for graft or other forms of misfeasance, even while the situation in Kashmir and on the western border remains unsettled. Prime Minister Narendra Modi effectively has less than five months to reverse a mood of spreading disenchantment with his government, so as to prevent Arvind Subramanian’s gamble on the Opposition winning the 2019 LS polls from becoming a reality. The expectation is that the Economic Advisor’s planned “tell-all” book on the Modi government will reach bookstores well before polling for the Lok Sabha. As for the existing government, growth rates in the short run are difficult to change, but on the anti-corruption front, there is talk among a few officials that a PM-led major drive against “mega corruption” may get launched shortly. However, success in this may be affected by the sabotage tactics of the many officials who have been associated with past misdeeds but who still retain influential positions within the post-2014 government. This persistence of high-level corrupt officials is resulting in the creation of a growing threat to the stability of India. The present situation is not optimal for the economy, as two engines of growth, the banking system as well as stock exchanges, are experiencing problems related to their misuse by crony capitalists and their political and official patrons, especially after the 2009 Lok Sabha polls. Unmolested by the CBI, ED or DRI, several politicians and former officials from India repeatedly visit the Swiss financial hub of Zurich, a recent example being that of a former Union Minister of Finance, who wore a pair of trousers rather than his traditional southern attire. Dubai and Singapore are the other locations to where frequent visits by top Indian politicians and former Indian officials (as well as family members of serving officials) get made. These three cities (together with London, Mumbai and Delhi) form the operational headquarters of a cabal of financial carpetbaggers that has been operating in India since 2003, whose purpose is to cull out tens of billions of unaccounted dollars through systematic gaming of both banks as well as stock exchanges in India, the two pools of capital that entrepreneurs need to go to for their production needs.
THE ‘HIDDEN’ HAND
By 2005, the Carpetbagger Cabal had refined its tactics and begun functioning in a 24/7 mode, although the deleterious effects of their termite-like activities began showing in the economy only around 2009, the year when the UPA won a fresh term in office on the back of a stellar economic performance during the previous five years that was the result of decisions going back to 1992, but which began to be systematically reversed from 2007 onwards without much blowback from the “pink” press. During 2004-2006, the proportion of influence of Sonia Gandhi and Manmohan Singh on economic policy was about 30:70 in the Prime Minister’s favour. The Congress president deferred during that period to the individual she had chosen to head the government, at least so far as the economy was concerned. By 2007, however, the cry from Congress party treasurer, Motilal Vora, for large supplies of oxygen to fuel the 2009 Parliamentary election campaign witnessed a steady lowering of the share of Manmohan Singh in economic decisions, including those relating to allocation of resources such as coal and spectrum. Increasingly, key officers in the Prime Minister’s Office (augmented by 10 Janpath loyalists) were informally told to “do what was needed” to generate oxygen for the polls. These commands, couched in the language of requests, were in the form of both telephone calls as well as unsigned chits from the handful of individuals known within South and North Blocks to enjoy the complete trust of 10 Janpath. The economist turned Prime Minister, aware that seeking to get back his former influence would be a lost cause, concentrated his attentions on the 2005 nuclear agreement he had worked out with US President George W. Bush, finally witnessing its triumph in 2008. By the time he took office once again in 2009, the share of Prime Minister Manmohan Singh in economic decision-making was negligible, and it showed in the type and quality of decisions taken during UPA II.
The modus operandi of the cabal (which was led by a senior politician) was simple, and involved (a) the looting of commercial banks by forcing them to give loans to individuals who had zero intention of repaying such advances, and (b) manipulating selected stock prices through deployment of Participatory Notes (PNs), selling out just before their own artificially created stock bubbles burst. The holders of the soon to depreciate stock would either be government financial entities or small investors, including those who had placed their trust in mutual funds remote controlled by the cabal. Such ostensibly “independent” funds would join the public financial institutions’ and small investors’ queue in buying up stock offerings while they were at their cabal-created price peaks. The stock exchange scams of the A.B. Vajpayee government helped send off the BJP to the Opposition benches in 2004 and assisted the BJP’s return to office in 2014. It cannot be forgotten that PNs were first launched by the Vajpayee government and later made totally anonymous by P. Chidambaram. Unwisely and perhaps intentionally, the holders of PNs were given exemption from capital gains tax if routed through Mauritius. Worse, they were allowed to take the capital invested (as well as profits made) back entirely in US dollars, rather than in rupees, as ought to have been the case. Given that the cabal is still operating in 2018 with much of its potency intact, it would be a simple task for them to create stock market gyrations of such velocity close to the 2019 polls that the BJP’s prospects would once again get severely impacted as in 2004. This would come on top of the dent already created in the rural vote by the manner in which the currency reforms announced on 8 November 2016 were implemented, and which dampening effect the higher MSP prices announced by the Central government are unlikely to change. Although several warnings have been sounded in the past about the financial carpetbagger cabal, thus far regulatory and investigative agencies have looked the other way, or made only token gestures that have had near zero effect on the cabal’s operations. During the UPA-era tenure of M. Damodaran as SEBI Chairman, officials say that he drew the attention of the Prime Minister’s Office to the manner in which a small group of hyper-greedy individuals led by a senior Union Cabinet minister was “talking markets up or down” and indulging in other insider manipulation to enable a designated group of investors and brokers to make windfall profits at the expense of other investors and public institutions. Rather than take this warning seriously, the PMO allowed the Union Ministry of Finance to persuade it to drop Damodaran as SEBI chief in 2008. Prime Minister Manmohan Singh had to give way to Finance Minister P. Chidambaram, who was adamant that Damodaran be shown the door. The no-nonsense official was replaced with Chandu Bhave, who at the time of his appointment as head of SEBI had an enquiry pending against him by the same agency. Later, a whistle-blower brought out into the public domain some aspects of the operations of the cabal, this when U.K. Sinha was heading SEBI. Interestingly, while a SEBI member attempted to make a serious enquiry into the allegations (which had been largely confirmed by an examination of the data by IIT), he was not re-appointed to his post, despite being in the middle of his enquiry into insider manipulation of stock prices, as well as being eligible for such an extension of service.
It needs to be reiterated that the investigative agencies have thus far not come up with any names of the carpetbaggers’ cabal. Hence, linking the cabal with any individual or group of individuals would be premature.
COMPLETE LACK OF ACTION
Financial experts point out that a group of unscrupulous carpetbaggers (they cannot be called “investors” as there is almost zero risk of their not making illicit gains from their manipulative insider information tactics) made billions of US dollars of profit at the expense of public financial institutions and retail investors. Part of this would return to India in the form of Participatory Notes (PNs), while the rest would be deployed in buying assets abroad. Interestingly, US Treasury Secretary Jack Lew, in 2014, offered the Government of India full details of financial transactions made by citizens of India through the global banking network. Taking advantage of this offer would have led to the discovery of numerous transactions that would have escaped tax in India. According to individuals in positions of authority in Washington, the Government of India is yet to respond to this offer. The Cayman Islands, Mauritius, Singapore, Dubai and other “safe havens” are almost wholly transparent to the Treasury Department of the United States. An exception is territory controlled by the People’s Republic of China, such as Macau or Hong Kong, as the PRC is—along with Russia—big enough to ignore when desired any requests for information made by the US. However, the warming relations between Prime Minister Modi and President Xi Jinping will make it easy for North Block to gain access to those individuals from India who have funnelled cash to locations controlled directly or otherwise by Beijing. Similarly, the Prime Minister may be expected to get a high degree of cooperation from London so far as an examination of offshore accounts controlled from that city is concerned. As yet, however, investigative agencies are going about the enquiry in what can only be described as a wholly unsatisfactory way. For example, although former Finance Minister P. Chidambaram was twice questioned by the ED, thus far there has not even been an attempt by the agency to check out in foreign locations such as London reports of property there. Essentially, the same financial data are with the ED that got discovered two years ago, despite occasional publicity about the matter through leaks by officials within the ED connected with the “investigation”. Coming to co-location, the scam affecting the National Stock Exchange (NSE), permission was granted in 2010 for such a close and unprecedented juxtaposition of brokerage servers next to those of the exchange. SEBI gave permission in the record time of a month for reasons yet to be ascertained. Immediately, several “carpetbagger funds” (i.e. those that sought to gouge out profit from the market using whatever methods they fancied (and which were illegal in the US) at the expense of small investors and public financial institutions. Several brokerage firms set up servers next to those of the NSE, but some got data faster than others. Such a difference in speed was probably illegal, as was possibly the 2012 decision of the exchange to allow brokerage firms to locate servers close to the backup servers of the NSE. Forget about serious investigation of any of such actions, even the relevant logs of the NSE have yet to be seized by the CBI, thereby giving those elements in the exchange who may have been involved in wrongdoing enough opportunity to alter records and delete logs. Such a lack of action is unprecedented in the financial world of London or New York, but seems commonplace in India. Given such lethargy, it will be a herculean task for the Modi government to build a sufficient case on a matter that has raised eyebrows across the world’s financial markets and given a handle to those who cast doubt on the integrity of exchanges in India.
‘NIRAV MODI, A LAUNDERER’
Global financial entities had raised eyebrows when India (during the UPA period) worked out an agreement with the Swiss authorities to reveal details of accounts parked in that country that was only prospective rather than retrospective. This allowed countless depredators to escape detection. Financial circles in Zurich say that a substantial proportion of the moneys parked by Indian citizens and their nominees (usually close relatives who have in a systematic way acquired citizenship in foreign countries solely for the purpose of being receptacles of illicit wealth generated in India) subsequently were withdrawn and expended on properties and other assets across the globe, including in India through PNs. Interestingly, individuals in London and New York familiar with the trade say that Nirav Modi was a “money launderer for the rich and powerful par excellence”. They claim that he would sell fake gems to individuals at inflated prices and then repay them through making deposits in offshore entities. Some years ago, he and his associates had their eye on temple gems. It must be added that the valuables in several state-run temples in India are negligible in amount, despite centuries of donations by believers. This is because of organised loot of such temples over decades by gangs having high-level patronage and which are still active. It is expected that the Narendra Modi government will institute an enquiry into the theft of temple jewels and idols across India and their sale in the relevant markets across the globe. This should also include a fullscope examination of the contacts and activities of Nirav Modi and Mehul Choksi since 2007, together with others who have played footsie with the wealth of the country, including in its temples.
The public will have to await the findings of the numerous agencies which are looking into the activities of the secretive cabal. Although several officials claim that former Finance Minister P. Chidambaram was at the centre of “several activities involving both banks as well as stock exchanges” during his tenure in office, as yet the agencies whose job it is to monitor such activities have not come up with conclusive findings. Hence, it would be improper to place the finger of suspicion on the former minister or his friends and associates. What is, however, clear is that Chidambaram had enormous clout within the UPA (even prevailing over the Prime Minister himself in the matter of the refusal to extend the tenure of M. Damodaran as SEBI Chairman, besides numerous other similar victories of placement of favourites in key slots). He drew around himself a circle of officials who were in touch with him as well as with each other. These included Arvind Mayaram, K.P. Krishnan, Raghuram Rajan, S.K. Das, C.B. Bhave, Ramesh Abhishek, Ashok Chawla, D.K. Mittal, Arbind Modi, U.K. Sinha, Sindhushree Khullar, Amitabh Verma, T.S. Vijayan, Vinod Rai (who remained close to Chidambaram despite sending damning reports on the UPA regime as CAG) and K.V. Chaudhary. Outside the government, the suave Union Minister for Finance had confidants of the eminence of Deepak Parekh, Ravi Narayan, Chitra Ramakrishna, Uday Kotak, Ajay Shah, Vijay Kelkar, Susan Thomas, Sunita Thomas, Suprabhat Lala and Amitabh Jhunjhunwala, together with others close to the group around the former Finance Minister. The heads of key global and domestic financial institutions were also part of his orbit. Chidambaram moved between the official and non-official world with ease, even as they moved together with each other. NIPFP’s Ajay Shah, for example, was regarded by senior North Block officials as being the de facto Economic Advisor to the Finance Minister from September 2013 (the time when Raghuram Rajan was made RBI Governor) till the time that Narendra Modi was sworn in as Prime Minister on 26 May 2014. Even earlier, Shah was a regular visitor to the office of Ila Patnaik, who for a time was Principal Economic Advisor in the Finance Ministry. Thus far, the agencies seem to have decided not to intensively question him, much less book him for several charges that have been laid at his door, but which are all emphatically denied not only by Ajay Shah but by his supportive (and powerful) boss, NIPFP chief Vijay Kelkar. Even after Union Cabinet notes (some relating to budget proposals) were mentioned by officials as having been found on his personal computer, Shah remains free to travel across the globe. It may be added that several individuals under investigation have been given permission to go abroad, from where they have created multiple alternative entities to hold legal ownership of the assets they have accumulated abroad. Small wonder that the SIT has come up with so little after so long.
SET UP MORE SITS
Should North Block be ordered by the PMO to take advantage of the offer made in 2014 itself and request the US Treasury Department to assist in locating the sources of such asset purchases, several individuals may find themselves in trouble with the law. Although exposing such mega financial crimes would be of immense help to the BJP in the 2019 Lok Sabha campaign, officers close to those guilty of wrongdoing appear to be going ultra slow on their enquiries, or diverting the investigation into irrelevant or insignificant channels, expecting that such “good work” (by not working) will stand them in good stead should the BJP tally crash in the coming polls as a consequence of economic woes. A method of collecting cash safely and quickly is to sell equity at lower than possible prices to brokers through PNs, who will give back the balance in cash in India. This route is favoured by politicians during elections, and each knows trusted brokers who can be expected to make deliveries of cash despite the eagle eye of the Revenue authorities. Thus far, none of these brokers have faced any other than token investigations into their operations. Their being linked to offshore funds ensures ease of money laundering, a factor that hopefully will come to the attention of the SIT during one of its sittings. The SIT represents the crown jewel of the Modi government’s battle against corruption and the holding of black money, but there are suggestions that more SITs need to be set up, this time including outside experts of known integrity.
THE FIXER AND FRIENDS
Thus far, serving officials whose identities have yet to be revealed have ensured that the enquiry into the alleged co-location shenanigans in the National Stock Exchange (NSE) has gone nowhere. A top UPA-era politician (whose name is not being mentioned as the agencies seem to be hesitant to move against him) is calculated by bureaucrats, who had worked with him, as having made Rs 35,000 crore in illicit stock market trading profits through this method alone. This long-serving politician (who had on several occasions held Cabinet-level posts) ensured for reasons of protection and future immunity that other VVIPs from multiple parties (both ruling and opposition) share in the booty generated by cheating small investors (and small depositors in public financial institutions), some of them earning several thousand crore rupees each through insider rigging. Those who took advantage of the co-location scam to make windfall profits (which officials attached to the UPA-era politician helped shepherd through the international banking system) and who are now in high office have an interest in ensuring that the co-location and associated stock fixing cases go nowhere, as they (and the concerned officials, many of whom are still in high positions) would get exposed were the facts to ever come to light. However, a few admirers of Narendra Modi say that it is “only a matter of time before the Prime Minister pays attention to the NSE co-location scam” and ensures through the PMO that the “facts tumble out, no matter who gets affected”, whether the wrongdoers be friend or foe. As the Lok Sabha election nears, unless much more success has been registered in the campaign against corruption than the scanty results achieved by the several sittings of the “Anti-Black Money” SIT, the BJP will be on the back foot when the party seeks to remind voters of UPA-era corruption. The question from voters in case no major activity on the VVIP corruption front takes place in the next few months will be: if the UPA leadership was so corrupt, how come none of them are in jail or have even been the subject of an FIR by the post-2014 government?
Thus far the investigative agencies have yet to seriously look into the charges against financial mastermind Ajay Shah, his wife and his in-laws. Allegations are multiplying that Shah was the mastermind of the co-location imbroglio, and (in the words of a senior Finance Ministry official) “misused data he had obtained from NSE (owing to his closeness to Kelkar, who was then its head) to assist firms controlled by close relatives to create algorithms and other software that would be given for use to select brokers. The internet servers of these brokers would be placed cheek by jowl with NSE’s own servers, thereby enabling chosen brokers to “get a time advantage through HFT and dark fibre” while striking deals. Data was secretly exchanged regularly between Mumbai and Singapore in a manner that enabled huge profits to be made out of funds that flowed in from offshore havens (mostly through the Mauritius route), and which gave a significant advantage to those brokers who were participants in the scam. Although names of such brokers have yet to be officially confirmed by the agencies, that somehow have yet not recognised the magnitude of the fraud, brokers who were a part of the Co-location Cabal are well-known within the profession. Major competitors were killed off by use of the discretionary power available to officials in India’s Victorian-era governance system. However, such misuse of the public trust has not prevented these officials from getting promotion upon promotion, including in the present dispensation, some of whose senior officials seem to be covering up for their brother (and sister) officers by not bringing to the PMO’s attention the manner in which stock markets and exchanges have been getting converted into insider trading and money laundering havens at the cost of the investing public
STRICT ACTION NEEDED
In August 2013, a senior official met The Sunday Guardian in the pre-dawn hours near an airport and gave details of how a senior minister was “talking the currency up or down, depending on what was needed for his speculative positions”. This was done in tandem with a “very senior person” in the RBI. The rupee had indeed been gyrating unusually during that period, mostly in a downward direction as the cabal were “shorting” the rupee. While “more than US $2 billion was made by those behind the induced currency volatility”, the losers were exporters, importers and the economy in general. Once The Sunday Guardian wrote about this, the volatility ceased from the next trading onwards, and the value of the rupee stabilised. However, officials warn that “the same set of currency manipulators are at work again” shorting the rupee yet again for illicit gain and causing it to lose value to a level not warranted by the fundamentals, but which is “perfect for huge profits by the corrupt cabal and their international money managers”. Not to mention those who hold large amounts of hard currency in offshore havens, and transfer parts of that stock to India via Participatory Notes invested in stock markets and in other assets. Neither the banking NPA meltdown nor the insider stock trading issues have been seriously examined by agencies whose remit is to protect the country from external and domestic depredators. Honest and patriotic officials (and they form the large majority even at senior levels of the bureaucracy) are hopeful that Prime Minister Modi will “go beyond the briefs placed before him by officials” (many of whom are friends of those involved in the scams mentioned, and therefore may be pre-disposed to regard the entire basket of wrongdoing as a “conspiracy theory”) and initiate “strict action”, including against not just VIPs but VVIPs, some of whom may belong to his own or allied parties. Unless this be done, the warning is that neither the banking system nor the stock exchanges can get cleansed of the rot that has infected them since the 1990s, thereby slowing growth to a level even below present rates, which are themselves below the rates achieved under UPA I.