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.
CARPETBAGGERS
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.
CHIDAMBARAM’S CIRCLE
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?
CO-LOCATION CABAL
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.
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