By M D Nalapat
Those looking towards a financial market in India that rewards not insider traders and ‘fixers’ but the retail investor are hopeful that justice will be done during Modi 2.0.
New Delhi: Unlike during the past, this time around, wrongdoer after wrongdoer is having to come back to India to face justice. Among those soon expected back is Vijay Mallya, “who will have to pay back his dues as well as go to jail for seeking to escape responsibility for so long”, a top official predicted. During Modi 1.0, the Prime Minister had warned “Lutyens Looters” that they would soon be spending sleepless nights. It has taken a while, but at least for some of them, that prediction is coming true. Two recent developments involving a CBI invigorated by new leadership mark a distinct departure from past practice. These are (a) the granting by a Special Court to grant Indrani Mukherjea the status of an “Approver” in the INX matter and (b) persistent CBI pressure on the Ministry of Finance to give approval to the unforgivingly delayed matter of granting approval for the prosecution of four officials who were part of what is known within the bureaucracy as the “PC network” within North and South Block. This very profitable network was formed under a former senior minister in the UPA period who parlayed insider and even strictly confidential knowledge into billions in riches. The INX matter which concerns Mukherjea involves what for new MP Karti Chidambaram (the hugely successful businessman son of the former Union Minister for Finance and later Home) is small change—$1 million—but as per the colonial-era laws still in force, there is scant differentiation between Rs 100,000 and loot of Rs 100,000 crores where legal action is concerned. So far as the request by CBI for sanction to prosecute some senior officials for presumed complicity in the PC network’s many dubious deeds is concerned, from 1947 onwards, a sense of cadre loyalty has ensured that officials belonging to the elite central services almost invariably dismiss as “not proven” even comprehensively documented evidence of graft on the part of their “cadre brothers”, especially if the same happen to be “batchmates”. This presumably explains the tardy manner in which this Chidambaram-linked CBI request for prosecution is being considered in the Ministry of Finance. The argument of those holding back sanction is: once the dam of silence and official inaction breaks, who knows who will get drowned in the flood that may follow. Since Jawaharlal Nehru’s order to drastically reduce the salaries of the higher levels of the bureaucracy (in contrast to Hong Kong, the UK, the US or Singapore, where remuneration levels are much higher), the warning to Nehru of Lee Kuan Yew against his policy of combining low salaries with high discretionary powers has come true. Every schoolchild in India is aware of the manner in which the triumvirate of business, officialdom and politics generate and divide loot on a scale that some estimate matches what the drain from the people was during the colonial period. Once the CVC and the Home Ministry take up with the Finance Ministry the manner in which delay in sanctioning prosecution of the four officials is sabotaging Prime Minister Modi’s efforts at cleaning up the system, it will be difficult for the PC network to sabotage such sanction for much longer.
SYSTEM MANIPULATORS
Illegitimate money flows from India have long been the primary business of a group of insider traders and system manipulators that may be described as operational associates of the PC network. This is the “Mumbai Financial Force”, a small and secretive group within the financial community in the country’s commercial capital. The MFF may more accurately be described as the Mumbai Financial Fraud Force (MFFF). Given the number of senior officials who have derived monetary and other benefits from the PC-linked MFFF, it is small wonder that any infraction of law that comes to light usually gets described and later compounded as a “procedural lapse”. Harshad Mehta’s Narasimha Rao-era formula for rigging the movement of share prices so as to loot the small investor went unobstructed for years, owing to a “procedural lapse”, according to officials. The co-location shenanigans in the National Stock Exchange (NSE) have yet to yield any of the perpetrators before the portals of justice. Indeed, the matter is being treated—not just even but especially by SEBI—as largely a “procedural lapse”. Live data that no exchange should allow to be shared was handed over by the exchange to a private thinktank by an agreement that has yet to excite official notice. Software created from outside the exchange was utilised for algo trading, with the “keys” being made known to a handful of brokers, who therefore made huge amounts of money in trading, all at the cost of the retail investor. A whistle-blower made available to SEBI full details of the actions committed in order to enable a few to profit at the cost of the many, but the then SEBI chief U.K. Sinha seems to have decided that such revelations were unworthy of significant remedial action. Even when matters involving co-location and dark fibre transactions became too many to ignore, SEBI simply went in for cosmetic steps, even after a PIL was filed in the Supreme Court pointing lapses out. Once again, the Judiciary stepped in where the Executive refused to tread. There have been proven instances where select brokers have submitted multiple applications under a single name to corner the shares offered in an IPO. These shares were then boosted through what the PC network calls “perception management”, before being sold to retail investors, who very soon saw the shares lose value. Data theft does more damage to investor confidence in a modern economy than other forms. Yet repeated data thefts in India have gone unpunished and the evil continues. By contrast, such offenses are subject to severe fines and prosecution in the US, Singapore and the UK.
NO FORENSIC AUDIT
During the period when Chidambaram was Union Minister for Finance, nationalised banks were made to sell loan assets at throwaway prices to a very few investors. These loans were before long resold to others at a huge profit. Thus far, no forensic audit has been undertaken of such loan asset sales by Public Sector banks during the Chidambaram period. Given the pervasive culture of cadre and batch protection within the elite services, it is no surprise that criminal charges were not filed in the matter despite the wide spread between what the public banks got and what the same loan assets were subsequently sold for by select private financiers, nor was even a criminal investigation initiated. Co-location and dark fibre data leakage that ruined millions of retail investors also was treated not as a criminal but as a “procedural” matter. SEBI seems unaware of the fact that in an age of advanced technology, log sheets that may have been erased by wrongdoers within any exchange can easily be regenerated, so that deleted data gets traced. No such effort has been made in this direction. Those who now head NSE seem as unconcerned about the damaging impact of the co-location scam on the reputation of the exchange as their predecessors.
Among the most successful operations of the PC network was the Multi Commodity Exchange (MCX) matter. The then MD of MCX was the classmate of an individual at the heart of the algo transactions, and he was reported to have shared live data with his classmate for the benefit of select clients. Such activity makes nonsense of regulations meant to ensure a clean and transparent exchange. However, so far as official agencies were concerned, the issue was “merely procedural”. A well regarded Chartered Accounant, T.R. Chadha, researched and presented a detailed forensic report on several of the actions that took place in MCX. Thus far, neither the present MCX Chairman or the SEBI Chairman seem in any hurry to take action on the basis of the Chadha report. Meanwhile, the PC network is known by senior officials to be active in an effort to merge NSE with MCX that would create a monolith with a history of not being held suitably accountable for its actions by SEBI, for reasons that await a comprehensive investigation. Such an enquiry needs to include the circumstances where relaxation of rules was serially given to a few favoured players in the darker corners of the share market, by not merely SEBI but the RBI, and why such leniency shown during that period took place. Two senior officials, Ramesh Abhishek and K.P. Krishnan, have been extensively mentioned by whistle blowers as being very close to P. Chidambaram, and of being responsible for several suspicious decisions involving MCX as well as the National Spot Exchange Limited (NSEL). Both bureaucrats continue to enjoy stellar careers, so it is clear that their seniors do not regard the charges against them as worthy of notice. The two are not alone. There is a network of present and former officials regarded by their peers as having facilitated the operations of the MFFF and the PC network. Only a CBI enquiry into the PC-MFFF nexus would unearth the truth, but those complicit in past scams have sought to create a perception that action against them would spook the share market, when in fact strong action would greatly increase global investor confidence in India. As for SEBI, while it has declared the subsidiaries of some brokerage firms to be “not fit and proper”, the regulator has avoided a similar verdict on the actual brokers involved. Of course, the tradition of subordinates being punished for the crimes committed by their superiors has long been extant in India. In this case, the “punishment” for grave betrayal of investor trust cannot be described as anything other than cosmetic, as indeed have been several other orders that await a comprehensive forensic investigation by a team motivated by Modi 2.0 to rid the regulators of those who are in cahoots with the very wrongdoers they are meant to police.
ZERO TOLERANCE DOCTRINE
Those looking towards a financial market in India that rewards not insider traders and “fixers” but the retail investor are hopeful that justice will be done during Modi 2.0. Both during the Narasimha Rao as well as the Vajpayee period, stock market scams that went unaddressed resulted in horrendous losses to small investors, and to the defeat of the Congress and the BJP respectively in the 1996 and 2004 Lok Sabha polls. Prime Minister Modi is known to have studied the legacy of the past carefully, and to have instructed the PMO to ensure a Zero Tolerance doctrine for the many mega financial scams that took place since the UPA came to power. Officials are happy at Indrani Mukherjea turning approver in the INX matter and the moves being made on officials in the Finance Ministry to no longer continue to deny sanction for prosecution of Chidambaram-linked officers. They are confident that the PMO together with Union Home Minister Amit Shah will ensure that the orders passed by Prime Minister Modi to clean the financial regulatory system of crooked elements will soon bear fruit even in the matter of the misdeeds of the hyper powerful PC network. It has been estimated that the loss to the public of lack of sincere regulation has led to more than 71 per cent of the NPAs incurred since 2001 by banks run by the government. Only 29 per cent of NPAs have been caused by genuine borrowers whose failure to pay was based on the market rather than on collusion.
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