10 years of financial scamsIt terms of reform and development, the Indian capital market and financial sectorhave been the fastest to grab every opportunity presented by the paradigm shift inIndias economic policy. Their furious developmental activities have put the two
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top Indian bourses almost on par with the best in the world, in terms of theirstructure, systems and regulation. But for all the development efforts, thecapital market remains seriously flawed because three key ingredients are stillmissing. They are adequate supervision, strict accountability, and appropriatepunishment.As a result, the markets have remained shallow and stunted and have lurched fromone financial scandal to another over the last decade. Every policy change in theliberalisation process was pounced upon by unscrupulous companies, who aided by aretinue of investment bankers and consultants diverted thousands of crores ofrupees to themselves. In the process, retail investors have been the biggestlosers and the effect of their disenchantment is visible in the slow growth ofIndias investor population. China has over 25 million investors, while India,
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with all its rapid development and its 130- year old stock exchange culture hasonly 19 million investors.A simple roll-call of the scams of the last decade tells the story of why Indianinvestors are so frustrated.The Securities Scam of 1992: This was the mother of all Indian financial
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scandals. It exposed the utter lawlessness and absence of supervision in the moneymarkets; it allowed funds to be transferred with impunity from banks and corporatehouses into the equity markets; and saw thousands of crores of bank funds to movein and out of brokers bank accounts in what was later claimed as a accepted
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market practice. A Special Court under a separate act of parliament was set up
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and over 70 cases were filed by the CBI but not a single scamster has been finallyconvicted by the excruciatingly slow judicial system. Instead, their repeatedattempts to re-enter the market with the same bag of tricks have caused furtherlosses to investors. More significantly, the Reserve Bank of India which wasguilty of gross negligence and was discovered to have deliberately buriedsupervision reports was let off scot-free with just a couple of officialsreprimanded.The IPO bubble: The entry of Foreign Institutional investors led to a massive
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bull run, which saw the secondary market recover from the scam even though badlawas banned. Soon thereafter, the Control over Capital Issues was abolished with aone-line order and it opened the floodgates for a massive scam in the primarymarket (or Initial public offerings). This scam had two parts the first was
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perpetrated by existing companies which ramped up their prices in order to raisemoney at hugely inflated premia to fund greenfield projects and mindlessdiversifications, most of which have either failed to take off or are languishing.The other half of the scam had a multitude of small traders, chartered accountantsand businessmen, who teamed up with bankers and investment bankers to float newcompanies and raise public funds. The botched up M. S. Shoes case, exemplifies thefirst type of scam while the second type, which caused losses of several thousandcrores of rupees is known as the vanishing companies scandal. The IPO bubble whichlasted three years from 1993 to 96 finally burst when prices of listed companiesbegan to crash. So huge was investors disappointment that the primary market
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remained dead for the next two years, almost until the beginning of 1999.Preferential Allotment rip-off: This was an offshoot of the rampant price
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rigging on the secondary market. Apart from raising fresh funds, promoters ofIndian companies who thought that prices would never come down, quickly
orchestrated general body clearances to allot shares to themselves on apreferential basis and at a substantial discount to the market. Multinationalcompanies such as Colgate and Castrol started the trend and it led to a benefit ofnearly Rs 5000 crores (in relation to market prices at that time) to retailinvestors before the Securities and Exchange Board of India (SEBI) put in place aset of rules to block the practice. A public interest litigation filed at thattime drags on in court.CRBs house of cards: Chain Roop Bhansalis (CRB) cardboard empire is only the
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biggest and most audacious of many that were built and disappeared in the newliberalised milieu of the mid-1990s. His Rs 1000 crore financial conglomerate
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comprised of a mutual fund, fixed deposit collection (with hefty cash kick backs),a merchant bank (he even lobbied hard to head the Association of Merchant Bankersof India) and a provisional banking license. Many of these licenses requiredadequate scrutiny by SEBI and the RBI, and that fact that they passed muster isanother reflection of supervisory lethargy. Armed with these and favourable creditratings and audit reports, CRB created a pyramid based on high cost financingwhich finally collapsed. The winner: C. R. Bhansali, who, after a brief spot oftrouble with the authorities moved on to the dotcom business and the regulatorswho were never held accountable. The losers: millions of small investors who lostthrough fixed deposits or the mutual fund. The CRB collapse caused a run on otherfinance companies causing a huge systemic problem and further losses to investors.Plantation companies puffery: These followed the same strategy as vanishing
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companies, and since they were subject to no regulation, could get away with wildprofit projections. They positioned themselves as part mutual fund, part IPO andpromised the most incredible returns over 1000 per cent at least in seven years.
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High profile television campaigns, full-page advertisments and glossy brochureshad the investors flocking for more. Almost all these project, with barely anyexception have vanished. The cost: Rs 8000 crores plus.Mutual Funds disaster: The biggest post-liberalisation joke on investors is the
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suggestion that small investors should invest in the market through Mutual Funds.Yet, over the decade, a string of government owned mutual funds have failed toearn enough to pay the returns assured to investors. Starting with the scam-hit
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Canstar scheme, most mutual funds had to be bailed out by their sponsor banks, orparent institutions. The came the big bail out of Unit Trust of India. Since UTIis set up under its own act, it was the tax- payers who paid for the Rs 4800 crorebailout in 1999. Just three years later, it was back buying recklessly into theKetan Parekh manipulated scrips and suffering big losses in the process. Therecord of the private mutual funds has also been patchy after hitting a purple
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patch in 1999-2000, many of the sector specific funds are down in the dumps. Itwill be a long time indeed before small investors consider mutual funds areasonably safe investment.The 1998 collapse: What could be a bigger indicator of the ineffectiveness of
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the regulatory system and the moral bankruptcy in the country than the return ofHarshad Mehta? In 1998, the scamster, who was the villain of 1992, made a comebackby floating a website to hand out stock tips and writing columns in severalnewspapers who were told that his column would push up their circulation figures.His relentless rigging of BPL, Videocon and Sterlite shares ended with theinevitable collapse and a cover up operation involving an illegal opening of thetrading system in the middle of the night by the Bombay Stock Exchange officials.It cost the BSE President and Executive Director their jobs, but the broker andthe companies have got away so far.The K-10 gimmick: This too is already on the way to be hushed up even before it
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is fully investigated. Though everybody knows this as a Ketan Parekh scandal, but
if one examines the selective leak of the SEBI investigation report to the media,it would seem as though only three operators caused the problem by hammering downprices. The government promised stringent action not only against Ketan Parekh andthe brokers who hammered down prices, but also the regulators who slept over theirjob and companies/banks which colluded with them to divert funds to the market.Yet, within a month, the pressure for action is off and the momentum has beenlost.A decade later we seem to have come a full circle. The Ketan Parekh led scandalhas been considered big enough to warrant the setting up of another JointParliamentary Committee. And the fact that the second JPC has been spending itsfirst few weeks action (not) taken on the previous JPC report says it all aboutsupervision, regulation and accountability.1. Ramalinga RajuThe biggest corporate scam in India has come from one of the most respectedbusinessmen.Satyam founder Byrraju Ramalinga Raju resigned as its chairman after admitting tocooking up the account books.His efforts to fill the "fictitious assets with real ones" through Maytasacquisition failed, after which he decided to confess the crime.With a fraud involving about Rs 8,000 crore (Rs 80 billion), Satyam is heading formore trouble in the days ahead.On Wednesday, India's fourth largest IT company lost a staggering Rs 10,000 crore(Rs 100 billion) in market capitalisation as investors reacted sharply and dumpedshares, pushing down the scrip by 78 per cent to Rs 39.95 on the Bombay StockExchange. The NYSE-listed firm could also face regulator action in the US.
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