Asleep at the wheel

The epicentre of the scam lay in the Madhavpura Mercantile Cooperative Bank, operating in the deputy prime minister’s constituency, and the City Cooperative Bank, located in the prime minister’s Lucknow constituency. Both banks fell within the regulatory purview of RBI. Its inspectors had detailed their many and varied lapses.

The lapses were sufficiently serious to merit being brought to the attention of the Registrars of Cooperatives in Gujarat and UP respectively. The Ahmedabad deputy registrar rejected the RBI’s findings. This obliged the RBI to send their report to the central registrar of cooperatives for ensuring compliance.

Governor Jalan was unable to explain why this was not done. In consequence, Ketan Parekh and the Madhavpura chairman, Ramesh Mehta, robbed the bank blind to finance Parekh’s multiple stock market operations, which eventually ended in Madhavpura being bankrupted.

The story of City Cooperative Bank is similar. RBI inspectors had long discovered and reported in detail on what was going wrong. The report had been sent to the UP government, then under the control of the BJP. Nothing happened.

Perhaps because the promoters had the required influence in BJP circles to get the inauguration of a related Johari enterprise, Cyberspace Infosys, done by the local MP. That MP just happened to be the BJP prime minister of India.

If in either the Madhavpura or City Cooperative cases, the governor of the RBI had shown himself to be a truly independent authority ruthlessly unmasking misdemeanour and malfeasance, whatever the political connections, real or imagined, of those in error, corrective action could have followed.

And so, on discovering the ineptitude of RBI regulation, Madhavpura and City Cooperative went into overdrive to keep their broker friends well-supplied with the liquidity they needed to undermine the integrity of the stock market.

The recycling of other people’s money to keep Ketan Parekh in clover stopped only when, in March 2001, the Brihanmumbai Clearing House, run by RBI, stopped payment of a Mahavpura pay order in favour of Parekh.

Had RBI been alert to the numerous very high-value pay orders, running to well beyond the inherent strength of Madhavpura being issued by the bank in favour of the same well-known broker and being discounted with almost metronomic regularity by the same branch of the same nationalised bank, and presented for settlement week after week, in conjunction with massive borrowings by the same duo from the call money market, the illegitimate connivance between Parekh and Mehta could have been nipped in the bud much earlier. Madhavpura collapsed because RBI slept while those they were supposed to be regulating made hay.

The other major source of the scam was the Mauritius route. It is entirely significant that almost all the Ketan Parekh entities were incorporated in Mauritius long before the NDA came to office and Jalan became the RBI governor.

But misuse of the KP companies came only after unbridled liberalisation of foreign investment in the stock market by the NDA signalled to the players that the market for foreign institutional investment in Indian capital markets was, in effect, unregulated.

Governor, RBI, cheerfully admitted to his not considering the regulation of stock market investment from abroad as his business. Chairman, SEBI, was equally candid in admitting that no one had asked SEBI to monitor the Mauritius route. Nor did the finance minister consider this an urgent matter of policy. This did not change even when the stock market’s daily turnover rose giddily from around Rs 300 crore a day (mid-1999) to a fantastic Rs 12,000 crore a day during the autumn 1999-spring 2000 boom, touching on occasion the astonishing high-point of Rs 15,000 crore, primarily because of the unprecedented inflows from outside. The single most important source for this foreign bonanza was Mauritius, a country which hardly ranks first in any other stock market. But none of this seems to have led to red alerts anywhere in the regulatory system. The ministry of finance was too delighted basking in the glow of the “feel-good factor” to put in place any policy guidelines for regulation, and the two statutory regulators, RBI and SEBI, were content leaving it to the other, or to nobody at all, to check on the legality, legitimacy and propriety of these massive unprecedented fund flows.

On Bimal Jalan falls a particular responsibility for this level of negligence, for the single most important and innovative measure taken by Manmohan Singh in the wake of the Harshad Mehta scandal was the establishment of the High-Level Coordinating Committee on Capital Markets (HLCC), under the chairmanship of the RBI governor, with the broad mandate of keeping capital markets under review with a view to alerting all concerned to regulatory steps required to ensure the integrity of the capital market.

Jalan converted this high-powered committee, comprising key regulators and top finance ministry officials, into a kind of tea-and-sandwiches club, which did not care to ask itself whether the boom would not lead to bust if effective regulation were not designed to keep the crooks out of the market place.

The defence for such unforgivable negligence trotted out first by Jalan before the JPC and now reiterated in the government’s ATR is that now the terms of reference of the HLCC do not include the kind of high-level anticipatory vigilance written into the earlier ATR. Who changed it? When? Why? And how could a mandate approved by Parliament be so fundamentally altered?

There can be no democracy without accountability and responsibility. The NDA has compounded its thwarting of ministerial responsibility with rewarding a regulator who has failed this nation.