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'38,000 NBFCs raised some Rs 400 billion and vanished'

If Finance Minister Yashwant Sinha leaves New Delhi for Bombay on January 18, in spite of all-important Budget work, credit in large measure would be due to Kirit Somaiya, 45, the Lok Sabha member representing Bombay North-East and president of the Investor’s Grievances Forum. On Thursday, Sinha will launch a new awareness campaign of the IGF for small investors.

On the anvil are messages on cable and satellite television channels, workshops, conferences, literature distribution, advertisements to educate the small investor about his duties, responsibilities and money-making opportunities.

In an interview with Senior Editor Sheela Bhatt and Associate Editor Y Siva Sankar, the MP said the IGF would enlist the services of co-operative banks, Lions, Rotarians, social groups, business associations, medical associations, students, professionals like chartered accountants to make the campaign a success. He also took stock of the stock and money markets in the context of the small investor.

What should Finance Minister Yashwant Sinha do for the small investor in Budget 2001-02?

I expect two things: One, the finance minister should try to pave the way for a single legislation applicable all over India for investor protection. And I believe things are moving in that direction; two, I expect the finance ministry and the ministry in charge of the company law to initiate measures to form an Investors Protection Fund, initially with a corpus of Rs 2 billion that can be raised to Rs 10 billion in a phased manner.

Both things are possible. Homework has already been done on what to do with unclaimed dividends. The amended Companies Act says all unclaimed dividends should be transferred to the proposed Investors Protection Fund.

This fund is meant for the education, awareness and protection of the small investor. The corpus can go up to Rs 10 billion. Interest alone can be up to Rs 1 billion.

The small investor, irrespective of whether he is a customer of a non-banking finance company or a public limited company, whatever his instrument (debenture, deposit, etc), should be offered insurance cover.

I believe the insurance companies are willing to extend cover to customers of only ten reputed NBFCs. The government has been dithering on this issue. We feel the government should allow the insurance companies to at least make a beginning. Then other NBFCs will fall in line.

Please offer an overview of the IGF activities.

In the 1990s, India opened up its capital market in its march towards an era of liberalisation, globalisation and privatisation. Simultaneously, what was necessary were preventive and protective measures for investors. There we failed miserably.

For the protection of investors, the government set up SEBI. But the experience of the common investor has not been good.

The capital market shot through the roof. In the late 1980s and early 1990s, we had less than 10 million small investors in the capital market. At the end of the decade, or at the beginning of the 21st century, their number rose to 44 million. But nothing much was done to put protective measures in place.

Every year, we are witnessing a new type of scam or fraud. The small investor is losing money. There is nothing to recover the money. There is nothing to caution him. There is nothing to prevent the scam from happening.

The Investors Grievances Forum is a non-government organisation registered with SEBI. The IGF came into being in 1992-1993 when 39 chartered accountants came together and launched it. I was one of them. This was just after the Harshad Mehta scam. We thought we should do something.

Actually, our area of operation was Mumbai only. Afterwards, the IGF grew in strength as professionals from different fields joined us. Now there are about 100 active members and 500 members. There are some 10,000 associate members.

Our first struggle was against the State Bank of India public issue. We filed a petition in the Mumbai high court. Then there was the C R Bhansali case, followed by fraudulent plantation companies, the Morgan Stanley public issue and so on.

If you remember, Morgan Stanley said it is a closed-ended, first-come-first-served scheme for Rs 1 billion. So there was a mad rush among investors because it was the first foreign mutual fund in India.

Finally Morgan Stanley raised Rs 14 billion. They should have announced in the beginning itself that it is not a closed-ended scheme but an open-ended one. Worse, for five, six years, the investors did not get a single paisa in dividend from Morgan Stanley.

This case strengthened our resolve to fight malpractices. We CAs thought we should do something for the society we live in because we understood the market, and wanted to spread awareness of the changing capital market mechanisms among the ordinary investors.

The RBI's NBFC division, UTI, UTI Institute of Capital Markets, IDBI, LIC, Kotak Mahindra, SBI, SBI Mutual Fund, Birla Mutual Fund… all are supporting our movement because they realise it is actually their duty as well to prevent scams, and educate and protect the investor.

The first five, six years, we fought for protective measures. Now, for the first time in India, we are launching awareness campaigns for the benefit of investors.

For example, not many investors know where to lodge a complaint against fraudulent companies, where to go to get back their money. There are six different steps and 13 instruments… so a small investor has to go 78 places to recover his money.

One of our slogans is, Vaada Kiya Ek Ka Double/Baath Tho Choddo, Muddhal Bhi Gul. An IGF poster shows a picture of a tree. The punchline: Khwab Dikhaye Ped Ke, Aur Bheej Bhee Nahi Boye. So these are the things going on in the Indian capital market.

Do you have the expertise to detect hi-tech crimes/scams?

You will be shocked to know that for the whole of India, there are only seven SEBI-approved investors associations out of which only two or three are functioning. It is a pity. So we are trying our best to be in sync with the times.

What has the IGF achieved so far?

In the fraudulent plantation companies case, we filed a petition in the Mumbai high court. In the first year, these companies raised Rs 5 billion from small investors. Second year they raised Rs 1.5 billion, third year, when we started protesting, they collected Rs 2.5 billion; then we moved the high court which gave certain directives; fourth year the companies raised only Rs 450 million; and fifth year, their collection was zero.

So what we have achieved is prevention; we were not able to recover the money. But at least we could stop further frauds.

Between 994 to 1997, there were 3,500 public issues. After that, 2,500 of these companies simply disappeared. In 2000, only 99 public issues could visit the market, out of which ten were bogus companies. So you can call this the effect of preventive, protective and educative measures.

Why is the small investor so dear to you? Has he sought your help or have you taken upon yourself the responsibility to protect him?

I am a chartered accountant by qualification, I was among the top 15 rank-holders at the national level. I decided to enter politics when I was just 12! I entered politics because I though politics can be an instrument through which I can do some service to the nation. I did CA because finance and economy are close to my heart. Whenever I rise in Parliament, it is only to raise matters about finance and the economy.

When all these scams happened, I thought somebody has to take the responsibility for the safety of investors. So we CAs came together and launched the IGF.

It is not as if bad news is pervasive. People say the small investor should see glad tidings in the Takeover Code. For instance, in the open offers for stock of Gesco Corporation, the ordinary investor has gained.

This is the pity of the Indian economy: we think small investors are those who operate in the secondary market. Come to think of it, those who are in the secondary market are not ten per cent of the total investing community. You should also look at those who have invested in mutual funds, deposits, non-banking finance companies, plantation companies.

So it is a fallacy to say that the Takeover Code is going to help everyone. Those who stand to benefit are a fraction of the investing community. Some 38,000 NBFCs had raised some Rs 400 billion from millions of investors and vanished.

Assuming there are adequate checks and balances in the system, what is there in the stock market for the small investor anyway?

Look, there are always good stocks and bad stocks. It all depends on the way the small investor behaves. This is where the IGF sees a role for itself, in spreading awareness.

I feel the investor has to distribute his risks/investments/savings over various instruments. Some amount of risk must be there. I support the element of risk. The investor ought to have a long-term strategy. What is not advisable is the get-rich-quick, make-a-fast-buck mentality.

If I were a small investor, I would realise that the secondary market offers two types of instruments or securities/shares. One, that won't give short-term benefits: these can be from the old economy, or a long-time company with good management but carries an element of risk; two, those that give short-term benefits.

I would also look at reputed mutual funds for steady income. I would also invest in bank deposits. Then there are risk-free government securities that offer income-tax benefits. There are investment avenues outside the capital market as well.

What is your understanding of the hype about the new economy areas like infotech and their subsequent busting?

First of all, I don't agree that the infotech sector has busted, if that is what you imply. During November 1999, the IT scrips started rising. I said in Parliament, in the sittings of the standing committee on finance, at press conferences and various fora that the boom in infotech stock prices is artificial, manipulated.

Experts and stock exchange officials had agreed then that the future of infotech companies would be bright. Even now I'd say the same thing.

Profit potential of good companies varies from 100 per cent to 120 per cent. But the share price movement had nothing to do with the functioning, management, performance of infotech companies. It was all the handiwork of some indulgent operators. So what has busted is this racket, not the infotech companies themselves. Even now, Infosys, Wipro, Satyam and others are doing wonderfully well.

When we raised a hue and cry about the racket, the RBI appointed a committee to probe the sharp rise in prices and index movements. Every time the indices move up, one has to study where the money is coming from and where it is going. During the Harshad Mehta scam, the money came from the manipulation of securities, bank receipts.

I presented proof to the finance committee and the RBI governor about the IPO racket. In January and February 2000, there were public issues claiming oversubscriptions by 100 times, etc.

Obviously, the small investors were not the ones pumping in so much money. For instance, I withdrew Rs 100,000 from my bank account. A bank, directly through a mutual fund, gave a Rs 900,000 loan to apply for primary market.

The modus operandi was like this: Merchant bankers and mutual funds would approach investors that the latter have to invest, say, just Rs 100,000 and Rs 900,000 more would be invested on their behalf.

Investigations revealed that these merchant bankers and funds actually got their finances from banks. In other words, they were the middlemen between banks and investors. This is how several public issues got oversubscribed under the names of the small investors.

The RBI then appointed a joint committee comprising a director each from SEBI and the RBI. Within one month, they submitted their report that what I had alleged was true. Then they issued new guidelines against such undesirable ways of financing.

That is why, since April 2000, there were hardly any public issues that got oversubscribed by several times. One can count them on hand: hardly two, three issues.

At the same time, the brokers were given loans during that period for trading, etc. That was also stopped. That is why the share market fell.

Are you against the concept of banks offering loans to small investors so they can play the market?

The stock market is just a part of the overall capital market. Our objective is to make the capital market a healthy destination for the small investor. Everyone agrees that the small investor should not try to come directly into the stock market because he is usually not mature, and is not well-informed.

It is better they come indirectly. As an economics student, I feel an indirect entry is a more proper idea.

A mature investor, though small, can play the secondary market. Only then does the question of bank finance arise. In other words, the banks obviously would not like to fund an immature small investor. In the secondary market, there may not be more than four or five million small investors whereas there may be 50 or 60 million outside.

You have said the infotech companies have a bright future; if their stock-prices are falling, it is because brokers are manipulating them. What is the remedy for this price-rigging?

Correction. I didn't say brokers. I said operators. Operators can be outsiders. We had always maintained that prevention and protection are the duties of authorities. Not many people agree with me, but I believe it is the duty of SEBI, the RBI, the finance ministry and other institutions to protect the investors and maintain vigilance. They have to monitor things constantly.

I mean, if something (a scam) suddenly happens, they must study the situation.

Let me illustrate what I mean by an example. Take mutual funds. Every advisor says, 'Invest in mutual funds. It's safe.' Suppose a certain mutual fund doesn't function well. Then, it's the duty of SEBI to find out if there is manipulation or genuine risk in the mutual fund’s portfolios. If there's genuine risk element, then there is no room for any complaint.

Don't you think SEBI takes its role of the market watchdog seriously?

Of late, yes. It has started to adopt a proactive approach.

Sure, they have stepped up vigilance on mutual funds, especially after we raised a hue and cry over mutual funds that stepped into the market with new schemes during 1999-2000. Several funds launched schemes related to infotech. Most of these schemes failed miserably.

These things can be avoided if regulators perform their duties well. And if the small investor is also aware of market developments and remains vigilant, then the system will become proper and can be further improved.

What is your opinion about SEBI?

Initially, its functioning was not transparent. Now it is trying to be more transparent, more efficient, more proactive. It is the habit of Indian regulators -- they want authority, not accountability.

For instance, the RBI's NBFC division had powers to regulate the segment. But they woke up only after the CRB fiasco. By then, 38,000 NBFCs collected Rs 400 billion and disappeared.

Some five years back, there were lot of complaints about losing shares in transit, post-office, etc. SEBI has done very well in introducing demat. SEBI does good things when it is forced to do them or when it is pressurised.

Besides IT, which other industries are you bullish about?

One is the pharmaceuticals sector. It is doing well. There is scope for import replacements and higher exports. Health awareness has been rising in the last decade. The local market is getting wider.

Another sector with a good future is media and entertainment. In 1995, India had only 1 million cable connections. Now we have 30 million connections. In a short while, there would be 100 million. But the entertainment industry is not just composed of television channels. Television software producers, film industry, suppliers and so on are also segments of the industry. They are all set for high growth rates.

Not that other sectors don't have a future. There are lots of companies in the old economy that have good fundamentals and good management. It depends on individual companies's performance. But in general, IT, pharma, entertainment are the ones to watch out for. If you have shares of companies in these industries, they will pay for your next generation as well.

Do you agree with the view that the small investor in India is very reckless and very greedy?

No, I do not agree. These are the statements made by regulators who do not care for people and who do not perform their duties. Small investors are not self-centered or selfish, they are more worried about their future, their safety, particularly about their children's future.

If the savings rate is high, it should only mean that the investor is interested not just in his own safety but that of his next generation as well. All the small investor needs is some guidance, information, training. He can be moulded into a responsible, discerning investor.

Let bygones be bygones. At least now, the authorities should come together and work to make the 21st century a safe time for the small investor.

(Kirit Somaiya can be contacted at Neelam Nagar, Mulund (East), Bombay - 400 081, or 32, South Avenue, New Delhi - 110 001. His telephone nos. are (022) 564 4151 or (011) 301 6202, (011) 379 3311. He can also be contacted on kiritsomaiya@hotmail.com.)

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