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Business Commentary/Dilip Thakore

White collar criminals wreak havoc on money markets

Disgusting. That's perhaps the most appropriate word to describe the curious phenomenon of white collar scamsters and confidence tricksters who have swindled hundreds of thousands of citizens out of their life savings by setting up dummy corporations. Worse, even after being routed, most of them are openly, uninterruptedly and continuously enjoying their ill-gotten gains.

After the multiplying scams and swindles of this growing tribe of white collar criminals are exposed by the media, numerous investigative agencies of the government manned by time-servers who merrily draw salaries and perks for unspecified services, reluctantly swing into action and make a ritual arrest. But so rudimentary and unprofessional are their investigative skills that within a trice, these worthies are out on bail and enjoy a standard of living which is patently correlated to their misdemeanours and cognisable offences.

There is a curious and inexplicable reluctance within government and within Indian society in general, to vigorously prosecute and incarcerate white collar criminals.

A poor wretch who steals a few pennies or commits a crime against the property of relatively more prosperous citizens is likely to suffer the most brutal third degree investigative punishment within the nation's notorious police stations and prisons. But white collar criminals who cheat and steal the hard-saved money of widows, orphans and the aged, invariably receive kid glove treatmentfrom the police, investigative agencies (the Securities and Exchange Board of India and the Central Bureau of Investigation, etc.) and from so-called right-thinking members of society as well.

Right-thinking members of society can perhaps be excused for seeming to be soft on white collar criminals because scams and swindles tend to be complicated and it is a premise of the law that an individual is innocent until proven guilty in a competent court of justice. This makes it all the more important that when a scam or swindle is exposed by the media, SEBI, the public prosecutor's office, fraud squad, the Company Law Board, the Reserve Bank of India and other investigative agencies maintained at considerable expense by the public, exhibit some urgency and make sincere efforts to speedily bring white collar criminals to book.

If they fail to do so, heads should roll within these agencies, a phenomenon which is the rare exception rather than the rule.

It is important and very much in the national interest for the investigative agencies of government and the nation's lacklustre, lackadaisical courts to vigorously prosecute and impose exemplary punishment including imprisonment, confiscation of property and hard labour on white collar criminals. Because these anti-social elements have virtually destroyed the primary equity market and are destroying the nation's banking system.

Moreover, they are making a mockery of the judicial process and are eroding foreign investors' faith in India's justice dispensation system -- perhaps the only comparitive advantage this nation enjoys over other third world nations, particularly China which receives almost one-third of the world's annual foreign direct investment flow.

The ease with which white collar criminals have been able to swindle investors in India's hitherto booming IPO (initial public offer) market is astonishing and shows the stock-market administration and the law enforcement agencies in poor light. There are an estimated 300 companies which made IPOs through the Bombay Stock Exchange which have vanished without a trace leaving millions of investors in possession of useless and unmarketable equity shares.

To this day, the standard response of the BSE to investors who demand an explanation is that these companies have been delisted for not paying listing fees! The myopic members of the board of the BSE were too dimwitted to foresee that careless and arbitrary listing of all and sundry promoters would bring the stock market into disrepute and kill the IPO market. Which is precisely what's happened. Even SEBI has proved to be a toothless watchdog of the stockmarket and has not been able to bring any of the hundreds of spurious promoters who have misused the stock exchanges to fleece the public to book.

Likewise, frauds and scamsters have had a free run on the non-banking financial sector in which millions of investors have lost thousands of million of rupees in recent years. Though a distinguishing characteristic of the Indian economy is case-by-case over-regulation of organised sector private sector companies, an estimated 40,000 non-banking finance companies or NBFCs have been permitted to be promoted without let or hindrance by the RBI which supervises the nation's banking system.

Only as recently as 1997, by which time the volume of public deposits with NBFCs had swollen to Rs 200 billion, did the mandarins of the RBI wake up to the need to compel promoters of NBFCs to register themselves with it and to introduce a law compelling NBFCs to raise their net worth to Rs 2.5 million.

Meanwhile, as the RBI suffered a Kargil-like intelligence failure, hundreds of NBFCs defaulted in repaying the deposits of usually poor and ignorant citizens scattered across the country. This year, two NBFCs -- the Kuber Group and CU Marketing --which between them owe depositors over Rs 10 billion have gone bust. Last year, the JVG Group which had garnered small deposits from millions of rural artisans and farmers, shut its offices overnight even as it owes Rs 5.5 billion to its unfortunate depositors.

Meanwhile, seven years after he engineered the biggest bank and government securities scam in Indian history, Harshad Mehta (against whom the income tax department has filed a notice of Rs 40 billion for unpaid tax) is resting nice and easy on bail in his 75,000 square feet residence on Bombay's upscale Worli Seaface and is reportedly dabbling in the stock market once again. Ditto for C R Bhansali of the CRB Group which owes investors and depositors over Rs 15 billion.

Not a few media pundits and monitors of the Indian economy are of the opinion that the principle of caveat emptor (buyer beware) should apply to the stock and financial markets. According to this school, 'greedy' depositors and investors should pay for their sin of greed. This is a flawed argument because in a largely illiterate and peasant economy, government and its regulatory institutions have to play an active role in safeguarding the public interest. To expect people who are being exposed to the stock and money markets for the first time to read the fine print of prospectuses and be aware of the antecedents of promoters of NBFCs is to expect too much.

Unfortunately, the priorities of bureaucrats in the Union finance ministry and regulatory institutions such as the RBI, SEBI and the CLB are topsy-turvy. They spend too much of their time supervising relatively well-managed companies in the organised sector. The consequence is a devastated IPO market (which has hit industry hard), collapsing NBFCs (which explains why contemporary India continues to remain the world's largest market for gold) and continuous erosion of confidence in the nation's legal system.

Dilip Thakore

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