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Market crisis a case of fraud not scam

BS Bureau

The Reserve Bank of India has taken the probe into the recent financial sector crisis one step forward and unearthed more skeletons in the cupboards of financial intermediaries as well as a few corporates.

The 10-volume RBI report to the Joint Parliamentary Committee-which runs into over 1,200 pages-has graphically described how a few banks in the private sector joined hands with stock broker Ketan Parekh and, throwing all prudential norms to the winds, took the system for a ride.

It has also thrown light on the role of a few overseas corporate bodies as well as a few corporates, though in a guarded way.

However, the RBI has refused to describe the phenomenon as a "scam". According to the central bank, these are "frauds perpetrated on the system".

In fact, the six-hour session at the annexe of New Delhi's Parliament House on September 12, where governor Bimal Jalan led a 20-member RBI team to face the JPC, turned out to be a virtual one-on-one between Congress MP Mani Shankar Iyer and Jalan on the nature of the crisis.

No system is foolproof and frauds can take place anytime, anywhere, Jalan reportedly told the JPC, making it clear that the RBI cannot be held responsible for every little thing since it cannot keep tabs on every transaction in the financial system.

The RBI report makes it clear that it is ready to punish the guilty with an iron hand.

For the first time, it said that former Global Trust Bank chairman Ramesh Gelli did not resign but was sacked and was asked not to stand for re-election as a director on the board.

Another private sector bank chief -- AR Moorthy of Nedungadi Bank -- was not only sacked, but also barred from taking part in the management of any banking company for the next five years and a criminal complaint was filed against him, the report said.

Gaping holes were found in the balance sheet of the bank, which is said to have fabricated its net profits in the last two years.

On the Madhavpura pay order crisis, the RBI has squarely blamed the Bank of India for its failures in its internal controls and the risk management system.

Outlining the nexus between the banking system and the market, the RBI report said that among the co-operative banks, Madhavpura was not alone in taking exposure to the stock markets. At least 25 co-operative banks have taken stock market exposure, violating all prudential norms.

On the corporates' involved in the market crash, the central bank has refused to commit itself.

"Diversion of funds is not a specific violation under the Banking Regulation Act" and bankers are expected to ensure the end use of funds, the RBI said.

It has pegged GTB's outstanding advance to HFCL at Rs 2.13 billion and to Zee Telefilms at Rs 2.50 billion as on March 31, 2001.

But the RBI added: "It was not possible to ascertain how much of these funds have gone into the capital market and whether such diversions had inflated the stock prices. It has not been possible to conclude whether the said companies have ultimately diverted the funds to the capital market. It is understood that DCA would investigate into this aspect."

On the sensitive issue of FIIs and the operations of OCBs also, the RBI is non-committal. Even though the information received from the Securities and Exchange Board of India prima facie does not indicate any violation of exchange control regulations, the report said. Inspection of the operations of OCBs under the portfolio investment scheme of GTB has unearthed a string of irregularities and the RBI has directed the bank not to open any account of any OCB unless its systems are in place.

The RBI has found a wide gap between inflow and outflow in the accounts of five Mauritius-based OCBs that maintained accounts with GTB.

It has sought Sebi's views on the explanation offered by the bank which states that the outflows were higher on account of sale of shares obtained under FIPB approval, shares purchased from other OCBs outside India and underlying shares obtained by conversion of ADRs/GDRs.

On action taken against companies named in Sebi's preliminary report, the RBI has the following to say:

• The enforcement directorate has initiated an enquiry in respect of the misuse of EEFC accounts by exporters, including Zee TV;

• ED has also initiated an enquiry against Infosys regarding its subsidiary, Yantra, in the US. The RBI is not aware whether the inquiry has been concluded, although, it had submitted the information to ED in May 2000;

• The CBI has initiated action against Cyberspace.

• The RBI has refused to accept that any regulatory failure on its part helped trigger off the crisis. Neither has it admitted any lack of co-ordination between the regulators.

"The recent irregularities are of a fraudulent nature and hence, these have no relationship with the arrangements for co-ordination among various agencies which are already in place," it said.

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