Lessons in greed

How to sidestep future Satyam, Sahara and NSEL scams by spotting the alarm signals

By Mohan Sule
After a 32-month prison stint by erstwhile Satyam Computer Services founder Ramalinga Raju, Sahara group managing worker Subrata Roy became the second high-profile company boss to spend time in confinement. Raju confessed of fudging figures, while Roy’s dodgy fund-raising was detected by the Securities and Exchange Board of India. Even as Jignesh Shah was being painted as a David taking on Goliath Sebi for its refusal to grant MCX permission to start an equity exchange due to reluctance to dilute promoter shareholding to 5%, the blow to the FTIL group was struck by the finance ministry, which issued showcase notice to subsidiary NSEL for launching forward contracts and vested powers with the Forward Markets Commission to investigate the spot commodity exchange. The dogged determination of Sebi and Roy’s greed — the open-ended optionally fully convertible debenture issue of two group companies had invited the ire of the income tax department, as per the disclosure in the red herring draft prospectus of associate company Sahara Prime City and, earlier, the Reserve Bank of India had directed an NBFC in the group to return deposits for undertaking para banking activities — have led to the unraveling of a diversified empire, reportedly with Rs 60000 crore of revenue. There are many lessons to be learned from these three debacles.

The first is that there is a vast rural market waiting to be tapped. Sahara’s real estate and housing finance arms are believed to have raised more than Rs 20000 crore from OFCDs. Collection of even one-fourth of this amount, if not fictitious, is a stinging indictment of the inability of banks, mutual funds and NBFCs to reach out to the informal sector, leaving the field open to loosely regulated residuary NBFCs and chit funds. Perhaps small-ticket investments do not justify the cost of penetration for institutions in the organised sector, governed by stringent norms on capital adequacy. As a result, the financial services sector has not succeeded in tapping the entrepreneurial spirit of those with no capital or degrees but possess a missionary zeal. The focus of financial inclusion is on lending to the priority sector and weaker sections, but not on the liability side. The Sahara boss initially tried selling packaged snacks but discovered that the small savers were easy to attract than small consumers. The episode also shines a light on the lack of awareness in non-urban regions of the risk-reward equation and the importance of know-your-client norms.

Besides monitoring the resource-mopping exercise, scrutinising the end-use of the money is important. There is need for lowering the ceiling for accepting cash deposits to the earlier Rs 10000 from the current Rs 50000. Unlisted companies escape Sebi purview if their subscribers do not cross 50. As the Sahara saga of mysterious investors reveals, huge amounts can be collected from even a handful of subscribers eager to park their unaccounted wealth. Instead of volume, the threshold for Sebi and the RBI’s intervention should be linked to the value of subscription. This could be a multiple of the company’s capital. The Department of Company Affairs should be divested of its powers to regulate unlisted companies. Even auditors and credit rating agencies, in the crossfire for conflict of interest, can no longer be relied to be the keepers of investors’ trust. Autonomous monitors to supervise unlisted and micro firms’ market forays could address the anxiety on transparency. For investors, any tussle with regulators should raise an alarm. For instance, the FTIL group got permission to start MCX-SX after a legal battle with Sebi. High growth of companies operating in a shallow market should be another red flag. The contribution of NSEL to the bottom line of the provider of trading software was increasing over the past few years. Proximity of corporate honchos to the powerful works both ways: companies can secure the necessary approvals and contracts and politicians get a conduit to launder their commission. Roy was photographed with the who’s who of Bollywood and sports and Raju’s rise was touted as the showcase of Andhra Pradesh’s prowess as a tech destination to rival Bangalore. However, the market knows best. Stayam’s discounting was always lower than that enjoyed by other tier 1 tech firms. Diversification into unrelated fields should also cause unease. It was Satyam’s foray into real estate that cracked open the accounting scam. A striking feature of the three biggest scams in post-reforms India is that the protagonists are promoters and not soft targets like brokers. An applause-worthy performance by the finance ministry and Sebi.

Facing the truth

The nation needs a closure on some of the controversies in the process to eradicate corruption and crony capitalism

By Mohan Sule

This seems to be a season of intolerance. A scholarly work shining a light on the deplorable practices of a section of the society celebrated for its all-embracing liberalism is accused of affronting sensibilities and shredded by the publisher. A court injection is used to cover up the exposure of its underbelly by a conglomerate bloated on the small savings of the informal sector and which ironically had mocked in full-page ads the same legal process, sought by the regulatory environment to induce accountability in its fund raising, as harassment. No wonder India’s history is in black and white, with no concession for shades of gray. Contrast this with what happened when apartheid was dismantled. Despite being deprived of over 27 years of his life, Nelson Mandela was not bitter. He sought cooperation instead of collision with his tormentors. The post-reforms India can take a leaf from the Truth and Reconciliation Commission set up in South Africa to bring closure to many contentious issues that have played on the conscious of its people. Here victims recite their experience and perpetrators provide corroboration and are thereby spared from civil and criminal prosecution. A beginning has been made with the Securities and Exchange Board of India seeking monetary penalty from companies and market players accused of exploiting the system instead of undergoing the time-consuming legal process to seek conviction. This exercise in transparency would contribute to cleansing the system much more effectively than incarceration of wrong doers.

What better way to kick-start the process than by examining the rise and rise of Reliance Industries? Financial numbers and market valuation can of course detail the climb to the top of the empire that began by selling Only Vimal suit pieces and dress material and eventually knitting an amazing backward integration story, from bagging exclusive licences to manufacture intermediates used by the textile industry to producing petroleum products that go into these chemicals and finally securing blocks to explore and supply natural gas. In the process, many Indians got rich due to the equity cult fostered by founder Dhirubhai Ambani, who has claimed that he just worked around the system. It would be interesting to know if one person has the power to manipulate the government machinery including the cabinet and the relevant bureaucrats to achieve his goals. The timeline will reveal if policymakers have been responsible for artificially suppressing competition and fine-tuning policies to suit the group. The second commission can examine the opening up of the telecom sector. The Comptroller and Auditor General has merely quantified the loss due to faulty framework. The panel has to trace back the steps from introduction of mobile telephony and the subsequent measures, some of which succeeded in spreading the revolution and some in delaying the penetration, and the persons involved in crafting, in hindsight, these volatile moves that benefited a handful.

The flip-flop on PSU divestment, adoption of different methods for selling shares, the resultant loss to the exchequer if any and the cross-subsidisation to raise funds to meet the fiscal deficit target could keep the third commission engaged for a long time. The report should also dissect the issue of insider knowledge. For instance, the benign neglect of some PSU monopolies to benefit a few private players. The reverse turn on public sector from employment generator to a burden on the balance sheet should also merit the setting up another commission. The factors that prompted the change in heart and those responsible for perpetuating the concept of Big Government have to be brought under the spotlight. Why is that the Garibi Hatao slogan, first made popular by Indira Gandhi during the bank nationalization days of the late 1960s, resonates with the population even after more than four decades? The rulers who kept India under the Hindu Growth Rate till the early 1990s, thereby confining Indians to an economy characterized by shortages and bleak job prospects, should be revealed. It is during this period, which will go down in economics textbooks as the most wretched that India has ever seen, that consumption was frowned upon and FERA let loose on anyone spotted with dollars. Corruption was labeled as a global phenomenon. Company bosses spent more time lobbying in the capital than running their factories. It became convenient for the governing party to perpetuate the status quo and foist a quid pro quo with the promoters rather than encourage professional managers. If nothing else, at least the fear of being judged with contempt by history will prompt some of the future rulers to eschew populism in favour of pragmatism.