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.