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In the world of finance, the NSEL (National Spot Exchange) crisis is neither the first scam nor will it be the last. What is important is how our authorities deal with it — and prevent recurrence of such scams. Look at the facts: 24 borrowers — not even one is credit worthy; 88 godowns — not even one has all the stocks. We hear that the chairman's son-in-law is the largest borrower and the promoter's brother-in-law is the auditor. And then there is a web of well-paid, but poorly informed, independent directors and advisors. It looks like a perfectly fixed match, where even umpires and cameramen are taken care of. The result: 15,000 investors have been swindled of Rs 5,400 crore.
And now it is unfortunate to see our authorities messing it up — first, by inaction and denial, and then through their confused actions. In an election year, is the government too busy to deal with it, or is it trying to avoid a complicated mess? The case has been tossed from one department or ministry to another. The FMC (Forwards Market Commission) did not have regulatory powers; after the crisis, it has been given only 'limited' powers. It is literally begging for information from the accused. The Department of Consumer Affairs has limited understanding of financial frauds. The Ministry of Finance has no jurisdiction over it. The Ministry of Corporate Affairs is looking into it. The PMO (prime minister's office) is forming a committee. The opposition parties are trying to figure out 'what's in it for me'?
The erstwhile CEO of the NSEL has taken the entire blame, saying: "Hit me, hate me or hang me, but, I am the only person guilty of oversight or fraud. I want to embrace martyrdom and save all my company men, including the promoter, a hands-on entrepreneur, auditors who were supposed to verify the stocks, the board that was supposed to review audit and control processes." This implies that hundreds of people working at regional offices overseeing the godowns with no stocks, failing to comply with KYC (know your customer) norms while dealing with borrowers, preparing fake stock statements, VAT, insurance documents, etc, were all innocent.
Now, investors are getting restless about their money. We can soon expect hyper action with the involvement of the CBI, SFIO, EOW, Income Tax department, anti-money laundering authorities, and director of revenue, enforcement director, besides lawyers in a slew of civil and criminal cases. We all know our judicial system. As a fitting tribute to a deeply religious and spiritual nation, the judiciary presupposes the existence of next life. By the time our judiciary gives its final verdict, none of the victims or culprits will be alive. Further, our system is inspired by doctrine of 'unity of souls' in dealing with victims and culprits. It incriminates the victims by questioning their failure to do due diligence and asking them to pay tax on notional profits on investments they have lost entirely. It seldom convicts, but victimises the culprit with endless trials and no judgment.
The Harshad Mehta case is yet not closed and was messed up in a similar way. In contrast, the Satyam scam was a brilliant example of how to protect innocent investors. Satyam shareholders who were patient have not lost any money. The guilty are being tried. The company, its clients and country's reputation are all intact. We did not get distracted by frivolous allegations against brokers with 'buy' recommendations or analysts who missed such a big fraud. The management was superseded and key assets (the business itself) were ring-fenced.
Similar actions are needed in the NSEL case. It is clear that the management has neither character nor competence to continue even for a day. The CLB can supersede the management with an independent, competent board with immunity from past actions. The new board with support from authorities will trace the money trail and ensure that evidence of fraud is not tampered with. They can then ring-fence and seize the ill-gotten money or assets acquired with it, realise them and return them to investors. In the meantime, investigations can bring the guilty to book. It is still not too late to make sure that we do not mess up this crisis to the detriment of innocent investors.
An edited version of the above column appeared in the Economic Times print edition dated Aug 28, 2013