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Published: Fri, 12/04/2009 - 12:24 Updated: Mon, 07/27/2015 - 12:15

Until the government forgets about maintaining the high Sensex levels, it's nearly impossible to check frauds. The Market and the government work in tandem to help each other's interests

Akash Bisht Delhi
In 1992 when the securities scam broke out in the Mumbai Stock exchange, the then finance minister, Manmohan Singh, was blunt enough to say that he does not lose his sleep over the Sensex. His statement made it clear what he thought of the stock market and how it was peripheral to India's economy. This was long time ago. Since then the government has been showing an obsession to keep the stock market high at all costs even if it means maintaining a blind eye at insider trading, frauds and scams.

The recent Satyam scandal, for instance, is a good example of how big corporations can manipulate the markets out of their convenience. They are helped by the somnolent attitude of the regulators who just cannot fathom the extent of fraud perpetrated by the bulls, bears and corporate houses. Market watchers believe that the enormity of such manipulations have increased manifold because of the speed at which the stock market has been growing, despite all the regulatory restraints put in by the government.

The volatility of the markets is visible around the world and this has driven out small investors. The government is aware of what is happening in the market, but chooses to keep its hands off. Reason: Harsher restrictions would pull the stock market down and the government cannot afford it as it would drive away foreign investors.
Stock market watchers believe that the system is not at fault, but the people who manage and run it are. "If the people with these regulatory bodies would have done their work as desired, such manipulations could have been stopped if not wiped out completely," says Professor Chalapati Rao of Institute for Studies in Industrial Development (ISID), and a close watcher of the stock markets.

Rao also blamed the lack of political will in exposing these frauds as political parties are beneficiaries of the dubious funds that enter India from tax havens, especially during elections. A common practice is that the big corporations and individuals are investing in countries like Cyprus and Mauritius. The money then makes a round trip back to India. So no one is aware of where these funds are coming in and who is doing it. "This has become a common trend and the government and its regulatory bodies are well aware of it. But no concrete efforts have been seen on the ground," says a market expert.

Corporate scandals seldom get exposed until circumstances leading to it come out in the open. The people who run these corporations are highly talented and skilled individuals who are well aware of the nuances of the market and know how to manipulate it without being caught. "People running these companies are part of a small club and today they might be with Mckinsey and tomorrow with the Citi group. So they know the loopholes of the systems and how to take advantage of them. If Madhu Koda, a tribal, can siphon off funds to this extent then imagine what these extraordinarily intelligent graduates from Ivy League colleges can do," says Rao.

He rubbished the notion that public sector undertakings (PSUs) belong to the people. Hardly anyone, according to him, knows who the real investors in these corporations are. Many politicians have stakes in these companies after they were disinvested.

Most of the big businesses in India are owned and controlled by families. Hence, any favour that the government doles out to these companies, like bailouts or subsidies, don't benefit the common investor. It is only the family that benefits from it.

With corruption multiplying enormously in the past few years, the stock markets have become a breeding ground for rigging. The irony of the situation is that it gets most of the information about its own enterprise with the help of SEBI. "Why does a government-run enterprise, which is answerable to Parliament, be regulated by an outside body?" asks Rao.

The other question that remains unanswered is what happens to the money raised by the sale of stakes of the PSUs. There is little clarity about how this money is used and where it is invested.

Mutual funds (MFs) are promoted as an entity where the common man can invest. However, these mutual funds are routinely used by big companies to misuse the public's money for their own business interests. "Every big business house has a mutual fund under their belt. One wonders why all these big businesses have this great interest in mutual funds. Also, the government wants these companies to regulate mutual funds and it is similar to giving them the keys and asking them to monitor. If these companies monitor and manage MFs then they can very well use them for their own benefit," explains Rao.

In the aftermath of the Satyam scam, there was a hue and cry about the role of independent directors in private firms who are supposed to bring in objectivity and transparency. The present corporate governance structure revolves around these directors. However, the directors can hardly play an effective role in avoiding such corporate frauds. These directors are somewhat helpless and the only way they can ensure that corporate frauds are minimised is by depending on internal audits, external audits, and legal counsel.

Recently, the row amongst Ambani brothers took a dirty turn when one of them alleged that the other was involved in corporate frauds and also blamed the government in advertisements that appeared in most of the newspapers in India. Interestingly, the government kept quiet. "Government did nothing to investigate these allegations to check whether it had any credibility or not," mentions Rao. The government, surprisingly, did not retaliate against some of the allegations that were quite defamatory.

The participatory notes (PNs) can also be attributed for the large number of volatilities being witnessed by the market. Reason: It is not mandatory for foreign institutional investors (FIIs) to disclose the names of PN holders, thus the real identity of these investors can never be revealed. Ketan Parekh scam was the first that exposed the misuse of PNs wherein the promoters had parked large funds overseas with FIIs.

On October 16, 2007, the SEBI proposed restrictions or even a ban on PNs which at that time accounted for roughly 50 per cent of the total FII investment in India. The SEBI wanted to crack down on spurious investors that were helping in rigging the stock market. However, the proposal didn't go down well with investors and the Sensex witnessed a dramatic crash the following day. The then finance minister, P Chidambaram, later retracted and claimed that the government was not planning to ban them immediately. As soon as the news broke, the market managed a remarkable comeback. This was not the end of the volatility and continued for a few more days. "Earlier the government said that the PNs are increasing speculations in the market and could be banned. However, now they are encouraging people to use PNs. What went wrong or rather what went right no one knows," asks Manish Kaushik, a market analyst.

The other question that is constantly echoing in the minds of the common man is how many among them invest in the market. Several investor surveys have been conducted but nothing conclusive has been found. As experts would tell you, what matters is how much of the savings have been diverted to the markets. Whenever the markets plunge, the savings are invested. So, how right is it for the government to spend the savings in a market when the chips are down?

All these market manipulations bleed small investors who are repeatedly betrayed by the government, big business houses and regulators. Some of the companies, where some of these small investors put in money have been blacklisted so that they can no longer trade in the market. "Some of the companies have been blacklisted for something as small as not submitting a paper. The government and regulatory bodies should rehabilitate these companies and ask them to return to the market. This will certainly help the interest of small investors," says Rao.

Market experts believe that the Satyam scam was not unearthed by regulatory bodies, rather they stumbled upon it. The SEBI was forced to act owing to pressure from international players as the fraud impacted foreign interests.

Each time a scam hits the market, a slew of measures are proposed to be introduced in the market. Usually, the government only acts once they detect a fraud and then no new measures are adopted to unearth new scams due to the lack of political will. Until the government forgets about maintaining the high Sensex levels, it's nearly impossible to check frauds. Market fraud and government work in tandem to help each other's interests.

Until the government forgets about maintaining the high Sensex levels, it’s nearly impossible to check frauds. The Market and the government work in tandem to help each other’s interests Akash Bisht Delhi

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This story is from print issue of HardNews