Scam: JPC states the obvious

The JPC report—which was tabled in Parliament today—however, holds the UTI management and the Finance Ministry’s ‘‘lack of pro-active role’’ as reasons responsible for the fiasco of the US-64 scheme.

After severe pressure from the Opposition, the JPC was set up in April 2001 and was supposed to submit its report by the monsoon session of Parliament three months later. 2001 was a year investors would love to hate, when they faced a major crisis of confidence in the equity markets with a series of scams and scandals eroding their wealth.

The market capitalisation of listed shares on the Bombay Stock Exchange plunged to Rs 566,897 crore on December 31, 2001 from Rs 692,565 crore on the last trading day of 2000. In short, Indian investors lost a whopping Rs 125,000 crore (around $26 billion) in their share investments during the whole year.

The JPC report makes only a general statement on both SEBI and the Finance Ministry: ‘‘Although action has been taken by the Finance Ministry and the SEBI when the stock market was rising unusually …. both these should have been more pro-active and vigilant.’’

In fact, after presenting the report in the Parliament, JPC chairman Prakash Mani Tripathi made a categorical statement to clear Sinha’s name. ‘‘There is no direct reference to Sinha of any wrongdoing,’’ Tripathi said.

‘‘Everybody will have to share the blame: stock exchanges, regulators, SEBI, RBI and Department of Company Affairs and the ministry,’’ Tripathi said adding that government must take immediate steps on the JPC recommendations for restoring investors’ confidence.

To repeated questions as to how Sinha, as Finance Minister, could be absolved of the responsibility, particularly when his Ministry was being held responsible, Tripathi said: ‘‘Read the report. I am not giving any opinion. Ask those demanding the resignation if they had not agreed with the report,’’ said Tripathi adding that the report was the view of every member.

Earlier, three Congress members of the JPC, S Jaipal Reddy, Mani Shankar Aiyer and Kapil Sibal, had demanded Sinha’s resignation. Coming out in favour of Sinha, Tripathi said: ‘‘When you are talking about the ministry, you are not talking about the minister…You can’t expect Sinha to go to Mumbai to find out (details) from the UTI chairman’s office.’’

The JPC was of the view that there was a nexus between Ketan Parekh, banks and corporate houses and it recommended this nexus be further investigated by SEBI or DCA expeditiously. The JPC, however, came down heavily on SEBI for its failure to bring out irregularities and defuse them before the scam blew up.

The report, presented in the Parliament by JPC chairman Prakash Mani Tripathi, states the obvious: that the stock market scam is basically the manipulation of the capital market to benefit market operators, brokers, corporate entities and their promoters and management. The report called for expeditious action to find out facts regarding Ketan Parekh’s Swiss bank account.

SEBI’s investigations after the scam have revealed that the amount outstanding from the Parekh entities to certian corporate houses at the end of April 2001 was over Rs 1,273 crore. Dues from Parekh’s entities to MMCB was Rs 888 crore and to GTB was Rs 266 crore.

The JPC states that other broking groups belonging to D K Singhania, A K Podar and H C Biyani were primarily responsible for the payment problem in March 2001 in Calcutta Stock Exchange.

The report says that a matter of concern is the emergence of the practice of non-accountability in the financial system. The committee held regulators, FIs, banks, registrars of cooperative societies, corporate entitites and their promoters and managements, brokers, auditors and stock exchanges responsible in varying degrees.

According to the report, public sector banks were in general not involved in the scam and have fared well, but private sector banks need to be closely watched especially in the area of risk management and stricter regulation. Cooperative banks have tended to ignore rules, procedures and risk management, the report said, adding this should set RBI and government thinking.

On the US-64 fiasco, the report has stated that ‘‘even if (the then) UTI chairman (P S Subramanyam) did indeed keep everybody in the dark, as the then finance minister (Yashwant Sinha) told the Rajya Sabha, the committee finds the ministry did little to bring itself out of the darkness, as it had not instituted any formal mechanism to keep itself informed about the health of US-64 scheme.’’

Referring to a letter of UTI chairman on June 30, 2001, to the then finance secretary Ajit Kumar, the committee said it had stated that the UTI board would meet on July second to consider two options—to freeze US-64 redemptions and convert US-64 to net asset value based scheme. ‘‘Quite obviously, this was a very important piece of news and the finance secretary should have acted immediately.’’

‘‘Taking no action to immediately discuss the matter with the finance minister or find solutions to the serious problem that could arise consequent to the board meeting on July 2, shows that the Secretary considered the problems in a routine and casual manner which is not expected from an officer of his rank,’’ the report said.

To win back retail investors confidence, the JPC has recommended strict accountability by listed companies through certification by their chief executives, which if proved incorrect should attract criminal liability under the law.