Driven into a corner

The largescale manipulation of the market by the broker-banker cartel that is alleged to have taken place leaves very little for the Finance Ministry to defend itself with, says Alok Mukherjee.

THEY MAY not admit it officially, but the top brass of the Union Finance Ministry has started losing sleep over the latest stock market scam. Nightmarish visions of 1992, when the beleaguered Dr. Manmohan Singh had a tough time explaining in Parliament the whys and hows of the Harshad Mehta-induced stocks scam and the largescale connivance of bank officials, are now haunting the present set at the North Block.

The stock market crash of March 2001 and the suspected manipulation by brokers and bankers is not the first scam to have occurred since 1992. M. S. Shoes, C.R.B. Capital, the vanishing finance and plantation companies have all taken place in recent years. But this time the Opposition is on overdrive. Buoyed by the Tehelka tapes exposure, it has been quick to demand a Joint Parliamentary Committee (JPC) probe into the latest scam where the market is reported to have been heavily manipulated - first by the `bulls' who pushed up the prices of select scrips and then by the `bears' who used insider information to make these very scrips crash.

Anticipating an Opposition onslaught when Parliament reconvenes on April 16, the Finance Minister, Mr. Yashwant Sinha, has lashed out at the brokers, promising the severest penalty for those found guilty. But his real concerns are elsewhere, since accusing fingers are being raised at two if not three top official institutions. In the line of fire are the Securities and Exchange Board of India (SEBI), the Unit Trust of India (UTI) and even the Reserve Bank of India (RBI), one of the strongest regulatory authorities in the country which somehow managed to survive the 1992 scam after-effects.

The spotlight is of course on the SEBI, the stock market regulatory which has now come out in extremely poor light. In the 1992 scam, the SEBI at least had the excuse of lacking statutory powers to regulate the market but in the last eight to nine years, the regulator has been systematically armed with more and more powers. Despite that, the largescale manipulation of the market by the broker-banker cartel that is alleged to have taken place leaves very little for the Finance Ministry to defend itself with.

Similarly, the role of the UTI, which is reported to have purchased a large chunk of shares of companies which were on the so-called ``Ketan Parekh's top 10 list,'' despite the fact that the values of these scrips were plummeting almost on a daily basis, has come in for a fair amount of criticism, resulting in the UTI Chairman doling out explanations almost on a daily basis.

The Reserve Bank too has been accused of laxity, especially in the case of urban cooperative banks which for the second time have turned out to be the provider of illegal funds to brokers intending to manipulate the market. There are some 2,000 urban cooperative banks in the country which technically function under the dual control of the RBI and the State Governments, but in practice neither of the authorities are reported to be supervising their functions. In fact, a former director of one of the cooperative banks has written to the Prime Minister, pointing out that all that the RBI did was pass on innumerable circulars to these banks, without even bothering to check whether these instructions were being adhered to or not. The entry norms for the urban cooperative banks are also said to be very lax, making it easy for unscrupulous elements to manage and control such institutions.

Given this background, there is considerable apprehension in the Finance Ministry on various counts. First is the obvious concern that if a JPC is indeed constituted and a thorough enquiry launched, there is no certainty how many heads will roll and where the buck would ultimately stop.

Second, the Ministry would be hard put to push through with financial sector reforms, given the tendency of the financial institutions to repeatedly get embroiled in scams involving public money.

Another factor likely to hit the Government would be the fallibility of the regulatory system. With the opening up of more and more sectors to private and foreign competition - insurance, telecom, civil aviation, etc. - the Government so far had been pointing to the independent regulator in each sector to ensure fair play. But when time-tested regulators are seen to be failing, there would be few takers for any official assurance that the interests of all, especially the public, would be ensured by the regulator. That, in turn, could distort the reforms time- table, something that the Finance Ministry would like to avoid.

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Section  : Opinion
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