The treadmill of business frauds: From 1957 LIC scandal to PNB scam

Every country has its share of business frauds but India’s are unique in that they have almost consistently involved the failure of the financial system and/or regulatory loopholes that businessmen have exploited. That has been the case from the Rs 12.6 million Haridas Mundhra-Life Insurance Corporation (LIC) scandal of 1957, billed as independent India’s first corruption scandal, to the Rs 4 billion Harshad Mehta-State Bank of India (SBI) scam of 1992, the first scandal post economic liberalisation, to the Rs 127 billion Nirav Modi-Punjab National Bank (PNB) scam of 2018.
 
Up until Harshad Mehta’s Big Bull era, it was possible to be complacent; India was a closed economy. If one finance minister (T T Krishnamachari) chose to have a government-owned life insurance (LIC) help out a failing businessman (Mundhra) by buying shares in his ailing companies, only the Indian public knew about it.

 
Some points about the Mundhra scandal are worth noting. The first was the speed with which Nehru acted after his estranged, talented son-in-law exposed it. The one-man inquiry commission he appointed took 24 days to conduct investigations, the hearings for which were held in public (one report talks of speakers being rigged so that the huge crowds that gathered could follow proceedings).
 

Second, one of the ostensible reasons forwarded for LIC to invest in patently shady firms was to shore up the market. LIC officials openly said this was a specious argument. But LIC’s utility in propping up the markets — including picking up the slack for IPOs and FPOs of government companies — endures to this day. On the other hand, public hearings of enquiry commission investigations have gone the way of the Dodo.

 
Harshad Mehta bequeathed to the public lexicon in India such exotic terms as “ready-forward deals”, just as Nirav Modi has made Letter of Undertaking and Nostro Accounts familiar to laypeople 26 years later. Mehta exploited the lack of computerisation in the banking system to help himself to funds from state-owned banks, principally State Bank of India but other state-owned banks too, with which to play the market. Nirav Modi exploited the lack of integration between two trading platforms by PNB, India’s second-largest state-owned bank, to help himself to free capital.
 
Harshad Mehta also suborned a cooperative bank to issue fake bank receipts for reasons too complicated to explain here. Six years later, Ketan Parekh helped himself to funds from a cooperative bank to play the markets. When a bear cartel bet against his infamous K-10 portfolio in 2001, the markets crashed. It took a 30-member joint parliamentary committee to investigate this scandal and till 2018 for various convictions to be imposed.

 
Remarkably, both Mehta and Parekh remain heroes to a certain section of the stock market fraternity. When Mehta held his famous press conference to accuse the then Prime Minister Narasimha Rao of accepting a Rs 10 million bribe to get him off the scandal, some brokers spontaneously applauded when he entered the room.
 
Still, the banking regulator continued to move slower than a snail when it came to its core function of, well, regulating banks. Nothing highlighted this better than the case of the new generation private bank Global Trust, which collapsed in 2004 under the weight of irregular lending practices — including to Ketan Parekh. The central bank knew of these dealings as early as 2001, but only acted when matters had reached crisis point. First, it declared a three-month moratorium on the bank, leading to a headlong rush of panicky depositors to Global Trust branches, and then merged it with government-owned under-performer Oriental Bank of Commerce.

 
This scandal was among the first to have global ripples because both Goldman Sachs and International Finance Corporation had stakes in Global Trust, and the bank's auditor was one of the Big Four accountants PriceWaterhouse. Five years later, another business scandal erupted, this time it had global repercussions as far as the New York Stock Exchange. This was the scandal involving Satyam Computers, one of India’s IT services racehorses with clients around the world and a Wall Street listing. Promoter Ramalinga Raju confessed in a letter to the stock exchanges of overstating profits for years with the help of the same accountancy firm (and accountant!) that audited Global Trust.

 
The Satyam scandal was unique in that the government played no part in it. In fact, the United Progressive Alliance regime worked commendably swiftly to set up a search committee to find a buyer and salvage the company (and India’s global reputation). Within four months of Raju’s confession, it was sold to Tech Mahindra. Satyam offered the first inkling of the chronic governance problems in Indian companies, when a board stuffed with signature international personality patently failed to do its due diligence.
 
In the second half of the noughties, telecom, coal, Vijay Mallya and now Nirav Modi, have all attracted international cynosure that India, ever-hungry for foreign investment, could do well without. Almost all of it is the result of the overweening involvement of the government in areas in which it has no business to be. If it hasn’t read the writing on the wall, it may want to heed the message from the markets at least.