Economic Highlights

New Delhi, 24 December 2008

NY MAYHEM SPREADS TO INDIA

By Shivaji Sarkar

 
The New York mayhem is not restricted to the US. It’s not Bernard L Madoff, former chairman of the powerful Nasdaq alone, but corprorates everywhere that have become suspect. And, India is certainly no exception.

This is testified by the latest Satyam bid to shell out $1.6 billion to the sons of its chairman Raju Ramalingam and the Enforcement Directorate’s (ED) probe into two Anil Dhirubhai Ambani Group ADAG companies – Reliance Natural Resources (RNRL) and Reliance Energy Ltd (REL).

This apart some non-resident Indians (NRI) have become a vehicle for $300 million investment by foreign banks in bond markets and mutual funds. It is so because foreign banks cannot invest directly and NRI clients are used as transaction modes.

In all these cases the deals were done indirectly to impact the stock market. Madoff may not be linked to the operations but it exposes the vulnerability of the investors – the common man – to the unscrupulous methods adopted by what is termed as “global financial managers”.

Regulation by any agency is ineffective be it the US Securities Exchange Commission (SEC) or India’s Securities and Exchange Board (SEBI). Both the SEC and SEBI have indirectly admitted to their incapability. Surprisingly, despite this governments world over are shying away from issuing directive to the common man to keep away from the so-called deceptive stock market, whether it is Mumbai or New York. So far they have not asked the banks and financial institutions (FIs) to severe their links with stock market related operations.

Clearly, the Indian operations expose the ingenuity and devious methods used at duping people. And, the technicality of the methods is so complex that even the ED is finding it difficult in fixing legal responsibility. This is what exactly has been the problem of SEC, which had knowledge of Madoff’s shady operations, as per its own admission, since 1999.

This is what the FIs, banks and the government need to be cautious of. The perpetrators of financial crimes plan long-term bleeding programmes, which become difficult to detect. They bleed the system gradually to fill in their coffers at the cost of the people, society and governments.

The Parliamentary Standing Committee on Finance in its latest report on Prevention of Money Laundering (Amendment) Act, 2008 (PMLA) notes, “Although the bill envisages covering offences having cross-border implications, the Committee is constrained to observe that it is extremely difficult to track the transfer of funds”.

Concurring with SEBI, it also observes “prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control leaves the possibility of depriving the investors of refunds reallocation shares that may be ordered by SEBI in cases involving manipulation of primary issues etc.” In such cases seizures of assets – if any is left - are ordered and the investor as per the present law does not get his money back.

It not only exposes the vulnerability of the investor, who is seemingly destined to lose, but also establishes that no regulatory mechanism is effective. The stock or equity transfer is complicated and convoluted. The deals at the stock markets are manipulated using deceptive devices. Insider trading is more a rule than an exception in the global context.

Clearly, there are devious ways and nothing can stop a fraud at the stock exchange. In the case of RNRL and RENL of the ADAG, the cautionary signals had come from the Swiss bank UBS. The two companies had their accounts at the London branch of UBS. Overdrafts had been fraudulently drawn against these overseas accounts in order to route funds through a number of Indian diamond traders. The money was suspected to have been used to buy participatory notes (PN) – derivative instruments with Indian stocks. Among the alleged perpetrators are two UBS bank officials of Indian origin. The UBS sacked them. The crime dates back to April-May 2007 and is still being investigated by ED for the complicated nature of transactions.

In Satyam, it was a breach of trust and mismanagement. It has tanked the share prices. That means even without the transfer of the money, shareholders have lost millions. In case of a share, except for dividend the company has no obvious liability. One has to make good his losses by selling or trading at the stock exchange. The Satyam is a blatant instance of how insider trading and manipulative transfers could be resorted at the expense of the shareholders.

Methods of Madoff are no different. His victims span from the super rich to pensioners, powerful FIs and charities, said Harvey Pitt, a former SEC chairman. He has betrayed trust of very close friends such as New Jersey Senator Frank Lautenberg, wherein his family charity foundation lost millions.

Regulations, supposed to be toughest in the US, are not only not trusted any longer but their effectiveness is being questioned. “I think now it is very difficult for people to invest in things that are regulated in the US,” said Nicola Horlick, manager of Bramdean Alternatives, which had invested nine per cent of its funds with Madoff.

The way foreign banks have used NRIs to invest $300 million in debt market – bonds and mutual funds - reflect a growing feeling that the Indian bond market is in the beginning of a bull run. The local bond market is already witnessing a rally in anticipation of the fall in interest rates.

Regulations and tracking movement of funds as per SEBI’s admission to the Parliamentary committee are extremely difficult. Prohibition of manipulative practices too has not helped. The ADAG transactions have reportedly violated the PMLA and Foreign Exchange Management Act (FEMA). So far, the ED has not sent any queries to the group, which yet again reveals that it is difficult to book the lawbreakers.

The obvious fallout is the loss to the common investor –big or small. In all these cases, the lawbreakers in the stock market or related activities have resorted to swindling funds from the FIs and banks. That is the obvious source for the drain of all funds. It requires a simple legal solution: decoupling of stock activities and stopping of speculation in the bond market. If a step to check the bond market is not taken soon, another fraud may be perpetrated on a larger scale. It requires no great intelligence to do it. But it requires the will to enforce it. As a society why don’t we demonstrate this? ---INFA

 (Copyright, India News and Feature Alliance)