Tuesday, January 20, 2009

A brief history of Indian scams

Sushila Ravindranath
First Published : 19 Jan 2009 04:25:00 AM IST
Last Updated : 19 Jan 2009 09:28:07 AM IST
In the first decade of independence all kinds of wrongdoings erupted, which have naturally gone out of public memory. For example, in 1948, the then high commissioner in London, V K Krishna Menon’s name was linked to a scandal where the Indian government had placed an order for 2,000 jeeps with a London-based firm that had false credentials. While most of the money was paid upfront, just 155 jeeps landed. As we all know, Krishna Menon went on to become Prime Minister Jawaharlal Nehru’s trusted ally and the defence minister.
Does anyone remember that in 1949, Industry minister Rao Shiv Bahadur Singh, father of Arjun Singh, was jailed for three years for taking a bribe of Rs 25,000 from gemstone trader Sachendubhai Baron for renewing his diamond- mining lease? Please note, only Rs 25,000 exchanged hands.
What was seen then as the mother of all scandals happened in 1958. Finance minister T T Krishnamachari, finance secretary H M Patel, LIC chairman L S Vaidyanathan, are some of the names linked to a scandal exposed by Indira Gandhi’s husband Feroz Gandhi, involving LIC’s
investment of Rs 1.25 crore in six companies set up by Haridas Mundhra. TTK resigned as a result of the affair, and Mundhra was jailed.
Businessmen were punished with some regularity those days. In 1959 Ramakrishna Dalmia, chairman, Bharat
Insurance Company, was arrested for misappropriating around Rs 2.2 crore from the company and sent to jail for two years.
In 1960, businessman Dharma Teja managed to get a Rs 22 crore loan from the government to start a shipping company, and then siphoned the money out of the country. He was arrested in Europe and jailed for six years. Must have been exciting times.
Loss of innocence
The swinging Sixties also saw its share of misdoings and blatant corruption. In 1965, Orissa chief minister Biju Patnaik (present chief minister Naveen Patnaik’s father) was forced to resign after it became known that he had favoured his privately owned company, Kalinga Tubes, in awarding a government contract. It is difficult to believe that acts like these were seen as crimes those days.
In the Seventies, Indira Gandhi and her son Sanjay’s names started popping up every now and then. There was the never-quite-explained Nagarwala scandal. Nagarwala is said to have impersonated the prime minister on the phone and got State Bank of India to give him Rs 60 lakh. Both Nagarwala and the police officer who investigated the case died in mysterious circumstances soon after. In 1974 Indira Gandhi’s name came up again in the first Maruti scandal, where her son was favoured with a licence to make passenger cars in the then highly restrictive environment.
Again in 1976, in the face of falling oil prices, a $200-million contract was awarded to the Hong Kong-based Kuo Oil Co to take future deliveries at current prices. The government lost Rs13 crore. The money is supposed to have gone to Indira and Sanjay.
From the Eighties, the names Snamprogetti, and its representative Ottavio Quattrocchi started doing the rounds. In 1980 petroleum secretary H N Bahuguna, N N Kapadia, agent of many foreign companies, petroleum minister P C Sethi and K P Unnikrishnan were accused in a scandal where a consultancy contract for the Thal Vaishet project was awarded to a subsidiary of Italian Snamprogetti in violation of laid down norms.
In 1981 there was the great Maharashtra cement scandal, when chief minister A R Antulay was charged with malpractices and favouritism in giving cement meant for public consumption to private builders.
Coming of age
The political scandals got much bigger. In 1986, there were alleged kickbacks to the Indira Gandhi government in buying two submarines from German firm HDW. The scandal that refuses to die happened the next year in 1987, when Rajiv Gandhi and others were accused of receiving Rs 64 crore in payoffs for the 155mm howitzer deal from the Swedish firm Bofors.
In 1991 L K Advani, V C Shukla, C K Jaffer Sharief, Arif Mohammed Khan, Madan Lal Khurana, Kalpnath Rai, N D Tiwari and many others were accused in the Rs 64-crore Jain hawala case.
Joining the big league
With the Harshad Mehta scandal of 1991, the dimensions of money involved expanded exponentially.
Mehta, SBI, NHB, Grindlays, Citibank and Stanchart were all accused of having played a part in the Rs 10,000 crore securities scandal.
Keeping up with inflation corruption started scaling bigger heights. No more small change of a crore or two. Remember the fodder scam? When Bihar chief minister Laloo Prasad Yadav and other state politicians and bureaucrats were alleged to have siphoned off Rs 950 crore from funds meant for the state animal husbandry department? Down south in 1996, M Gopalakrishnan, former chairman and managing director of Indian Bank, and others were accused of having sanctioned huge loans totalling Rs 1,500 crore to companies without obtaining adequate collateral security.
Then came the first telecom scandal in 1996 when former communications minister Sukh Ram was charged with accepting kickbacks from a number of telecom companies in exchange for special favours. About $1 million in small-denomination rupee notes was found in the homes of Sukh Ram. Runu Ghosh, a senior official in the Department of Telecommunications (DoT), was arrested on corruption charges, including having allegedly favoured telecom equipment manufacturer Advanced Radio Masts Ltd (ARM) in purchase contracts. In the same year owners of several large shoe companies in Mumbai were arrested on charges of having floated bogus cobbler co-operatives to get low-interest loans from the Maharashtra government.
This list is only indicative and by no means exhaustive.
Bluffing gets liberalised
The rapid growth of the capital market after liberalisation has led to its fair share of financial scandals. The major shake-up happened with the Harshad Mehta episode. It exposed the utter lawlessness and absence of supervision in the money markets: Funds could be transferred with impunity from banks and corporate houses into the equity markets; thousands of crores of bank funds moved in and out of brokers’
bank accounts in what was later claimed as “accepted market practice”.
At the same time there was the Initial Public Offer (IPO) bubble. Many existing companies in the Nineties decided to make huge public offerings.
They inflated their prices to fund greenfield projects and completely unrelated diversifications.
Windmill manufacturers wanted to set up airlines. Shoemakers wanted to set up steel plants. It was a period of utter madness.
Then a whole lot of small traders, chartered accountants and businessmen, teamed up with bankers and investment bankers to float new companies and raise public funds. This caused a loss of several thousand crores of rupees and is known as the vanishing companies scandal.
All this resulted in the death of primary markets for many years.
The many faces of scams
The Nineties was also the period of many other scams. One of them was the mushrooming of non-banking finance companies (NBFC). Most of them built houses of cards, took investors for a massive ride and then rolled over and died.
Take the case of Chain Roop Bhansali’s CRB. His Rs 1,000 crore financial conglomerate comprised a
mutual fund, fixed deposit collection (with hefty cash kickbacks), a merchant bank (he even lobbied head-to-head the Association of Merchant Bankers of India) and a provisional banking licence. Many of these licences required adequate scrutiny by SEBI and the RBI, and the fact that they passed muster is another reflection of those times. Bhansali managed to get favourable credit ratings and audit reports, CRB created a pyramid based on high cost financing, which finally collapsed. Bhansali, after a brief spot of trouble with the authorities, moved on to the dotcom business and the regulators were never held accountable. Millions of small investors lost their shirt. The CRB collapse caused a run on other finance companies and many cardboard empires came crashing down.
This was also the era of plantation companies.
Investors were asked invest in dubious plantation schemes. “Put money in one teak tree and you will get 1000 times the returns in seven years”, they were promised. Since they were not subject to any regulations, the plantation companies could get away with wild profit projections. The advertising companies were the real gainers.
High profile television campaigns, full-page advertisements and glossy brochures had the investors flocking for more. Almost all these projects have vanished.
In the early days of liberalisation even the government-promoted mutual funds were in trouble. Nobody anticipated
stock market crashes.
Starting with the scam-hit Canstar scheme, most mutual funds had to be bailed out by their sponsor banks, or parent institutions. Then came the big bailout of Unit Trust of India. Since UTI is set up under its own Act, it was the taxpayers who paid for the Rs 4,800 crore bailout in 1999. Just three years later, it was back buying recklessly into the Ketan Parekh-manipulated scrips and suffering big losses in the process.
The record of the private mutual funds has also been patchy.
The dotcoms which became dot cons is another big story. Sadly,
investors in all countries get carried away by hype and publicity. They do not have the time or the knowledge to analyse their investments. When things are going well nobody wants to know anything. Nobody questioned Satyam’s quarter-to-quarter growth and margins. Nobody wondered why the promoters were constantly disinvesting in their company.
Nobody took E A S Sarma, former secretary, department of economic affairs, seriously when he was unhappy with the Satyam balance sheet, or E Sreedharan, managing director of Delhi Metro Rail Corporation (DMRC) when he alleged that the Andhra metro rail line alignment was altered and extended to benefit the bidder (Maytas), seriously.
But everybody has now woken up because this simply is the biggest case of individual scam in the country.

1 comment:

  1. Against each scandle please report where
    the scadle money had gone: who were the beneficiaries.