Writing for essay series, ‘Reimagining India’, Fareed Zakaria says Indians must embrace their common ambitions if the nation is to fulfil its tremendous potential
Fareed Zakaria, editor at Time magazine and host at CNN, while opining on India, feels that there is a birth of a new sense of nationhood in the country, drawn from the aspiring middle classes in its cities and towns, who are linked together by commerce and technology. “They have common aspirations and ambitions, a common Indian dream with rising standards of living, good government, and a celebration of India’s diversity. It is a powerful and durable base for a modern country that seeks to make its mark on the world,” he said, as a part of an essay series complied by McKinsey & Co under its ‘Reimagining India’ series.
Fareed Zakaria said, “Most of India’s wealth is generated from its cities and towns. Urban India accounts for almost 70% of the country’s GDP. But almost 70% of its people still live in rural India. Now, without central plan or direction, there are forces pushing India toward a greater sense of nationalism than before. Economic liberalization has created a national economy, and technology is creating a national culture. Technology is giving power to the people to make their voices heard, even when outnumbered by other interest groups. India is unusual in combining the growth of an emerging market with the openness of a freewheeling democracy.”
Giving an example of the states the host at CNN said, “State governments (in India) are aggressively promoting economic growth. Gujarat, the state of 60 million people has grown faster than China over the last two decades. India itself, for all its problems, has been one of the fastest-growing large economies in the world over that period.”
Fareed Zakaria said he believes that, “the country simply cannot reform at the pace necessary to fulfil its ambitions for growth and progress. Everything gets mired in political paralysis, and the governing class remains committed` to a politics of patronage and pandering. This is all true and deeply unfortunate. But it is a snapshot of today’s reality, not a moving picture of an evolving society.”
Courtesy: McKinsey & Co, Reimagining India
Sebi’s show-cause notice to HSBC for duping actor Suchitra Krishnamoorthi could set a great precedent
Ashow-cause notice to the Hong Kong and Shanghai Banking Corporation (HSBC) for duping well-known actor and singer Suchitra Krishnamoorthi could probably end the silence of our regulators over the way banks have been allowed to loot customers through dubiously run wealth and portfolio management schemes or selling them toxic insurance products. The stage is clearly set for path-breaking action and a landmark order, but whether it materialises or not depends on whether the Securities and Exchange Board of India (SEBI) is willing to pursue the issue with the same doggedness with which it has taken on the dubious Sahara business empire.
As I write this column, the 21-day period for HSBC to respond to SEBI’s strongly-worded show-cause notice comes to an end. The Bank has been charged with reckless churning of Ms Krishnamoorthi’s mutual fund portfolio. HSBC needlessly divided her funds into as many as 38 schemes, deliberately invested in under-performing funds and churned the portfolio relentlessly to generate fees and commissions in excess of Rs27.93 lakh, caused direct losses through bad investments and caused her to pay a tax penalty due to misinformation about short-term capital gains.
HSBC’s bad-faith actions were clear from the beginning. It made false promises of returns in excess of 24% (for mutual funds as well as insurance), listed an emotionally vulnerable woman as an ‘aggressive investor’ (allowing it to put 100% of her money into risky equity and no debt) and then churned mutual fund investments which, by their very nature, are meant for long-term investment. SEBI has correctly threatened the Bank with disgorgement of these dubious earnings but, more importantly, debarred it from acting as a mutual fund advisor and banned it from the capital market for an appropriate period of time.
HSBC, which has now earned notoriety globally, has chosen to ignore Ms Krishnamoorthi’s complaints from the very beginning and continues to maintain a surprising silence. But the situation this time is very interesting. Although the Reserve Bank of India (RBI) is HSBC’s primary regulator, there is no turf battle involved. On the contrary, RBI will most probably weigh in on behalf of the customer for several reasons.
Dr KC Chakrabarty, who holds the customer-services portfolio, has always maintained that he is against the sale of third-party products by banks, but has pleaded helplessness.
RBI and various banking ombudsmen have regularly taken the stand that they will not step on the turf of another regulator and have refused to rule in favour of depositors even when it involved the most brazen mis-selling of third-party products such as mutual funds and insurance. RBI had not even acted when ABN Amro and other banks aggressively marketed unregulated investment schemes like art funds (Osian) or realty investment deals.
This is probably the first time that a customer has taken a bank to the appropriate regulator for mis-selling a third-party product, leading to a show-cause notice by the relevant regulator. So what happens next? HSBC is probably weighing several options to decide what will cause it the least financial damage or risk to its business operations. Let’s examine what these are.
• Loss of reputation does not seem to be a major concern for HSBC. It has settled a massive charge of laundering money for drug traffickers at one end of the spectrum and, at the other, got away by hard-selling the idea of hiding income from US revenue authorities in Indian bank accounts. Then, a leaked list of accounts showed that it has been stashing unaccounted wealth for Indians abroad. In both cases, RBI and other revenue and enforcement agencies have done nothing. The victims of its hard-sell have paid a price, so the Bank cannot be blamed for thinking it will ‘fix’ the Suchitra Krishnamoorthi problem too.
• Secondly, it has paid nearly $2 billion dollars to settle the money laundering charge in the US and several hundred million dollars in other jurisdictions to settle other charges. So paying back Ms Krishnamoorthi’s entire investment to stop the negative publicity was always an option for HSBC. Why has it chosen to maintain a thundering silence? Probably because it is not about Ms Krishnamoorthi. HSBC did not single out her account to churn mutual fund holdings to extract commissions and charges. That misdemeanour is its official business. Glance at Moneylife’s report on the Suchitra Krishnamoorthi case and you will find scores of others who say they have been similarly cheated—many of them are Indians living abroad who find it hard to pursue the Bank in India, especially when the regulators have not been receptive. So HSBC is probably worried about opening a Pandora’s Box of litigation and claims, if it admits any wrongdoing in one high-profile case.
• Thirdly, in every case, involving a high net worth person, the Bank gets away with downright cheating because the customer is unwilling to devote the time to pursue the case personally. Engaging a lawyer, especially for a celebrity, only means having the meter running on legal fees for several years which, for a sum of less than a crore of rupees, only means compounding losses. One of the big flaws with India’s legal system is that lawyers cannot accept briefs on contingency fees and have no incentive whatsoever to end litigation. HSBC probably did not bargain for the fact that Ms Krishnamoorthi would not hesitate to make endless trips to regulators, counsellors and to Moneylife Foundation (including our open house session with the RBI’s Dr KC Chakrabarty) to push her case to the point where a tough show-cause notice has been issued.
• Fourthly, HSBC probably hoped that turf issues between regulators would work in its favour and has failed to realise that, this time around, both regulators seem willing to bat for the customer. Again, if SEBI sticks to its guns and issues a tough order against HSBC, then RBI will probably have to follow it up with an investigation. In fact, we understand that RBI has already investigated the Bank. Tough, punitive action by SEBI and RBI will make this a landmark action of delivering justice to victims of mis-selling by banks. It is bound to send shockwaves through the banking industry, causing this powerful body to lobby hard against any action that affects lucrative earnings though sale of dodgy financial products.
• Finally, HSBC probably hopes that all this will amount to nothing because Indian regulators will not dare to act. HSBC’s $2 billion settlement caused global outrage, because as a US Federal Judge, Justice Rakoff, said recently, not a single high-level executive has been punished for the global financial crisis. And most large banks, despite the global outrage, got away with hefty civil settlements which allowed them to continue to do business as before. Public protests such as the ‘Occupy Wall Street’ movement were forcefully quelled, despite public support. Why should HSBC believe that it will not be able to browbeat Indian regulators, when banks have got away with massive, systematic fraud in 2008 leading to a global crisis?
The big debate in the US today is: Why haven’t any of the top bankers, responsible for shady policies, been prosecuted and punished? Well, who can blame HSBC for assuming it can get away with similar fraudulent sales? Let’s hope SEBI and the RBI gives us a reason to cheer.
Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]