Frauds are increasing due to collective failure of the regulatory oversight mechanisms like statutory auditors, independent directors, the board, the shareholders and other regulators, says CBI director Sinha
The Central Bureau of Investigation (CBI) has blamed 'collective failure' of regulatory oversight mechanism, including statutory auditors, for the rise in corporate frauds in recent years, involving about Rs29,000 crore.
India has witnessed a marked increase in the number of scams that have surfaced both in public and private sectors, said Ranjit Sinha, director of CBI.
He said, “The scale and size of corporate frauds in India has zoomed in the last 15 years with majority of the cases of fraud involving siphoning off funds by promoters, top management and defrauding the lenders or investors”.
He said commercial banks have reported around 1.69 lakh cases of frauds involving Rs29,910 crore as on 31 March 2013.
“The public sector banks have commutatively lost a massive sum of Rs22,743 crore due to cheating and forgery in the three years ending March 2013,” Sinha said, while addressing the eighth annual summit on corporate frauds organised by Assocham.
He said a short-term objective of good results instead of long-term sustainability and failure of corporate governance mechanism are leading to growing fraudulent practices.
“These frauds are also occurring due to collective failure of the regulatory oversight mechanisms like statutory auditors, independent directors, the board, the shareholders and other regulators. This is, where a lot of correction, is required,” said Sinha.
The CBI director also highlighted 'sharp rise' in the non-performing assets (NPAs) of commercial banks. “The gross NPAs of the public sector banks was Rs1.64 lakh crore in March 2013 comprising 3.6% of gross advances and are estimated to have grown further as on March 2014,” he added.
According to the CAG, industries vulnerable to abuses of capitalism based on rent seeking, include banking, mines, telecom spectrum, utilities, oil and gas and public infrastructure
Regretting that economic progress has thrown up a class of 'rent seekers', Comptroller and Auditor General (CAG) Shashi Kant Sharma on Tuesday said the CAG will continue to audit private companies and private public partnership (PPP) projects in cases, where revenue sharing with the government is involved.
Speaking at a conference on corporate fraud, he said, "Work on telecom audit is already in progress and I am hopeful that our first report would be ready before the year end. A report on gas and oil exploration will be presented to Parliament soon. We will be taking up performance audit of some ongoing PPP projects shortly".
Noting that CAG audit will not cause any discouragement to investors, Sharma said, "in a mature market economy, where there is very little scope for manipulations and fudging, why should companies fear such audit if they have nothing to hide."
Capitalism based on rent seeking, he said "is not just unfair, but also bad for long term growth. In such an environment, resources are mis-allocated, competition is repressed and dynamic new firms are stifled by better connected players".
Rent seeking refers to instances when a company or individual uses public resources to obtain economic gain from others without reciprocating any benefits back to society.
"Many of the corporate tycoons, throughout the emerging economies, are today accused of making fortunes by 'rent seeking'. They want to grab a bigger slice of the pie rather than making the pie bigger," he said, adding the industries vulnerable to such abuses include banking, mines, telecom spectrum, utilities, oil and gas and public infrastructure.
Although several private companies, specially in telecom, oil and power have resisted audit by CAG, the Supreme Court in its latest judgement had ruled that any entity using public resources in its business and sharing revenue with the government can be audited by the CAG. "Our stand has been the same since long," Sharma said.