Promoters like Pramod Mittal exemplify how banks and RBI allow Indian industrialists to get away easily
The Reserve Bank of India (RBI) frowns on bad loans; the All-India Bank Employees Union (AIBEA) says deliberate defaults are weakening banks. But, we, the ordinary people, find it hard to believe that banks are serious about recovery because of the lavish display of wealth by habitual defaulters. Consider the 60 million Euros that Pramod Mittal spent on his daughter’s lavish wedding in Barcelona.
Why is it a problem if Pramod Mittal decides give his daughter one of the most expensive weddings ever? For nearly 15 years now, Mr Mittal has made news mainly because of his perpetually high debts, loan restructuring and, eventually, selling out his steel plant supposedly for a pittance. This, too, happened only after a two-time corporate debt restructuring (CDR) involving massive write-offs. Although the Mittals have been defaulters even in the 1990s, Pramod Mittal’s Ispat group was bank-rolled for a series of global adventures after 2003 that have all run into trouble. These include contracts and major acquisitions in Bulgaria (including a football club), Nigeria and the Philippines, which are all mired in controversy. Employees of Ispat’s Nigerian business have reportedly remained unpaid shortly after 2006 and have been left high and dry.
The group also owes over Rs630 crore to the State Trading Corporation (STC) which STC is now trying to recover from JSW Steel of the Sajjan Jindal group (which acquired the beleaguered Ispat Industries in 2010). A Central Bureau of Investigation (CBI) probe into this has also gone nowhere. Pramod Mittal paid off some of his Indian debts with the sale of Ispat Industries; but, even today, the Nigerians threaten to agitate should he return. In India, Ispat Profiles, which owes more than Rs1,000 crore, is facing liquidation.
Everywhere, allegations against the Mittals are similar—building huge debt, often through collusive deals, diverting funds to other ventures leading to defaults. Yet, the Mittals’ personal wealth, and the lavishness of their lifestyle and spending, has only grown due to the benevolence of our banks.
The Special Court termed the purchase of the flat by Citi Limousine chief Masood as 'proceeds of crime', who was involved in money laundering by defrauding the hard earned money of gullible investors
A Special money laundering Court in New Delhi has ordered attachment of a flat worth over Rs22 lakh belonging to Sayed Mohammed Masood, chairman of Mumbai-based ‘City Limousine' that has duped thousands of investors through its money-circulation scheme.
The case had shot to prominence last year after the Enforcement Directorate (ED) got a first-time access to freeze Swiss bank accounts of Masood, whom the agency is probing for floating illegal ponzi (fraud investment plans) schemes by promising extraordinary returns which were not honoured.
The agency is probing the case under the Prevention of Money laundering Act (PMLA) alongside the Economic Offences Wing (EOW) of Mumbai Police.
Subsequent to pressing these laundering charges, the ED provisionally attached a flat in Pune’s Wakad area in the name of Ryewood Retreat Motels, which has Masood as its Additional Director.
The Adjudicating Authority, under Chairman K Ramamoorthy, for PMLA offences termed the purchase of the flat “as proceeds of crime” and that it is involved in money laundering by defrauding the hard earned money of gullible investors.
The probe agencies had filed a charge sheet in this case last year stating that close to 28,000 complaints from the investors were received by them in this regard and Masood’s companies had cheated investors to the tune of more than Rs500 crore.
Why is it that the interests of consumers and consultations with consumers is never at the centre of any rules the regulators make?
If you ask a roomful of people whether the consumer should be the primary focus of financial sector regulation, it would be safe to bet that you will have nearly 100% concurrence. Every stakeholder pays verbal obeisance to the importance of the consumer of financial services. The preamble of all statutes creating independent regulators (for capital markets, insurance or provident funds) casts a duty on regulators to ‘develop’ markets and ‘protect investors’. But, as Moneylife has repeatedly pointed out, regulators and policy-makers merely dance around issues that consumers face, without ever interacting with them to frame appropriate regulation.
This is why after 25 years of modernisation, development and regulation by India’s capital market watchdog, we have only seen an exodus of retail investors from primary and secondary market as well as mutual funds. It is also the reason why we are an under-insured nation and why our pension regulator has made no headway. But, put a set of neutral people connected with the financial sector in a room and the focus immediately becomes the consumer. At an interesting panel discussion organised by CUTS International on 16th December, there was a strong consensus that ‘there is need to focus on the consumer as the core purpose of all financial sector regulation’.
What do I mean by regulators’ dance around consumer issues without addressing them? Consider how the Securities & Exchange Board of India (SEBI) deals with mis-selling of products to retail investors. First, it makes it impossible for genuine and honest advisors or brokerage firms to function by tying them up in costs, rules, red tape and permissions. Those who ignore the regulator happily fly below the radar, unless they do something so big and foolish that they are caught. And, even the honest and ethical, who occasionally stumble on meaningless rules, are hauled over the coals.
Instead, exemplary punitive action in select cases or adopting a class action approach to mis-selling techniques will get better results. Consider the Suchitra Krishnamoorthi case that we have repeatedly documented. SEBI took long enough to issue a show-cause notice to HSBC and is now hearing the matter. A stiff monetary penalty and disgorgement order will really send a strong message to banks who have perfected the art of mis-selling of third-party products to their customers. Banks violate their fiduciary responsibility to customers when they mis-sell mutual funds, insurance or wealth management services; they get away with it because the Reserve Bank of India (RBI) has a hands-off approach to products that have separate regulators.
Tough action by RBI or SEBI in Ms Krishnamoorthi’s case would fall squarely within the new global thinking on consumer protection, which has moved away from the meaningless disclosure-based regime that we continue to follow to a policy of ‘treating customers fairly’ and ensuring that financial products are simple, easy to understand and sold on the basis of the customers’ needs and financial profile. Let’s look at a couple of key issues that came up at this consumer-centric discussion.
The multiplicity of regulators, and having similar products regulated by different regulators, leading to regulatory arbitrage and conflict between regulators was flagged off as an important concern. Turf wars between SEBI and the insurance regulator and the fact that we have a separate pension regulator when asset management companies will manage the pension funds were cited as examples.
A prominent view was that the lack of coordination between regulators was the key reason for conflicts and inappropriate regulation. And coordination was missing because regulatory bodies had become sinecures for retired bureaucrats who, often, bagged these posts without any relevant experience in the sector. These appointees were then expected to decide on complex, technical and developing issues—a tough act even for those with decades of experience in a given sector. This would not have mattered if regulators were accountable to parliament. Unfortunately, even the standing committees of parliament do not exert any clout because very few members have domain knowledge of, or interest in, regulation, good governance or consumer protection.
In the past year, the appointment of SEBI chairman has been the subject of multiple litigations. There is now a move to extend the term of the current incumbent through an executive decision. Such ugly controversies can be avoided if key appointments are validated by parliament or a select parliamentary committee as is done in the US.
Many panel members felt that the FSLRC’s (Financial Sector Legislative Reforms Committee) recommendation has provided answers to many of these issues by proposing a unified regulator. Unfortunately, dissenting notes by three of the FSLRC’s key members marred the report. One would have thought that a committee as eminent as the FSLRC, which operated on a generous public budget, would have understood the need to hammer out a consensus and present a set of unanimous and unequivocal recommendations. We also find it strange that FSLRC made almost no effort to engage with consumers or consumer organisations in the financial sector.
Prithvi Haldea, chairman of Prime Database group, raised a very significant issue. He pointed out that the absence of a systematic data collection, analysis and interpretation mechanism, that could feed into policy- and regulation-making, is resulting in poor regulation and a lack of regulatory predictability. Mr Haldea’s www.watchoutinvestors.com has been providing yeoman’s service to consumers by publishing orders of a slew of regulatory agencies, quasi-regulatory and self-regulatory organisations in the financial sector and those under the ministry of corporate affairs. Watchoutinvestors.com is doing the job that the government and our regulators ought to be doing, in creating this goldmine of collated, cleaned and standardised information which can be the basis of significant academic research and policy-making. Instead, regulators hardly give the work its due and Mr Haldea says he, often, receive threats and requests to remove regulatory orders posted on the website.
Citing an example of how data capture can improve regulation, Mr Haldea pointed out that promoters, often, reclassify themselves as public investors in order to sidestep regulations and disclosure rules. They also change the classification repeatedly, without any fear of detection, since regulators have no mechanism to track the mischief. In one case detected by Mr Haldea, a promoter had changed his classification from promoter to public investor as many as five times. In the absence professional data-mining, there is no scope for detecting or acting on early warning signals thrown up by these corporate actions.
We, at Moneylife, believe that data-mining and analysis that Mr Haldea refers to, especially with regard to information filed with the registrar of companies, is critical to detect and act against thousands of ponzi schemes or direct marketing scams that are looting gullible Indians everyday.
What was evident from this discussion was that almost every regulatory change that would be considered imperative to true consumer protection would be opposed by corporate lobbies as well as government bureaucrats who enjoy a five-year extension to the power and perks they draw at the highest level. A quick data check would also reveal that all top regulators spend over half of their time on foreign tours. This leaves little time for serious consumer protection. The result is that we have endless articulation and forced spending on ‘financial literacy’, but very little action on the ground.
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 firstname.lastname@example.org