We have seen an avalanche of corporate frauds since the outbreak of the IL&FS (Infrastructure Leasing & Financial Services) scandal in October 2018 and the aftermath is sitting as muck and filth (euphemistically termed non-performing assets, NPAs) in the books of banks and non-banking financial companies (NBFCs). The estimate is a mind-boggling sum and is far in excess of a full year’ revenue of the Central government.
Strangely, neither the Budget nor the Economic Survey that preceded it gave a full picture of this. The Reserve Bank of India (RBI)’s report on the financial sector did put out projections under different scenarios. None of the scenarios assumed provides any comfort on the figures.
Citizens who invest their hard-earned money and find it suddenly gone like the debentures in the Lakshmi Vilas Bank (LVB) or the deposits in Dewan Housing Finance Corp Ltd (DHFL) or being told without notice that money cannot be withdrawn as in Franklin Templeton mutual fund (MF), have every reason to seek accountability beyond half-hearted rescue measures.
Seldom has a regulator, whether the Securities Exchange Board of India (SEBI) or the Reserve Bank of India (RBI) explained to the affected citizens what went wrong in their oversight role and why the fraud could not be detected.
Such accountability has been sorely missing and even the courts have been shy to crack the whip, whenever the opportunity presented itself.
In the Franklin Templeton MF fiasco that has been unfolding since the 24 April 2020 when the eponymous asset management company (AMC) took the shocking and unprecedented decision to shut down six of its debt schemes and put an embargo on redemptions in open-ended schemes where people had parked short term surplus funds, the Karnataka High Court did not go beyond a few words of admonition for SEBI’s failure to deal with the crisis effectively.
This is a classic instance where the regulator was asleep at the wheels when it had every bit of the necessary information at its disposal to have seen the crisis coming. The intent of the article being different than doing an autopsy of the FTMF saga, it is mentioned more as an illustration of how the regulator enjoys a wholly undesirable level of immunity from being punished for failures and thereby making the invigilation of the financial sector in India totally meaningless and impotent.
The same goes with little distinction for RBI on the multiple failures of banks and NBFCs. A very legitimate question to ask is, how come no employee at any level in the regulatory system has been made responsible for any of the cases?
If failures under the very nose of the regulator leave every one other than the helpless investors unscathed, then why operate white elephants like RBI and SEBI at such huge cost to the exchequer?
There is a clear and telling need to address this if the economy needs to be an untilted pitch for both the providers of the capital and the users of the same. There is little doubt that the existing architecture has failed and there is a crying need to change.
In the FT matter multiple courts were approached initially and later the Supreme Court intervened and found a neutral venue in Karnataka for the case to be heard.
Similarly, police cases have been filed in different cities and the latest is the initiative of the enforcement directorate (ED) in approaching the case from an anti-money laundering angle.
It is not easy for any investor, small or big, to individually move any of the agencies in a crisis. The appeal to the regulator is never responded to and seldom acted upon.
In fact it is a farce to have the regulator and the inspector to be the adjudicator as in the case of both RBI and SEBI.
I wrote a scathing mail to SEBI immediately after the outbreak of the FTMF scam and followed it up with an article in The Hindu Business Line on 24 June 2020. I had expressed very clearly that SEBI should look at all redemptions post-October 2019 to check for ‘informed’ unit-holders taking out large sums.
SEBI had to wait for months and a forensic audit report to seek this data for the alleged insider trading of a senior officer of the AMC. There should be more to the FTMF case than meets the eye which perhaps only a completely independent investigation can help uncover.
But effectively, a small investor has no recourse in a crisis as all regulators are in a way conflicted to deal with the investigation and adjudication. This is a major lacuna that needs to be addressed ASAP.
Ideally, the country needs a special court to adjudicate white-collar crimes and financial frauds (SCWCFF). This court shall enjoy the power equivalent to that of any other high court in the country and have complete suzerainty geographically and over all enforcement agencies and regulators in the country.
The jurisdiction of this court shall prevail over any other body except the Supreme Court, in the event of overlap. Operationally, it can have benches in a few major cities but function virtually so that any aggrieved citizen can file a complaint for investigation of financial frauds involving entities regulated by the three key regulators being SEBI, RBI and Insurance Regulatory Development Authority of India (IRDAI).
This model will help keep the investigation and adjudication away from inspection which is the key function of the three regulators. Ideally, even offences that are otherwise covered under the Indian penal code should be brought under this agency in so far as it involves the type of frauds and the entities specified. All this, of course, are matters of construct and detailing.
But the urgent need is to put a harness on the regulators and make them accountable as every other participant in the financial system. Whenever this happens, it would not be a day too soon.
SCWCFF is not something to scoffed at!
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)