The current crisis of the financial system is not one of merely a depressed stock market and a scam in UTI. It is now becoming clear the crisis goes well beyond — into other financial institutions such as IFCI and IDBI — and is symptomatic of a much bigger malaise.

The Unit Trust of India (UTI) scam leading to the collapse of its flagship scheme US-64 is a gigantic fraud unprecedented in independent India, and warrants the Union Finance Minister’s immediate resignation. Alongside, an enquiry must be conducted into the manner in which unscrupulous politicians, bureaucrats and businessmen manipulated the system. This is necessary not only to bring the guilty to book but also to cleanse the system and set in place mechanisms to prevent any such occurrence in future.
A merciless loot of the Indian people has taken place, to the tune of nearly Rs 6,000 crore. The manner in which this happened, displays the worst type of crony capitalism, whose high points are corruption and nepotism. The list of companies whose shares the UTI bought runs like a “who’s who” of RSS-BJP sympathisers. Clearly, the Finance Ministry has been directing the UTI to siphon public money, the hard-earned savings of over two crore middle-class small investors, into such dubious companies. These companies, in turn, simply pocketed the money.

Taxpayers’ money to the tune of Rs. 1,800 core has already been pumped into Madhavpura Bank and the IFCI (Rs. 800 crore for Madhavpura and Rs. 1000 crore for IFCI); presumably UTI and IDBI will also receive bailout packages. Meanwhile, the small investors have lost heavily, with the current loss in UTI alone due to the lowered redemption rate being of the order of 40%.

The last three months have brought out clearly the basic contours of the current shenanigans. A set of brokers – Ketan Parekh being the key person here – worked in collusion with a set of promoters to boost artificially the share prices of companies such as Zee Telefilms, Global Tele, DSQ Software, Himachal Futuristics, Aftek Infosys, Lupin Laboratories, etc., referred popularly as the K10 stocks. In addition, Ketan Parekh also rigged the price of Global Trust Bank’s scrip in league with its promoters before the announcement of the decision to merge GTB with UTI Bank. SEBI has now identifical clear evidence of price rigging and circular trading in the Stock Exchanges. While a part of the money came from the promoters and the brokers, a part of this was derived from illegally diverting depositors’ money from Banks such as the Madhavpura Bank.

The second dimension of this scam was the collusion of Ketan Parekh and his cronies with UTI. UTI, which has a huge corpus of funds at its disposal (the investible fund is about Rs.75,000 crore), can influence the markets heavily. UTI’s investments in the K10 stocks were designed to help Ketan Parekh in his bull run.

Once the bull operators had made their money, the market was allowed to fall, with another set of brokers – the bear operators – hammering the market, particularly the K10 stocks. SEBI has identified Nirmal Bang and his associates as the key bear operator. The bear operators also rigged the market through price fixing and circular trading. This was the period in which UTI continued to invest in K10 stocks allowing the bear operators to liquidate most of their positions. For example, Unit Trust of India (UTI) bought 13,30,000 shares of DSQ Sofware at Rs 189 each, which stood at Rs.34 before being banned for further transaction. Similarly, it bought large amounts of stocks in March of HFCL, Zee Telefilms, Global Tele. The stock market went into a free fall after that with small investors and UTI left holding the bag. The UTI was clearly placing at the disposal of stock market scamsters and dubious RSS-BJP affiliated companies, the hard-earned savings of the Indian people for mercenary profit.

The third dimension of the current scam is huge funds flowing out of the country using the Mauritius route. There is now clear evidence that Ketan Parekh used certain Overseas Corporate Bodies (OCBs) to siphon the funds out of the country. The money came in and went out through the Mauritius route – the net difference between the inflows and the outflows being of the order of Rs. 3,000 crore. The paid up capital of all these companies is a paltry total of $16,720. We had argued earlier that the Mauritius Double Taxation Avoidance Treaty is being used by FIIs, Indian Corporate houses and other speculators to avoid paying taxes in the country. It was at the instance of Yashwant Sinha that the Mauritius route was kept open, even though the Income Tax had given notice to a number of FIIs for using the Mauritius route fraudulently. Not only did the Finance Minstry absolve the FIIs, it also made clear this would apply to all investments routed through Mauritius. It now is clear Mauritius is emerging as a vital hub in the speculative activity in the Indian Stock markets and the Finance Minister is an active accomplice.

Credite Suisse First Boston (CSFB), a FII, has been found involved very closely with Ketan Parekh and his market manipulations. It lent him money, involved itself in circular trading to artificially boost share prices and allowed OCBs to operate using its account. SEBI has found that CSFB operating for Ketan Parekh through FIIs sub-accounts, OCBs, as well as domestic corporate bodies. The last category included his firms — Classic Credit, Panther Fincap and Luminant Investments and its prominent FII sub-account Kallar Kahar Investment. Incidentally, Credit Suisse is the company that the Government chose to be one of its advisors in the VSNL disinvestments. Sucheta Dalal has reported in her column in the Indian Express dated April 29 that CSFB’s K R Bharat is one of seven Citibankers asked to leave during the 1992 scam. CSFB’s track record in stock market scams is well known. CSFB was deemed to have broken New Zealand stock exchange rules and in America, it is undergoing investigations linked to rigged initial public offerings.

In May this year, the corporate investors withdraw (i e, sold back US-64 units) over Rs 4,000 crore. This confirms the conspiratorial nexus between the UTI and corporate sector. Having inside information about the impending crash of US-64, the corporates withdrew their investments. In this background, it is outright dishonesty on the part of the finance minister to claim that he had no knowledge of UTI developments. If the corporate sector knew, it is ludicrous to believe that the finance minister did not.
It is reported that the Reliance group alone reduced its holding of US-64 units from over Rs 800 crore to just Rs 13 lakh over the last few years. When the corporate sector withdrew its investments in May, the unit was selling at Rs 14.55. Today, the government is offering to buy back not more than 3,000 units from the original US-64 investor at Rs 10 per unit. In the National Stock Exchange (NSE), the unit was quoting at Rs8.25 today (July 24).

The Finance Minister is arguing that neither NDA nor his Ministry has any responsibility for the events that is taking the entire financials sector in the country towards bankruptcy. His argument is that the financial institutions – UTI IFCI, IDBI, etc., are all autonomous and the Finance Ministry does not interfere in their running. If this is so, these must be the only public sector bodies in the country in which the government does not interfere! Published evidence of phone calls made by senior Finance Ministry and PMO officials to UTI ex-Chairman Subramanyam is now surfacing. Even if we accept the argument – that the Finance Ministry does not interfere in investment decisions of the FIs — are we to believe that the Ministry keeps its eyes closed to the state of their net worth or whether they are following the government guidelines and policies?  If the Ministry, and the Finance Minister does not monitor the state of the Rs. 75,000 crore corpus of the UTI, the entire lot needs to be sacked and sacked immediately. The Finance Minister’ excuses and refusal to accept any responsibility shows the complete lack of accountability that has been the hallmark of the NDA.

It is now clear that the investments and loans to the steel sector and the Independent Power Producers (IPPs) are going to saddle the public financial institutions with huge non-performing assets. The steel industry – Jindals, Ispat Essar and Lloyds – accounts for a hefty 10% of all the NPAs of the FIs. Even though the promoters are defaulters in one company, the Group is considered for loans for other projects. While the FIs allege that Essar Power has defaulted on its loans in spite of making profits for two years, they are considering a Rs 2,500 crore loan package to fund the Vadinar refinery project of the same group.

The exposure of the Indian FIs for IPPs is not far behind; for Enron alone it is $1.3 billion as loans and another $600 million to US Exim, Japanese Exim, Belgian Exim, et., as guarantees for foreign loans. Currently, public FIs are considering loans and investments in a number of IPP projects that are bound to follow the Enron route. Power Finance Corporation is providing loans for Maheshwar Hydel Project of S.Kumar that has a rate of power that is higher than even Dabhol. Other financials such as IDBI are also considering the Maheshwar project for loans and investments. PPN power project in Tamil Nadu has just completed its construction with loan from Japan with guarantees by Indian financial institutions.  Similar projects are proposed for many states, five coming for Andhra alone — Konaseema EPS Oakwell – 469 MW CCPP, NCC-Satyam 469 MW CCPP, Vemagiri 340 MW CCPP, BPL Ramagundam 500 MW coal power project, GVK 220 MW CC expansion project with EPC on Alsthom. In all these projects, the public FIs will have the major exposure either through direct lending or by the way of providing guarantees for foreign loans. The IPP exposure, if Dahbol is any indicator, is likely to lead to huge increase NPAs for the FIs. All this is the result of the Government forcing to extend the core-sector lending program of the FIs to private capital.

Yashwant Sinha has sought to put the blame of the current crisis on previous governments, particularly the private placement of Reliance Industries shares worth Rs. 1073 crore with UTI in 1994. It is true this was an indefensible deal. The Ambanis paid only Rs. 61 per share for which UTI paid Rs.389.00, an over payment of Rs.705 crore. This was a fraud on the investors in UTI, and on the small investors who subsequently bought the Reliance Industry shares. However, this can neither explain why UTI, after a bail-out in 1998 of Rs.3,300 crore, has again got into a crisis nor why Sinha kept quiet about it for the last three years.

Instead of hiding behind others’ misdeeds, Yashwant Sinha needs to answer the following questions:

• Why did UTI increase its equity holdings to 74%, from 66% when the Deepak Parekh had explicitly recommended that it be brought down to less than 40% within 3 years?
• Why did the Finance Ministry sleep for the last two years over this curious reversal of government directives to UTI?
• Did the government ask the UTI to shore up the share market in order to make Yaswant Sinha’s budget of 2001 look good?
• How did the UTI continue with private placement of shares, particularly shares of companies such as Cyberspace Infosys, etc.
• Did the political establishment – key RSS functionaries involvement have been noted in the Cyberspace fraud – not play any role in reversal of UTI’s decision to invest in ventures of Johri brothers.
• How did UTI build up such large holdings in companies such as Ispat, Essar, etc?
• Why did the Finance Ministry not ask the UTI to freeze redemption of units when the stock market fell sharply in March? It is now reported that major corporate houses – Reliance, Tatas, Birlas etc. redeemed their units (i e, sold back US-64 units) worth Rs. 4,000 crore at a price of Rs. 14.55 per unit in April and June. Contrast this with the Rs.10.00 that the small investors are getting today, that too on their first 3,000 units.
• Why has the Finance Ministry made no attempt to plug the Mauritius route, which has become a constant source of speculation and tax evasion? Compensating Mauritius for its loss would be a small price to pay compared to the losses that the Indian economy is suffering currently.
• Is it an accident that a major section of the promoters of the K10 companies have close links with the BJP?

The presiding deity of such a system, that institutionalises the loot of gigantic proportions, is the finance minister. There is no way he can absolve himself of the responsibility for creating this crisis and ruining the lives of millions.

Key Facts

• The Stock Market index the Sensex and the NSI stood at 6,000 in Feb 2000. Today, it stands at 3,310 the loss in market capitalisation is about Rs. 2 lakh crore.
• The Indian stock market is one of the most volatile markets in the world, second only to NASDAQ. The monthly turnover to market capitalisation is of the order 29% for India, 33% for NASDAQ and about 14% and 8% London and New York Stock Exchanges. The volatility of the emerging markets  — Mexico, S. Korea, Malaysia is even lower  — lower than 5%. This shows the enormous speculative pressure on the Indian stock markets.
• There have been two major scams in the 90’s – the reform decade – both of which have brought the financial sector to the brink of collapse. This time, the crisis has engulfed not only banks such as Madhavpura, but also UTI, IFCI and IDBI.
• The Mauritius route has emerged as a major source of speculation in the stock market. Its anonymous character allows tax evasion, black money and money with criminal origin to flow in and out of the country at will. Ketan Parekh operations through five OCBS — Brentfield Holding, Kensington Investments, Wakefield Holdings, European Investments, Far East Investments located in Mauritius — have resulted in a net outflow of Rs. 2,900 crore.
• The loss of taxpayers money due to the current scam are Rs.1,800 crore already, Rs.800 crore for bailing out the Madhavpura Bank and Rs. 1,000 crore for IFCI. It is not clear at this stage how much will be required to bail out UTI and IDBI.
• Foreign Institutions Investors such as Credite Suisse. First Boston has played a key role in the Ketan Parekh operations. They have been involved in circular trading and allowing OCBs to use the Mauritius route through them. As in the earlier Harshad Mehta scam, the FIIs have been deeply involved in illegal stock market manipulations and siphoning money out of India.
• The Cyberspace scandal involves not only UTI, but reportedly also LIC and GIC.
• There was a sharp about-turn in private placement of Cyberspace shares to UTI. On July 17, 2000, UTI had taken a decision to turn down the offer of private placement of Cyberspace shares after its equity research cell advised against it. Within a scant four days of this decision, UTI reversed its decision and invested Rs.32 crore in Cyberspace.
• UTI had reserves of Rs.3,000 here in June 2000. Reportedly, in the last 12 months, UTI has run through it entire reserves, which is now negative.
• UTI’s unit capital as of Dec 2000 was Rs.57,500 crore. The US-64 scheme has a unit capital of Rs.12,778 crore as on 30th June, 2001.
• Out of the 1,426 companies that UTI has invested in, only 81 only have shown appreciation, 654 are non traceable or not tradable. The investments on these companies have depreciated by about 50%.
• Between July 2000 and April 2001, UTI picked up 81 lakh shares of Jindal Vijayanagar Steel at a time that the steel industry is in recession. UTI and other public FIs  already have large exposure for in the steel industry, with Essar and Mittals, and Loyd Steels.