The
Scam

From
Harshad Mehta to Ketan Parekh

Debashis
Basu

Sucheta
Dalal

KenSource
Information Services P. Ltd.

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Copyright
© Debashis Basu & Sucheta Dalal

First
Published 1993

First
Reprint 1994

Revised
& Updated 2001

Third
Revised Edition & Fourth Printing 2005

Third
Edition, Fifth Printing 2006

Third
Edition, Sixth Printing 2007

Third
Edition, Seventh Printing 2009

Third
Edition, Eighth Printing (updated introduction) 2014

ISBN
81-88154-09-1

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To
Our Parents

Acknowledgements

WE
had initially followed the scam while working for The
Times of India and
Business
Today. The
book partly derives its material from scores of interviews with most
of the players who were directly or indirectly part of the scam,
mainly top brokers and top bank officials. Overcoming their initial
circumspection about talking to the press while the scam
investigation was on, they eventually gave us a lot of their time to
discuss, clarify and share important documents that helped our
writing. Our deepest gratitude is to these numerous knowledgeable
anonymous sources. Many others helped a lot by way of crucial
information, introductions, and their moral support, but
unfortunately, they too cannot be named.

Finally,
this is the place to record our inestimable debt to our prime source,
a wonderful human being and now a dear friend and guide. He cannot
unfortunately be identified (our notes and conversations
unimaginatively refer to him as Deep Throat) because he is a part of
the securities business himself. Our understanding of the complex
transactions, the nature of the players, the specific deals and
confidential conversations between top officials were all derived
from the long hours he has so generously spent with us in nondescript
restaurants in the suburbs, dropping us home in the dead of night and
then driving back into town. Without Deep Throat’s help, this
book, and much of the reporting we have done earlier, would have been
inconceivable.

This
book was a bestseller in 1992-93 when it was first published. For
seven years the book had been out-of-print. We had innumerable
requests for copies, so we decided to update the book after what was
known as the Ketan Parekh scam in 2000. The book was then printed in
2001 under the KenSource imprint after extensive revisions and
additions (the Scam of 2001). That edition was soon sold out.
Encouraged by the continued demand we published a third expanded
edition of the book, which has gone into multiple reprints. In this
effort, as in the earlier edition, we received invaluable guidance,
help and encouragement from the late Mr TN Shanbhag of The Strand
Book Stall in Mumbai. Mr Shanbagh was an institution by himself and
spent his life pursuing his mission to encourage people to read. His
absence continues to be felt by book lovers in Mumbai. The book has
also benefited immensely from the editing expertise of Dr. Nita
Mukherjee.

Table
Of Contents

Chronology

Authors’
Note

1. The
Scam Surfaces

2. Banker,
Broker, Sucker, Thief

3. Creed
of Greed

4. A
Greenhorn

5. The
Big Bull

6. A
Bloody War

7. Harshad
in the Net

8. Wielding
the Crowbar

9. Stanchart
and the Gang of Five

10. Stanchart’s
Money Trail

11. Superbanker

12. The
Fairgrowth Story

13. A
Can of Worms

14. The
Buccaneer Bankers

15. The
One-eyed God

16. The
Witch-hunt

17. Who
Won, Who Lost, Who Got Away

18. Harshad’s
Return

19. Justice
Delayed

20. Play
It Again Sam

21. Nothing
Official About It

22. Epilogue

Chronology

April
23, 1992: The
Times of India reports
that the State Bank of India has asked the Big Bull to square up Rs
500 crores of irregularities.

April
29-30:
There is mayhem in Parliament. The finance minister, Manmohan Singh
announces that the Reserve Bank of India will probe the scam. The
government calls in the Central Bureau of Investigation (CBI).

April
30: The
Indian
Express reports
that the UCO Bank allowed Harshad Mehta’s companies to use Rs
50.37 crores by discounting its bills.

May
5: The
Reserve Bank of India forms a committee headed by deputy governor, R
Janakiraman, to probe the scam.

May
6: The
Indian
Express reports
that the National Housing Bank, a wholly-owned subsidiary of the
Reserve Bank of India has given money to Harshad Mehta to help him
square up his outstanding with the State Bank of India.

May
9: M J
Pherwani, the non-executive chairman of the National Housing Bank,
quits. Two days later he leaves the chairmanship of the Maharashtra
State Finance Corporation, the Stock Holding Corporation and the
Infrastructure Leasing and Financial Services.

May
10: The
Standard Chartered Bank learns about the securities gap in its books.
The UCO Bank chairman, K Margabanthu, is asked to go on leave.

May
11: The
CBI led by K Madhavan, starts investigations.

May
14: The
CBI freezes Harshad Mehta’s bank account and seizes his assets.

May
21: M J
Pherwani dies.

May
25: The
RBI asks Bhupen Dalal to step down from the Bank of Karad.

May
27: The
High Court orders the liquidation of the Bank of Karad. The order
sparks a run on the bank.

May
29: S P
Sabapathy, chairman of the Bank of Madura, is dismissed by the
Reserve Bank of India. There is a run on the State Bank of Saurashtra
after rumours that it is stuck with false bank receipts.

May
30:
First report of Janakariman published. The CBI registers a case
against the State Bank of India officials after the first Janakiraman
Committee report.

May
31-June 1:
Niranjan Shah, an associate of Harshad Mehta, is raided by the Income
Tax department. He slips out of the country.

June
4:
Harshad Mehta, his brother Ashwin, the State Bank of India deputy
managing director and others arrested.

June
6: Special
Court Ordinance promulgated.

June
20: The
CBI files cases against Bhupen Dalal, J P Gandhi, Hiten Dalal, Abhay
Narottam, T B Ruia and officials of Canbank Mutual and Canbank
Financial Services.

June
23:
Bhupen Dalal, A D Narottam, Hiten Dalal and others are arrested.

June
29:
Ashok Kumar of Canbank Financial Services is arrested.

June
30: The
RBI bans Fairgrowth from any transactions.

July
2 :
Notification of Bhupen Dalal, T.B.Ruia and J.P.Gandhi

July
3-8:
John Docherty takes over from P S Nat as chief executive officer of
the StanChart Bank. The bank sacks five employees - Arvind Lal,
Jaideep Pathak, R K Iyer, V R Srinivasan and V Srinivas. The second
report of the Janakiraman Committee comes out. Bhupen Dalal and
others are further remanded to custody. The UCO Bank chairman, K
Margabanthu, is sacked. The CBI registers two more cases against
Harshad Mehta relating to SBI Capital Markets and State Bank of
Saurashtra.

July
9: P
Chidambaram quits because his wife owned 25,000 shares in Fairgrowth.
The CBI registers a case against the UCO Bank chairman, K
Margabanthu. The government announces a probe by the Joint
Parliamentary Committee.

July
13: The
CBI files a First Information Report against Harshad Mehta and
officials of the National Housing Bank and the SBI.

July
20: K
Madhavan of the CBI seeks voluntary retirement. There are rumours
that he was being pressured to suppress the probe.

July
21: V
Krishnarnurthy resigns from the Planning Commission.

July
22:
Bhupen Dalal and five others are granted bail.

July
30: The
CBI registers a case against Fairgrowth. and raids its offices.

August
6: The
Joint Parliament Committee, consisting of thirty members, is set up.

August
7-10: The
CBI files Corruption charges against V Krishnamurthy and arrests him.
His accounts and the Sanwa Bank account of K J Investments Ltd., run
by his sons, is frozen.

August
26: The
third Janakiraman Report indicts the Bank of America, Citibank and C
Mackertich, and Stewart & Co.

August
28: The
office and residence of Ajay Kayan, a key broker for Citibank, are
raided.

September
4: The
Joint Parliamentary Committee files a breach of privilege case
against Minister Of State For Finance Rameshwar Thakur for attempting
to influence certain Committee members.

September
7: The
CBI arrests K Dharmapal, managing director of Fairgrowth Financial
Services Ltd.

September
15: The
Joint Parliamentary Committee hearings start.

September
21: R
Lakshminarayan, executive director of Fairgrowth, is arrested.

September
22: Harshad
Mehta is released.

October
8: The
Standard Chartered Bank sues Citibank in New York for Rs 115.69
crores.

October
14: The
JPC hearing implicates the union minister for petroleum and natural
gas, B Shankaranand, for having ordered the placement of funds to
Canbank Financial Services, where his son was a director.

November
10:
Attorney General G Ramaswamy quits over allegations that he had taken
a Rs 15 lakh overdraft from the scam-tainted Stanchart Bank.

November
24: The
CBI raids the office and residences of M C Nawalakha, member
(finance) of the Oil and Natural Gas Commission.

November
25: The
CBI registers a First Information Report against Nawalakha for
diverting Oil and Natural Gas Commission funds to Harshad Mehta. The
industrialist, T B Ruia, is arrested six months after the Stanchart
Bank named him as one of the accused. (He was let off by the court
several years later).

November
27: The
Stanchart bank files recovery claims against sixteen banks and mutual
funds amounting to approximately Rs 650 crores.

November
30: The
RBI rejects the Bank of America’s application for Vikram Talwar
to continue as its India chief. Talwar quits India.

December
2: The
RBI asks Citibank to remove A S Thiyagarajan, area manager of the
bank’s operations in three South Asian countries and the
mastermind behind the bank’s Indian operations.

1993

June
16: Mehta
claims to have paid a Rs 1 crore bribe to prime minister P.V.
Narasimha Rao.

October
26:
First charge sheet filed by the CBI (against Canfina)

December
21: JPC
report presented in Lok Sabha.

Scam
2001

Feb
28: Yashwant
Sinha unveils a `dream budget’. Sensex opens firm at 4070.37
and closes at 4247.04, gaining 177 points.

Mar
1:
After an intra-day movement of over 160 points, Sensex settles with a
gain of 25 points. New Economy stocks under selling pressure. Rumours
of Ketan Parekh’s payment problem circulates.

Mar
2:
Black Friday. Sensex sheds its entire post-budget gains and finally
settles at 4095 with a loss of almost 176 points, under massive bear
hammering. Main casualty : K-10 stocks. Rumours about payment
problems accelerates. SEBI announces that it will probe into the
crash.

Mar
5:
SEBI raises margins. Sensex loses another 97 points. Selling
continues in IT stocks. SEBI rules out any payment crisis and
contends that BSE holds Rs 2,400 crore in the form of capital and
margins – 47% of the total outstanding amount.

Mar
8: SEBI
bans short sales. Rumours of a payment crisis on the Calcutta Stock
Exchange (CSE). BSE president Anand Rathi resigns in the afternoon
following allegation of misusing sensitive information. Deena Mehta
becomes interim president.

Mar
9:
Sensex which opens with a downward gap of 70 points and loses 175
points during the day. Three prominent brokers operating for Ketan
Parekh - Dinesh Singhania, Ashok Poddar and Harish Biyani default in
CSE.

Mar
12:
Sensex loses another 114 points on the back of a falling Nasdaq, and
sale of shares held as collateral by banks. SEBI sacks BSE
broker-directors Deena A. Mehta, Anand Rathi, Himanshu N. Kaji,
Jayesh Sheth, Kirit B. Shah, Motilal Oswal and Niranjan K. Nanavati.

Mar
13:
Sensex swings by over 340 points and sinks by 227 points to touch a
new 22-month low of 3540.65 after Nasdaq had fallen below 2000 and
Dow melted by 400-points overnight. Sinha announces that 200 more
scrips will be put on rolling settlement including those in the ‘A’
group. Tehelka.com’s videotape on defence bribery scandal hits
during market hours and even as the Parliamnent is debating the
stockmarket crash.

Mar
14:
Thanks to massive support operations launched by UTI and other
institutions, Sensex bounces back by a staggering 184 points.

March
15:
SEBI bars proprietary trading by stock exchange presidents,
vice-presidents and treasurers. It also mandates that fund managers
and investment advisors to disclose their exact positions and that of
their family members before they pass any comment on a particular
scrip in the media.

Mar
30:
Ketan Parekh’s involvement in the Madhavpura Mercantile
Co-operative Bank’s pay order scam comes to light when Bank of
India files a criminal complaint against Parekh with the CBI. CBI
arrests Parekh in the evening. SEBI asks CSE’s governing board
to resign.

March
30:
CSE president Kamal Parekh, vice-president K. K. Daga and six other
directors resigned followed the payments crisis on the bourse for the
last three settlements.

Apr
4: CBI
questions and arrests Kirit Parekh, a relative of Ketan Parekh. The
merger of UTI Bank and Global Trust Bank is called off. SEBI bars
Ketan Parekh’s broking and merchant banking firms from doing
fresh business.

Apr
9-11:
CBI arrests Ramesh Parekh, managing director of Madhavpura Mercantile
Cooperative Bank. Ketan Parekh admits to CBI that he was funded by
Zee and HFCL. Zee denies lending money to any broker but says it
advanced funds for acquisition of 28.5% in AB Corp and 15% in B4U.
Ramesh Gelli of Global Trust Bank steps down as the CMD even as GTB
denies link with Ketan Parekh.

Apr
12: R S
Hugar, former chairman of Corporation Bank, appointed as the new
chairman and managing director of Global Trust Bank. Sensex tumbles
by 142 points to touch a 27-month low of 3184.

Apr
16:
SEBI investigation into the market crash blames bull liquidation and
short sales by bear operators. Sensex touches a 28-month low of
3096.51 and bounces back.

Apr
19:
SEBI bars Credit Suisse First Boston, Nirmal Bang Broking and First
Global Stock Broking from doing fresh business till further notice.
It permanently debars Harshad Mehta from dealing in securities. It
finally acts on the 1998 case of price rigging, barring BPL, Videocon
and Sterlite from accessing the capital markets.

Apr
20:
First Global’s Shankar Sharma arrested for allegedly
threatening an IT official but later granted bail.

Apr
24: CSE
files cases against 10 brokers for dishonouring cheques issued by
them to the exchange.

Apr
26: A
SEBI committee proposes to abolish carry forward for shares trading
under rolling settlement, which is to encompass all A group scrips by
2 July 2001. Government forms a Joint Parliamentary Committee to
probe the stock market scam.

May
2: Bombay
High Court dismisses Anand Rathi's petition challenging the
suspension of his four firms by SEBI. The risk management group of
SEBI decides to lift the ban on short sales from 2 July 2001, and
announces that on the same day 200 more scrips will be shifted to the
rolling settlement mode.

May
9:
Broker Bimal Gandhi commits suicide after he suffers a huge loss as a
result of the stock market crash.

May
10: RBI
sacks the chief of Kozhikode-based Nedungadi Bank, A R Moorthy, for
allowing bank funds to be misused by three brokers including Rajendra
Banthia scam-accused in 1992 and 1998.

May
14:
SEBI finally approves the JR Varma Committee proposal to ban badla
from July 2, introduce options on individual stocks and shift all
stocks into rolling settlement from 2 January, 2002.

May
16: In
its third session some JPC members oppose chairman’s idea to
exclude UTI and other mutual funds from the ambit of the probe. He
announces that session and a final decision on submission of the
report would be taken by the end of July. The next day he retracts
asserting that the committee can call UTI or any other mutual fund
for the probe.

May
18:
Mumbai court grants bail to disgraced stock broker Ketan Parekh,
embroiled in Madhavpura Mercantile Co-operative Bank scam which
culminated in a major crisis on markets. The court releases Parekh
for a bond of Rs 5 lakh and orders him to present himself to the
Central Bureau of Investigation's office twice a week.

May
23: The
Calcutta High Court restrains four defaulting stock brokers of
Calcutta Stock Exchange - Dinesh Kumar Singhania, Harish Chandra
Biyani, Ashok Kumar Poddar and Ratan Lal Poddar - from transferring
their assets kept with banks and depository participants as well as
immovable properties.

July
2: UTI
freezes sale and repurchase of units of its US-64 scheme and slashes
dividend to 10%.

July
3: UTI
chairman PS Subramanyam resigns in a midnight drama.

July
11:
Supreme Court convicts Hiten Dalal to one year’s imprisonment.

July
20:
Ex-UTI chairman PS Subramanyam and two UTI executive directors raided
by CBI. A three-member committee set up to probe UTI’s
investments.

August
6: Tata
Finance files FIR against Managing Director Dilip Pendse, 5 others

August
8:
Hiten Dalal surrenders before special court

August
10: CBI
arrests Ketan Parekh in MMCB case

August
11: CSE
Executive director Tapas Dutta sacked

August
24: Ketan
gets bail in MMCB case. Pledges to deposit Rs 16 crore

September
6: Zee
promoters sue to recover Rs 90 crore from Ketan Parekh. Hiten Dalal
gets 3 years of RI for defrauding Canbank mutual

September
7: GTB
picks up 13% of Ketan Parekh’s company Triumph International
against Parekh’s dues of Rs 180 crore.

September
28: Nirmal
Bang killed in road accident

October
15: SEBI
chairman DR Mehta tells JPC that there was no scam

November
9: CBI
arrests Harshad Mehta and his two brothers Sudhir and Ashwin on
charges of forgery and misappropriation.

November
27: Shankar
Sharma and Devina Mehra announce that they will sue the government
for Rs 500 crore and donate the money to charity

December
17: Shankar
Sharma arrested by Enforcement Directorate (ED)

December
31: Big
Bull Harshad Mehta dies of cardiac arrest

2002

January
9: Delhi
High Court refutes First Global’s claim of harassment due to
tehelka expose, noting that ED acted a week before the expose.

February
11: ED
sues Fist Global for selling HFCL shares to FIIs without RBI’s
consent

March
1: Shankar
Sharma released on bail

April
15: Ketan
Parekh fails to pay Rs 7 crore of the Rs 16 crore he had promised to
MMCB

April
19: BSE
terminates the services of whistleblower AA Tirodkar as recommended
by Enquiry Committee headed by Justice BV Chavan.

May
28: ED
charges 20 FIIs for FERA violation in the HFCL case

June
17: SEBI
suspends broking licence of CSFB

July
3: Tatas
file Rs 400 crore suit against Dilip Pendse

July
22-25:
Draft JPC report leaked to the press. JPC members disown it

September
23: SEBI
cancels First Global broking licence

September
25: Kolkata
police arrest six brokers, ex-directors of CSE

October
9: Kolkata
Police arrest BV Goud, former MD & CEO of SHCIL

November
2: RBI
declares moratorium on Nedungadi Bank

November
29: Kolkata
police arrest stock broker Ashok Poddar

December
2: Kolkata
police arrest Ketan Parekh in Mumbai but he “falls ill”
and gets bail

December
19:
JPC submits its report to the parliament

2003

January
14: Supreme
Court upholds Harshad guilty in Maruti case.

January
20: Ketan
surrenders before Kolkata court. In policy custody

June
7: DCA
requests CLB for faster resolution of cases filed by it

June
19: Ketan
parekh “agrees” to repay BOI’s dues

June
11: CBI
arrests investor Shirish Manyar and broker Mukesh Babu

October
9: Supreme
Court upturns Special Court order on 1992 scam, ordering Stanchart to
return Rs 79 crore with 12% interest to Citibank, which in turn would
pay a part to Canbank Mutual.

December
17: SEBI
bans Ketan, his cousin and 7 associates for 14 years

December
23: Delhi
police arrest Dilip Pendse

2004

March
8: SEBI
cancels broking registration of Ketan’s broking entities

March
8: SEBI
finds promoters of Aftek Infosys guilty of Fraudulent & Unfair
Trade Practices. Bars them from dealing in securities for one year.

April
8: Supreme
Court upholds SAT’s order of reduced punishment on Nirmal
Bang’s broking entities

July
24: Global
Trust Bank placed under moratorium by RBI

July
26:
Amalgamation of GTB with Oriental Bank of Commerce

Authors’
Note

Circa 1992:

On the morning of 4th
June 1992 the vast Arabian Sea, a few paces away from Madhuli, looked
calm. But on the third and fourth floors of the building, home of the
first Indian stock market superstar, Harshad Mehta, the atmosphere
was tense. Harshad stood exposed for having taken money from the
State Bank of India and for not delivering securities.

For the past six weeks,
Harshad had been trying to settle the problem commercially. But the
Central Bureau of Investigation had already been called in and
Harshad’s appeals to allow him time to pay back were being
ignored. For the flashy, immensely wealthy Harshad and his clever
brother Ashwin, the situation was grim.

A little past 8 in the
morning, some eighty people from CBI descended. Tactically, neither
did they interrogate the Mehtas nor gave any hint of arrests. They
spread out through the apartment and started turning things unsndle
the scam investigation. Madhavan wanted to meet Harshad. The CBI
officer supervising the operation turned towards Ashwin and said:“I
want you to come too.”Around 7.30 pm, they started towards
Kitab Mahal, one of the offices of the CBI.

Madhavan spoke to Harshad
for about 10 minutes. And then calmly said: “I am arresting
you.” This included Ashwin and some of their employees. The
arrest memos were served around midnight. A few hours later, the CBI
arrested the SBI’s deputy managing director CL Khemani, as
well. A sordid drama had begun.

Meanwhile, on Dalal
Street, the phones had stopped ringing. There was mayhem, as one idol
after another crashed with a huge thud. Harshad Mehta, the icon of
the equity cult was being grilled by CBI in a police lock-up; Bhupen
Dalal, suave and sophisticated,

had a hunted look; Jitu
Shroff, running a long-established securities broking firm, was being
raided. Banks were sacking their employees and launching criminal
cases against them.

It was a summer of panic
as the biggest Indian financial scandal in living memory broke out.
Popularly known as the “scam” (an Americanism that does
not figure in too many dictionaries) it ravaged the stock markets,
shook people’s faith in banks, tainted the reputation of
foreign banks and the image of India’s best-known bank, SBI. It
immediately consumed one life - a high profile player in the
financial sector, MJ Pherwani and several others later. It yanked a
go-getting minister, P Chidambaram, a Planning Commission member, V
Krishnamurthy, and the attorney general, G Ramaswamy, out of their
chairs.

The scam was so gigantic
that it was easy to lose perspective. Larger than the health budget,
larger than the education budget, it made millions of rupees look
like loose change. As the stock prices started crashing all over the
country, following the most explosive and absurd rise over the
previous six months, the scam - fifty times the size of Bofors -
invaded middle-class homes like a whirlwind.

But it has also solved a
big riddle: the much-speculated but never correctly-guessed reasons
behind the astounding bull phase that had gripped the stock markets
from the last quarter of 1991 till the end of March 1992. Within a
week after the news on Harshad Mehta’s scam broke, it became
clear that Harshad’s main source of money was not smugglers,
film stars and drug lords, though they may have also indirectly
benefited when Harshad made stock prices fly. His strategy was
simpler, less dramatic. He was the classic interloper.

He bought securities for
SBI but got its officials to issue cheques to him and failed to
deliver the securities. In this scheme, he was aided by the
blue-blooded ANZ Grindlays Bank and the National Housing Bank, the
fully-owned subsidiary of the Reserve Bank of India (RBI). Both
freely credited cheques to Harshad’s account.

Harshad also managed to
operate SBI’s account maintained with RBI as his own, putting
through fictitious purchases and sales through that account and
having his own bank account credited or debited corresponding to such
buying/selling.

Was Harshad the con man
of the century? He certainly stands out in his sheer brazenness and
ambition. At thirty-seven, after trying his hand at over a dozen
different businesses, he was suddenly at the centre of a
rags-to-riches fairy tale that sometimes left even him perplexed.
Overseeing a 15,000 square feet apartment in Madhuli, at Worli
seaface in Bombay, a putting green, a fleet of cars including
Toyota’s top-selling luxury model Lexus, Harshad Mehta was on
his way to becoming one of the richest men in India.

Harshad, and to some
extent, brokers like Pallav Sheth and traders like K Dharmapal of
Fairgrowth Financial suddenly proved that the short cut to getting
rich quickly is getting shorter and shorter. It took Dhirubhai Ambani
decades to attain superstar status. Harshad managed it in just a few
years without Ambani’s hassles of setting up manufacturing
assets, battling the government and the press. Harshad, banks,
brokers and businessmen had merely to dip their hands into the money
sloshing about in the inefficient banking system.

It was so easy that the
great and good of the business world, especially the foreign firms,
got involved. The Standard Chartered Bank was caught dealing in
thousands of crores worth of securities from a shady broker, who
often gave no contract notes and had the transactions all in his
mind. With telling effect, the scam soon spread fast, well beyond
engulfing a streetsmart upstart like Harshad. Its other, unexpected,
murkier stream tarnished venerable names like Bhupen Dalal, who has
inherited a 100-year-old broking firm and was passing on to his two
sons a rich legacy.

Stanchart, as the bank is
commonly referred to, was also recklessly dealing in slips of paper
called bank receipts (BRs) issued by tiny banks with a few crores of
capital. No less shocking

was the role of its head
office in London, which despite internal and external inspections
remained blissfully unaware that its operaion in India was in
tatters. ANZ Grindlays, though not an integral part of the scam, was
caught crediting cheques from the National Housing Bank and the Power
Finance Corporation into Harshad’s account. Harshad used that
money as his own.

Caught unawares, the
players publicly bumbled, aided by poor PR strategy. Stanchart and
ANZ Grindlays, two of the largest foreign banks in India,
persistently refused to speak openly to the press, provoking a rash
of critical writing. They form one of the richest case studies on PR
disaster. Grindlays was portrayed as impudently quarrelling with RBI.

Stanchart emerged as a
bumbling bank that over-reached itself in a greedy but reckless
pursuit of bumper profits. It first stonewalled the press. Then it
flew down John Pank from London to handle the disoriented PR
department, which suddenly called a press conference. It was a dismal
effort. The high and mighty bankers from the city of London hummed
and hawed in response to specific queries and left journalists
bewildered as to why they were called in the first place.

The head of the Bank of
America in India, Vikram Talwar had been denying that the bank had
done anything wrong till the third report of the Janakiraman
Committee blew his cover. When on 22nd April, The Times of India
asked MN Goiporia, chairman of the State Bank, about Harshad’s
problems in squaring up certain transactions, he flatly denied it.
RBI Governor called a press conference to deny something, which he
had not even checked on.

The smartest of all,
Citibank, was seen as smug and arrogant despite drafting a banker to
undertake press relations. It also hired Roger Pereira the high
priest of PR to act as a buffer. Pereira, perennially unctuous when
face-to-face but malicious and nasty behind our backs, sought out one
of us to “favour” him with facts and a “perspective”
on Citibank. His spiel: he wanted to know as much as possible in
order to decide whether to accept the assignment or not. The fact is,
he had already signed up with Citibank. The meeting was a set up,
designed to draw out vital information and to slyly find out how much
we know, to be reported back to the client. Apart from such
craftiness, planting stories and maligning select presspersons, what
else do most PR agencies offer anyway?

The person worst affected
in the scandal was the most forthcoming of all. Despite the fact that
the initial press report in the Times has precipitated it all,
Harshad bore no ill will. He gave journalists time and information
and complimented them for their work even when some of the articles
were against his interest. This was a clever move to keep the press
on his side but there was also a streak of pure enthusiasm, a sunny
world-view that made him capable of appreciating anything remarkable.

Circa 2001:

In India, the problem has
never been the existence of laws. The bigger issue is enforcement of
those laws. There is an insider-trading law now but the market is
rife with insider trading. Off-market badla is illegal but it was
being done on the floor of the Calcutta stock exchange. There are
laws against market manipulation and price-rigging but nobody is ever
caught. Who regulates companies? There are agencies called the
Registrar of Companies and Department of Company Affairs but have you
ever heard of them taking any action against anybody? The Scam 2001
is readymade for them to probe funds diversion by companies like Zee,
Global Trust Bank and Himachal Futuristic for stock market
operations, but only on the prodding of JPC did they start moving
their muscles. Market players know this too well. According to an
enlightening conversation one of us had with a Citibank employee in
1990, the bank viewed the Reserve Bank’s rules merely as
recommendations, not the law of the land.

In fact, regulatory and
investigative agencies like RBI, CBI, Income Tax Department, and the
Enforcement Directorate often meticulously collect evidence and then
can it. That emboldens the market players more until things just go
out of hand again.

Another
scam was waiting to happen again. The wonder is that it took so long.
And another scam will happen once it is clear that collectively JPC,
SEBI, RBI and various arms of the government want to bury the Scam of
2001 and its culprits.

The Scam of 2001 was
simple. Massive price rigging, over-trading, huge losses, to support
which, money was drawn out, of colluding companies and banks. This
was hardly new. However, information on the collusion between Ketan
Parekh, his price-rigging, diversion of funds from high-profile
companies and banks was dribbling out only thanks to some tough
questioning by a couple of JPC members.

Just out of the CBI
custody in May 2001, Ketan Parekh threatened to sue Bank of India for
“defamation”, because it dared to complain to CBI. And
yet, by late July, more staggering details of Scam 2001 emerged. CBI
called a press conference to announce that it had unearthed and
frozen a Swiss bank account containing $80 million, whose beneficiary
was Ketan Parekh. JPC’s questioning led to more offshore
companies being unearthed- following the revelation in May that Rs
2900 crore were transferred out of the country through five Overseas
Corporate Bodies between March 1999 to March 2001. SEBI revealed in
July that it has discovered six more OCBs used by Ketan Parekh for
“cornering and parking of stocks”.

One of these was Delgrada
Ltd, which issued 1.75 crore shares of Zee Telefilms on its
acquisition of Zee Multimedia Worldwide. SEBI says that Subhash
Chandra, Chairman of Zee Telefilms, was the sole beneficiary of this
Delgrada. Some of these shares were later sold through Ketan’s
firm Triumph International and about Rs 450 crore was remitted to
Mauritius.

SEBI
also disclosed to the JPC that Zee Telefilms had directly lent Rs 515
crore to Parekh in March 2001, by borrowing the funds from various
sources, including Global Trust Bank to stop him from going under.
Himachal Futuristic, whose promoter Vinay Maloo is a
close buddy of Ketan had organised Rs 700 crore for him. Add all this
to SEBI’s information that Ketan had sent over Rs 2700 crore to
Kolkata brokers between January 2000 to March 2001, Rs 2900 crore
vanished overseas and CBI’s discovery of $80 million and you
have more or less the true dimensions of the Scam 2001. It comes to
roughly Rs 6400 crore- larger than the first estimate of Rs 5000
crore on Scam 1992.

Despite such startling
revelations, Indian regulators have been dragging their feet over
disciplinary and supervisory action like price manipulation, insider
trading, oppression of minority shareholders etc. Banks and
institutional investors such as the beleaguered Unit Trust of India,
which was buying up Zee shares and funding companies to help Ketan in
March 2001, have been acting dumb instead of filing suits. That left
Ketan Parekh free to influence politicians and certain JPC members,
threaten banks with defamation and make allegations against CBI while
the regulators quietly plodded on with their endless
“investigations”. Sounds the same as in the Scam of 1992.

One interesting
difference between the two financial scandals separated by nine years
was the role of media and politicians. In 1992, the press was
glorifying Harshad Mehta and brokers like him without asking the most
elementary question: What was the source of their funds. Some
journalists were part of Harshad’s charmed circle, but even
they seemed to have been happy with just stock tips. A couple of
senior business journalists tried to support Harshad initially but
later backed off once they realised the extent of his mischief in
SBI. Most publications, however, went after the scam with a degree of
seriousness and a lot of information made it to the public domain.

In 2001, sections of the
media played a more dubious role. At the junior level many routinely
wrote excitedly about K-10 stocks without mentioning the word
price-rigging. And two executives of the National Stock Exchange
(NSE) who were asked to leave on the suspicion of leaking information
to brokers, immediately found berths in two top pink papers!

What
was remarkable was the wide circle of people that the scamsters had
cultivated among politicians and media. Not only did they have senior
editors of widely-circulated papers as open sympathisers, they were
probably funding the operations of some others and had a complete
lock on what should be written and how. Two well-known editors of
struggling newspapers joined in a savage personal attack against us.
It was probably the first time that journalists were passing off
personal abuse about another journalist as first page “news”.
The Asian Age and
The Pioneer neither
of which has any readership worth talking about, but are backed by
dubious financiers, twisted some facts about us, made up some others,
laced it with nasty innuendo and printed it on the front page.

This was new. There are
just too many loss-making newspapers controlled by businessmen and
politicians. It is easy for scamsters to hire one of these rags and
use it to peddle scurrilous writing. For instance, a third editor,
whose insignificant media company was funded by Ketan Parekh,
suddenly turned into an expert on ‘bulls and bears’. He
even found a platform in the largest selling English daily to preach
that bears destroy the economy. By “national wealth”, he
obviously meant market value of shady companies rigged up by
speculators. Indeed, some people were trying to generate a debate on
whether investigative writing was hurting the country.

Certain
sections of the media were so well-funded, that to them the Scam of
2001 was a trigger to malign whoever was speaking the truth rather
than an attempt to expose the actual wrongdoings. Zee News, which did
extensive re-runs of the tehelka
tapes, did not even seem to notice that rigging of the Zee scrip was
at the centre of the scam. Isn’t it surprising that neither The
Asian Age nor The
Pioneer had anything much
to say about Ketan Parekh’s shenanigans and his political
friends? Most seem to have also missed the implication of Parekh’s
direct investment in certain media companies. This was a key
difference between 1992 and 2001. The stakes had become bigger, the
means dirtier and people’s response more indifferent.

The
only exception is the Indian
Express
group. At a time when so many newspapers were hand-in-glove with
scamsters or were busy reporting society tattle, only The
Express
continued to support investigative reporting despite enormous
pressure. For that credit is entirely due to Shekhar Gupta,
Editor-in-Chief & CEO. If the pressure tactics of corporate
houses and scamsters succeeded, it was mainly because the reading
public tends to take the freedom of the press for granted. They
expect newspapers and journalist to fight their battles but are
unconcerned about what goes on behind the scenes.

Circa 2005:

The 2001 edition of this
book, which was sold in two years, stopped at the dramatic event of
one midnight in late July 2001, when UTI chairman PS Subramanyam was
asked to resign. Much has happened since then, involving both the
scam-tainted personalities and the course of investigation. Harshad
Mehta, the swashbuckling sultan of speculation in 1991-92 passed away
at Thane civil hospital where he was rushed from the Thane jail. He
was under police custody in connection with another phase of unending
investigation. With his demise, public interest in the 1992 scam
reduced. But scores of criminal suits and hundreds of civil suits
continue to drag through the Special Court that was, set up under a
separate act of parliament to deal with that scam.

But events seemed to have
a way of catching up with various scam-tainted personalities.
Rajendra Banthia, a close crony of Harshad Mehta, landed up in a
Gujarat jail in connection with Nedungadi Bank, whose shares he had
bought in 1992 along with two broker friends. In a predictable replay
of regulatory lapses, the RBI allowed the bank to collapse and then
forced a quick merger with Punjab National Bank to bury the dirt.

The
Scam of 2001, more limited in scope, has created far less
after-shocks. Our apprehensions documented in the 2001 edition proved
correct; various government agencies have let most of the scamsters
and all industrialists get away. This edition has updated and
expanded some of these developments. It shows that there has been no
change in the quality of supervision by the regulatory agencies. The
most recent proof, if such proof was needed, came on 24th
July 2004 when the RBI placed the notorious Global Trust Bank under
moratorium, after having ignored many red flags and even offering
covert support to the bank. The government engineered a shotgun
marriage for GTB and the scamsters behind GTB collapse escaped. Some
even made money selling the stock ahead of the collapse. The more
things change, the more they remain the same.

1

The
Scam Surfaces

Within
a month, a bank had gone under; the CBI had been called in to nab the
biggest player in the stock market; and a pillar of the financial
establishment had died under mysterious circumstances. But all this
was just the beginning.

It
was early morning at Palani, a small, sleepy town 150 kilometres from
Coimbatore. Palani has had no claim to fame except for its temple
atop a hill. It has no industry, no major railhead, and it has never
produced a luminary. But on 12th
April 1992, Palani was to witness a historic event. Only five persons
could have sensed that. Harshad Mehta? He hadn’t a clue. He
hadn’t even heard of Palani.

At
five on that Sunday morning, in one of the rooms of a small hotel
called Subam, RL Kamat, a deputy general manager, funds management
department of State Bank of India, was out of bed. Unassuming and
honest, Kamat had arrived from Bombay the previous evening. By six he
had had a bath, dressed up and stepped out. He was headed for
Palani’s landmark, the temple.

He
had been there the previous evening too. But not on a pilgrimage.
What Kamat set out to do in a nondescript town hundreds of kilometres
away from Bombay would later turn out to be among the first steps to
shatter the Harshad Mehta myth.

Kamat’s
mission in Palani was to bring back to Bombay one of his colleagues,
R Sitaraman. Sitaraman, a junior management grade officer, would
later emerge as the key figure in Harshad Mehta’s scheme to
pick up money from SBI without securities. But on that Sunday
morning, Sitaraman was merely a suspect and that too within the bank;
nobody had imagined the extent of his wrongdoing. He was wanted as he
was the only one who could throw light on what his bosses feared was
a massive fraud.

Simply
put, SBI was short by Rs 574 crore in securities. The antiquated,
manually written books kept at the Public Debt Office of Reserve Bank
of India showed that Rs 1170.95 crore of an 11.5% Central Government
loan of 2010 maturity was standing against SBI’s name on 29th
February.
The figure was Rs 1744.95 crore in SBI’s books – a clear
gap of Rs 574 crore. But the discrepancy was not apparent.

The
PDO statement given to SBI had been overwritten, i.e., falsified, to
make the figure 1170 look like 1670, covering the gap of Rs 500 crore
and bringing it close to SBI’s figure. It was like dis-covering
that your bank account, which ought to have had a balance of,say, Rs
1700 showed, in the bank’s pass book, a balance of Rs 1000
which was later falsified to Rs 1600.

On
the 11th
floor
of SBI’s main office, this startling discovery was made over
the week ending 11th April. Between the 6th
and
the 9th
,
three officers in the treasury department – RL Kamat, TPN Rao
(assistant manager) and their boss, CL Khemani (deputy managing
director, treasury and investment management) – had uncovered
the Rs 500 crore gap along with other discrepancies. The man
responsible was Sitaraman, who was working in the securities division
of the Bombay main branch. His job was to put through the
transactions at the branch level as directed by Khemani and Kamat
from their base in the head office.

However,
Sitaraman had a mind of his own. Or rather, a mind that was owned by
Harshad Mehta. He did what Mehta wanted him to, not what Khemani
ordered. Of course, he kept confirming to Khemani that he was putting
the right deals through.

From
a difference of Rs 574 crore in February, the gap between the SBI’s
books and that of the PDO grew to Rs 1022 crore by March 1992. When
the full impact of the fraud hit the SBI top brass, Sitaraman was on
a train somewhere between Bombay and Coimbatore. It was the first day
of his seven-day leave. He and his wife were taking his four-year-old
son to Palani for the mundan
ceremony.

But
unknown to him, at 9.30 p.m. on the night of 10th
April
in Khemani’s room, his fate was changing. Kamat was planning to
set out on his trail; to pull him out from his leave as soon as
possible. By noon the next day, Kamat was on the flight to
Coimbatore. But would Sitaraman be in Palani? Kamat made sure of that
by discreetly checking with Sitaraman’s mother, the date of the
ceremony. It was the 12th
.

As
he fastened his seat belt on the mid-morning flight for Coimbatore,
Kamat was fully prepared for all outcomes. He would have Sitaraman
arrested in case he attempted to flee. Kamat had contacted the
Palani-based regional manager of SBI and asked for security help.
When he met the regional manager and the security officer at
Coimbatore it was 2.30 in the afternoon. They hired a car and reached
Palani at 5.30 in the evening. But where was Sitaraman?

The
regional manager was an influential man in that area. So, when the
three set out to search the main hotels and four dharamsalas
they had easy access to the registers. Sitaraman’s name was not
listed anywhere. Could he have gone to the hilltop temple? A
religious procession was winding its way up the steep hill and the
three went along with it. By 7 p.m. they were on the temple premises.
It was a futile search. After going around the temple several times,
they gave up. They would
search again the following day.

12th
April:
Kamat stepped out of the Subam Hotel at 6 a.m., ready to resume the
search. Unknown to him, Sitaraman had entered Palani an hour earlier.
By 6.30, Kamat and his two associates were at the temple. The
structure of the temple was in their favour. It had many entry points
but only one exit. They parked themselves in front of that exit. For
three hours nothing happened. Then, at 9.45 Kamat spotted him.

Sitaraman,
his wife and their son were in the midst of the mundan
rites. Kamat stayed calm, forced a smile, moved forward and made eye
contact with Sitaraman. When he noticed Kamat, Sitaraman jumped
out of his skin. “He was extremely disturbed”, recalls
Kamat.

Kamat
played it cool. He walked up to Sitaraman.

“I
am waiting nearby”, he said. Sitaraman merely nodded. Kamat and
the other two men went into a restroom and waited for Sitaraman.
After some time he walked in with his wife and son.

“Khemani
has sent me to take you back”, opened Kamat. “We have a
big problem on our hands. Please come to Bombay and tell all that you
know.” Kamat’s brief was to inspire confidence in
Sitaraman, not fear.

Sitaraman
didn’t say much. A storm was blowing inside him. His wife, who
works for Central Bank of India, was clueless. She started
complaining that Sitaraman worked long hours in the office and so had
little time for his son. “Why can’t you transfer him to
some other department?” she asked Kamat, little realising that
Sitaraman wasn’t working late for nothing. They ordered masala
dosas
and spent some more time chatting. Sitarman spoke very little. Around
1 p.m. they climbed down the hill and went to Sitaraman’s hotel
where he packed his bags. The family would move into Subam where
Kamat was staying.

Sitaraman,
dark and medium-built, was apparently a competent officer. In
1991-92, when the bonds market was highly active and volatile, he
rose to the pressure of an increased workload. “He could easily
handle 40-50 deals a day, often working on Saturdays to clear the
backlog”, says Kamat.

Sitaraman’s
return journey had been planned via Madras, from where he was going
to fly back to Bombay. Kamat changed that. He planned to take the
family to Coimbatore and fly from there. After they all moved into
Subam, Kamat went to the SBI branch and called up Khemani to let him
know that he had got Sitaraman. “He has the SGLs”, Kamat
assured Khemani. Khemani was very pleased. But it was premature.

Kamat
told him that they would be in the office by Monday afternoon. They
hired a car and reached Coimbatore around 5 p.m. While Kamat checked
into a hotel called Annapurna Lodging, the Sitaramans spent the night
with one of their relatives. The next morning they joined Kamat at
the hotel. Since they had some time before the flight took off, they
even managed to shop to buy sarees.

During
the flight they spoke little. Sitaraman confirmed to Kamat that he
had the SGLs with him. At 3 p.m. Sitaraman and Kamat stepped into the
head office (known within the bank as the central office) at Nariman
Point. They went straight to Khemani’s room on the 11th
floor. The three had a brief chat. Khemani queried Sitaraman about
the discrepancy. Cornered, Sitaraman changed his story.

“I
have BRs (bank receipts) not SGLs”, he said.[1]

“But
you said that you have the SGLs”, asked Kamat.

“Where
are the BRs?” queried Khemani.

“I
have them in the branch”, replied Sitaraman.

“Kamat
will go with you. Hand them over to him”, Khemani said.

When
they reached the branch, Sitaraman confessed that he did not have
even the BRs. “Harshad has them now”, he said. “He
has taken the BRs with the promise to buy SGLs.” This tallied
with the story Harshad had told the SBI top brass on Saturday the
11th.
But Sitaraman was still lying.

Khemani’s
worst suspicions were true. Actually, Sitaraman’s game was up
early March, the day that Khemani had told Kamat to start securities
reconciliation work so that SBI’s books balanced with those of
the PDO on 31st
March. The idea was to keep the books reconciled at least till
February, so that there would be no difficulty in reconciling just
one month’s transactions later.[2]

One
week passed by. The reconciliation statement never came. Khemani was
getting edgy. He kept pushing Kamat for the statement. Kamat, in
turn, was told by the Bombay main branch that the reconciliation
would take another three to four days at the most. Sitaraman was
trying his best to fudge the books in those weeks. But he was caught
in the wide and intricate web of transactions. After all, in just one
month, March, SBI transacted securities worth Rs 8,700 crore, a
quarter of the whole year’s transactions.

On
the evening of 6th
April, a man from the Bombay branch delivered the statement to
Khemani. Since it was late, Khemani put it in a plastic folder and
went home. He took it out the next morning and looked at it closely.
There was overwriting, alterations and can-cellations in the
statement. Some securities that SBI had bought had not been included.
To top it all, there was a difference of Rs 74 crore between what
Sitaraman showed (Rs 1744.95 crore) and what the PDO reported (Rs
1670.95 crore). Khemani became suspicious. He called the assistant
manager, TPN Rao, and asked him to go to the branch to check the
accuracy of Sitaraman’s statement. His brief was to crosscheck
the SBI statement with the RBI’s books. Rao made a preliminary
enquiry and then, on 9th
April, returned to the branch.

“Please
come with me to the PDO”, Rao requested Sitaraman.

“I
have a lot of work to complete. Why don’t you go on your own?”
asked Sitaraman. Rao persisted with his request. “The staff at
the PDO knows you well. We can finish the reconciliation faster if
you help.”

Sitaraman
was reluctant. “I have to start for Palani tomorrow for my
son’s mundan”,
he said. And then added: “Don’t worry about the
discrepancies. I will sort them out when I come back from leave on
the 17th.”

“I
have instructions to set them right today”, said an insistent
Rao.

They
left for the PDO, a few minutes’ drive from the SBI office. The
PDO is fittingly housed in the old RBI building, a stately old
structure situated opposite the modern, twenty-six storied edifice
that is now RBI’s main office. Sitaraman introduced Rao to a
few clerks there and went back. Rao got them to set right the small,
genuine discrepancies. But when they looked into SBI’s balance
of the 11.5% central loan of 2010 maturity, the fraud leapt from the
pages of the antique ledger of the supreme banking authority of the
country. It read Rs 1170.95 crore. Somebody had altered the PDO
statement issued to SBI so that Rs 1170.95 crore read Rs 1670.95
crore. A gigantic banking fraud right in the backyard of the banker’s
banker, the supercop whose job it is to discover banking frauds!

One
month after that fateful day, callous officials in the ministry of
finance, an overzealous Central Bureau of Investigation and the
sharp-witted governor of RBI worked in tandem to deftly shift the
blame for the fraud on to SBI. The RBI governor simultaneously played
a major role in uncovering parts of scam but in the charged
atmosphere of early May 1992, when Parliament was in session, what
everyone wanted was some action. Never mind who was steamrollered.

In
a brazen display of power, under the prevailing chaos, every senior
person in SBI who had anything to do with the treasury department was
harassed and hounded. What about the clerks in the PDO who were later
found to be hand-in-glove with the brokers? The CBI had no case
against them. Who were the clerks reporting to? The names were never
revealed. None of the RBI staff were charged for the fraud or even
properly interrogated. Indeed, RBI ‘suspended’ some of
them. But nothing more. The final twist to the farce was provided by
the expert committee set up by RBI to probe the scam, popularly known
as the Janakiraman Committee. Hear what this committee has to say
about the PDO office: “Functioning of the SGL section in the
PDO in general is satisfactory.”

Rao
returned from PDO and broke the bad news. “That means another
Rs 500 crore of shortfall in 11.5% 2010”, remarked a depressed
Khemani. (The precise amount was Rs 499 crore.) Sitaraman had already
gone on leave and so Rao and Kamat went back to the branch the next
day
(10th
April)
to find out the reason behind the shortfall. It was a transaction of
14th
December for which the
bank had already made the payment but had not received the securities
(i.e., the SGLs) from Punjab National Bank and State Bank of
Saurashtra.

It
was much more complicated than that, though they did not realise it
then: Khemani had sold Rs 845.09 crore of securities to PNB and
bought securities worth Rs 725.58 crore from PNB and Rs 98.40 crore
from SBS – a net inflow of Rs 21.11 crore. What Sitaraman
recorded was receipts of Rs 226.12 crore from seven banks and
payments of Rs 205.01 crore to six banks and Harshad Mehta –
again showing an inflow of Rs 21.11 crore to camouflage the fraud.

They
discovered another thing, something that later emerged as a common
thread in the securities scam. The entries Sitaraman recorded were
invented. The money did not go to the banks from which the securities
were shown to have been purchased, though the branch (Sitaraman)
dutifully told the central office (Khemani) that it did. The money
went to the broker who struck the deal.

The
broker? Harshad Mehta.

Kamat
and Rao returned to the central office at 6.30 in the evening.
Khemani immediately contacted his boss PV Subba Rao, one of the two
managing directors. Khemani and Subba Rao made up the investment
committee that decided how SBI should deploy its funds. In reality
Khemani, a genial soft-spoken man, was taking all the investment
decisions,
and very astute ones. His department must have contributed crores to
the SBI’s bumper profits in 1991-92. On the evening of 9th

April, however, Khemani, who was a heart patient, felt a kind of
pressure he had never felt before. He reached for the phone to talk
to
Subba Rao.

“I
have to discuss something very serious with you”, he said.
Subba Rao called him in.

Khemani
explained everything and asked, “Do you think we should file an
FIR with the police complaining of a fraud?”

Rao
reflected for a while, then said, “But we must recover the
money first.”

This
was a commercially sound step – to secure the money first, then
take legal action. Later, the CBI, in a brutal attempt to prove
criminality, would do just the reverse and thereby jeopardise
thousands of crores of taxpayers’ money. Ironically, SBI had to
pay heavily later for trying to secure the money first. If only it
had filed a police complaint, its officers would have been the
accusers, not the accused and Khemani and his colleagues would
rightly be credited with discovering the fraud instead of having
committed it. This is precisely what KV Krishnamurthy did as chairman
of Bank of India, when faced with a shortfall from Ketan Parekh in
March 2001.

During
discussions that night, Subba Rao called R Sinha, chief general
manager (vigilance). They discussed the course of action and then
planned to go to the Chairman, Maneck N Goiporia’s house. But
they were told that Goiporia was out meeting somebody and would
return only after 10 p.m. It was then that Khemani and Subba Rao
decided that Sitaraman should be called back to find out if he was
holding SGLs or BRs.[3]

They
even sent somebody over to the branch and broke open Sitaraman’s
drawer. It was a desperate move. There was nothing there.

On
the night of 10th
April,
in Subba Rao’s room, the SBI top brass took three decisions.
First, to send Kamat to Palani to bring Sitaraman back. Second, to
start an immediate
enquiry by the vigilance department. Third, to apprise the chairman
the next morning and chalk out plans to recover the money. (At that
stage, they did not know the exact amount involved.)

The
next day, Kamat took off for Coimbatore while Subba Rao and Khemani
met Goiporia. The discussions clarified two things: first, the
transactions done by the branch were different from what the central
office had instructed. Second,
the bulk of the shortfall was due to non-delivery of the transactions
done on 14th
December
through
Harshad Mehta. It was clear to them that Sitaraman and Harshad were
working together. This crystallised SBI’s position. At that
stage, RBI, which later claimed to have uncovered the scam, had no
clue about the exact nature of the fraud, not even about the
falsification of the PDO statement, in its own backyard, which proved
the Sitaraman-Harshad nexus.

When
Khemani bared it all, Goiporia may not have been totally surprised.
If Khemani knew something that Goiporia didn’t know, Goiporia
knew something too. He was working in tandem with RBI to choke off
Harshad. This was part of RBI’s “nab Harshad” plot
which later gave the RBI governor, S Venkitaramanan, the strength to
claim “I caught the thief” and secured him the finance
minister’s backing when some
powerful MPs wanted him out. But more about that later.

On
11th
April, as the Harshad-Sitaraman-PDO link became clear to Goiporia,
Subba Rao and Khemani, they decided to call Harshad and ask him about
the 14th
December
transactions done through him for which there were no entries at the
branch. By that time the chief general manager (vigilance) had come
to know that SBS, one of the selling banks, had no such transaction
with SBI on the date stated. Later, another transaction with Harshad,
of 21st
March,
turned out to be bad. Harshad was supposed to give Rs 170 crore of an
11.5% loan of 2007. The money went out but no securities came in.
Clearly, Harshad had picked up the money and Sitaraman had covered
for him by showing fictitious buying from PNB, SBS and other banks.
Harshad owed SBI Rs 499 crore and Rs 170 crore in two sets of
transactions.

“I
feel we should immediately call Harshad and ask him to explain. We
must ask him to face the chairman. That will create pressure on him”,
said Khemani. Strangely, Goiporia refused.

“I
think you should handle it yourself”, he told Khemani. “If
it becomes impossible then call me.”

Khemani
was unhappy. He felt that a tough word or two from the chairman would
be useful, keeping in mind the magnitude of the fraud. At around
12.30 in the afternoon, Khemani placed a call to Harshad. “Please
come and see me immediately. It is urgent”, he told Harshad.

Though
Harshad had stopped dealing in securities, he readily agreed to come.
He may have known about the discovery of the fraud by then. From his
office to Khemani’s is a two-minute walk. Quite possibly,
Harshad drove down because he entered Khemani’s room at 12.30
sharp.

“You
were supposed to deliver these securities...” started Khemani.

“Yes
I know”, interrupted Harshad. “Instead of SGLs, PNB and
SBS have given BRs. I have taken the BRs from Sitaraman to get SGLs
from the two banks. But as you know, the Income Tax has sealed my
offices. I don’t have access to these BRs now.”

“That
is your problem”, said Khemani. “Either you give us the
securities or get the counterparty banks to pay.” After a
moment’s pause, he added, “You must start making payments
immediately.”

That
was a tall order even for Harshad. His first payment – a cheque
of Rs 243.18 crore from ANZ Grindlays Bank – came in on Monday
the 13th
and
then nothing for the rest of the week. Meanwhile a worried Khemani
threatened, begged, cajoled and pleaded with Harshad to return the
money. What partly helped were the holidays between 14th

and 18th
April
when the market was closed. On 18th
Khemani
buzzed Subba Rao. “Call Harshad and force him to meet the
chairman”, he told him. Subba Rao agreed. Harshad got a call
from SBI the same day and turned up in Khemani’s room.

This
time, he most certainly came in his car, his Rs 45-lakh Toyota Lexus,
the world’s top-selling, new luxury model, driven by a
white-gloved chauffeur. It proved to be a fatal error. Word leaked
out that Harshad had problems in reconciling his transactions with
SBI.

Harshad
was taken to Subba Rao’s room and from there to the chairman.
He was at his voluble best. He promised to square up in the next few
days. “I am an honest man. I have all the BRs”, he
asserted. (Later, in jail, he told Khemani, “I am sorry for
what has happened.” Khemani probably felt like pulling a
trigger on him.) The rest of the time (almost 30 minutes) Harshad
delivered a monologue on his investment philosophy. He had done the
same thing with V Krishnamurthy, member, Planning Commission, his
associates and on 1st
April,
with the RBI governor.

The
cornerstone of Harshad’s philosophy was his pet replacement
cost theory, under which existing companies ought to be valued at the
much higher cost of replacing them and not at the much lower
historical cost as per conventional accounting methods. Looked at
this way, many Indian companies appeared undervalued and were,
therefore, great scrips to buy. Harshad’s other theory was that
the Indian economy was turning around and it was time we invited
foreign investors into Indian markets.

On
the 18th
Harshad gave three more Grindlays cheques totalling Rs 142 crore and
two more, on the 20th
,
of Rs 160 crore. Two visits by the famous Harshad to the SBI
headquarters within one week set tongues wagging. A former SBI
employee picked up the gossip. He passed it on to The
Times of India on
22nd
April.
A day earlier, Harshad had given in another Rs 5 crore.

Only
one cheque remained – of just Rs 6.35 crore – which
Harshad would deliver on the 24th
.
Just one more day and Harshad would have made it and SBI would have
recovered its money and, at the most, suspended Sitaraman.

The
23rd
day
of April was like any other. Except that The
Times of
India
front-paged a three-column story innocuously headlined, “Broker
asked to square up Rs 500 crore”. The broker was not named. He
was referred to as the Big Bull.
That was due to Goiporia’s stonewalling. When he was asked
whether it was true that Harshad Mehta had large outstandings with
SBI, he came up with vague answers.

“Was
there a problem of reconciliation with Harshad?” The
Times
asked Goiporia. “We deal in thousands of crores of securities.
We do have reconciliation problems from time to time.”

“Is
Harshad Mehta unable to pay Rs 500 crore?” Goiporia responded:
“Harshad Mehta? The broker? I can’t comment”, and
he disconnected the phone.

Khemani
was more categorical. “There is no problem here. It is
completely false. A reconciliation gap of Rs 20 to Rs 30 crore is
always there”, he said, reducing the sum considerably.

Soon
after, Goiporia was asked to go on leave. As months of revelations
would prove, SBI, unknown to its chairman, had a great deal to do
with Harshad. And journalists’ imagination fell way short of
guessing the true dimensions of the securities scandal. There was
deep rot within the system that even shrewd market players like
Khemani were fully unaware of.

On
23rd
April,
when the story broke, the question that vexed everybody was, where
did Mehta get the money from to pay back SBI. The answer was quite
startling. He picked it virtually from the RBI. The money came from
National Housing Bank, a fully-owned subsidiary of RBI. The news that
an RBI outfit had helped a broker to cover his fraud broke in early
May when Parliament was in full session. Though no Member of
Parliament understood the highly technical nature of the scam, they
were smart enough to convert it into a political hand grenade.

On
29th
April, NKP Salve, deputy leader of the Congress in the Rajya Sabha,
told Manmohan Singh that since he was the finance minister, “I
would have thought it was best to go home.” Singh, however,
failed to even make a statement in the House because he did not have
enough facts. To control the MPs baying for blood, CBI was called in
the same day. From that point, the scam ceased to be a commercial
problem; it
became a political and criminal issue, ravaging the markets and
sending shivers down the spines of bureaucrats and bankers.

On
1st
May,
The
Indian Express
exposed another scam. It reported how the United Commercial Bank had
discounted two bills drawn by the Mehtas on their two main companies,
Mazda and Growmore, to give them money to boost the prices of a host
of scrips, most notably, of Reliance Industries. Reliance was then
anxious to place its equity issue overseas and Mehta presumably
colluded by buying 10 lakh shares that sent the price shooting to Rs
400 on 28th

March from just Rs 285 on 20th

March. The story put further pressure on Harshad. On 5th
May,
The
Indian Express
exposed the NHB angle.

That
brought into focus, MJ Pherwani, chairman of NHB who, as the chairman
of the Unit Trust of India till 1989, had earned the title “Big
Bull” for his aggressive buying strategy. Harshad took that
mantle in 1991-92 by his frenzied buying. In an unmatched irony, the
earlier Big Bull was suspected of helping the present Big Bull to
tide over his financial crisis. Pherwani, of course, consistently
denied that he had anything to do with NHB’s money flowing into
Mehta’s account. On 8th

May, Pherwani resigned from NHB and later, from three other
institutions he was heading.

Unknown
to Mehta, Pherwani and other players in the drama, another huge scam
was being unearthed in the plush offices of the Standard Chartered
Bank, Canbank Financial Services and Canbank Mutual Fund. Mehta’s
unreconciled BRs forced the lid off this scam. When the RBI governor
returned from Washington, he set up a committee to probe and ordered
a BR reconciliation among all banks to flush out the outstanding BRs.

Bankers
sat in batches around a table on 19th
May,
matching each other’s positions as reflected in outstanding
BRs. At the end of the next day, Stanchart emerged with the highest
outstanding position. It was found carrying BRs worth Rs 225 crore
issued by the Bank of Karad and Rs 530 crore issued by the
Metropolitan Co-operative Bank. Next was Canfina, holding Karad BRs
worth Rs 425 crore. CanMutual was sitting on Rs 103 crore of SGLs
issued by Karad. The BRs were bogus – issued without any
underlying securities – and the SGLs which were one-year-old,
had bounced.

Both
the Bank of Karad and the Metro Bank were tiny, private banks with a
net worth a fraction of the hundreds of crores outstanding against
their names. Karad had been caught misusing BRs in 1991. Alarmed by
the magnitude and complexity of the fraud, RBI ordered the
liquidation of the Bank of Karad on 27th
May
and superseded the board of the Metro Bank.

A
week before this, something else happened. At 2.30 a.m. on 21st
May, Pherwani died. It
was a mystery nobody wanted to investigate. Reports state that he had
a heart attack. But his death certificate was signed by an
anaesthetist. His face was covered – unusual for a Hindu –
so people who came to the funeral didn’t really see him. Was it
a natural death? Could it have been suicide?

The
story was getting complex and gory. Within a month of the scam being
exposed, a bank had closed down, CBI had been called in to nab the
current Big Bull, the biggest player in the stock market, and a
pillar of the Indian financial establishment, the original Big Bull,
had died under mysterious circumstances. But all this was just the
beginning.

2

Banker,
Broker, Sucker, Thief

“We
had become the principals while the banks were acting as brokers.
Banks could decide on the brokerage they would pay. We used to tease
them by asking how much bankerage they would charge on the deals we
created for them.”

DURING
the summer of ’92, new revelations about widespread corruption
in the money market left not only the lay public, but financial
journalists, even key players in the financial sector and regulatory
authorities aghast. It was a world few knew existed.

Harshad
Mehta’s rags-to-riches story, including his fleet of cars and a
15,000 square foot house with huge terrace lawns, became public
knowledge. Much less known were facts about traders earning a salary
of Rs 2.5 crore; one-year-old finance companies buying and selling
shares worth Rs 7000 crore; blank bank documents (bank receipts or
BRs) stacked in brokers’ offices; crores of rupees sent by one
bank to another, but deposited in individual accounts.

Suddenly,
the shadowy, cabalistic world of money market brokers and obscenely
wealthy operators was under the arc lights. As the scam felled one
big name after another, tarnished by charges of wrongdoing, the air
was thick with names of people one had never heard of, bizarre market
practices and maddeningly complicated deals that foxed even RBI
officials.

At
its core, the structure of the business was simple. One bank wanting
to sell securities to another would hire a broker who would do the
buying and selling and get a brokerage. But the market was shallow,
brokers very few in number and the expertise was concentrated in the
hands of a few individuals. This created strange relationships and
distorted market prices.

It
was a world glued together by its own mores. The swank and
technologically fortified treasury of Citibank merged with small and
shady offices of brokers like Hiten Dalal. High-flying executives
manning foreign banks were hand-in-glove with down-to-earth brokers
in accommodating each other. Money snaked in and out of the coffers
of public sector companies, banks, brokers’ personal accounts –
a movement about which the RBI officials were partly clueless and
partly tolerant. It was a world of fast moving money facilitated by
fig leaf of securities, false BRs and privileged information.

Driving
the deals were a set of brokers and treasury officials of banks –
Citibank, Bank of America, ANZ Grindlays Bank, Standard Chartered,
State Bank of India, Canara Bank, Syndicate Bank and a few others.
The brokers were VB Desai, Bhupen Champaklal Devidas, Hiten Dalal, C
Mackertich, Naresh Aggarwala, Harshad Mehta, DS Purbhoodas and
Jayantilal Khandwala.

The
passport to the money markets as well as equity markets is the
membership of any stock exchange. So, all brokers functioning in the
money markets were important in equities too. However, most of them
stayed away from dealing in money markets because it was an arcane
world supposedly offering wafer-thin profits.

Till
the mid-1980s, only five players had a mafia-like grip over the money
market. Citibank was the kingpin, masterminding the market’s
course. The broking business was dominated by just four firms, three
of which were loyal to Citibank: DSP, VBD and C Mackertich. The
fourth was BCD. As the market expanded, new players came in,
including individual brokers and banks who saw an opportunity to make
money by trading in bonds.

The
two oldest firms, who also played godfather to the broking community,
were VBD, owned by the affable Jitu Shroff, and BCD, owned by Bhupen
Dalal. BCD was actually being run by the wily JP Gandhi, notorious in
the market for his many “innovations”. Batlivala &
Karani of Bombay and C Mackertich & Co. of Calcutta were two
other big broking firms, which, along with VBD, have been the
launching pad for several individual careers.

VB
Desai, then eighty-two, had spent thirty-five years at Lewis &
Jones, one of the oldest securities firms in the country. He was a
rare Maharashtrian in the Gujarati/Marwari dominated broking
business. Jitu Shroff, or Jitubhai, was his protégé.
“He has looked after me since my father died when I was just
sixteen”, he says. The two quit Lewis & Jones to form VBD &
Co., in 1978. Four years later, Desai retired and Jitubhai took
charge, after a quarter century of working with his mentor. It now
appears that VBD, under Shroff, has been one of most crooked dealers
in the money markets. Citibank used it as its front in numerous
dubious deals and eventually took over a company controlled by Shroff
called Havelock Leasing, renaming it Citicorp Securities and
Investments Ltd.

Appropriately,
from the same firm emerged a strange broking creature: Hiten Dalal, a
distant nephew of Bhupen Dalal. Hiten was virtually unknown, even
among the broking community. As the scam exposed his massive trading
volume, close nexus with Stanchart and reckless transactions that led
to the loss of hundreds of crores, even astute market players like
Harshad were stunned.

Hiten
was thirty-five years old, portly, and a man of few words but had a
phenomenal memory for figures and transaction details. He worked with
Jitu Shroff from 1978 to 1987, a stint during which he met and
married a colleague, Leena. In 1988, not content with the Rs 10 lakh
per year he was earning, he started his own broking firm. He had been
dealing with Stanchart ever since. He never had a large office, used
a Premier 118NE and did not keep a phone at his suburban home in
Andheri. Hiten had no investment philosophy like Harshad’s, was
not a cunning operator like Ajay Kayan of C Mackertich and did not
have the sophistication or ability to chisel arguments like his uncle
Bhupen. But to the treasury officials in banks he was more important
than all these other high-fliers put together.

Hiten
was the Mr Fix-it of the securities business, the ultimate problem
solver. “He was virtually running the treasury desks of almost
all major banks”, said a sacked Stanchart employee. It was
later established in court that he was most certainly running the
Stanchart treasury desk for a fixed return to the bank. Hiten had
Andhra Bank under his control, was the biggest securities broker for
Citibank and one of the biggest for Grindlays. No wonder he did
business worth Rs 75,000 crore in 1991, which was the largest, and
well ahead of BCD, Harshad and his mentor Jitu Shroff. His
telegraphic code, printed at the top right corner of his letterhead
was: “Think Rich”.

Others
to go through the Jitu Shroff training school were
MA Kamat,
Samir Dalvi, Asit Mehta and Sunil Jhaveri, son-in-law of MJ Pherwani,
former chief of Unit Trust of India. On 18th
May 1992, three weeks after news of the scam broke, the partnership
VBD was dissolved and Jitu Shroff became the sole proprietor.

When
the scam surfaced, Jitu Shroff was busy spawning dozens of finance
and investment companies. He was moving into industry as well.
Jitubhai explains this, saying, “My guruji
advised me to set up a whole lot of companies.” The guru was
Anna Sardeshpande, who had disciples all over the world. One of them
was Bhupen Dalal whose son Milan married Sardeshpande’s
daughter.

Handsome,
articulate and sharp, Bhupen was a director in a number of reputed
companies including Bennett Coleman, the publishers of The
Times of India. He
played godfather to several struggling brokers including Hemendra
Kothari of DSP in his early days. Bhupen’s business was run
almost entirely by JP Gandhi and Abhay Narottam who held his power of
attorney. The market was surprised when, after the scam was exposed,
Bhupen distanced himself from Abhay Narottam. Bhupen himself appeared
taken aback with the dimensions of the scam. His mind was elsewhere.
Encouraged by Prime Minister Narasimha Rao’s liberalisation
policy, he was busy planning for the next round of growth under the
banner of Champaklal Investment and Financial Consultancy Co., his
merchant banking firm.

The
other training firm in the business was Batlivala & Karani which
was active in equities and bonds and foreign exchange markets. Its
operations were split between Madhur Murarka, who handled the bonds
trading and the foreign exchange, and Manoj Murarka and their sister
Rashmi Agarwal, who looked after equities. S Ramaswamy, who was
arrested in connection with money moving from Stanchart to the
Metropolitan Bank, started in B&K, moved to Lewis & Jones and
then to Harkissondas Laxmidas (a powerful broking firm which went
bust) and finally to PR Subramaniam before launching his own outfit,
Excel & Co. in 1987. Similarly, Anupam Kalidhar and Ziaur Rahman
left B&K to start their own financial services company, AR
Financial.

C
Mackertich, though based in Calcutta, emerged as a major player in
equities and bonds. It was run by Ajay Kayan, a low profile but sharp
operator then in his mid-thirties. C Mackertich was at the centre of
a network of broking firms – Stewart & Co., Rahul & Co.
and YSN Securities. It had a joint venture with Stewart & Co.
called Stewart and Mackertich Consultancy Services. These firms
dominated the business in close collaboration with Citibank. C
Mackertich, originally bought by Ajay’s father, Gauri Shankar
Kayan, spawned independent brokers like DP Poddar.

Among
the big ones, the odd firm out was DSP. It was then a significant
entity in the stock markets but not in the money market. Though its
volume of transactions appeared large, it had few big traders. It
struck money market deals for Kayan who did not have an office in
Bombay. The contract notes that went to banks went from DSP.

Unique
among the brokers was Naresh Aggarwala, who left the treasury chief’s
position at Grindlays to start out on his own in New Delhi. He had
neither inherited the broking business nor was he working for a
broking firm like Hiten Dalal. Short, dark and rotund, Aggarwala was
as forceful in his deals as he was in arguments. He loved to bet big
and on several occasions lost heavily mainly to Harshad and BankAm.
According to market players, he and Harshad, both close to Grindlays,
have been bitter rivals. Harshad may have used Grindlays against him
while Aggarwala taught his staff to hate Harshad and his empire, in
order to make his firm more competitive. The rivalry started with
their race to dominate the units[4]
market
and spilled over to equity scrips like Apollo Tyres in which Harshad
was long and Naresh was short.

None
of this was known to the outside world. The bond market was a closed
and secretive enclave for two reasons. First, unlike equity shares,
bonds were not publicly quoted. RBI announced the prices of some
securities but a lot of deals were done on an “off-market”
basis. Second, the bond market was closed to the public. It was an
inter-institutional market – only banks, insurance companies
and certain other institutions bought and sold government securities.
In this cabal, “you need the support and goodwill of at least
two of the top brokers, to get in and survive”, said a new
entrant in the business.

Not
surprisingly, this handful of leading money market brokers and
trading banks tended to operate in close groups. For instance, C
Mackertich would strike a deal with a Bombay bank and the contract
would go from DSP, owned by Hemendra Kothari, the flamboyant former
president of Bombay Stock Exchange. The two firms worked in tandem
with Citibank, which simultaneously had an equally strong
relationship with VBD.

Similarly,
Hiten and Aggarwala worked as a team, while Hiten was also close to
Narottam. He transferred hundreds of crores from Stanchart into
Narottam’s account in the Bank of Karad from where some of the
money flowed back to his account in Andhra Bank. Harshad and
Aggarwala worked closely with Grindlays and BankAm, whose treasury
operations were headed by Neeraj Batra. Aggarwala rarely dealt with
Citibank and Harshad did so only in 1991-92.

When
the scam was exposed, the leading money market brokers were at one of
the three stages in the game. Some, like Kayan, wanted to remain
brokers, carrying out Citibank’s orders. The second set –
players like Harshad – dreamt of competing and beating banks as
principals. The third set included Kothari and Bhupen who had emerged
as high-profile merchant bankers, with Bhupen even diversifying out
of the financial sector. Working in tandem with them were the bond
traders or treasury officials – the
guys
with claws stuck into huge amounts of raw money. The big names in
money markets were MK Ashok Kumar of Canbank Financial Services, Atul
Sud of American Express, earlier Neeraj Batra and then Alok Aggarwal
of BankAm, Ramesh Kumar of Citibank and Arvind Lal of Stanchart. Each
of them was unique.

Ashok
Kumar was tall, dark, thin and nondescript in looks but by common
consensus, an extraordinary trader. As executive director for
Canfina, he picked up thousands of crores of bonds issued by the
public sector companies, partly to help Canara Bank boost deposits.
He was a gutsy trader in equities as well, with a clear leaning
towards Citibank and C Mackertich. Neeraj Batra short, plump and
smooth, with a clear mind as to when and how to draw the line –
a very critical quality in a trader. He had a compulsive desire to
design complicated products, which made him look akin to Harshad.
Less than thirty when he was dealing for BankAm, his young age and
constant swearing earned him the title “brat”.

Atul
Sud was a charmer, an egoist and very cautious. He dealt with
everybody, specifically acting as the routing bank for Kayan. Arvind
Lal turned out to be a reckless dealer but was rated very skilful by
his own bank just a few months before the scam was exposed. Vishnu
Deuskar was the gentlest creature in money markets who did not mind
his wily juniors taking credit for deals he may have helped put
through. Ramesh Kumar, slippery and very clever, talked fast and
furious in indecipherable money market jargon. A broker has this to
say about him: “Though normally quite reasonable and courteous,
there was one breed of brokers he truly detested: brokers other than
Hemendra Kothari, Ajay Kayan and Utsav Parekh. To him and other kids
in the money markets, brokers were meant to be treated like loyal
dogs.”

This,
in short, was the world of money market brokers and treasury dealers
– a world hidden from the public eye. The wider arena where the
public could get a full view of these players was the equity market
where huge profits were virtually guaranteed, especially since 1987,
after public sector mutual funds started sprouting. In the five years
since then, using mutual funds as the dumping ground, stockbrokers
emerged as one of the richest communities in India.

This
was not obvious on Dalal Street, where the BSE is located, in the
modern twenty-eight storied Jeejeebhoy Towers. There, money propelled
rapid changes to create spectacular anachronisms in the years leading
to the scam. A vivid symbol of this were the crumbling buildings that
stood next to the stock exchange. Musty, damp and dark, their
dilapidated wooden staircases were lit only by the fluorescent lights
of various offices. But
their
condition was highly deceptive for these were some of the most
expensive properties in the country. In fact, they were no less
expensive than an office in Manhattan or London.

One
such structure, Cama Building, was packed with brokers’ offices
including VBD. Jitu Shroff’s office, nestling within this
decrepit edifice, was a plush oasis in white laminates, chrome and
glass. His own cabin had at least a dozen pictures of various gods
and goddesses and several photographs of his guru, Anna Sardeshpande.
There were almost as many telephones as photographs. These were the
lifelines of a broker and in those days considered to be the first
symbols of prosperity. Every successful broker, who started with a
couple of numbers to his office, eventually boasted of at least a
dozen. A telex line to brokers’ offices in Calcutta, Madras,
Ahmedabad or Delhi was the second acquisition. Next in the prosperity
index were fax machines and, of course, computers which were slowly
replacing the chopdis
or
ledgers wrapped in red cloth.

The
ultimate sign of prosperity was the acquisition of an office around
Dalal Street or the comparatively cheaper, though still phenomenally
expensive, Nariman Point. There were reports that Harshad had planned
to convert one of the buildings there, “Maker Chamber V”,
into “Mehta Bhavan”. At the height of the stock boom in
1991, office space there was going at Rs 12,000 per square foot.

What
was least visible was the amazing personal wealth of brokers. Harshad
came in and broke the mould. He was the first stockbroker who openly
flaunted his wealth. He moved his family of four brothers and their
wives from a small flat in the suburbs of Bombay to a 15,000 square
foot apartment with a terrace garden at the Worli Sea Face. Other
brokers bought farmlands and new houses. Some had numbered accounts
in secret havens. A couple of bull operators were also scouting
foreign markets from where they could borrow cheaply.

Foremost
among the bulls were Harshad and Pallav Sheth, who represented the
’90s. Sheth was silky smooth, affable, excellent in public
relations and confident of his skills. Rotund and jovial, he made
crores rigging the shares of the ITC. Sheth’s career was proof
that brokers’ fortunes did not come from brokerage but through
their skills in diverting corporate finance to stock trading and
making mutual funds a dumping ground for a continuous source of
funds.

Sheth,
who restricted himself to the equity markets, operated through the
firm of Shrenik Jhaveri. Within a year, he had his own card on the
BSE, sponsored the purchase of another on Bangalore Stock Exchange
and had enough money left over to acquire a few more. In the same
period he acquired a black BMW, a grey Mercedes Benz and a Honda.

Between
1987-92, money-market brokers too were undergoing a slow
transformation. The second-generation in most broking houses were
more educated and sophisticated. Some were armed with foreign degrees
and had done stints in merchant banks or industry. They had visions
of becoming full-fledged bond traders, buying and selling on their
own account. They wanted to be in the same position as banks for whom
they had been acting as agents.

An
agent was basically a courier. He bought and sold securities on
behalf of the banks and collects thin commissions. Becoming traders
in their own right meant taking risks by betting own money on
information and research on factors such as the outlook of the
economy, inflation, likely changes in interest rates, etc. In the
jargon of markets such betting is called “taking positions”.
It signified a basic trans-formation – from an agent to a
principal. This is a perfectly legitimate desire, a natural business
progression that brokers world-wide have undergone. Even in India, it
ought to have been simple to do if only the successive bureaucrats in
the ministry of finance and the RBI governors had opened their minds
to the numbing distortions created by the tight clench of regulation
on the financial markets. Their minds were so closed that they failed
to see that the same B&K, Harshad and Kayan who were supposed to
act like post offices for banks in the bond market, were quite
legiti-mately taking positions in the equities market. In fact,
brokers who were both in stock markets and money markets were the
real position takers.

As
the markets developed, the new generation of brokers with superior
skills stepped in and taking positions became natural and paying.
Entrepreneurship sprouted in the over-regulated bond market. The
biggest entrepreneur was Harshad. But there were others, like
Aggarwala, who was the treasury chief of Grindlays but had struck out
on his own. He emerged as a daring risk-taker. Position-taking erased
the line between banks and brokers and created a split among them.
Harshad’s outfit increasingly began to resemble a bank, in
particular, a trading bank. Harshad had a huge position in units
round the year, perhaps the biggest in the market. The trading banks
and some aggressive finance companies took positions on the issue of
bonds, banking on their ability to market them through a series of
deals. These were Citibank, Grindlays, BankAm, Canfina and Punjab
National Bank. They developed skills to switch, swap, structure and
package a combination of market instruments to meet the needs of the
borrowing banks. Unlike staid and sleepy public sector banks, they
avoided blocking up their funds, moving money around to the highest
point of return.

The
foreign banks, especially Citibank, were past masters in that game.
AS Thiyagarajan, who moved into Citibank in 1978, was one of the best
traders who had learnt the ropes at Canara Bank and before that at
Syndicate Bank. He turned Citibank into the dominant player in money
markets. He was one of the first to understand that a clever switch
of securities and money, coupled with the ignorance of his treasury
counterparts in the public sector banks, could fetch huge profits.
Later, these banks advised by brokers who were not part of the
Citibank’s favoured cartel, became wise too and started
emulating the foreign banks. Citibank frowned upon the idea of
brokers taking positions because it made
them
competitors in its easy pickings in the money markets.

In
the shadow of these brokers, the non-trading banks increasingly
looked like passive brokers. The roles reversed. Brokers had the
expertise, information and understanding that few banks could match.
Like Harshad’s brother Ashwin said: “We had become the
principals while the banks were acting as brokers. Banks could decide
on the brokerage they would pay. We used to tease them by asking how
much bankerage they would charge on the deals we created for them.”

Brokers
had their corporate clients. Bankers who found it impossible to get
that cash ended up broking for the brokers. In two years, the BR
would have stood for Brokers’ Receipts. Fairgrowth was already
using something of that sort – Securities Receipts. The
Syndicate Bank, Nariman Point branch, got Rs 203 crore from portfolio
clients and funnelled the entire amount through a single broker,
Kishore Narottamdas Amarchand, who in turn gave it to Fairgrowth
Financial and Fairgrowth Investments. The broker was taking all
decisions on the PMS account and was virtually operating the scheme.

But
there was still a vital difference. Banks had capital. Brokers did
not. Brokers could not go public, could not borrow, and could not
even issue debentures. On the other hand, companies with a much lower
net worth could tap the capital market for funds. Unable to raise
money, these brokers had to find ways and means to fund themselves.
This quest for capital in order to draw the playing field level is
crucial to understanding Harshad’s capers in the securities
market. But more about that later.

Brokers
could not have traded heavily on their own. The system did not allow
it. So, for years the brokers in money markets have had a dual
relationship with banks. For some deals they were just brokers while
for others, they acted as a client. In the first role, they acted as
an agent earning brokerage. In the second, the banks acted as agents
to these broker-clients and charged a fee for fronting the deals and
putting through the cheques. This was called routing. Sometimes the
bank charged a commission reflecting the full deal in the current
account of the broker. In other cases the routing bank owned up
transactions on the bank’s account and after charging its fee,
debited/credited the broker’s account for the difference.
Routing helped the broker give his deals the status of a bank deal.
He could then take a position and compete directly with other banks.

Brokers
were of great use to banks as well. The government (rightly) wanted
the public sector banks to compete and earn profits because they were
close to bankruptcy. However, it (wrongly) wanted them to deliver
results immediately with the same rotten infra-structure and skills
and with their hands tied behind their backs. The banks, carrying
huge bad loans on their books, saw treasury as the only way to make
quick profits. They turned to their allies: the brokers. This
explains why the chairman of the sick and bankrupt United Commercial
Bank, K Margabanthu, eager to turn the bank around, had a close nexus
with Harshad.

Brokers
saw an even bigger role for themselves as the Narasimha Rao
government moved towards a system driven by markets and not by
government diktats.
This meant, for instance, that the staid development financial
institutions like IDBI and ICICI who were earlier being fed with easy
money were now out in the market calling in brokers and merchant
banks and seeking presentations on how best to raise money. IDBI, for
instance, had an open-door policy. Anyone was welcome to make a
presentation. If it worked with the officials, he got the mandate.

Even
the public sector was no longer a holy cow. Their shares were up for
the grabs. The first lot of public sector undertakings shares were
sold off in December 1991 initially to the government-owned
institutions like UTI, banks and insurance companies. It was only a
matter of time before these shares would be listed and offered to the
public. The interest rates on corporate bonds were freed and coupon
rates on government securities hiked, leading to a great turbulence
in the money market. Those were heady days for the financial
community. Risk-taking increased exponentially. Brokers and bankers
sincerely believed that their market, based on trust, though
defective in many ways, was doing fine. Nobody batted an eyelid while
taking exposures of Rs 10 crore or accommodating each other for spot
finance up to even Rs 4-5 crore.

Equity
brokers were no less innovative. They had metamorphosed into
investment advisors to their corporate clients and helped them
shrewdly deploy surplus cash to increase the company’s
earnings. This was a big change from the earlier days when brokers
would be at the beck and call of industrialists to either
clandestinely dump shares or rig prices.

If
the brokers were in the throes of a transformation, so were many of
the institutions where treasury officials realised that by churning
their portfolio of bonds they could step up their earnings.
Basically, banks could take advantage of the multiple rates prevalent
in the same market, borrowing low and investing high.

So,
by the beginning of 1991, both in form and substance, the spirit of
Wall Street had arrived. It was possible to trade dangerously, win
handsomely and even have a part of the megabucks spill over into
one’s pocket. It was like transforming oneself overnight into a
go-getting entrepreneur in an area still regimented and controlled by
the State. One example of this phenomenon was Prime Securities, which
was ahead of its time and defined the shape of things to come. It was
set up by Ravi Sheth, a young member of the Sheth family which
controls Great Eastern Shipping. The Sheths, especially the late
Vasant Sheth, Ravi’s uncle, had a great trading instinct. He
would trade from ships to stocks sometimes on the basis of privileged
information.

His
nephew, Ravi Sheth, thirty-one, driven by mega ambitions in a
business that needed only brains and a few phone lines, launched
Prime with Rs 1.3 crore of asset portfolio obtained from Great
Eastern Shipping. To head it, Ravi lured away Neeraj Batra, the
treasury chief of BankAm with whom walked out his colleagues Ravi
Mehrotra, Shiv Kumar and Nitin Kataria. In June 1992, Batra persuaded
N Jaya Kumar of Citibank, an aggressive merchant banker in his
mid-thirties to join Prime at a sign-on bonus rumoured to be Rs 25
lakh, which was then a very large sum.

Prime
Securities was soon the talk of town with its profits and large bonus
pool arrangements that would make its core team rich overnight. In
1990-91, after a few months of operation, Prime had made Rs 2.23
crore post-tax profits. In 1991-92, as the money market turned
turbulent and the stock market boomed, Batra, thanks to his close
association with Harshad, made a killing in the stock market and
substantial profits in the money markets. At its peak, Prime was
trading more than Rs one crore a day in units alone. At the end of
the year, Prime had logged a stupendous profit of Rs 9 crore. And
then it was time to turn the eyes towards the bonus pool. Prime had
in place a team bonus that sliced out 40% of the income after
deducting all expenses. This bonus was available in a pre-set ratio
only after the team crossed a profit hurdle.

Calculated
this way, Batra earned a mind-numbing bonus of
Rs 2.5 crore of
which Rs one crore got deducted at source as income tax. That was
more money in a year than most executives earned in a lifetime those
days. Batra’s account at Citibank (ironical, because Batra,
teaming up with Harshad, had broken Citibank’s monopoly in the
money markets) used to have around Rs one crore teasingly lying
around waiting for him to decide where to invest.

These
megabuck bonuses drove the market players no doubt. But there was a
lot of reckless over-trading as well where dealers got carried away.
Lata Sriram was one of the few women bond traders in the business.
She was the main trader of DB Finance – a finance company
floated by Deutsche Bank and Brooke Bond. The employees of the bank
and the Unilever companies, of which Brooke Bond was a part, owned
26% of DBF’s capital. DBF was set up in the hope that the
financial sector would be liberalised.

Though
a separate legal entity, DBF was completely controlled by Deutsche
Bank and the employees even made joint marketing calls for new
business. In the great turbulence of 1991, Sriram, who was extremely
well connected, found the situation tailor-made for her. Her husband
was at American Express, her father-in-law was in SBI Mutual Fund and
her father was a secretary in the ministry of finance. She herself
was a former employee of Grindlays which incidentally did not think
too well of her. One mutual fund wanted to hire her but was advised
by a Grindlays executive not to.

Sriram
was caught up in the whirl of spiralling prices and near certain
information that UTI would either hike its dividend consi-derably or
link the units to net asset value. If UTI did that, the price of
units would have jumped from Rs 15 to Rs 30 – the real net
asset value calculated by UTI internally. Like many other bond
dealers, Lata was carried away with visions of earning record
profits. Her forward buying exposure to units mounted steadily until
DBF, which had a Rs one crore capital, had an exposure of Rs 1000
crore to units, some for July 1992 and the rest for the next year.
But the dividend never rose too much and the unit price was not
linked to net asset value. Lata’s bet was wrong.

DBF
admitted to the first commitment to purchase Rs 600 crore units in
July 1992, but refused to accept the second of Rs 400 crore for 1993.
Sriram resigned soon after the scam surfaced and the bank faced a
minimum loss of Rs 20 crore on an equity of just Rs one crore due to
her commitments. Both DBF and Deutsche Bank pretended that this
nightmare never happened. Even when it became imperative to explain
the bank’s position to the press, the German chief executive,
HJ Fraezer, maintained silence.

Sriram’s
was not an isolated case of over-trading. Arvind Lal, was less than
thirty years old and lived an austere life, was a vegetarian,
teetotaller and a non-smoker, ended up dealing recklessly in
thousands of crores through shady brokers, without proper documents
and taking bafflingly large risks on relatively unknown banks like
the Bank of Karad and Metro Bank. Ironically, Lal was considered one
of the brightest persons in Stanchart’s treasury and was
mentioned as the best trader in Stanchart’s MESA region (Middle
East, South Asia). It was later revealed that broker Hiten Dalal was
the man running the division.

However
skilful, enterprising or reckless these players – a dealer like
Ashok Kumar, brokers like Harshad or Sheth and trading banks like
Citibank – they all needed a fertile ground in which to plant
their investments. That ground was a financial system created by
bureaucrats in the ministry of finance, by the slothful senior
officials in RBI and successive finance ministers. As passive
participants they were no less important than crooked brokers,
reckless traders and greedy bankers.

3

Creed
of Greed

The
scam was not limited to individuals. Everybody was in it, like
vultures nibbling at a rotten corpse.

THE
scam was inevitable. What eventually emerged as a gigantic securities
scandal was a collection of small sores that had been festering just
under the skin of a gasping banking system. The sores were created by
two decades of over-regulation on paper, lack of control in practice,
a creaking infrastructure and the misguided policies of RBI that
refused to acknowledge the reality of the market place. That banking
system, still in place, was so flawed that Harshad came up with this
telling justification of his wrongdoing: “I am a part of the
system.”

The
system was unique. Imagine a business where the government dictates
what price you pay for your raw material (interest paid on deposits),
selling prices (interest earned) and whom to sell – a business
that is a 53.5% disaster. Till the 1992-93 Budget, 38.5% of the
deposits went into statutory liquidity ratio as forced subscription
to low-interest bonds issued by the government and its various
agencies. Another 25% went into cash reserve ratio as cash and other
low-interest short-term securities like treasury bills. You were free
to deploy only 36.5% of the cash you collected and that too went into
the “priority sector” and political lending.

Imagine
also that though your hands are so tied behind your back, the money
outside the core banking system carries varying costs and returns.
For instance, if you ran a company and had some surplus cash you
could finance buying and selling of shares and make more than, say,
40% per annum. In this fashion, different segments of the financial
sector offered different rates of return; commercial banking offered
one of the lowest. This was ironic because banks controlled virtually
70% of money flows, with insurance companies, the corporate sector
and mutual funds accounting for the rest.

But
though rates of return were high in some pockets at the fringes of
the financial system and lowest at the vast middle, money was not
allowed to flow freely from a low-return area to a high-return one (a
movement called arbitrage) thanks to rigid lending parameters and
controlled interest rates. But successive finance ministers and RBI
governors (including Manmohan Singh, who has served in both the
capacities) failed to acknowledge a simple fact: the flow of money is
uncontrollable. If brokers are choked off from bank credit when the
stock markets offer 40% interest per annum, whereas government
securities offer 12.5% and corporate lending 21%, money will find a
way towards the brokers’ accounts. This would be illegal, but
commer-cially understandable. Academics even have a name for it:
regulatory arbitrage.

The
arbitrage was facilitated by the lack of a proper market for
securities worth Rs 200,000 crore! Unlike the stock exchanges, where
equity is openly traded at publicly quoted prices, there was no
proper money market – where public sector bonds, debentures and
Gilts could be quoted and traded openly. This also applied to new
mutual fund units like Cantriple on which speculation was intense.
RBI announced purchase and sale quotes only for some central loans
and had never been a net buyer of securities in the open market. This
one-way street ensured that prices were never market oriented.

This
gave rise to widespread manipulation in bond trading. Banks and
brokers could quote artificial rates and cream off huge profits,
usually at the expense of smaller nationalised banks. RBI’s
parti-cipation in the money markets could have been a corrective
mechanism. Unfortunately, its role, unlike several leading central
banks, ended with the issue of central loans. RBI tried to get
Discount and Finance House of India to broker security deals and
opened a security window on 1st
April 1992, with much fanfare. But DFHI was an unwitting broker to
Harshad’s massive buying of 11.5% government loan and the
window dwindled to a showpiece in less than a month.

In
money markets, the first signs of inevitable rot appeared sometime in
the mid-1980s. After more than a decade of so-called social banking,
banks found themselves groaning under a load of investments they were
forced to make to maintain the SLR. The investments were in
low-interest bearing loans issued by central and state governments
that financed the government’s ever-increasing appetite for
cash.

Banks
intended to hold these low-interest government bonds till maturity.
But each time a new set of loans came with a slightly higher interest
rate (called coupon rate) the market price of older securities fell.
Banks began to book losses, which eroded their profitability. So, in
1985, to cover up one foolish idea (of forcing the banks to buy
low-interest securities) the government came up with another. Banks
were told to show their investment at cost in their books.

Banks
could show the value of a bond in its books at, say, Rs 100 when the
market value was perhaps Rs 95. This signalled two things. First, it
meant an official sanction to push dirt (a loss of Rs 5) under the
carpet. Second, it also signified that RBI was unconcerned about
bank’s books reflecting the reality of the market. In this
case, those investments were no longer worth Rs 100 in the market
place. The idea was to choose convenient solutions. These two factors
were later applied with monotonous regularity in every area. RBI
authorised it: hide your dirt and ignore the market, in part, because
there is no proper market. Among the many factors responsible for the
scam, these two were foremost.

The
banks got around the problem of falling value of investments in an
ingenious way. They started switching their securities. They would
sell one for Rs 100, which had a market value of, say, Rs 90. Then
they would pay Rs 95 to buy a security worth Rs 85. The banks would
not lose anything and in the bargain their portfolio was priced
closer to the market. The deals were put through by brokers,
some-times through their books. This is one of the first signs of
brokers being used as tools by institutions to “adjust”
losses – a strategy that explains lot of bizarre deals and lies
at the heart of the scam.

Thanks
to RBI’s market-blind rules, institutions were using brokers –
often clandestinely – as their extended arms. For instance, RBI
prohibited brokers for call money transactions – inter-bank
money transactions done on a minute-to-minute basis. Brokers were
routinely called in for help. In some cases, bank officials used to
sit in brokers’ offices to do the deals. Since brokers got no
brokerage for this, the institutions had to find other ways to
compensate. All institutions were “guilty” of it. Even
RBI subsidiaries used brokers extensively for call money operations.

When
Canbank Mutual Fund started, its first set of operations was executed
in the office of Growmore. A large amount of ready forward deals of
Canbank Financial Services were nursed in Growmore’s books for
over a year, at the rate of Rs 109. Citibank had a range of products,
which it offered its brokers. Within certain parameters, it offered
brokers an open mandate to take positions in partnership with
Citibank. Of course, most of the time Ajay Kayan alone had the
privilege. ANZ Grindlays Bank on the other hand was close to the
Mehtas. “We love the bank. They believed in relationship-based
banking, not deal-based banking, unlike BankAm (Bank of America) or
Citibank. We were one of the major brokers and a major client as
well”, said Ashwin Mehta.

Brokers
were also acting as agents for smart banks, often dumping securities
on to the books of weaker banks. In the absence of a regular market,
trading in government securities was controlled by Citibank, whose
“skills” and methods stand out like a sore thumb. The
market norm was: loot a weak party when you find one. This is best
exemplified by the story of SBI.

A
few months after DN Ghosh stepped into the chairman’s office at
SBI, he wanted to make the treasury operations an important source of
revenue. “This is a trend all over the world. We too must
energise our treasury department”, Ghosh told his colleagues.
He inaugurated a golden era for SBI’s treasury operations.
Brokers were asked to make presentations to the bank, explaining how
the market worked and how certain foreign banks could manipulate
quotes through their favourite brokers to create win-win situations
for themselves.

Ghosh’s
principal secretary was CL Khemani, who along with GG Vaidya, (later
became the chairman), started churning the bank’s portfolio to
maximise return. This was a big leap. SBI’s treasury had been a
place for executives in semi-retirement. A few years before Khemani
took charge, it was headed by a heart patient; the bank top
management posted him there because it was the least onerous job!

As
soon as Ghosh took over he conducted a securities audit. He and
Vaidya discovered to their horror that SBI had been looted
systematically by a couple of foreign banks and its set of loyal
brokers. Their strategy was simple: sell securities with longer
maturity to SBI (say, 7.5% coupon rate of 1997 maturity) and buy
securities with shorter maturity (say, 6.75% of 1992). Why would SBI
buy them? Because they fetched it higher (7.5%) current yield than
the bonds it sold (6.75%). The deal, brokers argued, helped SBI step
up the yield of its portfolio.

The
yield step-up trick, of course, rested on ignoring a crucial point:
effective yield. The purchasing bank would go for the maximum
interest-bearing instrument available in the government securities
market. Assume that the maximum rate going is 11.5%. That, then,
would be the benchmark for all trades. Through yield step-up, a bank
ought to be able to earn 11.5%, not just 7.5%. It could do this by
buying the same 7.5% bond but at a lower price so that its effective
earning is 11.5%. In a free market, the traders, guided by effective
yield, would automatically price the older, lower interest-bearing
bonds, to reflect the maximum yield available. But what if there was
no market price to reflect this?

The
best way to fix the price would be to use bond tables and arrive at
what traders call “yield-to-maturity” – YTM. Bond
tables provide ready-made information on what ought to be the price
of different interest-bearing bonds for each year up to maturity, at
particular yields. Unfortunately, while YTM was well known to dealers
in foreign banks, it was an alien concept in public sector banks. In
1987, a broker was shocked to find Vaidya calculating year-by-year
bond values manually. He suggested to him that he use bond tables
instead and thus SBI was inducted into modern day-trading. A quick
look at bond tables would show that in 1986, when the current coupon
rate was 11.5%, a 6.75% 1992 bond would be priced at Rs 83.50 to give
10.5% yield. If the bank were to exchange this for a 7.5% bond of
1997 maturity, it would similarly look up the bond table and find
that the price is just Rs 79.25. The exchange, therefore, left it
richer by 0.75% on current yield but poorer by Rs 4.25 on price.

The
public sector banks did not know of this simple technique. So, the
brokers would first sell the yield-step-up idea (I’ll give you
securities that give 0.75% more as interest). Then as a “bonus”
they would price the 7.5% bonds at a slight discount from face value,
say at Rs 98, and buy out the 6.75% bonds at Rs 100. The selling bank
was effectively giving a discount of just Rs 2 when the actual
difference was Rs 4.25. In this manner, public sector banks have been
cheated out of tens of crores by one aggressive US bank and its loyal
brokers, which kept a part of the loot in the form of higher
brokerage.

When
Ghosh discovered these transactions, known among the broking
community as “rape deals”, he thundered, “I am
going to close down this bank in India”, referring to the US
bank that had plundered SBI’s portfolio. SBI became vengeful,
mean and aggressive, using its gigantic size to the hilt. It was
hoarding the largest stock of bonds, lying largely inactive. Then in
1985 Indian Banks’ Association announced a ceiling of 10% on
call money lending. It was a big bonanza for SBI, the biggest lender.
Faced with an acute shortage of funds to meet statutory obligations,
banks queued up at SBI for call money. SBI’s cash horde was so
huge that it could control liquidity in the market and hence the call
rates. “Even banks’ chairmen had to beg and plead with
SBI for money”, brokers recounted. The worst affected were UCO
bank, Central Bank, Vijaya Bank and Canara bank.

SBI
decided to use its liquidity to flush out its bond portfolio. On
paper it gave out funds on call at 10% but in practice at an
effective rate of 60-70%. The trick was to force banks to buy a
packet of securities at an artificially high price – after
loading the cut-throat call money rate. It helped SBI get rid of all
its unattractive low-priced securities. This did not make it popular
in the industry – other banks resented being made collectively
responsible for the lapses of SBI’s own treasury officials. But
it had little effect.

Brokers
and other bankers found SBI’s “take it or leave it”
attitude particularly humiliating. Vaidya’s favourite
dismissive line “Ley
lo, nahi to khao piyo aur mast raho”
(Take the offer, or eat, drink and be happy) rang in the ears of many
bankers. MN Goiporia, as chairman of Central Bank of India, had
suffered at Vaidya’s hands. As soon as Goiporia came to SBI,
Vaidya was transferred. SBI’s dominance continued from 1987 to
1989, until RBI scrapped the mindless 10% ceiling on call rate. The
looting of SBI treasury and its revenge signify one thing: money
markets were not markets in the Western or American sense of the
term. They were akin to an Indian jungle.

By
1986, another festering sore erupted which the government found
impossible to contain; lack of resources for capital-intensive public
sector undertakings like National Thermal Power Corporation. Banks
had no money left after funding the government at a low cost and
writing off bad loans made under political pressure. So, the
brilliant mandarins in the ministry of finance devised another
makeshift arrangement. (The finance secretary then was S
Venkitaramanan who later became the RBI governor.) PSUs were asked to
borrow directly from the market by issuing 9% tax-free bonds and 13%
bonds. Later, some were allowed to issue 17% bonds as well. By the
end of 1991, PSUs had issued bonds worth over Rs 20,000 crore. This
was a time bomb, quietly ticking away.

Nobody
knew who would buy these bonds, how they would be serviced, how they
would be bought and sold in the secondary market and what would
happen if interest rates turned turbulent. But banks needed deposits
and PSUs needed money. So they formed an alliance – another in
a series that market players struck – to cut off each other’s
handcuffs put on them by RBI. The banks picked up the bonds on
condition that the PSUs would also make additional deposits with
them. (Citibank, Canara Bank and Canfina were the most active in such
deals which always resulted in large spreads for them.) But the
problem remained. How would a bank service the bonds in its portfolio
if the corresponding deposits suddenly disappeared?

The
following year, another “innovation” entered the scene:
the portfolio management scheme. This was another child produced by
the regime of controls and regulation. Banks were allowed to accept
deposits (free from SLR and CRR obligations) under PMS from any
institution sitting on surplus cash. But the rules were so stringent
that instead of giving more freedom to both the parties it became
another handcuff. PMS was supposed to be provided at clients’
risk; the money had to be kept for one year, transactions were
supposed to be at market rates; and nobody could guarantee a fixed
return.

These
rules were restrictive and impractical, bordering on nonsensical. The
boards of PSUs work under the glare of respective ministries and
government auditors, including parliamentary com-mittees. They could
never bring themselves to give out money without being assured of
definite returns clearly documented. But the rules stipulated that no
guaranteed return could be paid. So, here too the players forged
alliances to break the handcuffs.

It
was too tempting not to. Stripped of the restrictions, PMS was a
potential gold mine. Money was gradually accumulating in ever-larger
pools outside the banking system. In 1987, banks and insurance
companies were allowed to float mutual funds and the early success of
CanMutual provided the impetus to others. Soon they would be raising
thousands of crores of investible cash. Another growing money pool
were the treasuries of the public sector. Several PSUs were financing
imports through borrowings in dollars in exchange for which they were
sitting on rupee surpluses. Thanks to the depreciating rupee, their
effective cost of dollar borrowings was as high as 25% in 1987. The
Indian Oil Corporation had an exposure of Rs 4000 crore with
potential loss of Rs 600 crore in interest cost in one year. This is
when smart brokers, foreign banks and Canara Bank stepped in and
showed the means to reduce the cost of funds through investments in
tax-free bonds and units. SBI, with whom the bulk of the money was
deposited, did not similarly respond and PSUs started dealing with
foreign banks in a bigger way. Also, the ever-increasing budget
deficit forced PSUs to float their own bonds and borrow directly from
the institutions which had the money to subscribe. NTPC and the
Indian Railways Finance Corporation emerged as big bond issuers,
often sitting on hundreds of crores in short-term cash. For instance,
IRFC issued 9% tax-free bonds worth Rs 800 crore in July 1991 and
again Rs 700 crore in November the same year. PSUs needed to put this
money somewhere. Enter the banks.

The
banks were starved of profitable avenues to make money. There was a
stage when the government was impounding 63.5% of deposits. They
desperately needed all the money it could get from the cash surplus
companies. The conduit: PMS, announced by RBI in 1987. Since PMS
money was supposed to be held merely in a fiduciary capacity, it did
not form a part of the deposits garnered by the bank. It was,
therefore, free from the draconian reserve requirements (CRR and SLR)
imposed on bank deposits that sapped profitability. PMS money could
be used any way and fully. Citibank and a few Indian banks like the
Syndicate Bank and Vijaya Bank soon realised that by subverting all
important PMS rules including the ban on foreign banks from availing
of the PMS, they could make a great deal of easy money. The idea was
simple: collect money from the public sector companies with a promise
to deliver a fixed return and deploy it in the equity and money
markets where the returns were much higher.

Smart
bankers invented ways and means to bypass RBI regulations that
chained PMS. Citibank, being a foreign bank, was not allowed to run
portfolios of PSUs. It got around the rule by using Vijaya Bank as a
front. It cleverly played on terms like “assured return”,
“benchmark return” and “indicative return” to
skirt the rule that forbade fixed or guaranteed return. It approached
cash-surplus PSUs, guaranteed (illegally) a fixed and low rate of
return and used their money to trade in shares and bonds – both
of which generated huge margins. Surplus PSU money parked with the
nationalised banks was weaned away to foreign banks. It was a win-win
situation for banks. On paper, the client was taking the entire risk.
In practice, the banks were reaping all the rewards.

PMS
was such a lucrative honey pot in the over-regulated banking system
that desperate brokers and bankers struck deals with PSUs to ensure
that the money was routed through them. This obviously involved
greasing palms. It was at this stage that political influence came
into play. To get a PSU to park its money with banks, a standard 2%
kickback was paid – often through brokers. Brokers have even
bypassed companies and struck deals with parent ministries. Foreign
banks employed close relatives of various government officials who
could influence the investment decisions of the PSUs. When the
business became rampant in the 1990s, even nationalised banks paid
kickbacks to get PMS money. How have the banks accounted for this?
Partly by granting advances to firms controlled by politicians and
their backers and then writing off that money as bad loans over a
period of time.

RBI
rules on PMS were never observed. Banks were freely accepting money
for less than one year and were guaranteeing fixed returns –
above the normal interest rate on one-year bank deposits. The minimum
PMS duration of one year was circumvented by various means. Very few
PSUs had surplus cash to park for one-year periods. They normally
used the PMS of banks to do ready forward deals in fixed-income
securities. The books of the PSUs showed them as deposits. The banks
showed them as ready forward transactions. The deal was simple: use
brokers to buy units and bonds and liquidate them three months later
– all on the client’s account. It was a neat trick but a
clear violation of RBI guidelines. The source was deposits made by
the public sector units and so banks were obliged to put 63.5% of
that money in statutory reserves. But they brazenly flouted that by
showing those PSU deposits as short-term funds used for buying
securities for selling them back and returning the money to the PSUs.
These transactions were rolled over in an unending chain.

This
was done with the full knowledge of RBI. Throughout 1987-90, RBI
noticed what was happening and issued repeated warnings to the banks.
But such was the market players’ contempt for RBI that these
warnings were completely ignored. Some banks had actually cloaked
their violation in legalese. They secured legal opinion that while
PMS – as dictated by RBI – would have to follow the four
cardinal rules (money for one year, no guaranteed return, investments
dictated by clients and transactions at market rates) the same
transactions could be structured as short-term cash management deals
that need not follow RBI rules. In these cases, deals were done on a
transaction-to-transaction basis, investors did not specify what to
buy and the risk was on clients.

To
a great extent the distinctions between PMS deals and short- term
deals were semantic in nature. RBI had never specifically allowed
anything outside the PMS. But it never disallowed it either. Banks,
however, went to great lengths to create sophisticated distinctions.
The cash management schemes were supposed to generate fees and the
banks satisfied themselves with legal opinion that since there was no
basket of securities or long-term arrangement, they did not fall
under the PMS. In 1990, around Rs 5000 crore of money market assets
were being churned in this fashion as per the Stanchart’s
estimate.

Canfina
and Stanchart conferred an even greater cloak of legitimacy by giving
them fancy names like Corporate Cash Deployment Services (as in
Stanchart) and Financial and Investment Advisory Services (as in
Canfina). Surprisingly, Citibank, which slung the biggest gun from
its shoulders in the fight to procure funds, never bothered to cloak
its scheme, preferring to plainly call it PMS. After the scam was
exposed, Citibank claimed that it had done nothing wrong whereas
Grindlays admitted to the JPC that it had violated each and every
guideline.

The
foreign banks and Canfina were found to be the most active in PMS
thanks to their willingness to create a win-win situation for all.
For instance, when the PFC needed money it issued Rs 300 crore of 17%
bonds to Citibank and Canfina who subscribed to the bonds only
because PFC promised to re-invest the money in their PMS. PFC put the
money in Citibank’s portfolio at just 14.25% return in the
middle of a booming market and when even the best corporate
debentures carried a 16% return.

The
Madras office of SBI Capital Markets collected money under PMS and
turned it over to brokers mainly Harshad Mehta but also to Citibank
and Kotak Mahindra Finance. When the money came back – with
profits – SBI Caps returned the principal and the fixed return
to the client and kept the rest. But SBI Caps was not the biggest
player in the PMS game. Citibank and Stanchart headed the list.
Strangely, though it was crystal clear that these two banks have
bilked customer accounts just like SBI Caps has, RBI made no effort
to investigate them.

In
1987 came the biggest incentive for corruption in the equity markets:
the mutual funds. Till then there was just one, the UTI headed by the
eternal optimist, MJ Pherwani, the original Big Bull. UTI, with a
corpus of Rs 20,000 crore was the big dad of the market. If it
bought, the market went up. If it sold, a minor crash followed. Then,
in 1987, the government-owned banks and insurance companies were
allowed to set up mutual funds, a decision that was piloted by S
Venkitaramanan when he was the finance secretary.

One
after another came the mutual fund schemes of Canara Bank, SBI and
those of the insurance companies. CanMutual emerged as the most
aggressive, cooking up subscription figures by getting other
institutions to subscribe and preferring to deal with a handful of
brokers. In the case of the much-vaunted Boinanza of Bank of India,
Harshad Mehta contributed Rs 20 crore of the Rs 49 crore corpus. In
return, the fund was supposed to buy the shares Harshad dictated.
Other top equity brokers too cultivated close relationships with
mutual funds, using them as their own. This arrangement was
particularly useful in rigging up prices or selling short. RBI was
supposed to sanction and regulate mutual funds, as they were bank
subsidiaries. It did nothing of the sort.

As
if in tandem, the infrastructure of public sector institutions was in
tatters. For instance, often money piled up with institutions but
they had neither the means nor the skills to move that cash around.
The treasury manager of an insurance company had hundreds of crores
at his disposal to place on the call market but he did not even have
a direct phone connection, leave alone a hotline to other brokers and
banks. The latter, on the other hand, were backed by sophisticated
telecom and transaction processing facilities. Often banks had no
pre-set exposure limits against each broker or transactions. Even
some foreign banks threw to the winds the systems they used overseas.
They ignored proper credit-risk assessment before they accepted a BR
or dealt with a broker.

The
infrastructure of money markets and stock markets was creaking too.
The Public Debt Office was supposed to record the transaction details
of various government securities for each bank on the basis of
subsidiary general ledger notes. The PDO did the recording manually
in ancient ledgers, often falling behind by more than ten days. The
SGLs entered in the ledgers often carried no reference to
transactions. For instance, if three SGLs of the Bank of America
reached PDO on the same day and two bounced because of insufficient
balance, it would be impossible to say which of the three had
bounced. And most amazingly, in a system where the daily trade ran
into hundreds of transactions, the banks were informed of the bounced
SGLs by post.

Brokers
and bankers quickly learnt to take advantage of PDO’s
sloppiness. They created delays and deliberately had the SGLs bounced
to show an artificially higher balance and then traded on that.
Bounced SGL intimation notes were made to disappear and their loss
blamed on postal delays. SGL bouncing was a genuine problem too.
Often, banks issued SGLs without realising that they had no balance
in the PDO to support the sale. To counter this came another
instrument: BRs. A selling bank would issue a BR instead of
securities. The technique was especially useful in the case of
buyback deals (ready forward) for short periods where there was no
need to exchange physical securities. But it gave further room for
manipulation.

Banks
and other financial institutions would issue BRs without holding
securities, or issue BRs against BRs. This way, the original BR of a
weak bank was quickly exchanged for that of a more “respectable”
bank. This technique was used by foreign banks to cover their tracks.
They used Andhra Bank, Syndicate Bank, State Bank of Saurashtra and
Canara Bank. Some banks like Metropolitan Co-operative Bank also got
into the name-lending business, issuing BRs for free. Citibank even
had the gall to issue bounced SGLs, which is akin to issuing a
bounced and cancelled cheque. To meet his inexhaustible appetite for
cash, Harshad pressed ahead with the ultimate subversion: securing
straight credit from the NHB against no transactions or securities
and BRs.

Public
sector companies, which raised money through bonds, took almost a
year to allot them, since printing the bonds was not allowed until a
mortgage was created. So, letters of allotment were traded as
security. One PSU had not printed bond certificates even four years
after raising money. There was no method of credit rating the bond
and prices depended on the traders’ perception of the issuer.
This could be highly biased. Even when bond certificates were
available, trading volumes were so large that it was difficult to
effect deliveries. Once a broker needed 240 signatures to transfer
680,000 bonds. Obviously bankers were reluctant to take deliveries
and instead relied on their makeshift stock depository certificate –
the BRs. The same story occurred in the equity markets. Share
certificates belonging to SBI Caps were piled up in the corridors of
SBI.

The
quality of regulation failed to keep pace with the volumes –most
glaringly in stock markets. There were no penalties and little
disclosures of transactions. The Securities and Exchange Board of
India, though empowered through an ordinance to be the whistle
blower, was fighting a pitched battle with brokers. SEBI wanted
brokers to register with it; brokers were reluctant and closed down
the markets in protest.

Under
chairman GV Ramakrishna, SEBI was at least trying its best to enforce
some rules for the jungle. But RBI, which never lent its ear to the
babble in the marketplace, was mostly clueless as to the growth of
the money market and the extent of malpractices in PMS, the can of
worms called mutual funds, the emergence of new players and the need
for an open system and close regulation. This is painfully clear from
the reports produced by the Janakiraman Committee, which naively
wonders why the banks were booking artificially high rates and why
brokers were taking large losses in their books. On the rare
occasions when RBI officials stumbled upon shady deals, their bosses
looked the other way.

This,
then, was the Indian financial sector: lack of a proper money market,
poor infrastructure and systems, PMS and mutual funds as a dumping
ground and poor supervision. Attracted by this opportunity, brokers
and bankers had all converged in the late 1990s in a grand alliance
like vultures on a corpse. Thanks to thin disclosures, their deals
were closed to the public view, stock prices were shooting up and
down and the world of money rested precariously on one word:
accommodation.

The
banks needed brokers’ help to hide losses. In return, the
brokers needed bank money and their treasury deals to make abnormal
profits. The mutual funds needed brokers and banks for subscription
to their schemes while the brokers needed mutual funds to dump shares
at high prices and create liquidity for their next capers. The
cash-starved public sector needed banks to subscribe to their bonds
in exchange for putting the same money back into the banks as
portfolio schemes. Everybody was willing to accommodate the other,
hindered only by individual jealousies and rivalries.

The
password to this world of accommodation was “trust”.
Deals were put through first and the paperwork was done later.
Sometimes even that was unnecessary. Call money transactions took
place overnight, via the telephone and call receipts were sent
leisurely three to four days later. In case of buyback deals, brokers
liased with banks and acted as couriers in buying and selling the
securities and routed some of the cash through their own accounts.
Stanchart accepted photocopies of bond certificates as delivery. The
whole system rested on trust. That trust was misused.

Indeed,
so trusting were the banks and brokers of each other that banks were
fronting for broker-deals through what was known as “routing”.
They were funding brokers and putting through their transactions by
lending their name. This was necessary because several banks still
refused to trade directly with brokers as counter-parties. So a fig
leaf was needed – a fictional counterparties bank. In came the
idea of “routing banks”.

Several
banks actively wooed brokers for their business, and brokers used to
bargain with banks about the spread they would offer for the routing.
This explains why Grindlays promptly credited more than Rs 500 crore
received from NHB into Mehta’s account even without a covering
note to do so. In a similar deal, SBI credited Rs 90 crore to his
account, allowing Mehta to withdraw it and square up its Rs 622 crore
outstanding with SBI. Grindlays and SBI regularly routed money into
Mehta’s account even on oral instructions. American Express did
it for Ajay Kayan and Andhra Bank for Hiten Dalal. Banks, very
simply, were too keen on accommodating brokers.

This
was manifested in many other ways – most importantly in the way
brokers were using bank money to do their own deals. And Harshad was
not alone. Banks would buy securities from the broker with the
understanding that the broker would take them back after a few
months. The deal was another way of lending money to the broker for a
certain period. But it violated RBI directive to banks against
advancing money to brokers. Also, the broker got access to bank funds
without having to comply with margin money requirements. The practice
was widespread.

The
second scheme was direct financing of brokers through discounting
accommodation bills and purchase of shares on ready forward terms.
United Commercial Bank discounted bills worth Rs 50.40 crore for
Harshad Mehta, covering share sales by Jyoti Mehta. This was clean
credit. On maturity, UCO Bank itself provided funds to retire the
bills by buying shares from Mehta for Rs 49.50 crore.

Thirdly,
banks placed money on call with other banks, but in the books of
receiving banks there was no record of any call money accepted. The
money
was credited to individual brokers’ account. NHB lent Rs 40
crore at call to UCO Bank on 6th
April
1992, which went to Mehta’s account. On 2nd
April
1992, it lent Rs 17 crore at call to SBI, which again was credited to
Mehta’s account.

Overseeing
all this sophisticated networking, accommodation and routing and
bank-broker alliance was a row
of deputy governors and the governor of the central bank with their
eyes and ears firmly shut and with an archaic set of regulations on
hand. As the 1990s rolled in, the financial sector was ripe for a
disaster. The faint push needed to bring this decrepit structure
crashing down, however, came from a most unexpected quarter.

Since
the regime of secrecy and controls had corroded the guts of the
system, most policy makers – including those who were
respon-sible for such secrecy and controls – decided that
“liberalisation” was the right medicine. The ministry of
finance sought to administer precisely that. But such moves were
horribly timed. In July 1991, the finance ministry decided to
liberalise the interest rate on corporate debentures and bonds.

It
is still not clear if the government understood the impact of this
decision. It meant that companies could now issue debentures at 16%,
17% or even higher. Naturally, the older bonds of 13% would be less
attractive and start losing value. In concrete terms, the stock of Rs
20,000 crore of PSU bonds would lose value by 20% on an average.
Covering up this loss was one of the main causes of the scam.

Manmohan
Singh as finance minister later set up a committee to recommend
widespread changes in the financial sector, intending to take the
policy of liberalisation further. These signals made the market go
haywire. Bond values continued to fall. By the end of 1991, 13% bonds
had fallen by 35% and 9% bonds by 20%. The total notional loss to the
bondholders was more than Rs 6000 crore though by not selling the
bonds they could avoid booking the loss. RBI, after all, did not want
investments marked to the current market value.

Among
the large holders of these bonds were merchant banking subsidiaries
of public sector banks like Canfina and foreign banks like Citibank,
BankAm, Stanchart and Grindlays either in their own name or in
clients’ account. Even after the interest rate was freed,
Canfina picked up a 9% IRFC bond issue of Rs 800 crore in July and
another tranche of Rs 700 crore in November. Foreign banks, Canfina,
SBI Caps and some brokers were holding close to Rs 7000 crore of
these bonds. They hadn’t bought them for investments. They were
trading in them. BankAm and Citibank even had a policy to mark them
to market. So, logically, they ought to be reflecting losses close to
Rs 1500 crore in their books.

In
the third week of September 1991 came further liberalisation.
Effective from 3rd
October, the interest rate (or coupon rate) on government securities
(Gilts) was hiked from 11.5% to 12% leading to a fall of about 10% in
the value of older Gilts. This meant further loss of hundreds of
crores. Within six months, on 17th
March 1992, the government hiked up the interest rate again on
government bonds to make it 12.5%. More losses.

This
is where the strong nexus between banks and institutions reached a
point of climax. They helped each other out in three ways. One was
dumping the losses in the PMS account from the bank’s own
account. PMS was, after all, clients’ money held by the banks
in a fiduciary capacity and the bank was not obliged to turn over the
profits made in excess of the “guaranteed” return. The
second was asking brokers to fund the bond losses for which the
broker looted someone else in the system, perhaps Stanchart. The
third source of money was equity markets where prices were rocketing.

In
simpler deals, banks and institutions got brokers like Hiten Dalal to
take the bonds at artificially high prices and thereby avoided
booking losses. Here is an example of this sort of transaction. On 6
February
1992, Canfina sold six lots of PSU bonds and other debentures to
Citibank for Rs 82.85 crore through Hiten Dalal. But Canfina got just
Rs 59.93 crore and that too, not from Citibank but American Express
at the behest of C Mackertich, a broker close to Citibank. The
balance (Rs 22.92 crore) came from Hiten Dalal.

This
example highlights the operation of a routing bank (Amex for C
Mackertich) and the close nexus between Citibank and C Mackertich
whereby their position as the counterparty to a deal was
interchange-able. But most important, this was a clear example of a
large institution like Canfina recovering its bond losses from a
broker. How does a broker fund an institution’s losses? There
were two ways. First, he gets somebody in the system, perhaps
Stanchart, to pay him through a false BR. Second, the institutions
give away compensatory profits from the PMS clients’ accounts
to the brokers.

One
of the best examples of compensatory adjustments at the expense of
portfolio clients is that between Citibank and its virtual
house-brokers, C Mackertich and Stewart & Company. Citibank had
used money obtained on behalf of its “fiduciary” clients
under PMS to buy mutual fund units, GIC Rise I and GIC Rise II, and
sold them at below-market rates to its favourite brokers, Ajay Kayan
and Utsav Parekh who run C Mackertich and Stewart & Co. The
brokers resold them at a price that yielded Rs 89 crore in profits at
the expense of Citibank’s PMS clients. This and other deals
like these in mutual fund instruments were possible because the
equity market was booming and units like GIC Rise or Cantriple were
not yet quoted.

The
system allowed it. The smart and the crooked ganged up to bilk the
weak and ignorant who remained so because they had no incentive to be
otherwise. RBI, watchdog of the banking system, merely watched.
Actually, it did not do even that. It simply did not know how rotten
the corpse was. The stock markets were worse. They were supposed to
be more organised than the money market though no less opaque and,
therefore, totally outside the vision of any regulatory watchdog.

As
the turbulence of the money market and equity market converged in
1991-92, it hit the decrepit system like a gale, tearing it to
shreds. Suddenly, profiles of the market players, their illegal cosy
deals the bank-broker nexus were all out in the open. Since little of
this was known, everybody reacted with shocked disbelief. Brokers
themselves were stunned. Even while the guns were being pointed at
individuals, there should have been a close re-look at how completely
rotten the system was. Unfortunately, that did not happen.

The
scam was not limited to individuals. But the public imagination was
transfixed at one or two banks and, more importantly, at one
individual as the villain of the piece. His life and deals make for a
fascinating story. The name: Harshad Mehta.

4

A
Greenhorn

He
stepped in to watch how the world, of the share market spun on its
invisible axis. That afternoon a new chapter began in the life of
Harshad Mehta. This was an unfamiliar world, a world that would be
his kingdom 10 years later.

THE
year was 1971 and the place Raipur, a semi-industrial town in Madhya
Pradesh, located along the main trunk route that connects Bombay to
Calcutta. There, in a small private school, a loud, brash 16-year-old
boy was making life miserable for his fellow-students and teachers. A
Gujarati by birth, he was particularly weak in Hindi. Ms Ghosh, the
Hindi teacher, found it difficult to deal with his pranks, get him to
do his homework and attend classes. One morning, unable to bear it
any longer, she complained to the principal. The principal called the
boy. “Ask your father to see me”, he said.

That
scared the boy to death because his father was a stern man. Instead
of heading back home, he went to a movie. He then roped in an
elderly-looking man called Mr Sahu and produced him before the
principal. “My father is not in town. So I have brought this
gentleman. He is my uncle.” Mr Sahu listened carefully to the
principal’s complaints and promised to take care of the unruly
boy.

It
was a neat little trick. Too neat for a 16-year-old prankster to
remain discreet about. Soon he was bragging to the class that he has
managed to fool Ms Ghosh and the principal. That was a terrible
mistake. One of his foes squealed.

The
principal was livid and promptly rusticated him. His father, equally
angry, put him to work in the family shop. The boy had to open the
shop at 8 a.m. every morning. He got cut off from his friends and his
favourite game, cricket.

Of
all the fascinating stories about Harshad Shantilal Mehta, this is
the most telling. Twenty years later, the story would repeat itself
in a gigantic, much more complex and agonising fashion. Like he tried
to substitute his father, he would try to substitute hundreds of
crores of rupees he had taken out of State Bank of India. Like he
unnecessarily bragged about his trick to his classmates, Harshad
would show off his house, Toyota Lexus and Rs 26-crore tax return.
Just as his classmate tattled, one of his rivals at the Bombay Stock
Exchange would engineer an income tax raid on him. And just as he was
held captive in his father’s shop, Harshad would have to spend
months and months in prison, roughed up and humiliated like a common
criminal.

The
two events separated by two decades mark the beginning and the end of
a phenomenon called Harshad Mehta, though like a battered penny stock
he tried to bounce back in 1998. Brash and ingenuous, Harshad, the
oldest of four brothers, would emerge from being an anonymous wastrel
to India’s best known financial “criminal”, the
centre of immense national curiosity.

He
did not go back to the school at Raipur, passing the school leaving
examination privately. In 1973, he returned to Bombay (where he had
spent the first nine years of his life) in the eastern suburbs of
Ghatkopar with his maternal uncle. Ill health had forced Harshad’s
father, Shantilal Mehta, to abandon his business of selling yarn and
cloth in Bombay in 1964 and move to Raipur. There his health improved
but not his business. By the mid-1970s, the family was facing a
financial crisis. Harshad, fed up with his life there came back to
the fortune seeker’s Mecca and India’s financial capital.

In
Bombay, he got admitted to Lala Lajpat Rai College – not
because of his academic prowess but thanks to his abilities as a
cricketer. In an unusual combination that typifies most of Mehta’s
actions, he was a left arm leg spinner and a right hand batsman.
However, Harshad, who would probably have played for the Madhya
Pradesh state team had he lived on in Raipur, never played for the
college team. Instead, he devoted a great deal of his energy in
making money on the side. Thus, when he secured a bachelor of
commerce degree in 1977, it was with barely a passing grade.

Harshad
dreamt of making big money while in college but his business choices
were extremely limited. Unlike the then BSE president, Hemendra
Kothari, with whom he crossed swords later, or his buddy bull Nemish
Shah with whom he worked in tandem to create one of the biggest bull
runs in the BSE’s history, Harshad was not born into an
affluent family. He had no capital and no contacts. So the only thing
open to him was trading, starting with delivery work. In the three
years he was in college, Harshad peddled plastic scrap, hosiery and
cement among other things, at times lugging material to the factory
sites. This was perhaps the first time he became familiar with the
cement company ACC, whose scrip he would take to dizzying heights
fifteen years later.

In
June 1976, Harshad’s brother Ashwin joined him in Bombay,
starting work on 29th
December
for ICICI. Two years later, the family business in ruins, the Mehta
clan uprooted itself from Raipur and came to Bombay for good.
Shantilal Mehta was returning to Bombay after fourteen years, a
period that was jokingly referred to within the family as “Rama’s
exile”.

Meanwhile,
in 1974, one year after Harshad came to Bombay, he met Jyoti during
Dandiya
Raas,
a collective singing and dancing ceremony of the Gujaratis that often
goes on throughout the night. Harshad used to play cricket in the
same compound where Jyoti lived. Five years after they met, they
married and moved to Vikhroli, a working class neighbourhood a few
kilometres from Ghatkopar.

In
1977, fresh out of college, Harshad joined the New India Assurance
Company as a clerk, at a salary of just Rs 600 a month. He was posted
in the Hull department, processing marine insurance claims. Within a
year, the stock market caught his fancy. He entered the market
surreptitiously, betting a few hundred rupees. Fascinated, he asked
for a transfer in 1978 to the investment department.

But
Harshad Mehta hadn’t yet made up his mind about his career. In
the evenings, he used to go to the diamond market and every weekend
to Surat, a southern district in Gujarat, from where he picked up
rough diamonds, got them polished and then resold them. He made about
Rs 200 on each of his weekend trips.

By
the end of 1979, he was feeling frustrated. Despite trying his hand
at virtually every business that he could think of, he was nowhere
near the high road to riches. They still had not been able to save
enough money to buy a house. Towards the end of 1979, one night, the
family members assembled for a chat as they used to almost every day
after dinner. It was late – about 12 – and Ashwin, who
had by then left ICICI to join the Unit Trust of India, was thinking
aloud about the future. “We need contacts and capital to
succeed”, he said. They had neither. “Besides, the
diamond market is depressed. We have to look elsewhere”, he
added. Then he suggested: “Let’s go to the stock markets
in the afternoons.”

Their
lunch break was for one hour. “We used to finish our lunch in
fifteen minutes and rush to the markets”, recounts Ashwin. The
skyscraper that houses BSE hadn’t yet come up. There used to be
a trading ring, where brokers and jobbers struck deals, located in
the adjacent three-storied structure. The ring was a reserved area,
open only to jobbers and brokers. Harshad was just an onlooker. But
he had a burning desire to get in and do deals.

He
cajoled the doorman and stepped in to watch how the world of the
stocks spun on its invisible axis. That afternoon a new chapter began
in the life of Harshad Mehta. A totally unfamiliar world that would
be his kingdom ten years later. Unknown to Mehta, at about the same
time, the BSE ring was becoming the playground for another man,
several years younger. He was Nemish Shah, with whom Harshad had
nothing in common. Harshad was brash, Nemish was measured; Harshad
had no money in his pocket, Nemish came from an affluent family;
Harshad’s books were a mess, Nemish’s were organised. But
both had one thing in common: a desire to make it big in stocks.

The
first step Harshad took was to become a jobber whose job is it was to
match buyers and sellers by gesticulating and yelling out quotes.

It
is not easy to become a jobber. You needed the backing of a broker.
Harshad went to P Ambalal and requested him to give him a jobber’s
badge. Ambalal, was not too keen. So Harshad gave him his sales talk.
“You have two sons. Consider me as the third.” Ambalal
relented. Harshad entered into a contract with him to do jobbing,
with some limits drawn on profits and losses.

He
was off to a terrible start, losing Rs 2000 in his very first set of
transactions. Ambalal got annoyed and stopped him from going to the
ring. Harshad begged and pleaded for another chance. This became a
regular affair. Harshad’s fate was decided on a day-to-day
basis, hanging at the end of each day strictly on that day’s
performance. But those precarious months and years allowed him to
hone his skills. “Harshad emerged as one of the most skilful
jobbers, one of the best market makers”, claims Ashwin.

But
even a skilful jobber has his limitations. Harshad realised that to
stay ahead of the market he needed hard information in advance. He
soon found a way. He was a jobber for the Premier Auto scrip. One
day, in 1980, he noticed a small newspaper item that said Premier had
announced a steep hike in the price of its automobiles. Harshad
calculated that this would lead to a windfall for the company. But he
still needed to know what the Premier plant was capable of producing
to actually take advantage of the higher price.

He
went to the plant in the suburbs of Bombay and found out that its
fate rested in the hands of labour unions, led by the militant leader
Datta Samant (later gunned down). Harshad focussed his attention on
labour leaders. One of them lived in Vikhroli, not very far from
Harshad’s residence. Harshad persuaded him to supply him with
the daily production data of Premier so that he could detect the
first signs of labour trouble the day production fell. He developed
his contacts further to keep himself abreast of any major development
on the labour front.

Harshad’s
drive to determine and monitor the critical factor that could make or
break Premier was a crude attempt at equity research at a time when
the stock market was more of a gambling den than today, shooting up
and down purely on rumours, speculation and money power. Such
research, which forms the backbone of stock trading all over the
world, caught on among a set of young stockbrokers big in the late
1980s. In the US, Harshad’s use of privileged information on
Premier would be classified as insider trading. However, insider
trading was not illegal in India until November 1992, a loophole that
was exploited by Harshad and others to the hilt during the bull run
of late 1991-92. Even after the laws came into effect, insider
trading has remained rampant in the Indian market.

Late
that year, Harshad had turned the corner and, by the following year,
was on his way to breaking the shackles of poverty. Apart from giving
him enough money, jobbing also gave him insights into the market. Now
he felt confident of taking positions, i.e., trading in his own
account and being responsible for the profits and losses on it. This
brought out the best and worst in Harshad.

He
was great on the floor but extremely sloppy when it came to
book-keeping. The list of disputed trade (where his buying/selling
did not match with the counterparties) was a mile long and his
trouser pockets were bulging with objection memos. That was the
forerunner of things to come. In the bull market that he engineered
in 1991-92, Harshad went berserk, not knowing what his positions and
exposures were.

Still,
by 1982, Harshad had registered a meteoric rise. He had made enough
money to buy a house in Kandivli, a western suburb, in early 1981,
for Rs 165,000. Part of the profits also went to get Harshad’s
brother Ashwin and their sister married on the same day in December
1981.

Business
continued to boom in 1982 and Ashwin left UTI on 19th
February, to join Harshad. That year Harshad extended his ambit of
“research” to cover scrips like Shree Synthetics,
National Rayon and Great Eastern Shipping. He also applied another
technique to make quick gains: identifying a thinly-traded share
early, boosting the price by buying huge quantities in a very short
time and then selling a part of the block. Done properly, one could
make huge gains with very little capital. Harshad teamed up with
Nemish Shah to corner Blow Plast and Bharat Gears. But it was too
ambitious a plan. They kept buying but the price went up only
marginally. They were unable to sell enough to recover their initial
investment and soon exhausted their capital. “Harshad was like
Abhimanyu”, recalls Ashwin, referring to the character in the
Mahabharata.
“He knew how to get in but not how to get out.”

But
those were heady experiences, short cycles of great excitement and
depression. The thrill of winning and cutting losses was seasoning
Harshad into an excellent market maker, skills that he would apply to
money markets later. He had developed by then, his own distinct
style: trusting his own instincts and reacting with lightning speed.
This contrasted sharply with Ashwin’s style, which was more
delibe-rate and based on research. Then came black Thursday.

It
was 18th
March 1982 and the market had opened on a sedate note. Till 1.30 p.m.
it seemed that the two-hour trading would pass off uneventfully.
There were minor stirrings as the clock ticked on, past 1.50 p.m.
Then suddenly the entire market went into a convulsion. For the next
15 minutes, panic selling gripped the market as it recorded one of
the fastest falls of the century. Harshad was virtually ruined.

There
was no apparent reason for the free-fall. The carry-forward charges
on outstanding sales had been rigged and an invisible set of hands
had pressed sales. Apparently, the market was hollow within and so
caved in easily. “The prices simply melted”, recalls
Ashwin. “Even small positions resulted in big losses.”
Ashwin was at the stock exchange that day and watched the mayhem
unfold right in front of his eyes.

Harshad
made large profits on jobbing that day but lost massively on
positions in Tisco, Telco, Century and a few others. In those fateful
fifteen minutes, he had lost about Rs 10 lakh. But he had such huge
positions a few days before, that he could have absorbed a loss of up
to Rs 30 lakh. His nose for the market saved him from going bankrupt.
Four days before the 18th
March crash, Harshad had liquidated his positions without any
apparent reason. Still, the Rs 10 lakh loss turned the Mehtas into
paupers. Harshad had about Rs 3 lakh of his profits, made between
1979-82, parked with a broker. So, by late March he found himself
short by Rs 7 lakh, owed to brokers JL Shah and Suresh Nandlal Shah.
One morning in late March, Harshad, Ashwin and their father went to
Juhu to meet the two brokers. “We have no assets except our
flat and some jewellery. You can take them”, Harshad’s
father told them. They allowed the Mehtas to retain the house and
worked out a schedule of repayment because they still had confidence
in Harshad’s skills. But they took away Harshad’s badge,
banishing him from the floor. To repay part of the money, Harshad
pawned his wife’s jewellery.

Left
with very little money, Ashwin and Harshad sat around through the hot
months of April and May figuring out ways and means to have another
go at the markets. Interestingly, Ashwin never regretted that he had
left a secure job with UTI and was now in a soup. He had an offer
from Hemendra Kothari and Shitin Desai of DS Purbhoodas to work
either in Sri Lanka or Bombay but refused. From May to December that
year the income that sustained them was neither Harshad’s nor
Ashwin’s. It was that of Deepika, Ashwin’s newly-wed
wife. She was earning as much as Rs 10,000 every month, doing
freelance work as a beautician.

Then
in the wee hours of the morning of 7th
June 1982, at 2 a.m., Shantilal Mehta, who was just fifty then,
suffered a massive heart attack and expired. “Had he needed
hospitalisation we would have been in deep trouble. We had no money.”
The death was a major psychological blow to Ashwin and Harshad.

A
few weeks after their father died, the two brothers landed up in a
hole-in-the-wall office in a building called Bharat Bhavan at
Kalbadevi, the cloth and yarn-trading centre of Bombay. Harshad’s
father had rented an office there long ago when he was a cloth
merchant. The rent was a mere Rs 250 and the office, a covered
balcony shared by four. Harshad asked the landlord if they could use
it. “What are you going to do?” he asked them. “We
want to set up a small stock-broking firm.” The landlord
consented but increased the rent to Rs 500.

On
17th
August 1981, Growmore Consultants was born as a partnership firm with
four partners drawn from the family. Looking back, it must have
appeared to the Mehtas a comical effort at launching a business. They
could just about squeeze in one table and two chairs. If a visitor
came, either Harshad or Ashwin had to get up and leave the office.
They did not have a typewriter, having sold their father’s new
Godrej machine to Reliance Industries for Rs 3,000 to raise seed
capital.

So
they hired a typist, one D’Mello, on the condition that he
bring his own typewriter. Soon the hired typewriter and the hired
typist started churning out letters for Growmore, letters that
solicited surplus money from wealthy individuals to be channelled
into stock markets under portfolio management schemes. “Growmore’s
business strategy rested on the belief that Indian investors were not
getting proper service and advice”, says Ashwin. The Mehtas
felt they could give high returns to clients. They started by looking
for clients among close friends and relatives. Ashwin’s
father-in-law, PC Shah, chipped in with Rs 4 lakh and HR Dhruv, a
chartered accountant, put in Rs one lakh. With a few lakhs in the
kitty, the Mehtas started their selected stock-picking.

Among
the first hidden gems they identified was the tea industry. Tea
prices had gone up by, Rs 3-4 a kg but this was still not reflected
in the stock prices of tea companies. That apart, there were specific
scrips that seemed terribly under priced. McLeod Russell was paying a
20% dividend year after year but was still selling for just Rs 14.
The Mehtas bought this scrip heavily, also picking up Tata Tea and
Harrisons & Malayalam. Within a year, tea shares started shooting
up.

The
Mehtas looked for bargains during the day, traded in the afternoon
and met clients in the evening. Their monthly brokerage income ranged
between Rs 1500-Rs 2000, made up of many, many cheques of Rs 25 and
Rs 50. But it was worth it. “Each month was a better month”,
recounts Ashwin, as Harshad’s high-octane sales pitch fetched
clients by the dozens. By October 1983, they moved out of their
cubby-hole in Kalbadevi to a larger office closer to the stock
exchange.

By
the first quarter of 1984, the Mehtas realised that though Growmore
was doing the hard job of procuring clients and funds, as sub-brokers
they got only 50% of the fees while the brokers through whom they
traded walked away with half the profits by doing virtually nothing.
The obvious solution was to buy a membership card. In the middle of
that year, Harshad bought a card at the BSE and started operating
with it from 12th
December 1984. “It was a dream come true”, says Ashwin.
“We felt liberated.” It was also well timed. The Indian
stock markets were on the verge of being exposed to the first dose of
liberal economic policies since independence, which whipped up one of
the most thundering bull runs in many decades.

Ashwin
and Harshad identified, anticipated and profited immensely from this
bull phase. In October 1984, Indira Gandhi was gunned down. Rajiv
Gandhi, fresh-faced and clear-eyed, seemed eager to make radical
changes on all fronts. But since he had become Prime Minister so
suddenly, very little was known of his economic thinking. An article
in India
Today
offered a peep into his mind. The Mehtas noticed it with interest.

By
early 1985 Harshad and Ashwin realised that they were standing on the
threshold of a once-in-a-lifetime opportunity. “We were among
the first to predict that a big boom was coming”, claims
Ashwin. They went on a buying spree, overbuying in every client
account. They picked up Indrol now called Castrol (Harshad bought so
much that he was known as Mr Indrol in the market), Southern
Petrochemicals Industries Corporation and Zuari Agro.

An
amazing boom followed in which Growmore made huge money – so
much that the Mehtas are embarrassed to talk numbers. Profits flowed
in till they lost count. The same year they bought offices in Maker
Chambers IV at Nariman Point. But by then, weaknesses in the Growmore
systems crept in. “We had no experience of running a broking
firm”, confesses Ashwin and this led them to violate prudent
norms of capital requirements that are mandatory in Western
coun-tries. At that stage, Growmore may not have met even the BSE
requirements of keeping records properly. They were losing control.

But
1985 was easily the watershed year, the year of Harshad Mehta. The
market witnessed his meteoric rise and whispers of Growmore’s
portfolio management skills were circulating speedily. People lined
up to put their money in Growmore. Harshad’s popularity,
however, sowed seeds of jealousy among his rivals, most notably the
legendary bear, Manu Manek, the reclusive and publicity abhorring
operator who controlled BSE. Manek was operating almost as a parallel
stock exchange, doing massive off-market deals at prices set by him.
Year after year, Manek managed to pack the BSE board with his
nominees and controlled the unions in the BSE, which often led to
curiously-timed strikes and closures.

Strangely,
Harshad’s rise during this period was virtually without any
help from UTI, the biggest and the most dominating player in the
equity market. It was presumed that without UTI’s business one
simply could not grow big enough. The domination was so absolute that
brokers used to wait outside the office of KN Atmaramani from 8 in
the morning to get orders. Ashwin claims he was not among them. “I
made a conscious decision to stay away from UTI after I left it in
1982”, he says. Some time in February 1985, Ashwin met his
former boss Atmaramani and the Mehtas started dealing for UTI. But
soon, other favoured brokers mounted a whisper campaign: “They
are speculators”, the allegation went. “They have dumped
shares from client portfolios into UTI.” Their association with
UTI started in February 1985 and by June, had turned lukewarm.

In
August-September 1985, Ashwin went to London, his first trip abroad,
to study the way broking firms and the London Stock Exchange
operated. He needed the experience. Huge and indiscriminate trading
had left Growmore’s books in a big mess. In December 1985, when
the market was closed for two weeks, the Mehta brothers and even some
other members of the family stayed in the office and cleared up the
backlog. Little did they know that just round the corner lurked a big
disaster – the second one in Harshad Mehta’s broking
life.

On
26th
February, SPIC announced a board meeting to consider a 1:1 bonus. The
bonus came, yet the price did not go up as much as Harshad expected.
Two days later, VP Singh’s Budget took away some of the liberal
provisions of the long-term fiscal policy promised just a year
before. The market entered a prolonged bear phase. The first casualty
was SPIC and thereby Harshad. It was time for Manu Manek to strike.

In
March 1986, he hammered SPIC down and rumours started floating that
Harshad would not honour his commitment though he had a Rs one crore
margin money lying with BSE. As the rumours took root in the fertile
speculative ground that stock markets are, Manek and his allies met
secretly to plan another assault the moment the market opened for
trading after a four-day holiday. But Harshad had his friends too. At
10 p.m. the same day, a broker close to both the camps walked into
Harshad’s Nariman Point office and spilled the beans. Ashwin
and Harshad ran their computers the whole night and by 8 in the
morning had finished taking stock of their positions, the margins
required and the liabilities.

They
then went to Narbheram Harakchand Parekh, a big institu-tional
broker, who had sponsored Harshad’s membership, and asked for
his advice. “The best way to kill the rumour about your
possible default is simply to pay up”, he counselled.
Coincidentally, Narbheram Harakchand metamorphosed into NH Securities
later and gave India the next Big Bull, Ketan Parekh. In a curious
turn of fate, in 1999, when Ketan was making prices jump ten times in
a year, he had Ashwin supporting and advising him all the way.
Anyway, the Mehtas contacted MR Mayya, the executive director of BSE,
and told him, “We are ready to meet all our dues. Please tell
the board that Harshad’s payment has come and put that news up
on the notice board.” Mayya said, “I can’t put it
up on the notice board but will ensure that nobody rigs the market on
false rumours.”

That
weekend the Mehtas drafted a letter asserting that Harshad was not
about to default, attached it to the cheque and delivered it on
Monday morning. Word about Harshad’s payment having come in
spread like wildfire. Mayya called a board meeting and announced it
as well. The bears were stunned. Harshad had made the payment
fourteen days in advance. Unfortunately, many clients refused to pay
up the losses and Growmore had to absorb them, claims Ashwin.

This
exposed another weakness of Harshad’s operations: speculating
on own and client accounts. This also led to a critical strategy: not
to depend on the market for funding. It exposes a bull operator to
bear squeeze because the market always gets to know the bull’s
position. Harshad, Nemish Shah and Pallav Sheth all organised funds
from external sources. It was either corporate money or it was bank
funds. History was to repeat itself in March 2001. Anand Rathi, the
BSE President was accused of trying to find out Ketan Parekh’s
market position on 2nd
March 2001 and was asked to go even as Big Bull Ketan Parkeh was
trying to organise funding against a bear onslaught.

The
debacle did not leave Harshad with unbearable losses but
Rs 1.5
crore of his net worth was wiped out. He had his assets but he was
back to square one. Clearly, Growmore had to be recast. Harshad and
Ashwin realised that they could not afford to risk client money even
though, from 1982, Growmore had averaged returns of more than 80%
each year. “We cleaned up our portfolio and asked all our
clients to take their positions elsewhere”, says Ashwin.
Through it all, Harshad went on a forty-five-day trip to the US and
Canada. All this while the family was still staying at Kandivli and
using their first car, a Premier Padmini.

By
the third quarter of 1986, the Mehta brothers started with a clean
slate. After the debacle, Ashwin asked Harshad: “Do you want to
remain a broker or be an investor?” They started targeting
institu-tional clients for stable and respectable business though
stability and respectability were not the only reasons Harshad
abandoned speculation.

More
crucially, Harshad realised that a speculator has no chance of
winning consistently in Indian markets, because of margin
requirements. “If the margin is 40%, you make only Rs 60 every
time you book a profit of Rs 100 and pay Rs 140 for every Rs 100 of
loss. It is a lose-lose situation”, he says. “Now, the
law of probability says over the long run you win once lose once. If
you win twice consecutively, your chances of losing the next time are
double and so is the probable loss. So when the loss hits, you are
wiped out.”

Harshad
soon emerged as one of the top institutional brokers. But he was
still not getting business from UTI. This was partly because of
opposition by entrenched brokers but there was another grave reason.
The story goes that UTI had mistakenly sent some shares of Vam
Organics to Harshad which he promptly sold off.

Harshad
denies this story and stops a discussion on his problems with UTI
with a tone of finality: “People spread canards about me.”
Apparently, when chairman MJ Pherwani discovered the fiddle, he
blackballed the Mehtas. Curiously, Pherwani would later bail Harshad
out when he needed Rs 622 crore to pay back SBI.

Harshad
says that UTI was biased against him. His strategy was to first
become the dominant broker with all other institutions like insurance
companies. “We wanted to tackle UTI last”, he says. UTI
was huge. It could make or break a broker. But luckily for him, its
dominance was on the wane. Other aggressive funds like Canbank Mutual
came up. Harshad could still grow without doing much business with
UTI.

He
was on his way to becoming an institutional broker. But it was not
enough. His ears were still ringing with a question thrown at him by
Ashwin after the great debacle of 1986: “Do you want to remain
a broker for the rest of your life?” Of course, he didn’t.
He wanted to be a principal – buying and selling on own account
and keeping the profits. But this required huge sums of money –
money that was outside the stock market system. In India, bank
finance is not available for investments in large amounts. So the
ever-ingenuous Harshad found a new quarry: the money market.

Beginning
1987 Harshad embarked on five years of breathtaking growth in both
the money market and the stock markets, leading to accumulation of
immense personal wealth. But Harshad’s entry into the money
market also touched off an intense battle with him on one side and
Citibank and its three loyal brokers on the other. Under-standing
that war is crucial to understanding the Harshad Mehta stream of the
scam.

5

The Big
Bull

“I
thought I’d be like a pied piper. I thought I can start selling
dreams because somebody needed to come and sell dreams, that asset
creation is not a crime....”

ON
Sunday 26th
April, three days after The
Times of India broke the
scam story, concealing his name and referring to him as the Big Bull,
Harshad attended an insignificant seminar titled “Gold import
scheme and the Indian market” at the hotel Leela Kempinsky in
Bombay. There he admitted that indeed The
Times
story was referring to him and asserted that his reconci-liation
problem with SBI was over. He even tried to cover a crucial track:
the source of money for his stock purchases. He denied that his
securities reconciliation problem had anything to do with the stock
market.

At
the same meeting, tax consultant HP Ranina, who had sold his control
in the sick Mazda Industries to Harshad but retained his
chairmanship, described Harshad as the Einstein of the stock market,
correcting somebody else who had earlier called Harshad the Amitabh
Bachchan of the Bombay Stock Exchange. Even such unbridled vacuous
fawning by Ranina, one of India’s best-known tax lawyers, was
not the most significant point at that Sunday morning meeting, which
was reported only by The
Observer of Business and
Politics
in a small single-column five-para item. It quoted Harshad as saying
that his securities reconciliation problem was misconstrued. What
Harshad said he attempted was only “breaking the monopoly of
foreign banks as market makers in the securities market.”

Nobody
realised it then but it was one of the most significant statements
made by anybody since the scam story broke. It was a rare confession
from a consummate salesman. This was the first time Mehta had
disclosed his strategy, one of the key motives behind what he had
been doing. Earlier, he had tried to rationalise the high market
index and his purchase of scrips at ridiculous prices by citing
suspicious sounding investment theories. In reality, he was engaged
in a bloody war with a set of powerful brokers and foreign banks in
both money and stock markets.

That
story, coinciding with the last phase of Harshad’s phenomenal
rise, begins in 1987, when his war with the cartel of brokers and
Citibank began; 1991-92 was the culmination of that war – with
the discovery of the scam. Between this half decade lies the
compelling story of the growth of a Big Bull, the first superstar of
the Indian stock market.

Harshad’s
entry into the closed cabal of the money market in 1987, after his
broking business went belly-up in 1986, was a logical business move,
but at the same time, highly unusual. None of the leading old-time
stockbrokers like Prabhudas Lilladhar, CJ Dalal or Mahendra Kampani,
were in the money market. Neither were the new rising stars like
Nemish Shah or Pallav Sheth. So what drove Harshad to it? There were
three factors. First, the need to have access to big money so that he
shed his broker’s garb and emerged as an investor. Second, he
was a restless creature who needed a constant stream of fresh stimuli
for his burning ambitions. As he came into contact with banks,
insurance and mutual funds, the world of money markets opened up to
him. The third factor was more mundane. Harshad wanted to diversify
his revenue streams and not be too dependent on stock-broking income.

But
Harshad’s move into money market sparked off a battle with the
status quo. “For first six months I simply observed the market
and figured out that it was the fiefdom of four brokers and one
bank”, recalls Harshad. “The bank was Citibank. And the
brokers were Ajay Kayan of Calcutta, Bhupen Dalal, Jitu Shroff and
Hemendra Kothari.” In addition, Kothari, who had a limited
understanding of the money market, had a special relationship with
UTI. UTI not only routed large and profitable stock trading through
Kothari’s firms but picked up money market deals from other
brokers, aborted the deals and passed them on to Kothari.

Citibank
and three brokers (other than Bhupen Dalal) formed a cartel. While
Citibank contributed the brains, the brokers contributed the contacts
and ability to “influence” treasury officials of public
sector banks. These brokers were completely loyal to Citibank,
faithfully carrying out transactions and earning a good brokerage
income. As Harshad entered the market, he ran afoul of Citibank and
its cartel who refused to deal with him. AS Thiyagarajan, the chief
of investment banking at Citibank said that he “never dealt
with Harshad because I didn’t like his flashy ways.”
Besides, Citibank had no reason to entertain new brokers as Kayan and
other cartel members were ever willing to toe its line.

Harshad
had a different interpretation. “They were scared that I would
do to the money market what I had done in the stock market where I
was dealing only with institutions and giving them good deals. The
cartel thought ‘we can’t take a chance with this guy.’
I was a threat. So when I started trading, the news went to Citibank
which controlled the entry and exit to the money markets. And among
its brokers Ajay Kayan was the king. They were chasing me on a
minute-to-minute basis on every deal, but I did not want to remain a
broker. I started taking positions. For brokers to take positions was
a crime, according to Citibank. But I refused to be a slave.”

In
his characteristic fashion, Harshad tore into the cosy world of the
cartel. What helped him was the common distaste other trading banks
had of Citibank’s dominance. Both ANZ Grindlays Bank and the
Bank of America found out that they were getting shut out of big
deals, which were being cornered by Citibank and its cartel. This was
because the crucial element of a bond deal is market information: who
has surplus units, whose cash flow is tight, etc. “For any deal
that I proposed”, recalled a former BankAm employee, “Citibank
and its cartel got to know. We desperately needed a non-cartel
broker.”

Harshad
was the man who fit the bill.

BankAm
and Harshad were made for each other. BankAm’s treasury was
then headed by Neeraj Batra, later chief of Prime Securities. (Prime
was raided by the Income Tax department in September 1992 for its
widely suspected links with Harshad.) Batra and Harshad emerged as
star traders. They became thick trading buddies, especially
dominating the market for units. Harshad’s rise was the first
sign of threat to the cartel. They watched him with curiosity and
irritation.

Mehta
had another early ally, Naresh Aggarwala, who would later join the
cartel and become Harshad’s arch enemy. In 1989 when Aggarwala
left Grindlays to strike out on his own, the bank kept alive its
relationship with him. Since the cartel blocked its way sometimes,
Grindlays, like BankAm, was keen on a stable relationship with a
non-cartel broker. Aggarwala, who incidentally had not dealt with
Citibank in his independent career, promised to deliver one –
Harshad Mehta. Harshad became extremely thick with Grindlays. This
was clear in the manner in which the bank went out of its way to help
him square off his Rs 622 crore outstanding with State Bank of India
by crediting to his account cheques coming from the National Housing
Bank.

What
was Harshad’s strategy in the money market battle? He recounts:
“I realised that in money markets, the crucial thing was
communication. So I gave hotlines to all brokers. Hemendra Kothari of
DS Purbhoodas said, ‘We don’t need your hotline. We deal
only with banks, directly’.” Harshad wanted to break the
cartel’s lock by capturing large volumes. “I was not
running after profits alone. Citibank’s brokers wanted a profit
on every deal. I was prepared to take small losses. My goal was to
prove that I can do whatever Citibank can.”

After
Batra and Harshad teamed up to do some large deals, the market and
the list of players started expanding. Subsidiaries of nationalised
banks and public-sector companies were allowed to trade. According to
Harshad, this helped him because the cartel had restricted itself to
certain banks like Vijaya Bank, SBI, Punjab National Bank and a
couple of Calcutta-based nationalised banks. “That made it
easier for me. I could trade outside Citibank’s ambit and
survive.” It helped Naresh Aggarwala as well who says he “never
traded with Citibank.” Of course, according to Harshad “after
shunning us for years, Citibank started trading with us through other
brokers. They could no longer ignore our deals and therefore paid the
price for their ego.” Indeed, in 1991-92, Citibank had some
very large deals with Harshad.

All
through 1987-90, the three years Harshad was trying to break into the
money market, he was reaping millions in stock markets, partly by
diverting the money market funds there. This reached its peak in the
turbulent 1991-92 period when Harshad recklessly used the banking
system for stock trading. It was a closely guarded secret though. In
1991, The
Economic Times
asked him where his money was coming from. “The funds have come
from my clients who are mainly corporate bodies”, he shot back.

Harshad
emerged as a major broker for all financial institutions except UTI
and was on his way to acquiring princely personal wealth that
normally takes generations to accumulate. Since 1989, he had been
looking for a house large enough to accommodate the family of four
brothers, their mother and grandfather who was almost 100 years old.

The
task of finding a suitable apartment was entrusted to Jyoti,
Harshad’s wife. “There was not a single broker in Bombay
who did not end up knowing her”, recalled Ashwin. After a
two-year search, in 1990, they settled for an apartment in Madhuli,
the whole of third floor and half of the fourth. The swank 15,000
square feet apartment overlooks the sea at Worli and is flanked by
huge terrace gardens; the one on the seaside, converted into a
putting green. The Mehtas planned to have a mini theatre and a
billiards room on the third floor but the work remained incomplete.
In 1992, parts of the apartment looked like a construction site, with
wires dangling and building material in heaps.

Half
of the fourth floor was split down the middle by a corridor; on the
left side was Dr Hitesh Mehta’s room. It was all in white –
white walls, marble floor, a huge head of a horse in white marble and
dashes of red and orange for some colour. Down the corridor on the
left corner was Ashwin’s room with a sweeping view of the
Arabian Sea and opposite that, on the right, Harshad’s bedroom,
where the predominant colours were black and gold. Each of these
bedrooms was fitted with glitzy artefacts in glass, metal and crystal
reflecting an overdose of professional interior design and kitsch.
Instead of paintings, the walls had laminated off-the-peg designs in
pastel colours. Below these bedrooms, on the third floor, was the
kitchen and on the other half of the third floor, the bedroom of the
fourth brother, Sudhir Mehta.

Their
parking lot had gradually filled up with the numerous cars the Mehtas
bought – twenty-nine in all. The pride of Harshad’s
garage was, of course, the famous brown Toyota Lexus, a star
attraction in Europe and America in 1991, as it represented the
Japanese assault on the luxury car segment, dominated till then by
BMW and Mercedes Benz. Harshad’s was the first Lexus imported
into India.

All
this made Harshad perhaps the wealthiest and flashiest stockbroker in
India but still, even in early 1991, very few people were aware of
who and what he was. Some referred to him as the ACC bull for the way
he dragged the scrip from Rs 300 to Rs 3000 and then past Rs 10,000.
(Even a shrewd broker like Harshad’s friend Nemish Shah exited
the ACC counter at Rs 3500 and then openly expressed his regret.)
Over 1991, as Harshad acquired his house and his cars, he also
acquired the title Big Bull – a two-word epithet that is
reserved for those who have that awesome power to light a fire in
scrips that catch their fancy.

That
title originally belonged to MJ Pherwani, when, as chairman of UTI,
he held the fate of the market in his forefinger that was poised over
the button BUY. Then came Harshad who overshadowed Pherwani many
times over. Pherwani had a twenty-five-year-old institution behind
him. Harshad was an individual. Pherwani played with Rs 20,000 crore,
Harshad, a fraction of that. Pherwani operated at a time when UTI was
the only big player in the market. Harshad was one of many.

Yet,
over the next year, Harshad displayed a brute power to move the
market over 100 points, either way, at will and turned himself into a
market legend. Awe-struck investors whispered that he was signing
cheques of over Rs 100 crore as margin payment to BSE (not true, he
said), that he knew about the Union Budget (unlikely), and that he
was a channelling money belonging to smugglers (untrue). But in those
heady days, when prices were shooting up and Harshad was stampeding
on the floor of the stock exchanges, who had the time to check these
rumours? They gained currency, creating a myth.

Harshad’s
men would announce in advance the stock that he planned to push, its
target peak price, and the time frame in which he would hit it. Often
when one of his employees merely enquired the price of a new stock in
the trading ring, its price shot up. Harshad’s hold on public
imagination touched absurd heights in the case of the Swaraj Mazda
scrip. There was nothing this company had in common with Mazda
Industries, the loss-making leasing company that Harshad had taken
over and turned around, except the name Mazda. Swaraj Mazda, which
produces light commercial vehicles, is a joint venture of Mazda of
Japan and the Punjab government. Harshad had nothing to do with it.
Yet the Swaraj Mazda scrip jumped up on rumours that Harshad Mehta
was buying another “Mazda company”.

What
he did to the real Mazda was remarkable. When he took it over, Mazda
Industries, set up during the leasing boom of the 1980s, was a
“loss-making leasing company”, declared Ranina. Harshad
planned to publish quarterly results instead of six-monthly results
(profit was up to Rs 2.7 crore). He did this along with an
advertisement that screamed “Doom, Boom and Zoom”,
describing the dramatic turnaround. Referring to the company as a
“Growmore Corporate”, the advertisement promised
expansion into the real estate business, exports and “innovative
financial instruments” and a listing at all major exchanges.

In
just six months to September 1992, Mazda Industries earned a net
profit of Rs 3.38 crore from a Rs 3.46 crore loss the previous year.
Its main source of income, leasing, slumped from Rs 3.28 crore to
just Rs 30 lakh. But this was more than compensated by “other
income” of Rs 5.19 crore, which was raw profits from stock
trading. Around the same time, JS Varshneya, chairman of PNB, joined
the Mazda board. Harshad took over Mazda Packaging as well, renaming
it Mazda Enterprises. In a matter of months, Mazda was rocketing up.
On 19th
October, the price was just Rs 39. It jumped to Rs 140 by December
and Rs 400 by February. Then in a mammoth leap it touched Rs 1600 the
following month, touching off frenzied buying. Three months after
Harshad’s arrest, the price had slumped back to Rs 40.

In
all this Harshad was not a shadowy character who quietly made it big.
In the pre-Harshad days, market dominance was through speculative
operations. Harshad was inventive (bordering, some say, on
conmanship), brazen and extremely ambitious. Through a highly
publicised lifestyle and grand slogans, he built tremendous hype and
personal following that he exploited to move the market.

Harshad
was the perfect huckster, a contrarian thinker and an ambitious
go-getter – all rolled in one. Market analysts, who go by the
traditional measure of share pricing like the price-earnings ratio,
were stunned by Harshad. Even though there are no hard and fast rules
that specify the level of P/E at which a share is fully priced, there
are acceptable and commonly shared benchmarks. For instance, a P/E of
40 or 50 would normally be considered high and a signal that it was
time to sell. Serious market analysts had a rule of thumb: a scrip
with a P/E of less than 15 was under priced and one above 25 was over
priced.

Harshad
refused to be stunted by conventional limits of P/E. He propounded
his own investment theories that made the entire market look like a
screaming buy. His theory rested on two planks: one, that the price
of a scrip is independent of its current earnings (and so P/E is
irrelevant) and two, that at high prices people don’t sell,
they buy! Harshad argued that in a growing economy, a high P/E is
itself a great reason for growth, a reason for buying such expensive
stocks. “A high P/E stock is a higher-than-average performer.
So, contrary to what is commonly believed, this scrip is not one to
be sold. In a growing market you can make more money in high P/E
scrips than in low P/E ones. A 10% earnings growth in a scrip with a
P/E of 50 means a further growth in price. Why do shares of foreign
companies attract a high P/E?” he asked.

Harshad
had a second weapon to demolish the P/E as the yardstick: his
replacement cost theory, which became one of the most fashionable
theories during the boom months. This rested on the argument that the
true value of a company, such as ACC, is not in just what it earns.
Its strength lies in the fact that to set up the same productive
assets, it would cost a new entrant several times more than what it
cost ACC. ACC’s value, therefore, ought to be at least what it
would cost to replace it, at today’s prices. In a market that
is more than a gambling den, this theory fascinated many. And in a
market that was desperate for a reason to buy, this was a masterly
excuse.

Harshad
took this theory further when talking to V Krishnamurthy, member,
Planning Commission. In February 1992, when they had their famous
meeting, Krishnamurthy asked how was it that while the realisable
value of ACC’s assets was Rs 3500 crore, the market
capitalisation (total equity multiplied by the market price) was Rs
5500 crore? In other words, how did the market put a value higher
than what it costs to replace it at today’s prices? “I
said it is not important what ACC possessed. The question is what it
could have. Taking advantage of its market price, ACC could raise
another Rs 2200 crore by doubling its present capital of Rs 56 crore.
With that it can add another seven million tonnes capacity. Even if
ACC pays a dividend of 100%, i.e., Rs 56 crore, its cost of funds is
2-3%.” In other words, the market is paying a premium for ACC’s
ability to raise money cheaply by taking advantage of its goodwill.
Harshad pointed out plenty of other such examples. “Excel has a
capital base of Rs 70 crore and market capitalisation of Rs 600
crore. DCL Polyester was Rs 55 even before it started production. So,
what’s so different about ACC?”

Harshad
was full of such investment theories, some smart some self-serving.
Listen to this Harshad’s explanation of what motivates people
to buy and sell: “In some ways the psychology of people in
Japan and Junagad is the same. Under specific circumstances, people
in a highly literate and illiterate society behave the same way. An
MBA and pan-wallah
share the same drive. If the Dow Jones theory is applicable to the
most sophisticated market in New York then it is also applicable to
oil trading in Jamnagar”, Harshad told Business
Today
in the course of a long interview in September 1992, after he was
released.

“The
basic economic law of demand-supply-price works just the reverse way
in stock markets. Textbooks tell you that the price of a commodity is
high when the demand is low. Also, supply is low when the price is
low. In stock markets, it is the other way round. If the stock prices
are on the upswing, the demand is also high. And when the price is
falling, demand also falls and the supply increases.”

Whether
this is always true in all markets is doubtful. But it has been
proved somewhat true in India in the bull as well as the bear market.
There were no takers for even blue-chip shares in the depressing
period of January 1991, when the BSE sensitive index fell below 1000.
But when the index crossed 3500 and 4000 there was a mad scramble to
pick up the same shares at exorbitant prices. This was so, Harshad
would argue, because stock markets are primarily driven by
perception, not performance.

The
price of a share is based on the perception you have of it, argued
Harshad and this perception is not based on what its past has been
but what the future is going to be. Harshad cited the example of
Great Eastern Shipping. “When Nemish (Shah) started buying it,
the scrip was available at Rs 35 cum bonus. One year later, there was
no big change in the shipping industry. Look at the two balance
sheets. No big change. Yet the price was Rs 180. Nemish made you
marry that share”, argues Harshad.

Harshad’s
logic may have been true in a sense (one savvy stock-broker friend of
his calls it “a load of crap”) but was fraught with
dangerous implications. It meant that Harshad could buy a completely
dud share and make its price fly no matter what he was buying and
why. Harshad’s perception theory reached its logically absurd
end when several loss-making companies like Karnataka Ball Bearing
and Amar Dyechem were quoting at crazy prices just because Harshad
was said to be buying.

Harshad
caught the BSE sensitive index by its collar and pulled it through
1500 and 2000 until on
24th
February
1992, it was 2491. Then on 29th
February
came the Union Budget and Harshad’s big bull charge. In two
months flat, Harshad whipped up the index by another astounding 2000
points, taking it to 4467 on 22nd
April,
the
day before the scam story broke. Along with this, the value of scrips
on BSE (market capitalisation) ballooned from Rs 60,000 crore in 1990
to Rs 125,000 crore at the end of 1991 and then zipped upwards to
over Rs 250,000 crore in the next four months.

That
the boom was single-handedly engineered by Harshad Mehta is without
doubt. The index simply wilted after the scam story broke on 23rd

April. On 28th
April,
the first day that BSE opened for trading after Harshad was known to
be in trouble, the index dropped to 3896, the same level it was a
month earlier. In the first three months of 1992, the more the market
boomed, the louder were Harshad’s drumbeats. He kept on
chanting the mantra
“buy, buy, buy” backing it up with brash statements.
Students of mob psychology could possibly debate on this phenomenon
of mass hysteria that Harshad unleashed – just as Ketan Parekh
did a decade later. Of course, later, Harshad would claim quite
innocently to the Asian
Wall
Street
Journal
that “I thought I’d be like a pied piper. I thought I can
start selling dreams, because somebody needed to come here and sell
dreams, that asset creation is not a crime, that if you wanted to be
a Harshad Mehta, come to the stock market.”

People
did, and soon Harshad started exploiting his new-found stock market
stardom, his crowd-pulling abilities and the perception theory to
formulate a shady new move: alliances with businessmen to boost their
stock prices. Harshad later told Business
Today magazine
that “the managements never looked closely at the value of
their own scrips. I made them aware. Reliance was quoted at Rs
130-140. Everybody was tired. Mutual funds were buying heavily.
Nothing happened. Some 80 lakh shares were bought. I started buying
at Rs 140-170. I bought 11 lakh shares and the price went to Rs
370-390. Is it not a matter of perception?” Businessmen were
quick to realise the potential of this new stock market Midas. They
approached Harshad to push their scrips. Harshad struck a deal with
them. He would jack up the prices provided they gave him a stake.
Exactly the same thing Ketan Parekh did later on.

In
1991, he picked up large blocks of shares of certain companies
(Apollo Tyres, Gujarat Ambuja) but not with the intention to take
over these companies, as was quickly presumed. He did not even demand
board membership. He simply intended to demonstrate what he could do
to their share prices. He bought large stakes only to emerge as an
ally of the promoters, as one who made them realise that their
companies are worth far more than they thought. As the prices flared
up, Harshad made huge profits because he had made large block
purchases outside the market well before prices were pushed up. This
made the average price of acquisition extremely low. When the stock
was high enough, mutual funds could always be tempted into believing
that they had before them a unique investment opportunity and Harshad
would offload his stock. This was insider trading and milking mutual
funds in its most raw form, to be repeated by many operators before
and after Harshad.

His
brilliantly fashioned but suspicious-looking arguments were soon
grabbed by other bull operators desperately looking for a rational
justification for the boom. One of them was Pallav Sheth. He told
Business
India in
April 1992 that “the market can be expected to reach the 6000
index by the last quarter of 1992.” He argued that perception
about equity investment had changed. “The P/E ratio is not the
issue any longer”, declared Sheth. And why so? Sheth referred
to the US, which, despite being considered a stable market, had
companies like General Motors and Union Carbide reporting losses at
the end of the 1980s but were quoted at prices of US $45 and US $98.

The
reason, said Sheth, sounding like a visionary professor of finance
and investment, is that replacement cost was gaining precedence over
traditional indicators like the P/E ratio. In the face of the
volatility of today’s market, expostulated Sheth, traditional
indicators seem to be losing relevance. “Take the case of
Reliance Industries”, he told Business
India.
“At Rs 500 per share for 150 million shares, the present
investment is Rs 7500 crore. But if the Reliance’s plant is
replaced, it will cost Rs 20,000 crore today. Fundamentals are less
in fashion, in purely financial terms. The accent is on good
intentions of the management and good performance. A good example is
Reliance again. Its Euro-market issue, gas cracker plant and proposed
power project attract people because these seem to have good
prospects.” Sheth argued that people are buying with an eye to
the future. He told Business
India that
the present prices should be measured against 1994-95 when companies
will be reporting a different pattern of profit.

These
arguments appeared phoney later, especially when it became clear that
brokers like Sheth substantially traded on inside information and
pushed up prices. They had their eyes on the next few weeks and
months, not quite patiently waiting for their humble efforts to yield
fruits in 1994-95 as they preached to the investors. But when Harshad
was the money messiah stalking the markets, followed by the likes of
Pallav Sheth, the public was led to believe that Harshad was a
brilliant stock picker deriving his stock alchemy from investment
theories and research. Harshad’s brother Ashwin, of course, was
keen on developing a research base in the manner of securities houses
world-wide. But Harshad totally disagreed with him, arguing that
nobody valued research in India. Harshad himself was demonstrating
that hype and slogans were the most potent growth elixirs in a
shallow and unregulated market like India, where the biggest players
are government-owned, uncompetitive, slothful creatures operating
with their limbs tied down.

Apart
from external factors, Harshad had his own reasons to be confident.
His perception theory, debunking P/Es and deals with industrialists
were innovative and effective moves that could come only from someone
who knew the market inside out and was applying those insights to get
rich quick. Harshad had become so versatile by 1991 that he could
later claim that “I believe I have had a wider exposure to the
market than anybody else. I have been a jobber, a broker and at one
time the biggest speculator. For over thirteen years on the floor I
have had the opportunity of knowing the psychology of the investors,
and on the other side, knowing the psychology of the institutions,
the psychology of the corporate managements.”

By
late 1991, however, this knowledge was at work in a dangerous
direction. Harshad started believing that he was god and thereby
started losing control over himself. Ashwin refused to agree with his
means and the scorching pace he had set for himself. He planned to
separate their businesses. “Our relationship was cordial at
home and lukewarm in office”, said Ashwin. Harshad had become
the biggest broker, the largest market player and among the
wealthiest Indians. Had he continued at this scale, within a year he
would have entered the Forbes
list of billionaires. But Harshad refused to slow down. The heady
scent of success went right to his head.

“I
work more with my heart than with my head. My strength is my
intuition. I operate from imagination, not from calculated thinking”,
Harshad would admit later. But in the boom days it didn’t seem
a drawback. He was dreaming on a giga-scale then. “I burn
inside”, he told us in late October 1992. “I can’t
stop dreaming big.” For instance, since in late 1991 he was
seized with an obsessive desire to beat the world’s largest
securities firm, Merrill Lynch (which has a tie-up with Kothari’s
DS Purbhoodas in India) in profits. He procured the 1990-91 annual
report of Merrill to discover that it had earned US $690 million in
profits that year.

Harshad
told himself that he wouldn’t take too long to beat that. If
you counted his unrealised profits of Rs 1000 crore as on March 1992,
he had already reached the halfway mark. And without Merrill’s
infrastructure and network. “They have a staff of 40,000,
dealing from apples to silver, operating in scores of markets,
getting money from Arabs to Japanese, some 200 offices around the
world, including one in India. I was working with one commodity
(shares), one market (India), 200 people, low technology and in a
regulated environment loaded against the bulls.” Harshad was,
of course, aware of the obvious counter argument. “You can say
that I have done it with scam money”, he said. But he had an
explanation that would satisfy his fans: “They have access to
cheap bank funds that I didn’t have. Let me have a line of
credit and I will show what can be done.”

Harshad’s
ambitions scorched him from within. His obsession with his own sense
of achievement made him reduce it all to such simple arithmetic:
“what are my profits today and in comparison what are the
profits of Telco, India’s largest company?” Such juvenile
compari-sons and oversimplified measures of success took permanent
root in his mind. Perhaps they fulfilled a psychological need, acting
as a surrogate for genuine recognition and a desire to be considered
among the greatest and the best. As one of his friends commented:
“Harshad was not happy being the biggest. His happiness lay in
others telling him repeatedly that he was the biggest.” Not
content with even that, he invented such measures of success as
beating Merrill Lynch and Telco. Harshad was desperate to be seen as
an institution and not as a Johnny-come-lately.

So,
to institutionalise himself and gain respectability, since late 1991,
Harshad started collecting, as a hunter collects heads, big names
from the world of business and finance. The first was ND Prabhu,
former chairman of Canara Bank, who became a director in Mazda
Industries. Harshad wanted him to head the Growmore Stockholding
Corporation and the southern India headquarters of Harshad’s
empire. To be located at Bangalore, it was planned to oversee
Harshad’s investments in Karnataka Ball Bearing, Karnataka
Explosives, and other state government-assisted companies that
Harshad was planning to take over.

Harshad
had also roped in JS Varshneya, former chairman of PNB and an advisor
to NHB which Harshad used almost as his private bank. After the scam
was discovered, Varshneya was allowed to quietly retire and disappear
from public view. But among the prize additions to Harshad’s
network was V Krishnamurthy who would have served as his vital Delhi
link. Harshad impressed him so much that within months they were deep
into business deals. This was awkward because Krishnamurthy was
holding a very sensitive post as member, Planning Commission and was
the head of the public sector disinvestment panel.

If
Harshad needed to wear his success on his Armani shirt sleeves, he
did virtually just that. On the morning of 10th
January
1992, he screamed at an unsuspecting but curious populace from
half-page newspaper advertisements: “Harshad Mehta is a liar”.
This campaign, created by Lintas in stark black and white, was a
gimmick to explain the investment strategy of his Growmore group of
companies, a strategy that supposedly hinged on research and
analysis. The advertisement accurately reflected Harshad’s
hyper-articulate, brash and trumpeting nature. That was the first
time Harshad had communi-cated to the public in any form. After all,
his main vehicle, Growmore, was an unlisted company, it wasn’t
yet time for the Mazda annual general meeting and he hadn’t yet
been discovered by the media.

He
was, after the advertisement appeared. By February, the biggest
business magazine, Business
India and
the newest one, Business
Today had
him on their covers and the top-selling video magazine, Newstrack,
did a celebratory story on him, describing his fabulous lifestyle,
his beautiful terraces, twenty-nine cars, etc. This was followed by
the news that he was India’s highest tax-payer.

After
making and losing crores and after working in the shadows for a
decade, Harshad Mehta had suddenly burst forth in a blaze of
publicity. On 28th
February
1992, one day before the Union Budget, he was raided by the Income
Tax authorities, but that did not stop Doordarshan from interviewing
him on the day the Budget was announced. Asked to comment on the
Indian economy and the capital markets he gave millions of Indians
one of his many memorable one-liners: “India is a turnaround
scrip in the world market.”

Harshad
may have believed this but he was also working to a plan. All through
1991, he was continuously using the banking system’s money to
fund his stock market operations. But he was precariously poised.
Having staked bank funds through dubious transactions, he was living
on borrowed money. He had to return the money, which he could if only
he had sold a part of his stake. This wasn’t easy. If he had
sold his shares, the price could have crashed because Harshad the God
was now selling. He could have dumped them into the portfolios of
mutual funds but the biggest mutual fund, Canbank Mutual Fund, was
not doing deals with him; also, every big broker was trying to use
these funds in the same way. As the prices reached giddy,
stratospheric levels in March 1992, Harshad was looking for an exit.
“Exit is more important than entry. It is easy to buy. Where
does one sell? Unless you have created a market to sell.” He
thought he had found not one but two of them.

The
first was getting foreign investors to buy Indian stocks at those
prices. At that time, Indian stock markets were still closed to
foreigners but the finance minister had promised in his Budget speech
that foreign funds were soon to be allowed to invest here, a promise
he fulfilled in October 1992. Harshad saw this as a great
opportunity. “We have the potential to sell our stocks all over
the world”, he said in October 1992. “India is the
greatest opportunity going. Even at the index level of 4500, the UTI
chairman said Indian markets are a great place to invest in.”

The
second was to go outside the circle of institutional buyers and bring
in new investors. They were already coming in droves thanks to the
fan following Harshad had built up among businessmen, bureau-crats
and ordinary investors. “The market was getting widened. We
were planning to build a distribution base. We were also planning to
take a couple of Growmore companies public, targeting to raise about
Rs 500-600 crore. But six months before that destiny has played its
role”, Harshad later said.

It
wasn’t destiny alone. One of the main reasons for his downfall
was Harshad’s relentless battle for market supremacy and his
attempt to win it at any cost. In 1987, Harshad had entered the money
market out of curiosity and had to fight against an established
cartel of banks and brokers. As he won his place there, Harshad soon
became aware that the money market could be used as a bottomless fuel
tank that could fire a stock boom where the pickings were the
easiest. As he did that he ran a foul of the same set of players.

We
have already documented Harshad’s war in the money market; it
spilled over to the stock market in early 1991. That war lies at the
heart of the scam story. Harshad was winning it hands down – by
fair means or foul – until the scam was discovered.

6

A
Bloody War

The
bears had been severely mauled by Harshad. They had by then changed
their position and were turning bullish, leaving Harshad a dubious
victor in a senseless war. But Harshad’s win was also his loss.
He himself had lost balance and ended up being the villain in the
greatest scam ever.

CALCUTTA
14th
March
1992: On the green, expansive lawns of 9/2 Hungerford Street,
surrounding a brilliant, white double-storied bungalow, the
best-known money managers of this country were clinking their
glasses. Dominating the crowd were stockbrokers and the treasury
chiefs of the foreign and large Indian banks. Surprisingly, Harshad
Mehta was absent.

This
was no ordinary occasion for the money-men. It was the house-warming
party of Ajay Kayan, part-owner of a network of four securities and
share broking firms – one of the most powerful in India. He had
just moved into his new home, located in the heart of the city,
behind the well-known Belle Vue nursing home. It was an address that
any local businessman country would envy. Kayan’s house was all
polished marble floors, done up with antiques, crystal, an ivory
Ganesha
carved out of a single tusk, and huge Japanese vases. Designed by the
well-known Hemant Thakkar, it was a showpiece. The same house would
be raided by the Income Tax authorities in late August.

As
Kayan greeted a stream of visitors that cool, Saturday evening, he
looked comfortable. (14th
March
was just the first day of a five-day celebration, each day reserved
for a separate group – local business-men, out-of-town
businessmen, etc). A powerful player in both securities and stock
markets, Kayan had thrived on his trading connection with the
aggressive US bank, Citibank, as also American Express and deep links
with two outfits of Canara Bank– Canbank Financial Services and
Canbank Mutual Fund. That evening Kayan had much to celebrate. In a
glaring miscalculation he had lost crores in the stock market by
selling short key scrips, or so his rivals believed. But with friends
like Citibank and Canfina he would not only manage to recover his
losses, he would be in the black. Kayan’s reputation was
intact. Tucked away in the dying city of Calcutta, here was a man who
could scoop up crores in a jiffy for his favoured corporate clients.

The
party drove home that point forcefully. Beyond the sprawling lawn,
the guests were spilling over into the house and the specially
created gambling room with Indian style divans
and gaddis
to roll on. A staircase lined with B Prabha’s theme paintings
led the guests to another living room from where music emanated.

The
mood was upbeat because the invitees were set to conquer the world.
The conversation flowed over liquor and high stakes at the rummy
table, reflecting the risks that the players were willing to take.
Naresh Aggarwala told a banker, “Who needs counterparties?
Banks will have to do business directly with brokers.”

It
was an evening of checking out rumours and swapping gossip. A banker
asked one of the big operators about his group’s plans to
acquire a membership on the New York Stock Exchange. He half expected
an outright denial, but received instead a confirmation. And this
wasn’t even the Big Bull. But a card in the NYSE was not such a
big deal, he pointed out later. “What does a NYSE membership
cost? US $775,000”, he answered himself. “That’s
around Rs 2.5 crore. You paid as much to buy a card at the Bombay
Stock Exchange (BSE) at the height of the boom.” Another was
negotiating for a luxury yacht. “I think it is a cruise ship
they were talking about”, said one banker. Alok Aggarwal of
BankAm quipped: “I don’t ride a Toyota or a Suzuki these
days. I’m riding a Mazda”, referring to what Harshad was
doing to the Mazda Industries scrip.

They
were all there, that evening. The chairman of Canara Bank, ND Prabhu,
the finance whiz of ITC Feroze Vevaina, Munnu Chand of Classic
Financial, brokers Pallav Sheth, Paresh Khandwala and Jitu Shroff,
treasury chiefs Sandip Sachdeva of BankAm, businessman Ghanshyam
Sarda and, of course, Kayan’s chief patron, Ramesh Maheshwari
of Texmaco, owned by KK Birla. But there was another special set of
people – Kayan’s thick-as-thieves business associates: AS
Thiyagarajan and Ramesh Kumar of Citibank, Hemendra Kothari,
president of the BSE and owner of broking firm DS Purbhoodas. These
men formed an informal cartel, working closely with four firms
controlled by Kayan and his partner, Utsav Parekh.

Of
these four, C Mackertich & Co, the key outfit, directly owned by
Kayan, used to dominate the government securities business. That was
before Harshad Mehta snatched away that mantle by roping in SBI and
BankAm, cranking up megadeals in 1991.

These
would be absolutely unknown names to lay investors, at least compared
to names like Mazda Industries and Growmore. And Kayan would be a
non-entity beside Harshad’s popular image. But Kayan, a
low-profile, wily operator then in his mid-thirties, was a much
bigger force in the broking business. Like Harshad Mehta, he
straddled all segments of the financial markets – units, PSU
bonds, government securities and shares. Like Harshad, he played huge
stakes in all these markets. Like Harshad, he had strong views on the
market and was willing to bet on them. And, like Harshad, he was
intelligent and able to construct complicated deals.

But
there were vital differences. Kayan, who alternates his charming
smile with an unsettling hard, penetrating look, was publicity shy
and cool. Harshad was loud and brash. Kayan was mild and preferred to
hang on to the coat tails of institutions. Harshad was willing to
stake money on his own account. Kayan’s office was fitted with
ordinary grey laminates. Harshad’s office was all glitzy glass,
marble and chrome. Kayan dressed simply and spoke diffidently.
Harshad wore double-breasted suits and drove around in his Toyota
Lexus. Kayan was a behind-the-scenes operator. Harshad was gregarious
and a charmer. Besides all this, there was another very big
difference. Harshad was the Big Bull and Kayan was a bear. They were
locked in a bloody war, a war that was the genesis of the scam.

It
was not surprising that the Big Bull was missing at Kayan’s
house-warming party. Indeed, his brother Ashwin was supposed to
attend but his wife just had a baby. But even if he had gone, he
would have been seen as a representative of the enemy camp. The
enmity had gone too far. Behind the celebrations, some guests were
keenly aware that Kayan had reasons to be worried. Defying all his
calculations, the stock market was booming. That was bad news for the
bears. The bulls were making a killing.

The
bull camp was led by the optimists – Harshad along with Nemish
Shah, Pallav Sheth and other smaller bulls. They held a very rosy
view of the future, arguing that the Indian economy was set for a
major turnaround. The government was about to jettison the control
regime of the past, unleashing new entrepreneurial forces. Past
performances mattered little in the new fast-changing context. This
view propelled the bulls to kick up prices, often with the connivance
of managements. They were indirectly supported by the mutual funds
which, with cash raised from the public, were going around with a big
shopping bag. Later, the booming market caught the lay investors’
fancy and they emerged as the vast silent majority, unwittingly
supporting the bulls. Sounds like recent memory? We just saw a sequel
in 1999-2000.

The
bear cartel was an equally formidable force. They were small in
number, a minority against the bull camp, but had seasoned, well
established players. Aggarwala knew the business inside out and was
capable of striking big deals with foreign banks. Kayan was the most
powerful securities trader at one time. Manu Manek was like a
parallel stock exchange with a nation-wide link-up, supplying shares
in bulk to anybody who had difficulty in delivering. This camp
depended on the support of the stock exchange, which they thought was
their rightful fiefdom. The bulls were the Johnny-come-lately. The
bear cartel was mostly part of the old establishment.

The
cartel members were all-powerful people, each bringing to the table
some specific contribution. DS Purbhoodas, owned by Kothari, was the
only broker with a hotline to UTI at the time when MJ Pherwani was
chairman. Less fortunate brokers say that UTI would often sell to
bail out the cartel members if they were trapped due to
short-selling. Indeed, for the bear cartel, getting UTI to react the
way it wanted it to was critical. After all, till 1990, if UTI
sneezed, the market caught a cold.

Pherwani
never liked Harshad and UTI was, therefore, closed to him. Pherwani
had, in fact, blacklisted him. But Harshad, the consum-mate salesman,
refused to give up. On a morning walk with Pherwani on Juhu beach, he
expressed his anger and frustration.

“You
are the only organisation that is not doing business with me”,
said Harshad.

“I
can’t do much, can I?” replied Pherwani.

“It
is seen as my failure. I can’t get over it. What is lacking in
us? Nobody else refuses to deal with us except UTI.” Harshad
pleaded with him and Pherwani relented.

Harshad
got him to agree to some transactions but they were never carried
out. The Mehtas felt that the establishment’s reach went very
deep. Equity brokerage for UTI was a coveted business restricted to a
few. “There was tremendous jealousy about anybody else muscling
in”, said one of Harshad’s brothers. After much protest
from other brokers, UTI gave hotlines to others too. Their phones,
however, rang less often than Kothari’s.

Even
after SA Dave took over the chairmanship of UTI, the situation
changed only a little (though the approved brokers’ list was
expanded considerably and many more got hotlines) because the cartel
had links with the dealers and very senior officials in UTI operating
just under the chairman. Dave had an open mind about Harshad. When
the BSE sensitive index crossed the 2000 level, he rang Harshad to
congratulate him. Nevertheless, Harshad got very little business.
Sometime in late 1991, Harshad got Dave and senior UTI officials to
look at a presentation by the Growmore research team. Still no
business.

In
fact, UTI executives even played nasty tricks with Harshad, according
to the Mehtas. In 1991, a Growmore dealer took a money market deal
with BankAm to UTI. The idea was to lend money against 13% public
sector bonds held by UTI and take back the same money on call. UTI
executives took down the details with a promise to get back to
Growmore. They never called through the day. At 4.30 in the
afternoon, UTI informed the Growmore dealer that the chairman had
taken a decision. The deal wasn’t going through. The deal went
to a cartel member, claimed the Mehtas.

Apart
from UTI, the crucial institution backing the cartel was Citibank,
the most aggressive and intelligent trading bank. Kayan’s
C
Mackertich was a close ally, almost like a house broker for Citibank,
say his rivals. Citibank’s treasury chief told his dealers to
put through any deal Kayan brought, declaring, “he is part of
the bank.” The bank did not deny this but insisted that it had
got very good deals out of these brokers and that they had been very
loyal to the bank. As the Janakiraman Committee found out, two of the
top three brokers of Citibank were C Mackertich and Stewart & Co.
Like UTI, many brokers and banks were shut out of Citibank’s
deals.

Citibank’s
link with Kayan was part of a wider business chain that included
Aditya Birla and Kothari. When Birla’s Grasim Industries went
for a foreign equity issue, the lead managers were Merrill Lynch and
surprisingly, Citibank, which is a minor league player compared to
Merrill. Merrill’s Indian partner of Merrill was DSP Financial
Consultants, owned by Kothari. Kayan and his partner Utsav Parekh,
were the leading brokers for virtually all the Birlas. Kayan was also
acting on behalf of a key executive of the KK Birla empire, Ramesh
Maheshwari. The board of BK Birla’s Birla Century Portfolio
Manage-ment Ltd. included Utsav Parekh.

Aditya
Birla, BK Birla’s son, was openly bearish, labelling the market
boom as irrational. Amazingly for a businessman, he sent a dossier to
many opinion makers drawing comparisons between the low
price-earnings ratio of Unilever and Reckitt & Colman quoted on
the London Stock Exchange and very high P/E of Hindustan Lever and
Reckitt and Colman quoted on BSE, to prove that Indian scrips were
overpriced.

The
cartel, mainly C Mackertich, enjoyed a strange relationship with
Citibank (probably Kothari who was close to AS Thiyagarajan,
Citibank’s chief of investment banking, who introduced Ajay
Kayan to Citibank). And they had firm control over Canara Bank,
Canbank Financial Services and Canbank Mutual for stock market
operations. This baffled and infuriated other brokers. Thiyagarajan’s
brothers, AS Murthy and AS Nagrajan, ran a broking firm in Bangalore
called Megastocks which “virtually ran like the Bangalore
branch of
C Mackertich”, says one Calcutta broker. By
Thiyagarajan’s own admission, some 30% of its transactions have
been with C Mackertich and Stewart and Co. This arrangement was
convenient for all. Since Canfina had its headquarters in Bangalore,
Kayan needed a local broker there. So did Citibank, for its deals
with Canfina, though, for obvious reasons, it did not deal directly
with Megastocks.

Kayan’s
relationship with Canfina and Citibank was very close. When a finance
company did a small direct deal with Canfina, Kayan called up the
dealer.

“So,
you have started dealing with Canfina these days”, said Kayan.

“It
is small deal of Rs 5 crore. But how do you know?” asked the
surprised dealer.

Kayan
laughed. “I get to know anything Canfina does.” The
dealer took it as a message to stay off Canfina.

Publicly,
of course, Kayan made a spirited defence of his close links with
Citibank, Canfina and CanMutual. “These institutions are run by
performance-driven people. They have excellent dealers. They chose to
deal with me because my dealings are fair and reasonable. They can’t
say we have harmed them.” That’s what all operators say.

But
it harmed others. One big securities broker based in Bombay simply
could not get the Bangalore-based Canfina executive director, MK
Ashok Kumar, on the line. “If you called Bangalore they said he
would be in Bombay on a particular day and will meet you then”,
recalls this broker. Once in Bombay, Ashok Kumar would be
untraceable. Some trading banks, too, found it as difficult to deal
with Canfina. It mattered. Canfina had picked up thousands of crores
of bonds. “You had to deal with Canfina”, says the
frustrated broker.

These
were the players on one side and on the other side stood Harshad. By
1990, the battle lines were drawn – the pedigreed cartel versus
the upstart Harshad who had regular dealings with Canfina, Grindlays
and BankAm (top three traders) but not Citibank, the biggest of all.
On one side were the bulls with no definite financial backing and on
the other, an established cartel with institutional support. Their
first battleground was the money market where Harshad had come up
fighting against the same cartel, leaving them wounded. The next and
final battleground was the stock exchanges.

Recounts
Harshad: “In 1990 and 1991 we saw a great deal of volatility in
money markets. The average interest cost was 19.5%. You cannot borrow
at that rate to put into 13% and 9% tax-free bonds. Units were
yielding 16%. So, you had to change your base security. We went to
equities. I was bullish while the cartel played bear. Kothari openly
declared himself to be a bear in early 1992. His money market losses
hurt his ego. ‘Who the hell is this fellow?’ he thought
about me.” Each member of the cartel privately expressed
extreme hatred for Harshad but publicly maintained that they were no
chest-pounding bears and that there was no fight.

Until
May 1990, the market was stagnant – the Bombay sensitive index
was at 700-800. But soon thereafter it started inching up, moving up
more and more rapidly as weeks wore on. On 2nd
August,
Iraq invaded Kuwait. The market was unconcerned, hitting 1602 on 9th

October. But that was the peak. The boom fizzled out even more
rapidly – in forty-five days flat the index fell to a bottom of
956 on 25th
January
1991, just after the Gulf war started. In only seven months, the
index had zoomed up by 100% and slid by 80%. Those seven months were
an indicator of the sharper swings to come. It left the players
further divided.

On
one side of the great divide were the bears who believed that
1200-1500 was the natural market level while on the other side were
the bulls who felt that at 1000, the index was at its rock bottom.
The bulls proved right. From the index level of 956, the stock market
fizz began leading to a phenomenal boom. In June, Rajiv Gandhi was
assassinated just before the parliamentary elections. This created
political uncertainty, which is the worst enemy of business. It
didn’t matter to the stock markets though. By the end of the
year, the market had taken off like a rocket, riding on the “liberal”
economic policies of the Narasimha Rao government.

By
22nd
April,
the day before the scam story broke, the index had touched 4467, a
rise of 375% or an eye-popping 321% on an annualised basis. In some
counters, Harshad’s favourites like Apollo Tyres, the jump was
an obscene ten times. This was a spectacular new pheno-menon. It
stunned market players out of their wits, since the market was used
to swings of up to a maximum of 40% between a bull and a bear phase.
Exactly the same phenomenon would be repeated in 1999-2000.

So,
if the bears thought that the market’s natural level was 1200,
a 40% rise above that or an index of 1600 was the time for them to
press the sell button. They did. From the middle of 1991, the cartel
and Mehta were face to face in the stock market. In May 1991, when
the index was poised to race through 1300, the bears went on a
hammering spree. In the brawl between the bulls and the bears, the
mutual funds, especially CanMutual, obliged by “opening up its
portfolio to the bears”, charged Ashwin. According to one
report, CanMutual sold 13 lakh shares of Apollo Tyres at a Rs 66-72
range. In three months, the price had gone up to Rs 230. Though
Citibank would not confirm or deny it, it too partially liquidated
its portfolio, believing that it was a great time to sell.
Ironically, the same sellers changed their views at a higher level,
chasing the stocks they had earlier sold. Citibank claimed that it
merely bought and sold shares as part of normal trading strategy and
never took an open bear position.

Mehta
was the Big Bull, using his position in the money markets to buy
Apollo, ACC and other scrips, backed by amazing personal hype. On the
other side, at various points the cartel members had been short on
ACC and Apollo Tyres, the Big Bull’s two favorites. One
prominent Calcutta based broker recalled that in an early January
party in Calcutta, Kayan and his men were asserting that the cement
industry had peaked.

“Cement
stocks are not moving”, said Ajay “I have just spoken to
Mysore Cements (a Birla company). ACC is only Harshad’s doing.”
It was above Rs 3000 that day. Some 15 days later, this broker
attended another dinner in Calcutta where Harsh Himatsingka, working
for C Mackertich, again asserted that ACC would go down. Instead, ACC
simply doubled. The bulls were tooting their horns.

According
to one account, Kayan was playing bear in many scrips till late 1991.
He was perhaps the hired gun for Citibank in its battle with Harshad
Mehta. Kayan was, of course, bullish in several other scrips most
notably the fertiliser shares of Gujarat Narmada Fertilizer
Corporation and Southern Petrochemicals Industries Corporation and
power companies like CESC Ltd. In April 1992, he pledged a part of
these scrips and raised about Rs 6 crore from Peerless Finance.
Rumours are that one member of the cartel squared up 3 lakh shares of
ACC when the price touched Rs 3000 – a total of Rs 90 crore.
Contrast that with Mehta’s move: 26 lakh Apollo Tyres shares
bought at Rs 30, pulling the price up to Rs 400. Who paid for it? One
member of the cartel was short by 30 lakh shares in Apollo before the
Budget. He squared up at Rs 275 against his selling price of Rs 150.

The
more the bears sold, the more the market shot up. In one of its last
ditch efforts, the bears slammed again in November and December 1991.
But Harshad hit back to near-finality. “This was a classic
Harshad move”, claimed Ashwin. All through late November and
December, Harshad gave the impression that he had exhausted himself.
He was low-key, listless and showed little sign of fighting back.
Then, in January, when the market opened, Harshad went in for the
kill. He ordered massive and continuous buying of all his favourite
scrips in all exchanges, mercilessly pummeling the bear operators.
That was the end of the bear resistance. Kayan boldly defended his
decision to sell. “When we said this is the right time to book
profits, some others didn’t like it. If Harshad wanted
everybody to speak in his language how can I help it?” This is
legitimate but sounds too rational. After all, the run-ins that the
cartel and Harshad were having were not a straightforward battle of
wisdom about the course of the market. Both parties went looking for
weapons outside the trading floor.

Harshad
was wooing corporate clients like Apollo, Mazda, Blow Plast and
Gujarat Ambuja in a big way, buying large chunks of these stocks to
push up their prices. Other companies had their own favourite
brokers. ITC had Pallav Sheth while Rajendra Banthia was bullish in
Bombay Dyeing. The newly emerged bull camp had struck deals with the
corporate sector for funds to form their own informal cartel.

While
Harshad was diverting cash from the money markets and joining hands
with the corporate sector, the bears would normally have had three
weapons. The first was using the governing boards of stock exchanges
to fix settlement prices, the second was to get big mutual funds,
mainly UTI, to sell and the third was to get authorities like RBI and
ministry of finance to order selling by the investment institutions
which were all government-owned. Indeed, the RBI governor called a
meeting of all these institutions on 10th
March,
and indirectly asked them to sell. But more about that in the next
chapter. Let’s look at the price-fixing mechanism first.

In
the BSE (the president then was Hemendra Kothari who had been
screaming that the market was overheated) the making up charges (or
hawala
price that the seller pays the buyer) of settlement No.22 were as
much as 15% less than the market rates for several scrips. In
Calcutta, where the governing board was dominated by men like
Sewantilal Shah of Stewart & Co. the settlement price on ACC in
April 1992 was just 7600 when the market price was 9500. The margin
money set on ACC for the settlement 24 of 91/92 for the period ending
4th
April
1992, was Rs 1500 for buying and Rs 1000 on selling, clearly letting
off the short-sellers easily.

The
bulls were, however, paying higher margins. While the hawala
rate for the ACC scrip between this period increased by 125% (from Rs
3700 to Rs 8350), margins payable by buyers increased by 400%. At the
same time, jobbers refused to accept offers to square up at higher
levels. It seemed that the idea was to block the bull funds by making
them pay on the spot.

It
was the third weapon that failed to work. The cartel may have
attempted to repeat its old trick, that is, ride with the
institutional wave in general and get some mutual funds to sell.
“Earlier UTI could make or mar the market”, according to
a Calcutta-based broker. But the cartel, it appears, failed to reckon
with the true, endless supply of banking system’s money that
Harshad could summon with which he was swallowing large deliveries as
easily as mid-morning snacks.

Ultimately
it was a battle of egos. “The cartel’s dominance was now
gone. Harshad had made the bear cartel appear foolish in their
forecast that the market was overheated. It hurt them”, said
Ashwin who was personally against the fight-to-finish war Harshad was
waging. There were some moves for reconciling the two camps. Harsh
Himatsingka and Vivek Mundhra, who also worked for Kayan in Calcutta,
even came down to Bombay and tried to make peace. The two sides
almost agreed on a truce but Kothari was unrelenting.

Through
the boom, Kothari continued to use his public position as the BSE
president to caution investors about the stock bubble. In fact, he
was so incensed that he called Harshad and Ashwin and told them to
behave. “I can stop you from operating in any stock exchange”,
he warned Ashwin. On 3rd
April
1992, after he had just stepped down from his one-year term as the
president of BSE, he told The
Economic Times
that the BSE index was already too high and that investors should
stay away. He pointed out, quite correctly, that even near-bankrupt
companies were being quoted at unrealistically high prices. The only
person who could have stopped this bloody war was Ashok Kumar of
Canfina, who was close to both Kayan and Harshad. He was counselling
Kayan to cool down and asking Harshad to go slow. He spoke to Kothari
too. But the war continued.

By
March 1992, it was clear that the bears had been severely mauled.
According to Ashwin, they had by then changed their position and were
turning bullish, leaving Harshad a dubious victor in a senseless war.
But Harshad’s win was also his loss. He lost balance and ended
up being the villain in the greatest scam ever. By then he was alone.
The other bulls had virtually withdrawn from the game.

As
for the bear cartel, it got out of the problem comfortably thanks to
its nexus with the Canfina and Citibank. “Their losses have
been parked in the PMS accounts of Citibank”, said Harshad. For
instance, in April, Citibank gave away Rs 89 crore of profits to its
house brokers, C Mackertich and Stewart & Co. by selling mutual
funds units at artificially low rates which the two brokers then
resold at very high profits. It did not hurt Citibank. The money
belonged to its PMS clients. Besides, a part of the Standard
Chartered Bank funds may have landed up with the cartel through Hiten
Dalal. Naresh Aggarwala, who was never close to Citibank, found his
own means to fund his losses.

But
after all this mayhem, Harshad was unrepentant. “A lot of
responsible people said that I was rigging the prices”, he said
in late September 1992. “How could I do that? I had invested
just around
Rs 500-600 crore. Even the smallest mutual fund in
the market had an investible fund of more than Rs 1000 crore. I was a
big individual player but still small by market standards. The point
is, everybody was buying. At the index level of 1100, some people
said, this is it. We have reached the peak. They were wrong. Then we
reached 1800. This time everybody said there is no way the prices can
move up anymore. Everybody was bearish.” In any case, Harshad
was fighting a deadly duel, by his own admission. “Either you
kill or you get killed”, is how he described the battle later.

Harshad
lost control over the steering and crashed. Kayan told Frontline
magazine in September 1992 that he thought Harshad was a “delinquent
juvenile. Had he been a little more mature he wouldn’t have to
suffer such trauma.” This is partly true. Harshad’s need
for hundreds of crores forced him to play with bigger and bigger sums
of money while wearing his success on his sleeve. He attracted more
and more attention to himself. It was easy for the bear cartel to
divert attention to him as the prime reason for the unreasonable bull
market.

That
attention was Harshad’s death warrant. It got the RBI governor
on his trail. Once that happened, Harshad had no chance of escape.

7

Harshad
in the Net

The
irony was that whereas RBI and its subsidiary, SBI, should have been
taking credit jointly for having taken the lid off the scam, one was
cornering all the credit while the other was humiliated and accused.

WHO
caught Harshad Mehta with his hand deep in State Bank of India’s
cashbox? The question is very simple but not the answer. Like the six
blind men describing an elephant, in this case there were three
partially blind men – the Income Tax department, Reserve Bank
of India and SBI. The animal: the metaphoric Big Bull.

The
first chapter describes how SBI officials uncovered the case of the
missing securities, how Sitaraman was nabbed and the fraud came to
light. Unknown to the well-meaning CL Khemani and RL Kamat of SBI,
the governor of RBI too was doing his own sleuthing. When politicians
started baying for his blood a month after the scam story broke out,
he would claim: “I caught the thief.”

Passions
ran very high at Madhuban, the high-rise building stone’s throw
away from the SBI head office, where its senior officials live. They
believed that the RBI governor was squarely responsible for the
mindless CBI assault on the homes of SBI officials and particularly
for the sad plight of Khemani. This may or may not be without basis.
But the great irony is that whereas RBI and its 97%-owned subsidiary,
SBI, should have been jointly investigating the scam, the latter was
humiliated and dumped in the dock.

So
what was RBI governor S Venkitaramanan’s claim to fame? If you
believe the sequence of events he traces, RBI knew, investigated and
handcuffed the guilty. The story began in 1991 with a few small
banks. The tale got linked to Harshad at a later stage – only
in March 1992.

Venkitaramanan
was installed as the governor of RBI on 22nd

December 1990 by the then Prime Minister, Chandra Shekhar. The
appointment was part of a deal struck by the Shekhar government with
a powerful business house, which had reasons to be beholden to
Venkitaramanan. For Venkitaramanan, who was the union finance
secretary between 1986 and 1988, this brought a long-standing dream
to reality. It also gave RBI a chance to reform itself after
successive governors had turned it bureaucratic and insular.
Venkitaramanan was perhaps the first governor who was, unlike the
earlier three (including then finance minister Manmohan Singh), keen
on listening to the market. But the market was far from his mind on
22nd

December.

Two
weeks after he sat in the governor’s chair at RBI, India was
close to a default on foreign loans. The foreign exchange reserves
were down to just US $ 1.1 billion or two weeks of imports. The
governor mounted a strong rescue package, like selling gold and
putting a draconian credit squeeze on importers. It was a critical
battle to retrieve the creditworthiness of a rudderless country. The
battle was marshalled by Venkitaramanan. Of course, the crisis was
created by the excessive short-term borrowing made by the Rajiv
Gandhi government, of which Venkitaramanan was a key member.

The
governor, while making his repeated trips to Washington, London and
other places, scrounging around for money, was also looking into
something as innocuous as BRs – the small slips of paper on
which thousands of crores worth of business was done. In March 1991,
the governor received a tip that BRs were being misused in the money
market, that banks were issuing BRs without actually holding
securities. This led to a fraudulent generation of credit by banks on
behalf of their broker-clients. Exactly three months after he took
over, the governor asked for an investigation into five such banks.

In
an instruction of 20th
March,
marked “top secret” he ordered the Department of Banking
Operations and Development to inspect the
securities department of the United Bank of India, Bank of Baroda,
Bank of India, Canara Bank and the Indian Bank. Curiously, under this
list (which he called “illustrative”) the governor
scrawled: “While foreign banks are also involved we have to
take care.” It was almost an afterthought and became a topic of
intense debate later. Was Venkitaramanan trying to protect certain
foreign banks? Or was he being extra cautious in view of India’s
dependence on loans arranged by those banks?

The
irony is that RBI’s vaults were full of inspection reports on
precisely this, i.e. suspicious money market operations dating as far
back as 1986. The governor or the deputy governor, Amitav Ghosh, just
had to look into their own backyard. At least half a dozen inspection
reports had openly named the Bank of Karad, Vijaya Bank, the
Syndicate Bank, Andhra Bank, Citibank and others as being involved.
But instead of picking up the threads from there, RBI went in for a
fresh investigation under the orders of Venkitaramanan. Amitav Ghosh
either forgot about the earlier inspection reports or pretended that
they did not exist.

RBI
inspections are long-drawn affairs – even in cases of suspected
fraud. After the investigation files came back to RBI, another two
months passed during which RBI inspectors had scrutinised twelve
public sector banks. The reports pointed out the misuse of BRs and
rampant deals at artificial rates and recommended issuing guidelines
to stop such practices. The bank that was at the centre of the BR
scam in 1991, as discovered by RBI inspectors, was the Bank of Karad.
Meanwhile, in June 1991, the RBI investigated three banks that
financed or routed brokers: the Bank of Madura, the Bank of Karad and
Andhra Bank. Incidentally, the files went to the deputy governor,
Amitav Ghosh. He sat on them for almost two months.

What
were his arguments? “Let there be an audit”, said Ghosh
to the governor. This suggestion betrayed his lack of faith in his
own inspection team. Ghosh wanted an audit done by the chartered
accountant firm, Bansi Mehta, later found to be either auditor or
director of scam-tainted institutions like Fairgrowth, Canbank
Financial Services, Canbank Mutual and several companies of Bhupen
Dalal. Ghosh also wanted RBI to investigate the United Commercial
Bank, presumably to buy time and deflect attention.

The
governor apparently disagreed. “We will be inviting adverse
comment if we do not issue instructions immediately to stop these
malpractices”, he wrote to Ghosh on 23rd
July.
“I am worried that even after I had pointed this out as early
as 20th
March
1991, no deterrent action has been taken so far. The draft
instructions may be kept ready for issue on 26-7-91. RBI has to act
quicker in these matters.” A few days after that, on 26th

July, Ghosh issued the circular that laid down the parameters for the
use of BRs. That was a full two months after RBI inspectors had
indicted the Bank of Karad – enough time for the brokers,
directors and employees connected with Karad to cover up.

Of
course, as subsequent events have proved, everybody simply ignored
Ghosh’s guidelines. There is no evidence to prove that Ghosh
made an attempt to enforce the circular that was signed by him. In
fact, the banks gave elaborate replies to the circular. This included
SBI and Standard Chartered Bank, where violations were rampant.
Stanchart’s case was almost hilarious. It was engaged in a
vigorous correspondence with RBI, writing three letters on 26th
August,
4th

September and 20th

December, asking for clarifications and asserting that it was
religiously following the circular. As proof of compliance, it even
attached to the letter, copies of its watertight control
instructions!

Its
4th
September
letter, signed by chief executive Pesi Nat, asserted that “We
do not undertake buy-back deals in government securities at rates
other than the market rate...we do not issue SGL (subsidiary general
ledger) forms against bank receipt holdings.” Then, the
self-certification reaches its climax: “As regards transactions
by us through brokers, our policy is particularly conservative...We
do not maintain broker accounts at all... Lastly, our transactions in
the inter-bank market are purely for our own statutory/trading
purpose and we do not act as agents for any broker-clients...”
All this, of course, turned out to be completely false.

RBI
left the matter at that, even though by December, fifty-one banks had
declared that they were complying with the circular and twenty-four
of them had sent investment policies and procedures to RBI. But a
month before that, an incident took place which may have seemed
innocuous then. RBI had put KK Mukherjee on the job of inspecting the
SBI, though not its securities transactions specifically. He produced
a management report. Mukherjee, an abrasive but extremely competent
officer, made comments on the Indian dollar account of the SBI. The
SBI chairman disagreed with Mukherjee. But that wasn’t the
important part.

Mukherjee’s
report suggested the creation of a “backup department in SBI
for monitoring whether the securities transactions of the bank were
in accordance with the RBI guidelines and those of the SBI central
office.” His recommendation, if properly followed up, would
have split Sitaraman’s function and made him more accountable.
But Mukherjee didn’t look into the use of BRs and SGLs. Why
not? Perhaps nobody’s suspicion was aroused then. The
governor’s explanation was that SBI was then involved in
marketing the India Development Bonds which were designed to channel
money from abroad. IDBs were a critical means of boosting foreign
exchange reserves and RBI felt it would be unwise to do any
investigation that would affect the morale of SBI staff.

That
one comment of Mukherjee’s, on the flawed system of the SBI, is
important in the scam history. It was the first time that the RBI had
an opportunity to gain an entry into Harshad Mehta’s dealings
with SBI but unwittingly let that chance go. The next opportunity
would arise three months later. And not due to RBI’s own
efforts.

While
RBI was looking into banking practices, Harshad had emerged as a
rampaging bull in, wrecking conventional wisdom about values and
prices of shares. But his influence was limited. While it was easy
for him to snake-charm stock prices, leaving his rivals agape,
Harshad was unknown in the centre of power, New Delhi. In late 1991,
the Mehtas decided that they needed to improve their links with the
government. “We were looking for an entry into New Delhi”,
says Harshad. The Mehtas were acutely aware that brokers did not
enjoy a respectable reputation. “I did not want to be seen as
another broker from Bombay. We wanted to position ourselves as
knowledge-able and best placed in capital and money markets. Our
presentation was our entry pass.”

As
part of his strategy to improve his “liaison”, Harshad
zeroed in on Krishnamurthy. It was the right choice. Krishnamurthy
was unique. He was a successful bureaucrat (having been industries
secretary) and a well-known industrial manager having headed the
public sector giants, Bharat Heavy Electricals, Maruti Udyog and
Steel Authority. He was also a businessman in his own right,
controlling, along with his two sons, a smallish industrial empire in
India and overseas. Finally, as someone close to Rajiv Gandhi and a
small section of the Congress, he was also an aspiring politician.

Harshad
requested businessman SN Chaturvedi (who was very close to a section
of the Congress and had aspirations of keeping one firm foot in
politics) to introduce him to Krishnamurthy. Since Chaturvedi was
close to Ghulam Nabi Azad, an important fund-raiser and Congress
leader, this later became a juicy piece of gossip in Delhi. Harshad
has a plausible explanation: “You need that introduction.
That’s the culture in Delhi. Nothing works without a reference.
I would not have been able to get past even the durwan
in North Block.”

On
18th
February,
Harshad Mehta met Krishnamurthy at Yojana Bhavan in Delhi and
impressed him immensely with his lethal combination of catchy
investment theories and his high-pressure sales talk. Harshad started
off by saying that “if you continue to throw away the public
sector shares for a song, the government will fall.” He
suggested that a disinvestment panel, headed by Krishnamurthy, should
package the deal attractively and redeem the public sector
undertaking debt through a debt-equity swap.

Krishnamurthy
was impressed. “I learned more about the capital markets in
those meetings than I did in my lifetime”, he was later quoted
as saying. This was partly so because he simply had no understanding
of stock markets. Harshad dazzled him by saying, “Capital
markets can solve all our main problems: unemployment, resource
crunch, inflation, etc.” Krishnamurthy was also keen to know
why the ACC shares had reached Rs 10,000. And that if ACC was quoted
so high what the Cement Corporation of India should be quoted at.

Later
Krishnamurthy would say, “Here was a man who was lionised by
the press as the brightest young thing in finance. He came to see me
and I received him as I do others who have ideas to share on
resolving the country’s economic problems. It is my job to be
open to ideas and information. Mehta came and told me that he had
concrete ideas on solving the country’s balance of payments
problems. I told him I am not the best man to deal with these as the
implementation was in the hands of the finance ministry. When I
realised that the purpose of his visit was to discuss resources, I
directed him first to my colleague Dr C Rangarajan. He said he was
busy and suggested that Mehta meet the finance secretary. All I did
was telephone the finance secretary that Mehta wanted to see him.
Geethakrishnan gave him an appointment.”

Mehta,
along with Jitu Shroff of VB Desai and Co. made a twenty-minute
presentation on how the capital market could be opened up to attract
funds. He also made the point that it was private organisations like
Merrill Lynch which today had more to invest than financial
institutions or even multilateral funding agencies like the Asian
Development Bank or the International Monetary Fund/World Bank with
whom India was engaged in a painful negotiation for a few hundred
million dollars.

Krishnamurthy
and Harshad hit it off so well that their relationship quickly
spilled over to business deals. Harshad registered Growmore Power
Corporation with Rs 1000 crore of authorised capital, presum-ably to
tap Krishnamurthy’s general management experience in running
large corporations and specific experience in running BHEL. But more
controversially, Harshad also gave him money without any collateral,
a transaction that the CBI labelled a bribe in an attempt to fix
Krishnamurthy.

Ashwin
said that Krishnamurthy’s “son called us and said that
they need between Rs 35 lakh to Rs 75 lakh to buy more shares in
India Meters. We sent instructions to Mohan Khandelwal of our Delhi
office to release up to Rs 35 lakh.” The Delhi office
eventually handed over a cheque of 32.74 lakh without working out the
interest, agreement or collateral. To help someone with an instant
loan without proper documentation is not unusual among businessmen.
“Harshad would give money to anybody”, said Ashwin. “Our
mental limit was Rs 20 lakh”. But to some the figure of Rs
32.74 lakh looked suspiciously like the exact rupee value of US
$100,000 at that time.

All
this while, the stock market continued to boom and the money market
remained turbulent with the banks merrily flouting the 26th
July
circular. In January 1992, the governor was once again tipped off by
a securities dealer about the rampant misuse of BRs. RBI chose to
investigate three banks: Andhra Bank, Bank of Karad and Bank of
Madura. The reports reached RBI in the middle of February. They
showed massive irregularities in securities transactions. The banks
had continued to lend their names to fictitious deals.

Some
DBOD officials suggested that the job of inspecting broker’s
books be handed over to outside investigative agencies like the CBI
or the Department of Revenue Intelligence. But this was too radical
an idea for the RBI, where the tradition is to pretend that brokers
do not exist, or at best, are necessary evils. One of the executive
directors, Vimla Vishvanathan, living up to this tradition, opposed
the idea of getting the CBI in. She also suggested, in a note dated
22nd
February,
that “the governor may like to take the opportunity to discuss
this with the bank chairmen after the next credit policy
meeting...before that, the issues may be discussed at a top
management meeting.”

The
governor was aware of Vishvanathan’s legendary slowness in
taking action on anything. So when the note reached him on 3rd
March he noted: “There is no need to discuss further. We have
to take action to prevent this kind of abuse. We have to remove the
directors who have shown involvement in this. Bank of Karad should be
asked to take action to stop this kind of abuse. May (I) have an idea
of what powers
we have to take action? I would like to issue clear instructions
threatening withdrawal of licenses in cases of such open defiance of
orders. Banks are benefiting brokers through fake transactions.
Please discuss.”

The
next discussion took place on 12th
March,
between the chief officer of the DBOD, ND Parameshwaran, Vishvanathan
and the governor. The governor recalls having suggested a takeover of
Bank of Karad. Vishvanathan said that under a section of the BR Act,
the RBI could act against erring banks but argued against it saying
that a take-over would lead to all kinds of speculation. “Let’s
not disturb the banking system right now. We will take up the matter
in the credit policy meetings with the banks”, she said. The
governor made the fatal mistake of giving in to Vishvanathan’s
arguments.

She
went back and wrote: “The governor said that while we need not
take any extreme steps immediately, a strong and final warning should
be given to the 3 banks about the possibility of various consequences
if they persist in contravening our instructions...The irregularities
observed in the scrutiny conducted in the three banks should be
communicated to them. We should seek the chairman’s written
confirmation that these irregularities will not recur and they will
ensure strict compliance with our July 1991 circular.” Karad
was again let off and the governor, by allowing Vishvanathan to put
words in his mouth, laid himself exposed to the charge of
dereliction, after having started the whole process of investigation.

As
the governor was pursuing the Bank of Karad issue, he was taking a
close took at the Harshad phenomenon. “There was no money in
the system, the borrowers were starved of credit and here was one
broker buying shares by the crores? I was curious”, he said.
“Where was Harshad getting his money from?” This was the
first time the investigation into the money market scam (misuse of
BRs by the Bank of Karad, etc.) and the stock market scam converged,
in the office of the RBI governor, an office that has traditionally
been an ivory tower in the murky world of Indian finance. But
Venkitaramanan himself was scarcely aware of that convergence.

He
became aware, following the leads thrown up by the much publicized
Income Tax raid of 28th
February
– one day before the Budget – at the prodding of a top
office bearer of the BSE. The Budget was one of the most significant
in Indian economic history. Its pro-liberalisation policies were used
by the bulls to send the stock prices shooting. Even the finance
minister felt that the stock boom was a result of the liberal
policies and statements of intent in his Budget speech.

The
Income Tax department wasn’t impressed. Some of the officials,
inspired by one of Harshad’s rival brokers, were curious about
the rise of Harshad Mehta. Harshad himself fuelled this curiosity.
The cover stories in the February issues of Business
India
and Business
Today celebrated
Harshad’s flashy cars, opulent seafront apartment and the huge
numbers that he was playing around with. Intrigued, the Income Tax
department planned a massive raid on him.

The
raid and subsequent investigation was conducted by
CP Ramaswami,
an upright and dogged deputy director (investigation), in his early
forties. But, while integrity was essential, it was not enough.
Harshad had computerised everything and officials had to break
through computer codes to gain access to critical records. They
drafted in a computer expert to break the codes but that too, took
months.

Still,
the Income Tax department gave RBI several crucial tips. One was that
huge amounts of money were coming in from Madras. The money, it was
rumoured, belonged to a top political leader of Tamil Nadu. The
governor ordered SBI to monitor Harshad Mehta’s current account
at the Bombay main branch where Sitaraman was then working as a
junior officer in the investment department. More about that later.

In
early March 1992, these disparate strands of the scam began running
parallel to each other. RBI’s investigation into Karad and
other banks for the misuse of BRs in money markets, the Income Tax
department’s curiosity about Harshad’s rise in the stock
markets, and his deepening links with Krishnamurthy. Among all these,
what captured the public imagination most and was uppermost in the
mind of the RBI governor was the booming stock market and Harshad’s
source of money.

Venkitaramanan
took a personal interest in the stock market boom and wanted it to be
contained at any cost. He genuinely believed that the boom was a
speculative bubble that was distorting money supply and the flow of
credit to where it was needed more: cash-starved Indian businessmen.
Was he also egged on by somebody? It is difficult to say but one of
the frequent visitors to his huge bungalow in the posh Cumballa Hills
area that year used to be Hemendra Kothari, President of the BSE. Did
Kothari, by then known as an open Harshad-baiter, advise the governor
to investigate Harshad’s source of funds? They were certainly
close.

In
1986, Unit Trust of India launched its first offshore mutual funds
with Merrill Lynch which had a collaboration with DSP Financial
Consultants, controlled by Kothari. As DSP was catapulted on to the
international arena, riding piggyback on Merrill Lynch, big
business-men smelt new money-making opportunities. Hoping that there
would be more offshore funds from India, including private funds and
huge commercial borrowings, the Hindujas approached Merrill Lynch in
India through its Swiss-based investment banking firm, Amas Holdings,
which had joint ventures and operations in several parts of the
world.

The
Hindujas knew Venkitaramanan, then finance secretary, very well. So
did Kothari, who used to meet him through Piyush Mankad, an IAS
officer then with the investment division of the Finance Ministry. In
one of his visits to India, Michael Von Clemm, managing director of
Merrill Lynch, told Venkitaramanan that the Hindujas wanted to be
their partners in India and that he wanted his advice. The governor
pointed out that Kothari ran a small business and if he was providing
the right services, Merrill should help people like him grow rather
than have him muscled out by a big business house.

On
9th
March,
the governor made a trip to Hyderabad and publicly stated that the
boom was speculative and that institutions should think of selling.
He had just left the Karad trail and, for the first time, got on to
Harshad’s trail. The next day, 10th
March,
was crucial. The chiefs of insurance companies (all
government-owned), Pherwani and
SA Dave, chief of UTI, by far the
biggest mutual fund player (also government-owned) were all there for
a meeting with the RBI governor. He opened the meeting with a small
note on the astounding rise in share prices. “The present
runaway boom is propelled by bull speculators and not justified by
fundamentals”, he said. “It
is not healthy. Do you have a clue why the prices are going up like
this?”

Few
people did, except Pherwani, the perpetual bull, earlier friend of
Kothari’s and now arch enemy. Pherwani had proposed the
establish-ment of a new stock exchange at Bombay (which later led to
the creation of National Stock Exchange), which Kothari was opposing
in order to protect the pre-eminent status of BSE. Pherwani
vehemently argued that it was a spontaneous bull run, which
demonstrated the market’s faith in the government’s
economic liberalisation. “We should not do anything to disturb
this.” Around the same time he told India
Today,
“This is the beginning of an economic miracle in India.”

The
governor was not convinced. He asked the institution chiefs: “Don’t
you think it is a good time to book profits?” Most of them
agreed in principle but had their own problems. Autonomous firms like
UTI could sell but most others like the insurance companies, wholly
owned and controlled by the government, had a genuine problem. “If
the price jumps up even more after we sell, we will be pulled up by
the government auditors and Public Accounts Committee for bad
judgment”, one of the chiefs of the insurance companies said.

Nevertheless,
the institutions came out and ordered sales of select scrips. The BSE
sensitive index tumbled from 3547 to 3316 – a fall of 231
points on a single day and another 150 points the next day.
Incidentally, even though the scam story unlocked the most damaging
and unnerving flow of information between May and August, the index
did not go far below the 3000-3400 range, a level at which the
governor pressed the panic button.

Venkitaramanan
wasn’t content asking the institutions to sell. On 13th
March,
he travelled to Madras to address the second annual
JV Somayajulu
memorial lecture organised by the Madras Stock Exchange. He seized
the opportunity to ask the stock exchanges to take immediate steps to
cool the market down which was overheated by excessive speculation of
specified shares. For a while, it seemed that the market would obey
him. On 12th
March,
the sensitive index went up 80 points but fell further, hovering
around the 3100 mark till 20th
March.
As a result of the 10th
March
meeting and his continuing interest in the boom, the governor zeroed
in on Harshad Mehta and his source of funds.

Many
people felt that Harshad’s money came from the Dubai-based
underworld don, as well as the corporate sector. UTI chief, SA Dave,
a greater admirer of Harshad than Pherwani was, publicly spoke of hot
money inflows into the market. But, nobody knew for certain what
Harshad’s source of money was. Not even his competitors.

On
16th
March, the governor asked Vishvanathan for an extract of Harshad’s
current account maintained at the Bombay main branch. Vishvanathan
contacted the SBI chairman Goiporia. Goiporia asked the branch to
give Harshad’s account statements, which he sent to
Vishvanathan at around six in the evening. She showed the statement
to the governor and sent a note to ND Parameshwaran, with the
following comment: “This
statement was sent to me by chairman, SBI at 6.00 p.m. I have shown
it to Governor. There are many large (underlined) credits and debits
in the a/c, and these are all transfer entries. Chairman, SBI said
that the vouchers will be scrutinised tomorrow to see where the funds
have come from/transferred. Our officers should also scrutinise these
entries. TOP PRIORITY action please.”

The
volume of money moving in and out of Harshad’s account was then
considered staggering. On 9th
March, for instance, the balance was close to Rs 186 crore. Transfers
in and out of the account have often been of Rs 30-40 crore. The
statements of accounts were sent to the finance minister. The
governor called up Goiporia: “Please put Harshad Mehta’s
account under continuous monitoring.” Whereas everybody was
looking for traces of funds coming from Dubai and other places, the
SBI found out that hundreds of crores were entering Harshad’s
account from Madras. Harshad got to know that his account was under
scrutiny and stopped using the SBI account. The last entry was of
14th
March
– a withdrawal of Rs 48 crore which left a balance of just Rs
1.61 crore.

For
those in the securities business, alternate Fridays were meant for
squaring up or carrying forward transactions. To most of them 20th

March was a Friday like any other. But for Harshad it was critical.
He was running a huge outstanding position with the SBI and wanted to
roll it over. However, Goiporia was already looking at the extract of
his current account with great alarm. He asked his officers to stop
the rollover. Harshad started contacting his new set of friends with
political influence.

In
the week beginning 23rd
March,
the RBI governor was in Delhi. Among other things, he planned to
address the Euromoney
conference. He spoke just after Cecil Parkinson, a former minister in
the Thatcher cabinet, who had overseen the British government’s
privatisation effort. Around the same time the government had already
formed a panel under the chairmanship of Krishnamurthy to suggest the
best ways of disinvesting the shares of public sector companies.
Venkitaramanan suggested that Krishnamurthy take this opportunity to
speak to Parkinson, who seemed to have good ideas on privatisation.

Krishnamurthy
instead took the opportunity to subtly plead for Harshad Mehta. “He
is a bright man. You should meet him”, he sug-gested. The
governor said, “Let him come on his own and not on your
recommendation.” Meanwhile, Harshad was continuing to scout for
a source of funds.

It
was All Fools’ Day when Harshad went to meet the RBI governor.
He expounded his investment philosophy and his pet theory of how
capital markets and direct portfolio investment were the solution to
the country’s domestic and foreign debt problem. The governor
politely told him that he did not quite agree with him because the
only long-term security on the balance of payments front could come
by boosting exports and cutting down on forex-guzzling expenditure
like petroleum imports. Harshad refused to give up. “I want to
make a presentation to you, sir. I need four hours for it.”

The
governor said, “I can’t spare four hours for you.”

Harshad
then said: “What do you have against me, sir? I have a problem
with SBI, they are not helping me. I am told they are taking
instructions from you, sir. Please speak to them.”

The
governor called up Goiporia in Harshad’s presence but deftly
avoided pleading for him. Instead, he encouraged Goiporia to continue
to monitor Harshad’s account. Following the JPC hearings it
has, however, been alleged that the governor had got Harshad Mehta’s
account at SBI activated by speaking to the bank.

Harshad
was increasingly desperate for a large source of money. He was
planning Initial Public Offerings of the Growmore companies but that
was some way off. In April, Ashwin Mehta travelled to the UK where
apparently he met the Hindujas. This may have been under Pherwani’s
guidance. Around the same time, somebody from the Hindujas rang up
the RBI governor and said, “We want to bring in 150 million
pounds. Is there a quick way?”

The
governor told him, “You can bring it under the normal Foreign
Currency (non-residents) deposit scheme.”

“Is
there any other way?” asked the caller. The governor was
suspicious. He dissuaded the Hindujas from doing anything.

Parallel
to all this ran SBI’s effort to reconcile its investment
portfolio. It detected that Harshad had not delivered the securities
it had paid for. Harshad started paying back from 13th
April,
but on 18th
April,
he threw up his hands. That was the due date for the reversal of Rs
360 crore of double ready forward transactions in treasury bills,
state loans and 11.5% central loan done for three fortnights.

On
18th
April,
SBI decided to roll over the transaction for another two fortnights.
The deal ticket states: “We are compelled to accede to the
request of extension as the broker M/s. Harshad S Mehta expressed his
inability to deliver 11.5% Central Loans.” Harshad subsequently
squared up his dues to the SBI by 24th
April.
RBI was curious to know how. Its inspectors discovered that the bulk
of the money (Rs 575 crore) had come from Grindlays. On 2nd
May,
RBI inspectors took a close look at Grindlays cheques and found that
the money had basically come from National Housing Bank (NHB) whose
cheques favouring Grindlays were credited to Harshad’s account.
The governor was informed of this on 4th

May, and from the next day, RBI started bulldozing the SBI and
Grindlays to return the money to NHB.

Between
1st
and
4th
May, Pherwani was in Goa. He was continuously in touch with his
officials at the NHB. Senior officials at the NHB started a scrutiny
on 1st
May,
and over the next seven days prepared a brief to cover themselves.
The report, signed by the executive director, PK Parthasarathy, was
presented to RBI on 5th
May.
Around the same time the governor received a phone call one night. In
a gruff voice the caller said: “Let SBI allow Harshad to roll
over his dues for another fortnight. You will sleep in peace.”
The caller was Pherwani.

Since
24th
April,
when Harshad had squared up his dues to SBI, he had been looking for
ways and means to return the NHB money but did not realise how fast
the RBI governor was capable of moving. So his initial reaction after
the scam was to hold on to all that he had and not settle. He was
talking to HUDCO to make a Rs 600 crore bond issue and get Allahabad
Bank to subscribe it. He would then have picked up the money from
HUDCO and kept the chain going.

Harshad
was also making frantic calls to the governor who refused to come on
the line. He also attempted to meet the revenue secretary, K
Geethakrishnan, and the finance minister but both of them ignored
him. Harshad was advised to sell his holdings to SBI Capital Markets,
a fully-owned subsidiary of SBI and thus square up his outstanding
position with SBI. But he was short-sighted enough to worry about the
capital-gains tax he would have had to pay if he sold his holdings.
Pallav Sheth and Ashwin told him that there was no sense in saving on
capital gains if he was not going to be left with capital. Harshad
refused to listen. Instead, he created a fresh liability – with
NHB.

“Only
two sets of people knew we were in trouble”, says Ashwin. One
of them was Citibank which took obvious pleasure in the fact that
Harshad was finally in a soup. But Citibank was a formidable player
in the market, commercial-minded and keen on grasping a good deal
when it saw one, regardless of whether it came from an enemy. Around
27th
April, Harshad opened
negotiations with Citibank to sell a chunk of his portfolio which was
then worth Rs 400 crore in the market. Citibank’s counter offer
was cut-throat: a 35% discount from the prevailing price. The deal
fell through. And the stock bubble that Harshad had created was
losing air. By the second week of May, the Stanchart-Bank of
Karad-Metropolitan Bank stream of the scam was beginning to surface.
But Stanchart itself did not know the extent of the problem. Chairman
Pesi Nat met senior RBI officials and sounded very confident,
although by then he knew that the bank was in deep trouble. In fact,
this was a murkier and bigger scam than Harshad’s and involved
some of the luminaries in the financial sector. This tableau of
foreign banks, shady brokers, a flashy businessman and perhaps some
ministers would continue to baffle the investigators for months on
end.

8

Wielding
the Crowbar

Since
NHB, a fully-owned subsidiary of RBI,
had been bilked by Harshad,
RBI got into the act to protect its own skin. This, it concluded,
would be best achieved by protecting NHB and savaging SBI and
Grindlays.

DR
Robert Edgar, the tall Australian chief executive of ANZ Grindlays
Bank won’t forget Tuesday, 5th
May 1992 in a hurry.
Having just returned from a trip to Bangladesh with his wife, he had
barely begun work that morning when he received a call from PK
Parthasarathy, executive director of National Housing Bank.

“We
have some transactions with you. Please reverse them or return the
funds”,demanded Parthasarathy.

Edgar
was surprised. “What transactions? Can you give me the
details?” he asked.

Parthasarathy
replied that they were related to some bonds and units but he was
unsure. Then with an air of authority he said, bluntly: “You
have our money and that should be enough.”

Edgar
told him that it was pointless trying to discuss this over the phone
and that he should write to Grindlays. Edgar did not have to wait for
too long. The same day, NHB despatched a letter – NHB (B) No.
5048/INV-92 – marked “Secret”, to Edgar’s
office. (That started off a series of claims by NHB on Grindlays, all
marked “Secret” until Grindlays asked point-blank what
the secret was.)

Edgar
opened the two-page letter with great curiosity at 10 in the morning
on 6th
May.
It
was signed by the assistant general manager, C Ravi Kumar, later
charged for cheating and fraud by NHB itself.

The
letter listed transactions in units (Rs 99.77 crore) and PSU bonds
(Rs 152.25 crore) for which NHB had paid money to Grindlays and which
were due for reversals on 5th
May. “However, till the end of the day, the payment was not
forthcoming from your Bank. In this connection, you would kindly
recall the discussions had with you by Shri PK Parthasarathy,
executive director...”

Edgar
wrote back to Ravi Kumar that he was not aware of the deals and so
did not “appreciate your request for the reversal of the
deals.” He asked him to clarify “the deals” and
“favour us with the documents, if any, in support of your
alleged claim against us.” Soon after, NHB and RBI bosses
discovered that Ravi Kumar himself was deeply involved in nefarious
deals. Meanwhile, Parthasarathy cleverly disappeared from the scene,
neither signing letters nor the First Information Report against NHB
officials, though he was the senior-most of the operating staff.

What
Edgar did not know at that time was that two RBI officers ND
Parameshwaran and Vimla Vishvanathan, investigating the scam, had
found out that the money Harshad Mehta had picked up to square his
dues with SBI had gone from NHB into Mehta’s account at
Grindlays. NHB was now trying to dissociate itself. Ignoring the
Harshad angle, it was declaring that it had paid Grindlays hundreds
of crores for certain “transactions” which were due for
reversals.

On
its own, NHB was not bold enough to take a line tough as this in
order to get back the money which it had turned over to Harshad in
active collusion with him. In this commercial dispute with Grindlays,
NHB’s line was being dictated by the RBI governor himself. But
what RBI conveniently ignored was the mess that NHB itself was. It
was being run so shabbily that for a long time it did not even know
what its “claims” against Grindlays actually were. The
5th
May
letter, for instance, mentions Rs 19.26 crore of transaction in a 9%
Coal India bond of 13th

April. The figure was actually Rs 13.26 crore as stated later in the
FIR.

NHB’s
bumbling ways became clearer in the subsequent war of letters with
Grindlays. On 7th
May, SD Hosangadi, the chief general manager, re-stated NHB’s
demand to Grindlays without being able to throw any more light on the
“deals”. He added, almost as an after thought: “In
case of any other pending claims we reserve the right to make our
claims to you separately.” Clearly, NHB was groping in the
dark. A few hours later on the same day, it magically pulled out six
more deals in units (Rs 67.65 crore) and bonds (Rs 215.20 crore)
between 23rd
March
and 20th
April,
discovering that though it paid the money to Grindlays, it had no
documents to back it. It requested Grindlays to give the bank
receipts immediately.

Grindlays
flatly refused and even found out that one of the trans-actions cited
was not with it; nor had any of its account holders received the
money. In that same letter (of 11th
May),
for the first time, Edgar disclosed that the NHB money had gone into
Harshad Mehta’s account. As part of its shrewd move to keep the
pressure on NHB, Grindlays kept on insisting that NHB supply
documentary proof of the transactions. The transactions against which
it gave out money were probably fictitious. NHB’s claim kept
shifting from one letter to another. In the first couple of
letters, it could not even name the bonds transacted, referring to
them generically as “PSU bonds”.

Nevertheless,
it reacted with shock and surprise, in a letter dated 12th

May, at the fact that Grindlays had credited the NHB cheques to
Harshad’s account. Equally shocking though, was the fact that
its own books continued to be in such a bad mess that it was still
discovering its deals. This was reflected in the annexure to the 12th
May
letter – a detailed table of its outstanding deals with
Grindlays. The table carried fresh transactions dating back to 11th
December
1991 and 21st
February 1992. It also reduced the outstanding transactions mentioned
in earlier letters. The amount due as per this table: Rs 520 crore.

Grindlays
greeted the constantly shifting and expanding composi-tion of NHB’s
claims with derision and disdain. But NHB was undeterred. Hosangadi
wrote to Grindlays: “Our accounts are under audit and in case
any further transactions come to light, we reserve our right to
prefer further claims on your bank.” On 3rd
June,
almost one month after it made the first demand, NHB finally arrived
at a definite
list of transactions and submitted a final claim of Rs 506 crore.
Shortly before this, K Jaybharat Reddy replaced MJ Pherwani as a
part-time chairman of NHB.

Meanwhile,
NHB was creating a similar confusion with SBI. On 27th

April, four days after the scam surfaced, SBI wrote to NHB asking if
there were any outstanding transactions with the bank. NHB said that
there weren’t. But as usual, it really hadn’t a clue. It
had entered into ten transactions with SBI between 25th
October
and 30th
March
and every single one was to be reversed on the same day – 5th
May
1992.

On
5th
May, NHB woke up. Ravi Kumar dashed off a letter to the SBI asking it
to reverse four transactions amounting to Rs 262 crore [5].
Then, NHB managed to dig out from its mess, four more outstanding
transactions. The total claim Rs 604.61 crore[6].

Astonishingly,
included was a claim of Rs 44.97 crore on State Bank of Patiala. All
these were to be reversed on 5th
May,
curiously the same day that NHB made its first claim on Grindlays.
SBI denied it had any of these transactions in its books and heard
nothing from NHB. Then three weeks later, on 27th
May,
there was another demand from NHB. By this time NHB’s
transactions with SBI had mysteriously swelled to Rs 724 crore. It
included two deals dating back to end-1991 and interest of Rs 27
crore.

Then
on 3rd
June,
NHB slapped another demand claim, taking the final outstanding amount
to Rs 734.73 crore. Later, as it did with Grindlays, it dug out still
more records, got wiser and pared its claim down to Rs 707.76 crore.
Strangely, in this commercial dispute between NHB on one side and
Grindlays and SBI on the other, RBI decided to take
the side of NHB and pressure the other parties to pay up.

It
is hard to understand how the governor found NHB even remotely
defensible. NHB was established in July 1988 as a fully-owned
subsidiary of RBI but till the scam was exposed, had no board of
directors. Under the Act, the board was supposed to consist of
fourteen members drawn from various fields, RBI and the government[7].
Such
an exalted board was never formed. Instead, since April 1991, it had
been headed by a part-time chairman, the consummate deal-maker,
Pherwani, aided by an executive director, Parthasarathy. In the first
place, NHB was supposed to promote housing. So how did it get
involved in the securities scam?

The
central figure in that saga was Pherwani, who as the part-time
chairman of NHB and three other financial organisations, was more
active than many full-time managing directors. Pherwani’s
boundless energy, his broad vision and his ability to strike big
multi-cornered deals involving politicians, big businessmen and
bureaucrats are the answer to a key question: why did NHB get dragged
into huge money market operations and oblige Harshad with Rs 1200
crore worth of fictitious deals?

Pherwani
was the original Big Bull of the Indian stock market, a sobriquet he
earned when, as the chairman of UTI, he could move the stock market
single-handedly. He was removed from that position just after VP
Singh became the Prime Minister in November 1989. UTI had allowed
Reliance Industries to gain control of Larsen and Toubro in 1988 by
passing on a large block of L&T equity to Reliance in a cosy
deal. The Ambanis of Reliance and Singh had been engaged in an open
war since 1985. Interestingly, though chiefs of other financial
institutions too, had to bend rules to help the Ambanis gain entry
into L&T, it was Pherwani alone who got the sack.

Then
Sharad Pawar, as chief minister of Maharashtra, made him the chairman
of the Maharashtra State Financial Corporation and Chandra Shekhar,
when he became the Prime Minister, put him in charge of NHB. Pherwani
started making big plans for these two institutions as well as for
the Stock Holding Corporation and the Infrastructure Leasing &
Financial Services – two other institutions of which he was the
chairman, though without executive authority.

He
was energetic, ambitious and quick in taking decisions. But as the L
&T takeover proved, he was reckless and ever ready to cut a deal
to help someone. Pherwani, who was not around to defend himself when
the scam investigations started, denied till the last day that he had
anything to do with NHB dropping hundreds of crores into Harshad
Mehta’s accounts in SBI and Grindlays. Few people believed him.
To the players in the financial markets, it was a typical Pherwani
move to oblige his friends and associates.

Whatever
be the truth, NHB was ripe for a major fraud. Contrary to the picture
portrayed by RBI, it was not a helpless victim of a heist. Under the
chairmanship of Pherwani, NHB turned itself into an aggressive player
in money markets. Between April 1991 and 1992, it had entered into
1332 money market deals worth Rs 26,400 crore, the bulk of it in call
money, public sector bonds and units. Its disputed transactions with
SBI date back to October 1991.

Pherwani,
who in all senses acted like a managing director, presided over a
complete lack of checks, balances and even the most elementary form
of internal control in NHB’s funds management department. All
fund management operations were handled by Ravi Kumar, who was not
only a dealer but also the signatory of cheques. He was helped by S
Suresh Babu, assistant manager in funds management. In April 1991,
Ravi Kumar asked for and was given authority by the chairman to enter
into ready forward deals. NHB sold bonds, which did not exist in its
books and lent money to Harshad Mehta, disguising it as call money
transactions. It paid money to SBI against supposed deals in treasury
bills and government loans but received no securities. Nor did SBI’s
books show any record of these deals.

Suspicion
that Pherwani knew and authorised the deals, remained. But on 4th
May,
one day before he called Edgar, Parthasarathy absolved himself and
the chairman from any wrongdoing even before he knew fully what had
happened. His note, addressed to the RBI governor, is an
extraordinarily watered-down version of NHB’s capers.

It
stated that NHB had always done back-to-back deals, never through a
broker, never staked its own money and that none of its deals were
authorised by the chairman or executive director. This note attempted
to pass the blame on to two junior officials but failed to dispel
suspicion that somebody higher up took the decision to favour Harshad
Mehta by turning over the money to him. Parthasarathy was known to
have a bureaucratic mind and a wishy-washy approach; so how was the
note so categorical? It was quite obvious that Pherwani had dictated
it, which explains the tone and the emphatic attempt to absolve the
chairman.

Apart
from the suspicion about Pherwani’s role, a big question mark
hangs over the mysterious M Varshneya, former chairman of the Punjab
National Bank, who was a director at Harshad’s Mazda Industries
at an astronomical salary. Varshneya was also an advisor to NHB. He
was allowed to quietly retire and was never been questioned by either
CBI or JPC or even RBI, despite the fact that he was the most obvious
link between Harshad Mehta and NHB.

Apart
from Pherwani, C Rangarajan was the other important NHB director who
was later replaced by R Janakiraman. When Pherwani stepped down, K
Jaybharat Reddy, additional secretary in the depart-ment of banking,
stepped in. Coincidentally, Janakiraman and Reddy were both directors
in SBI. Since it was discovered that the subsidiary of RBI had been
bilked by Harshad, RBI got into the act to protect its own skin.
This, it concluded, would be best achieved by protecting NHB and
savaging SBI and Grindlays. RBI decided to force SBI and Grindlays to
repay the money they had deposited into Harshad’s account. This
was a shrewd but ethically dubious move that had the full sanction of
the ministry of finance.

It
was, in fact, seamlessly co-ordinated. Three weeks after
Parthasarathy sent his note, Jaybharat Reddy too, wrote to the
governor, virtually repeating what the earlier note had said. But
there was a small difference. Reddy did not indulge in
Parthasarathy’s blatant whitewashing. His letter admitted that
“unfortunately, although the transaction details are recorded
in NHB’s books, the concerned NHB officials have not obtained
the necessary documents such as contract notes and cost memos and
bank receipts for the transactions.” Reddy cited retired
Justice of Bombay High Court, B Lentin’s opinion that
Grindlays’ and SBI’s action in crediting cheques to
Harshad’s account was contrary to the law and requested the
governor to “bestow immediate attention to the matter and help
us out of this difficult situation.”

The
governor applied his mind and emerged with this logic: RBI and NHB
had no claim against Harshad. Since it was Grindlays and SBI which
had credited cheques to his account, it was their books which should
have the outstanding against Mehta. At least SBI had recovered some
money but Grindlays was taking a tough line with RBI, arguing that
crediting banker’s cheques to an individual account like
Harshad’s was a “accepted market practice”. To
combat Grindlays better, RBI first wanted to set an example by
getting SBI to pay. In a sense, the governor’s logic was not
wrong. But it was accompanied by some very nasty tricks, a shameless
disregard of principles that would have prevented a conflict of
interest or even explicit points of law. The SBI drama,
coincidentally, began on 23rd
April,
the day the scam was exposed.

That
day the SBI executive committee, comprising a core section of the
board of directors, was scheduled to meet. It was a four-member
committee headed by the chairman. One of the members was Janakiraman,
who, by wearing five hats at the same time, made a mockery of the
principle of conflict of interest. He was in the SBI executive
committee, a deputy governor of RBI, head of the RBI appointed
committee investigating the scam, a director of SBI and NHB.

The
committee questioned the chairman about the report published by The
Times of India that
morning. Goiporia admitted: “Yes, the story is true. The amount
involved is over Rs 622 crore.” He claimed that the money had
been recovered from Harshad Mehta, though there was a small dispute
of Rs 3-4 crore which Harshad claimed was double counted. A few weeks
after this, RBI started pressing SBI to pay back NHB the money
Harshad had given to square up. Incidentally, the letter from RBI to
SBI was signed by a junior official and not the governor nor any of
the deputy governors. Goiporia replied to RBI around 22nd
May.

The
next meeting of the executive committee was held under the threat of
RBI’s demand that it pay up over Rs 706 crore to NHB. Goiporia
said that he would refer the matter to the executive committee for
their approval. The executive committee felt that the matter ought to
be discussed with the entire board. Goiporia pointed out that the
board had met barely a few
weeks ago but the members insisted that another meeting be called. It
was scheduled for 11th
June.

Just
before the meeting was held, Goiporia was asked to go on leave. SBI
directors were convinced that this was caused by the angry letter he
wrote to the RBI governor refusing to pay NHB. Senior SBI officials
feel that the bank’s tough stance invited the CBI’s reign
of terror leading to raids, rude interrogations and tapped phone
lines.

The
role of the RBI governor and of the ministry of finance is
intriguing, especially on the issue of Goiporia’s exit.
Goiporia went on leave on 2nd
June.
At 10.20 that morning, he got a call from the RBI governor asking him
to resign. Ten minutes later, even before he could act on that call,
there was another one. This time the caller was Montek Singh
Ahluwalia, secretary, department of economic affairs. He asked
Goiporia to go on leave, not resign. Goiporia expressed his
confusion. Ahluwalia promised to call him back which he did fifteen
minutes later. Goiporia was to go on leave, after all, and he quietly
retired without a blemish on 31st
July
1992, quite
relieved, according to his friends, that he did not have to face the
gathering turmoil.

He
left before he had received any reply to the angry letter he had
dashed off on 22nd
May,
refusing to pay NHB. In fact, a reply did arrive – on 10th
June,
a day before the NHB board meeting. It was framed by Janakiraman, who
declared that both NHB and SBI were in the wrong. The letter was
tabled before the board the next day. The
11th
June
meeting was chaired by Shrikant Ruparel, a businessman who controls
the Kolhapur Sugar Mills and who had been a non-executive director of
SBI for over eighteen years. There were two items on the agenda: a
discussion on the securities scam and the payment to NHB. Ruparel
said that each director would be allowed to express his views though
he, as the chairman, and the two managing directors would not vote.

Every
director who spoke was against the payment. The represen-tatives of
the trade unions (Godbole and Awasthi) were virulently critical of
RBI. Janakiraman had brought with him the correspondence between SBI
and NHB. He said “the RBI has made a decision and the SBI
should abide by it.” He suggested that the money be placed in
an escrow account (a separate account in which the funds deposited
cannot be used without the consent of both parties in the dispute)
without prejudice to the rights of SBI. Up to this point, the issue
of payment to NHB was not even open, since the opposition to the
proposal was so strong that the directors were certain it would be
turned down.

At
5 p.m., the two government directors, Reddy and Janakiraman, excused
themselves to attend the first ever meeting of NHB. (Janakiraman was
aware that NHB did not even have a fully constituted board until the
first Janakiraman Report was out. He may have deliberately suppressed
that fact in his first report.) After the two directors left, the
deputy managing directors of SBI, who had attended the meeting mainly
as observers, filed out and did not return. Janakiraman and Reddy
wound up the NHB meeting thereafter. A set of documents was
circulated to the newly constituted board, including the 5th
May
letter from Parthasarathy, which
pointed out that two officers, Ravi Kumar and Suresh Babu, had signed
the cheques and authorised transactions without the knowledge of the
top brass.

One
of the directors, HT Parekh, the grand old man of Indian finance,
rebuked the government directors for failing to constitute a board or
systematise the securities transactions. On the whole, the meeting
served no purpose other than recording the fact that the first ever
board meeting depended on the SBI meeting which had been suspended
halfway so that Reddy and Janakiraman could make a dash for the NHB
meeting and come back.

But
before these two directors rejoined the SBI meeting, they made two
critical calls. The first was to the finance minister and the second,
to the RBI governor. These two conversations changed the course of
the meeting. The two directors came back to the meeting and
threatened the SBI board that the ministry would issue a directive
under the RBI Act, asking the bank to pay up. The two government
directors now said that an escrow account was not good enough. They
not only wanted SBI to take a decision on the payment but also to pay
up immediately.

The
two directors were supported by the SBI deputy managing director, V
Mahadevan (apparently he was told informally that he may be in line
for the chairman’s job) and by CL Anand, promoter of Punjab
Anand Batteries and PV Subba Rao. Reddy and Janakiraman argued that
if SBI did not pay up, RBI could not make Grindlays pay the Rs 506
crore to NHB either. However, this point was deliberately omitted
from the minutes of the meeting. One of the two directors pointed out
that after the governor had met the Grindlays top brass in London,
the bank had written to RBI that if SBI was refusing to pay why
shouldn’t Grindlays? In response, one SBI director asked
Janakiraman that if instead of NHB it had been Citibank or Bank of
America which had made payments to Harshad Mehta, would SBI still
have been asked to pay up? There was no reply. At that meeting, it
was reiterated every thirty minutes that Harshad Mehta was not a
broker for NHB. However, this wasn’t entirely true.

In
any case, asked some directors, if NHB did not and was not supposed
to have a broker how did the money go to SBI? Even at the bankers’
round table to flush out outstanding BRs, NHB had claimed that it had
no outstanding BRs with SBI and Grindlays. What also remains
unexplained is that while the Bank of Karad and the Metropolitan
Co-operative Bank were liquidated for the dues against them, NHB had
to be protected, however strong the stench rising from its backyard.
None but two of NHB’s officials have been arrested, while the
SBI’s top brass lived in terror of CBI raids and interrogation.
Interestingly, SBI’s own probing led to the discovery that a
good chunk of the money, which was paid into Harshad Mehta’s
account at SBI, had found its way back to NHB from time to time. This
indicates a well-organised system of using NHB which couldn’t
have existed without the collusion of its senior officials.

The
SBI board caved in under the threat of a directive and the resolution
was passed unanimously. And then finally, the drama ends: how did SBI
pay back? It once again debited Harshad’s account, which had no
balance. In effect, SBI was asked to give the Big Bull another
massive overdraft of Rs 707 crore with no security! Looking back,
many of the directors were embarrassed at their non-resistance.
According to one of them, “we gave in for two reasons. First,
almost Rs 570 crore paid to NHB would have come back to SBI
subsidiaries from where NHB had got the money in the first place.”
Second, Mahadevan was convinced that SBI was in the wrong. Of course,
nobody analysed whether there was a criminal intent to defraud when
the cheques were issued. According to the SBI directors, NHB did not
have a bank account. It gave bankers cheques drawn on RBI. Whether
they were meant for SBI or for Harshad Mehta, at the most the action
of crediting cheques to Harshad’s account could be termed
irregular.

The
crowbar-wielding did not end with that farcical board meeting and
forced payment to NHB.
On 25th
June,
the SBI board met
again, this time for adopting the annual accounts. The two government
directors,
Janakiraman and Reddy, who had graced the SBI board meeting on 11th
June,
had again disappeared. Ironically, those SBI directors, who in the
first place had bitterly opposed the payment made to NHB, now, had to
bear the brunt of auditors’ queries as to why the money was
paid and had to lay open the correspondence to justify such payment.
The auditors also grilled them on why the Rs 707 crore payments was a
tax-deductible expenditure.

Soon
after, the SBI annual general meeting (AGM) was held at Patna. This
time the directors sent an SOS to the government requesting that
government directors be present to argue the case for paying NHB.
Some of the ex-officio
directors also threatened to speak out on what had transpired at the
board meeting. Their ambitions were cut short. Arun Jaswantlal and
Shrikant Ruparel were simply stopped from making it to the AGM. Their
flight was booked for Patna but phone calls from Mahadevan and
Virendra Kumar of SBI on 13th
and 14th
July, cancelled their plans and unceremoniously ended their
association with the bank.

A
1988 amendment to the SBI Act had suddenly been enforced and under
it, no director could remain on the board for more than six years at
a stretch. A quick notification was issued. The notification applied
only to the independent directors of SBI but the directors
representing the employees’ unions were also replaced.
According to some, indirect pressure had been brought on the unions
to change their men on the board.

In
all these calculations over who owes what to whom, one very
significant claim was never discussed. Harshad Mehta claimed that NHB
owed him Rs. 250 crore of money market securities handed over to it
as informal collateral. The securities were seized by CBI and handed
over to the Custodian. It was yet another proof of NHB having a
deeper relationship with the broker than it was willing to admit.
Later SBI planned to sue Harshad for 707 crore.

Grindlays,
in exactly the same position as SBI, continued to fight RBI. On 5th
November 1992, it called
a press conference and announced its decision to pay up. It was still
confident that it would win back the money in arbitration. But this
was uncertain. RBI had obtained copies of cheques that Grindlays
itself was issuing to others, carrying clear instructions whom to
credit them to. But commercial disputes apart,
Grindlays continued to apply pressure on New Delhi to make RBI
relent. That was the unseen face of the foreign banks. Their clout
and their buccaneering merit a separate chapter.

9

Stanchart
and the Gang of Five

Looked
at individually, there was no connection between the five. But put
Bhupen Dalal in the middle and suddenly they all come together,

deeply interconnected.

It
was the evening of 12th
May 1992. Bhupen Dalal,
the suave, six-foot investment banker, was back from work and about
to look at some files he had brought home. He had wide business
interests apart from investment banking: a departmental store, a food
processing company, stock-broking, and a clutch of companies abroad.
He also had a stake in a tiny private bank.

And
then the phone rang.

At
the other end was R Kannan, executive director of Standard Chartered
Bank who headed the investment banking division, which then included
the treasury department. The call was the beginning of a major
setback in the glorious career of Bhupen Dalal, one of the most
respected names in Bombay’s financial world. It went something
like this:

“Kannan
here, please speak to Nat.”

Parvesh
Singh Nat, popularly known as Pesi, was a highly ambitious banker and
the first Indian chief executive of Stanchart in India. He was
responsible for pushing the bank to the high-growth path. Stanchart,
which had started operations in India 135 years ago and had the
second largest branch network among foreign banks, made wafer-thin
profits. Nat, tall like Bhupen, with a patrician bearing, spoke in a
British accent and had a marvellous ability to articulate his
thoughts vividly. Bhupen and he had been friends so when he called,
Bhupen suspected nothing. Pesi did not waste any words.

“Bhupen,
my broker has taken away BRs worth Rs 250 crore. I don’t have
any securities in my record. Can I have them back?”

“Rs
250 crore? What are you talking about Pesi?”

Nat
repeated what he had said. Bhupen, apparently perplexed, promised to
call him back.

Nat
was referring to the Rs 250 crore paid by Stanchart to a broker
called Hiten Dalal for the purchase of government securities. Hiten
was yet to deliver them. What he had delivered were paper receipts
from another bank, Bank of Karad, which got the money from Hiten and
was supposed to deliver the securities to him. Bank of Karad, with a
capital of barely Rs 45 lakh, was such an insignificant entity that
very few banks dealt with it directly. Hardly anyone in the financial
world even knew that it was a big operator in the money markets. That
Bhupen and his son Milan were directors of Bank of Karad with a 6.7%
stake was intriguing. Bhupen’s was the single largest private
holding. Was he personally liable to Stanchart for the money that the
Bank of Karad took?

From
that one phone call, Bhupen Dalal would be drawn into a vortex of
events that would tarnish his three-generations-old market reputation
and destroy his core business of money management and financial
advisory services. Worse, for a man who had never been booked even
for a traffic offence, Bhupen would have to spend thirty days in
police custody, treated like an ordinary thief. Immediately before
his arrest, a frightened Dalal told Business
India,
“All that I have built up over thirty years will just collapse.
I cannot even show my face.”

The
spotlight had slowly started turning on Bhupen since
30th
April,
exactly seven days after the scam was first exposed by The
Times of India.
Unknown to him, within the magnificent Victorian structure that
served as the head office of Stanchart, the atmosphere was beginning
to turn tense. Stanchart officials had woken up that morning to the
horror of a massive and complicated fraud – a fraud that
eventually involved a far bigger sum than the Rs 250-crore gap that
had impelled Nat to call Dalal.

The
gap was discovered through a confession. On 30th
April, Arvind Mohan Lal, star dealer of the bank and “Pesi’s
blue-eyed boy”, went to his boss Ravi Iyer, director of the
local currency group, and told him of the shortfall. Lal, manager in
the Money and Investments Unit, with four dealers working under him,
told Iyer that the bank was short of Rs 300 crore of securities it
had apparently bought. It had paid out the money through its broker
but had not received any securities, subsidiary general ledger
receipts or BRs. The broker: Hiten Dalal.

A
stunned Iyer sat with Lal trying to figure out the extent of the
damage. Nobody in the bank knew of the disaster then, though the
market was abuzz with rumours that Stanchart would soon be dragged
into the scam. For the next ten days Lal and Iyer quizzed Hiten on
the transactions, cajoling him to produce securities to fill the gap.
Hiten was most helpful. He dropped in at the bank every day and
assured an increasingly jittery Lal and Iyer that he would meet the
gap.

Alarmingly,
the hole kept getting bigger and bigger.

By
4th
May,
it was an astounding Rs 900 crore. How on earth, would Stanchart
recover the money? The ever-resourceful Hiten had a ready solution.
He would procure more BRs to paper the hole temporarily. “From
where?”asked Lal and Iyer. From the Metropolitan Co-operative
Bank, Hiten replied.

By
5th
May,
Hiten delivered a BR of Rs 525 crore and SGLs of
Rs 50 crore from
the Metro Bank. They showed Stanchart’s investment in
(non-existent) units of UTI. The more Iyer looked at them, the more
he realised that he was dealing with a fraud and one that was too big
for him to handle. He probably hadn’t even heard of Metro Bank
then a tiny one-branch operation with a capital of just Rs 14 lakh.

On
Sunday, 10th
May,
Iyer and Lal called Pesi Nat at his home and told him about the
problem. They made another call, later that night, to Kannan, Iyer’s
boss. Nat had asked Iyer and Lal over to his house at Altamount Road.
Married to a member of the royal family of Patiala, Nat
lived in a plush apartment appointed with antique furniture,
paintings and books.

At
2.30 that afternoon, Nat was told the complete story. He couldn’t
believe what he heard. “Perhaps there is something wrong with
your computer systems”, he told Lal and Iyer. Before he pressed
the alarm bells, he wanted to be sure that it wasn’t a
book-keeping error. The sums were just too large.

Stanchart
officials spent the next two days (11th
and
12th
)
assessing the losses and trying to persuade Hiten to provide genuine
additional securities. Monday, 11th
May,
Hiten came in with Rs 145 crore of shares, debentures and
public-sector bonds. He promised more the next day. On Tuesday, he
brought an insignificant lot of securities. Nat did not have to wait
any longer to make up his mind.

“I
think we have a problem here”, he said, calling Stanchart’s
headquarters at London on Wednesday, “We need to investigate
and I don’t have adequate resources here to do it.”

Soon
Stanchart’s Bombay office was swarming with reinforcements from
the head office. Unfortunately, for the bank, most of them turned out
to be ignorant, high-handed and naive. It was on the same day that
Nat called Bhupen Dalal about the Rs 250-crore shortfall.

Stanchart’s
Indian officials latched on to Hiten Dalal, repeatedly interrogating
him to understand what had happened. Hiten would drive down to the
bank every day after office hours in his maroon Premier 118NE.
Amazingly, the bank took at least two weeks to figure out what was
happening in its own house, and months thereafter to get to the
bottom of its transactions. On the face of it, there were fifteen
suspect deals but that figure was very misleading. Each of these
fifteen led to a forest of twenty to thirty complex transactions,
fanning out in different directions.

Clearly,
Stanchart was in a big mess. Worse, there was a discrepancy of Rs 92
crore between what the bank put as its claims in the First
Information Report filed on 20th
June
and what it disclosed to the Janakiraman Committee appointed by RBI
to probe the fraud. The FIR stated that Stanchart had paid Rs 308
crore “to other banks for which
no securities were received from those banks.” The Janakiraman
Report, published in July, put this figure at Rs 400.35 crore,
pointedly clarifying that this was “as indicated by the bank.”
Did the bank indicate one thing to CBI and another to the committee?
It did, initially. Later, it corrected itself.

That
was typical of Stanchart. After the story broke and its operations
were exposed, it became clear that it had lost control in its race
down the fast track, beginning 1988 when it first began restructuring
itself. Led by Pesi Nat, the bank went on a hiring spree to beef up
its corporate lending, retail banking and investment banking. Its
role model was Citibank, which was making huge profits by cunningly
skirting regulations.

Stanchart
set steep targets for itself. Towards mid-1991, Kannan first added
25% to the yearly profit target agreed to at the beginning of the
year and then brought forward the target date to October. Nat, who
replaced Magnus Stirling, the last expatriate chief, harboured a
desire to beat Citibank in profits and make it to the Stanchart board
in London, say his former colleagues. It was quite possible. But what
made it difficult was the devaluation, which put greater pressure on
the Indian operations to meet the targets set in terms of pound
sterling. Another source of pressure was the bank’s long-term
view that the rupee would continue to slide, making present, rather
than future profits more valuable.

A
chase for the big bucks put the investment banking department on its
toes. Presiding over it was Kannan, a sharp, restless deal-maker.
Kannan was hired in 1990 for his expertise in the non-funds business,
for instance, advising on takeovers or the best means available for
companies to raise money. He wanted to position his department as a
premier investment bank specialising in takeovers, specifically
take-over of banks, which he felt was an uncharted but fast growing
area thanks to the impending financial liberalisation. He put through
the takeover of Nedungadi Bank by B Ratnakar, his mentor in Canara
Bank, and tried to broker the sale of the Bombay branch of the Bank
of Credit and Commerce International to the Emirates Bank.

He
was also preparing to invade the stock markets where shooting share
prices gave phenomenal returns to clever investors, especially big
investors who could use inside information to stay ahead of the
market movements. Citibank and ANZ Grindlays Bank were, for instance,
making use of the booming stock market to post record profits. Kannan
planned a stock-broking outfit, a mutual fund and re-vamping
Stanchart’s joint-venture company, Cholamandalam Finance and
Investment.

Unfortunately,
Stanchart’s big push coincided with a period of great
turbulence (1991-92) in the money markets from where it planned to
reap big money. The bank moved too fast, too soon, without pausing to
check whether its control procedures were being followed properly. As
Bhupen Dalal argued later, like any other international bank,
Stanchart surely would have pre-set exposure limits for each country
and within a country, for each bank and individual brokers. According
to insiders, the bank perhaps had a US
$200 million exposure to India and a limit of Rs 2 crore for Bank of
Karad. It had no limits for Metro Bank whose BRs worth Rs 525 crore,
the bank accepted on 5th
May even when news of the Harshad Mehta scam was raging.

In
1991-92, Stanchart emerged as the second largest trader of securities
among all banks. On the face of it, there was nothing wrong with
this, except that senior Stanchart officials made no effort to see
where its BRs were going or how many outstanding BRs of other banks
it was holding. Within the imperfect securities market, this left
large room for siphoning out money. The bank’s
asset-liabilities committee comprised Kannan, Nat and David Gardiner
among other people, who met once a fortnight to review investments,
cash flows and the funds position.

The
question that struck Stanchart’s top management after the scam
came to light was that if the bank was short of Rs 1300 crore, how
was it that the cash flow statements did not flash the red signal?
The answer: Stanchart was not in possession of the fictitious assets
it had bought. Besides, it had sold them forward, making the
transactions cash-neutral. The discrepancy could have been thrown up
by the asset position, but it was obviously doctored.

As
the scam story unfolded over May and June, it became clear that
Stanchart had thrown all rules and caution to the wind in attempting
to emulate Citibank down to its dealing room and lines of control.
Its biggest deals were with the shadiest player of all, Hiten Dalal.
In one case, the bank even accepted a photocopy of a public sector
bond from Hiten. Such appalling practices in a large international
bank remain an enigma. Possibly, its 1990 restructuring brought in
people who had little experience of conservative banking and who
carried into the bank a cultural apathy towards rules or what has
come to be known as the cowboy school of banking.

This
is partly exemplified by the story of Prakash Yardi. Yardi was asked
to leave the bank soon after he sent a report to the head office
detailing what he perceived were the risks the Merchant Banking
Division was exposing itself to. But since MBD was the bank’s
main chip in its bet to boost profits, it had its own budgets and
steep profit targets. It also had its own set of ethics. MBD’s
profit drive was led by the go-getting Ranjit Mathrani, head of MBD
in London who had joined the bank in January 1988.

Mathrani,
to whom the Indian MBD chief reported directly, brought in some sound
changes like incentive-linked pay but his ambitious profit targets
clashed with the meagre business opportunities merchant banking
offered in India. Even those were tightly circumscribed by the
banking rules. “To some these rules were unnecessary hurdles in
the way to making profits”, says a top executive of the bank.

Merchant
banking (or investment banking) in India was basically the management
of Initial Public Offerings for a fee that was too low for foreign
banks with their high overheads to make profits on. Like Citibank,
which figured it out long ago, some senior Stanchart executives
realised that the bank could make money only by bending rules.
Nevertheless, profits fell short of targets and Stanchart started
losing people.

The
bank had some curious recruits. It hired a person who was sacked by
Grindlays for making money on the side. When this was pointed out to
a senior MBD executive, he remarked: “If he has made money for
himself he will make money for the bank too.” Another employee
was hired for his Cambridge academic record. He soon launched his own
trading outfit on the side. The man was later wanted for gold
smuggling and figured in the Interpol list. According to one top
Stanchart executive, “The value scale got disturbed with the
advent of new people. There were not enough counterweights from the
cadre of hardcore bankers.”

This
resulted in MBD lending money to the corporate sector and later to
brokers like Hiten Dalal as clean credit, lending that would have
been questioned by hard-nosed bankers. MBD was asked to draw up a
list of cash-rich companies, borrow money from them and then lend it
in the inter-corporate market. Money flowed into Stanchart’s
pool from public sector companies like Rashtriya Chemicals and
Fertilisers, Power Finance Corporation (under CBI investigation for
having lent more than Rs 300 crore to Harshad Mehta through
Grindlays) and oil companies.

This
meant three things: the bank was taking a risk on the borrower,
unapproved by the bank because it didn’t fall under mainline
corporate lending; the exposure was not reflected in the balance
sheet; and it amounted to breaking the RBI rule of reserve
requirement. Collecting corporate money (ostensibly to invest in
units and bonds but lending it out) was a kind of disguised deposit
taking. But since the bank wasn’t reserving 40% of it to meet
the statutory liquidity ratio and cash reserve ratio, it amounted to
a violation of RBI regulations. The third report of RBI’s
Janakiraman Committee, points out that Citibank was caught doing
exactly this – another instance of how Stanchart tried to model
itself on Citibank.

As
a credit risk assessor, Yardi attempted to point out that MBD was
saddling the bank with high risks. Kannan, who had a close personal
knowledge of clients, was less bothered by conventional
risk-assessment criteria. He relied on his personal equation with
clients developed during his Canbank Financial Services days and his
commercial intuition – essential ingredients to staying ahead
of the competition. He told Yardi as much. But Yardi stuck to his
guns.

Through
all this, the Stanchart headquarters were in deep slumber. When Yardi
alerted a member of the Stanchart plc board (the parent bank in the
UK) in September 1990, it sent some inspectors down. They detected
serious violations. The amounts were small – just about Rs 111
crore of outstanding. The problems were covered up well and Yardi was
out of the bank on 14th
December.
By that time, however, Mathrani was no longer in charge of the Indian
MBD. In February 1991, Nat got the Indian merchant bank to report to
the main bank and Kannan was elevated has the head of MBD.

It
is open to question whether any of this was relevant to the soup that
Stanchart found itself in later. Stanchart did not suffer losses
because of its merchant banking function, as Yardi had feared. But in
a way, the seeds of the payment discrepancies in its back office were
sown by the risk-taking attitude of those days. The level of comfort
MBD employees had in making risky commitments and the trust they
reposed in their clients had gone out of control. The treasury
division, which was sandwiched with MBD to form the Investment
Banking Division perhaps unconsciously adopted the same reckless,
intuitive approach while making the securities transactions with a
tiny bank like Bank of Karad and a broker like Hiten Dalal. By the
time the scam surfaced, Stanchart’s internal checks and
balances had comp-letely fallen apart.

Worse,
when the bank was inspected by the internal auditor, in October 1991,
it was not only given a clean chit but also rated as one of the best
treasury divisions world-wide. That apart, there were two more
audits, one on 30th
June,
and another on 31st
December, to help the Stanchart PLC consolidate its accounts. None of
these detected any irregularity. Ultimately the great irony would be
that Stanchart, where Kannan worked and Canfina, where he had honed
his skills, would both be deeply embroiled in the scam – gypped
by the same broker, Hiten Dalal.

But
where does Bhupen Dalal figure in all this?

As
CBI saw it, Bhupen was smack in the middle of the huge murky scam
involving Stanchart. This scam ran parallel to the one involving
Harshad Mehta. The two were linked only in a very basic way –
in the use of BRs and unmatched transactions. Mehta had used
undelivered securities and BRs to raise money. So had Bank of Karad.
But the similarity ends there.

Harshad
was pumping money into stock markets, raising prices to astronomical
heights, locked in a combat of egos with a cartel of brokers opposed
to him. But the Bhupen Dalal story was different. Bhupen was not
dirtying his fingers in raw stock trading. Besides, unlike a direct
nexus between Harshad and National Housing Bank, this was more
complex. There were three victims and two profiteers. Stanchart was
not the only bank that suffered. A few days after the Harshad Mehta
story broke, Canfina, a fully-owned subsidiary of Canara Bank,
discovered that it was stuck with BRs worth Rs 435.31 crore issued by
Karad and received through Hiten Dalal. These BRs were unsupported by
securities. Similarly, Canbank Mutual Fund was short by Rs 104 crore.
On the other hand, Stanchart had accepted fake BRs from another bank
– the tiny Metro Bank. But Bhupen alone was not in the middle
of the scam, according to Stanchart.

You
could call it the Gang of Five, depending on how wide your
description of the suspected swindlers of the Stanchart and Canfina
money is. A little more than two weeks after the Harshad Mehta scam
surfaced and a few days after Pherwani died, the Gang of Five
emerged. They were unknown people. Hiten who? Abhay who? asked
everybody when their names first appeared. The public, of course, was
not expected to know these gentlemen. But except for a small circle,
not even those connected to the financial sector were familiar with
them. This core group, as understood by CBI and Stanchart, consisted
of Abhay Narottam, JP Gandhi, Teju Ruia, Hiten Dalal and Bhupen
Dalal. Two others were suspected to have dipped their fingers in the
scam money. One, S Ramaswamy, proprietor of Excel & Co., a small
broking firm and two, industrialist Hemant Vyas, controlling Bombay
Silk Mills Ltd. and Prag Bosimi Ltd.

Looked
at individually, there was no connection between the five. Abhay
Narottam apparently had nothing to do with Hiten Dalal (though four
months later a different picture emerged) and JP Gandhi had no
connection with Teju Ruia. But put Bhupen Dalal in the middle and
suddenly they all come together, deeply interconnected. Deep enough
for CBI to have put all of them behind bars for interrogation. The
links through Bhupen were wide and aroused deep suspicion in
Stanchart’s eyes.

Bhupen
and his son were directors in Bank of Karad, which was caught issuing
BRs at the rate at which RBI prints currency. That by itself was not
a crime. The problem was that the BRs issued by Karad and Metro Bank
were bogus. There were no securities to back them. Did these two
banks use Stanchart’s money to buy certain securities, which
were supposed to be in the pipeline? No. So where did the money go?
Did Bhupen have a hand in the money disappearing? Bhupen states that
he did not. He told RBI that “for the first time, on 14th
May
1992, a statement was furnished to the board, of outstanding BRs of
the Bank of Karad.”

After
some quick, preliminary
interrogation, Stanchart discovered that the money had passed from
Hiten Dalal’s account to someone in the Bank of Karad who had
issued the BRs. The name? Abhay Narottam. Narottam, then aged sixty,
with an adopted seven-year-old son, was no stranger to Bhupen Dalal.
He had been Bhupen’s associate for the previous twenty-eight
years. He owed everything to him – his entire stock-broking
career, including a card at BSE. Narottam was also a director of Bank
of Karad. Till September 1990, he held Bhupen’s power of
attorney. The question Stanchart and CBI found difficult to answer:
How could Bhupen not know what Narottam was up to?

Narottam
was not the only one. Hiten Dalal, portly and around thirty-five, is
Bhupen’s nephew, albeit a distant one. The Janakiraman
Committee would reveal that Narottam was booking huge losses in
securities transactions on account of Hiten. The final link in the
chain was JP Gandhi, a first cousin of Bhupen Dalal. Gandhi has been
an employee of Bhupen Champaklal Devidas and by all accounts, was a
master practitioner of the art of securities transactions, especially
those that fall in grey areas.

The
fifth player was Teju Ruia who controlled a clutch of companies, most
notably Killick Nixon, in which Bhupen Dalal was a director. Bhupen,
in fact, helped him take over Killick Nixon. Ruia, who later admitted
to having taken Rs 90 crore – Rs 125 crore of Stanchart money,
was one of Bhupen’s closest business associates, their links
extending even beyond Indian shores. For his son’s wedding,
Bhupen had borrowed Ruia’s Rolls Royce. Very coincidentally,
Ruia was a director of a tiny bank. The name? Metropolitan
Co-operative Bank. Investigations by Stanchart and the CBI would
later reveal how money flowed freely between them.

Clearly,
the Metro Bank was being used as a conduit. But at least it had some
assets and had a business line of lending money to cloth merchants.
The other conduit controlled by Ruia was a dummy: Dhanraj Mills. It
was a mill only in name. With a capital of Rs 997,000 and a small
office located in the textile district of central Bombay, Dhanraj
Mills’ main business was milling cash for Ruia. It survived two
attempts to liquidate it in 1958 and 1965. It sold some real estate
for about Rs one crore with which Ruia bought Killick Nixon through a
hostile takeover in 1982. Since 1992, Ruia has been living it up,
like holding parties in London for his son’s wedding. Where did
he get all the money? Perhaps he earned it. But the Metro Bank was
also busy crediting cheques received from Karad and Hiten Dalal to
Dhanraj Mills’ account.

There
was more to the nexus. Pradip Dharandharkar, a chartered accountant,
and KN Vyas were co-opted to the MCB board on 19th

March 1991. Both were managers in Killick Nixon. Dharandharkar quit
late in 1992 while Vyas continued to work in the export depart-ment.
Another key suspect was the chairman of the Metro Bank, Hemant Vyas,
about whom The
Indian
Express,
in a report of 31st
May
1992, said that he was about to be booked under the Conservation of
Foreign Exchange and Prevention of Smuggling Act in 1987. Express
alleged that he was rescued by the finance minister, ND Tiwari, whom
he calls Chacha
Tiwari. The charge against Vyas was that he was smuggling
polyester yarn. Neither Tiwari nor Vyas denied the story. Vyas
pleaded ignorance about the decisions taken by the MCB board.

So,
as Stanchart saw it, the equation was pretty clear. Hiten Dalal,
Bhupen’s nephew, had taken hundreds of crores of rupees from
the bank and gave BRs supplied by Abhay Narottam, Bhupen’s
close associate. More BRs came from Metro Bank, indirectly controlled
by Teju Ruia, Bhupen’s business associate. Part of the money
presumably went to JP Gandhi, an old employee of Bhupen, and to Ruia.
Caught in the middle of it all was Bhupen, against whom there was no
direct evidence. The press called him the kingpin, the mastermind.
Throughout the second half of May 1992, Bhupen would feel the noose
tightening around his neck. What would he do?

He
had his answers ready. “Hiten is my cousin’s son. I have
met him twice in three years and that too on social occasions.”
He said he had nothing to do with the Bank of Karad. “After
27th
July
last year (1991), when I became a director, I haven’t visited
the Bombay branch of Karad even once. Abhay worked with me for
twenty-eight years but we had little contact in the past two years.
JP Gandhi separated his business from ours in 1973. He was sitting in
our office doing some business of his own. He is getting old and has
no children. What are his interests?” And the man in the
printed silk shirt, hands in pockets, he encountered at the CBI
office at Kitab Mahal? “I had no clue that this was the same
Hemant Vyas”, said Bhupen. Stanchart was not impressed.

Bhupen
railed against Stanchart for having falsely implicated him. About
Teju Ruia, he was silent. Ruia got himself admitted to a private
hospital when the scam broke while Bhupen had to cool his heels in
jail. Bhupen showed no bitterness. Neither did he want to enter into
any discussion about Abhay Narottam. Bhupen was also inconsistent. In
a conversation with India
Today (31st
May
issue), he
said, “Our firm does not regularly deal in securities. Some 15
years ago, we used to specialise in securities. But now we have
diversified, yet in the market we are known as securities
specialists.”

This
was strange. His broking firm, BCD, was actually the second largest
securities broker. Between April 1991 and March 1992, BCD transacted
securities worth Rs 67,170 crore – more than Harshad Mehta’s
Rs 61,318 crore. Of course, these figures, as produced by the
Janakiraman Committee were in a way misleading. But it did point to
the fact that BCD was a big player in the securities market. Besides,
RBI officials soon discovered that some 35% of Bank of Karad’s
securities transactions were done by BCD. To that, Bhupen Dalal told
RBI it was “purely a decision of the executive officers of the
Bank of Karad through which broker it wishes to make purchase/sale. I
have never told Bank of Karad that its transactions in securities
should be done through BCD.”

Bhupen
Dalal first joined the bank in 1969. On 15th
February
1984, he had to leave the board because of the amendment to the
Banking Regulation Act. He automatically ceased to be a director,
having served continuously for eight years. Though rules allowed him
to rejoin the board after two years, he was reinstated on 27th
July
1991, after a gap of seven years. When RBI pointed an accusing finger
at him on the Bank of Karad deals, asking him to step down on 25th
May 1992, Bhupen cleverly pointed out the RBI circular of 9th
March
which had specified the roles of directors of private sector banks.
“I have acted consistently within these norms. My interaction
with executive officers of the Bank of Karad was minimal.” He
also pointed out, quite logically, that he was just a non-executive
director and “as per RBI guidelines, was not supposed to
participate in the day-to-day manage-ment of the bank.” He then
tellingly added, “The board also comprised a nominee of the
RBI” who, he implied, ought to have been equally liable.

Was
Bhupen Dalal as innocent as that? He was certainly not new to the
world of securities transactions. In the earliest part of his career,
between 1962 and 1976, he was deeply involved in securities dealings.
The business was different then. The chairman of a bank would often
deal himself. “You could meet the UTI chairman every day”,
said Bhupen. “The rules were stringent. Unless you had twenty
years of experience,
you could not sign cheques. All cheques were supposed to be signed
jointly.”

Then
came the roaring ’80s. Securities transactions became huge.
“The junior grade officers were allowed to sign cheques. Even a
single signatory was all right”, he says. “Treasury
departments of foreign banks were being manned by youngsters with
little experience. Controls went awry. Dealers got a lot of leeway.”
The irony is that Bhupen could say that about his own securities
broking firm, BCD that was virtually run by JP Gandhi. But the big
question remains – how much did he know? How much money passed
through his hands and did any of it stay with him?

The
entire financial community reacted with stunned disbelief that Bhupen
Dalal could be involved in a fraud of such magnitude. As one of the
most voluble, articulate and innovative members of India’s
financial community and as the high-flying chairman of the
Bombay-based Champaklal Investment and Financial Consultants, he had
positioned himself as a merchant banker for non-resident Indians. But
his name had got linked to Bank of Karad, a sleepy and insignificant
(or so everyone thought) private bank, headquartered in distant
Karad, a small town in the sugarcane growing belt of Maharashtra.

The
only son of Champaklal Devidas Dalal, Bhupen graduated from Sydenham
College in Bombay and then stepped into his father’s reputed
and well-established broking firm. Over the years, he had developed a
sophisticated business outlook which was reflected in the global
dimension he gave to his plans even when self-reliance, and not
globalisation, was the buzzword. He conceived and set up an offshore
fund called Cifco-Hill Samuel Fund at the time when India had just
one domestic mutual fund (UTI) and one offshore fund (India Fund) by
the same UTI. Dalal also started Cifco (UK) Ltd. Later he had set up
Cifco Emirates, a unit in Dubai, to advise NRIs on portfolio
investments. Critics say that these were conduits for laundering
money but enforcement agencies got no proof of that.

Bhupen
had curious Indian links. For instance, he used to visit Anna
Sardeshpande, his spiritual guru, living on the outskirts of Bijapur,
several times a month. Anna’s disciples – rich and
powerful brokers, a few bureaucrats and dozens of businessmen –
came from all over the country. Bhupen’s elder son Milan
married the guru’s daughter.

Bhupen
keeps every single visiting card he is given (the collection runs
into thousands). Addresses and contact numbers are meticulously
stored. He has an awful memory for names but a photographic recall
for situations. Bhupen, who never fails to return calls, had fax and
telex machines installed at home in the ’80s. He was known as a
strategic thinker in a business dominated by crude deal making. He
once travelled all the way to London just to lecture for an hour and
a half at a seminar.

In
the small financial community clustered in Bombay, Bhupen, born with
a silver spoon, played the role of a godfather. For instance, he
helped R Sankaran, his former employee and later chief of Stanchart’s
merchant banking division, set up an independent career, perhaps
providing money and office space. Numerous brokers and businessmen
admit to having received help from him – often free of cost.
Among them was Udayan Bose, one of the few non-Gujarati members of
BSE. When Bose’s membership was opposed by some directors, led
by a prominent broker who went on to become a president of BSE,
Bhupen pulled his weight and steered it through. At a meeting in
1991, Udayan openly called Bhupen his guru.

Hemendra
Kothari, owner of DS Purbhoodas used to call Bhupen his guru too, but
in private. (It is another matter that Kothari extended no support to
Bhupen when the scam was exposed.) The story goes that Bhupen’s
father was the one who brought Kothari into the stock-broking
business when he was working as a deputy sales manager in the
Morarjee Goculdas Mills. Kothari’s father was about to close
down the broking firm as he saw no future in stock markets. Bhupen’s
father prevailed on him to induct his son into broking. Kothari,
claim associates of Bhupen, used to sit in the BCD office at Dalal
Street for three hours every day to learn the ropes.

Bhupen
is articulate, organised and, therefore, a great teacher and guide.
His sons, Asim and Milan, say that they have been trained in the
“Bhupen Dalal School of Management”. A few years ago,
Bhupen took over a medical shop near their home to teach hiss sons
the art of running a company. He converted the shop into a limited
company to make his sons go through the process of registering and
running a firm under the Companies Act and local laws. They would
have regular board meetings, pass mock resolutions and conduct
general body meetings. Bhupen then sent his younger son, Asim, to
Hill Samuel, a small stock-broking firm in the UK, for training.

Bhupen
had it all planned out before the scam was exposed. Since the rigid,
state-controlled economic system gave him little leeway to use his
financial skills, he had meandered into other businesses in the late
’80s. He bought Foods and Inn, a closed food company, which
turned immensely profitable under him by exporting products to the
Middle East. In 1991, he bought Swadeshi Stores, a dowdy department
store and a landmark in Bombay. His son Asim later converted it into
a swank upmarket Bombay Store. But once Narasimha Rao’s
economic liberalisation was underway, Bhupen was back to his first
love, finance. He drew up big plans to make up for lost time. Cifco
conceived a mutual fund, a venture capital fund and offices overseas.
He certainly had all the contacts. Prime among them was Aditya Birla.

The
scam shattered it all. The rights issue of his flagship, Cifco, was
dropped, his BSE membership suspended and BCD debarred from doing any
securities trading.

But
just as he had wondered aloud to Nat over the phone on 12th

May, the big question remained unanswered for a long time. Where did
the money go? From this arose another nagging question. Why were RBI,
CBI and others not keen on hitting the Stanchart money trail, at
least not as keen as they had been to chase Harshad?

10

Stanchart’s
Money Trail

All
this was a farce. Stanchart was still groping in the dark. CBI
appeared to lose its way in a forest of transactions. And the Gang of
Five looked increasingly comfortable. It appeared
as if a
cover-up had begun.

WHERE
did the Standard Chartered Bank money go? There were no clear
answers, just plenty of dark hints and tell-tale links between the
Gang of Five. Stanchart’s strategy was to approach the problem
commercially: talk to debtors, find out where the money had gone and
get back as much of it as possible. Following Pesi Nat’s phone
call to Bhupen Dalal on 12th
May 1992, the bank and the Gang of Five sat through several long
rounds of discussions.

On
21st
May, Bhupen Dalal, Hiten Dalal, Pesi Nat and R Kannan met at The
Chambers, the exclusive club at the Taj Mahal hotel, to sort out the
mess. Their purpose that day was to fix the exact amount outstanding
and recoverable. Stanchart’s sums were: Rs 350 crore on account
of BRs accepted from Bank of Karad; Rs 400 crore on transac-tions
linked to Metropolitan Co-operative Bank with payment made to Bank of
Karad; and another Rs 550 crore routed through Metro Bank. The users
of these funds? Hiten Dalal: Rs 720 crore and Abhay Narottam, TB Ruia
and JP Gandhi: Rs 580 crore collectively. That was a very rough
estimate. Too rough to cope with a deficit of such magnitude.

Bhupen
Dalal took the lead in opening the meeting. “The scam will have
serious ramifications for India globally if Stanchart loses all this
money. It is in our interest to settle things amicably”, he
said. As per
Stanchart’s version, which appeared more consistent, he also
agreed to take responsibility for Gandhi’s dues.

According
to Stanchart’s internal documents, Hiten agreed to provide
additional security of Rs 160 crore made up of: shares in Reliance,
Lakshmi Machine Works, Pfizer, Bharat Forge (Rs 80 crore), debentures
of Sandoz and some other companies (Rs 10 crore) and mutual fund
units like Cantriple/Canstar (Rs 70 crore). He also agreed to trace
IRFC bonds (Rs 120 crore) and “excess holding” of other
bonds and BRs issued by the Bank of America due through “unidentified
transactions” (Rs 65 crore). In all, the shares and bonds made
up Rs 345 crore – Hiten’s share of the booty.

Over
detailed discussions, Stanchart fixed some kind of payback schedule.
Hiten suggested that the Bank of Karad give Central Loans of Rs 155
crore and Rs 125 crore of IDBI and ICICI bonds – a total of Rs
280 crore. He agreed to trace Rs 185 crore of IRFC bonds and bonds
from BankAm. He was also supposed to bring in Rs 305 crore of
shares/debentures, Rs 21 crore of units and Rs 205 crore cash against
the sale of Cantriple. The rest of the money – Rs 350-450 crore
– it was concluded, had been used to finance the losses of
other banks. Stanchart officials perhaps were used to writing off
certain losses. Later on, they filed claims against Canfina and
Citibank to recover some money.

The
problem with this arrangement was that it was based comp-letely on
Hiten’s statements. Stanchart officials may have believed them.
At that time, hopes of a settlement were running high; several times
a day they made quick back-of-the-envelope calculations to work out
how much the bank would reclaim. But was Hiten in any position to
speak the truth? Did he even intend to? Bankers recount that Hiten
never used to give a contract to back up his transactions. Yet, the
best and the biggest banks in the country, especially foreign banks
like Citibank, had done huge transactions with him. Over the next few
weeks, he repeatedly revised the figures.

Saturday,
23rd
May
was crucial for Stanchart officials. They would be able to assemble
all the major characters, suspected to be directly or
indirectly involved in the swindle, for a long discussion at The
Chambers. But before that, in the morning, Rajah Banerjee, director
of the India Task Force, (Banerjee, a blunt, fidgety person with
drooping eyes and a near-perfect British accent, was flown in two
days after Nat called London for reinforcements. He had been with the
bank for 25 years) and R Kannan would meet ND Parameshwaran, chief
officer in RBI’s department of banking operations and
development at World Trade Centre in Cuffe Parade, the southernmost
tip of Bombay.

“What
is Stanchart’s exposure to the scam, including unreconciled
BRs?” asked Parameshwaran, a tall, scraggy man with a lean
profile and bushy eyebrows, who looked more like a leftist union
leader.

Stanchart
was driven by two factors: first, the hope that the bank would get
its money back through negotiations and second, that at this
sensitive stage, discretion was important. So, when Prameshwaran
asked the Stanchart officials what the correct picture was, they
ducked the issue. “There is a large element of double
counting”, they replied ambiguously.

Parameshwaran
told them that the syndicate behind the Bank of Karad consisted of
five people – the names Stanchart already knew and with whom
Stanchart would have a brain storming session later in the day.

“All
money first went to Narottam and from there to three-four accounts”,
said Parameshwaran.

A
few more words and the meeting ended. It had lasted barely fifteen
minutes. Parameshwaran was rushing off to meet a deputy governor of
RBI. He left with a deep doubt in his mind: why wasn’t
Stanchart more open about its transactions?

At
4 p.m., all those involved in the murky Stanchart stream of the scam
met for a marathon four-hour session at The Chambers. Present were
Bhupen Dalal, Abhay Narottam, Hiten Dalal and Teju Ruia. Very
significantly, Gandhi, the man Hiten had identified as the
mastermind, was absent. Stanchart was represented by JR Heaton, Eric
Naslund, Pesi Nat, R Kannan and Wasseim Saifi.

Even
before the discussion began, Bhupen, an extremely smooth and forceful
talker, made sure his role was clearly understood: “I am here
due to my association with the Bank of Karad and because Nat and
Kannan have requested me to arrive at a settlement.” Bhupen
then referred to his similar exercise with Canfina where Narottam and
the others were present. Canfina’s deficit had been assessed at
around Rs 450 crore. The discussion then veered to specific
responsibilities.

Narottam
admitted that his account at the Bank of Karad was used to route
receipts and payments of all of Hiten’s securities
transactions. The method was simple. Hiten would orally inform
Narottam what to transfer where and Narottam would convert that into
written instructions for Bank of Karad. What was Narottam’s
interest?

“I
got commissions for doing the routing”, said Narottam.

“Is
that all?” asked Stanchart officials.

“Well,
about Rs 30 crore has gone into a dairy at Nasik.” The dairy
wasn’t doing well so Stanchart had no hopes of recovering that
money. They turned to Teju Ruia who was apparently playing the good
boy role. He admitted to having taken between Rs 90 crore and 125
crore.

The
width of that range was amazing. Here were seasoned businessmen and
brokers talking of hundreds of crores of supposedly missing money in
a manner as if it were loose change. More surprisingly, Narottam and
Ruia had different views on what those transactions were. Narottam
said that they were securities transactions done on behalf of Ruia.
Certain losses had to be added to it, which would explain the
inflated figure. Ruia disagreed. They were loans, he said, and later
insisted that the figure was Rs 90 crore.

“I’ll
pay it back”, he said. “But I want Canfina to be part of
the arrangement.”

Of
course, he wasn’t going to suffer a loss. Ruia had an
incredible strategy of paying back the money: “I’ll get
one of my companies to make a public issue. I need about three
months.” Perhaps he was hinting that Stanchart could act as the
merchant banker to this rob-Peter-to-pay-Paul public issue.

Halfway
through the meeting – at six in the evening – Hiten was
brought in. He had a few explosive things to say. “Don’t
pass the blame on to me. They know what happened.” He was
referring to Ruia, Narottam and Bhupen.

“Have
you lent any money?” asked Stanchart officials, “or lost
it in the market?”

“I
haven’t lent any money. I have lost some in the market”,
replied Hiten.

Later,
Hiten pointed a finger at Narottam and said, “His account at
the Bank of Karad will show all payments. Ask him to hand over all
the books for a reconciliation.” It was probably one of the few
reliable statements Hiten had made to Stanchart. Bhupen then turned
towards Hiten and said, “You must turn over all your books to
us. If you find it difficult to understand your own transactions, we
will bring in intermediaries. This has to be settled amicably.”
The intermediaries cited were Ajay Kayan and Manoj Dhupelia, Calcutta
brokers. Hiten indicated that Jitu Shroff, his former employer, was
acceptable to him. At that stage, with typical expatriate arrogance,
Naslund suggested that the bank fly in accountants from the UK “to
look into Narottam’s and Hiten’s books.”

Hiten
admitted that he had delivered photocopies of the Nuclear Power
Corporation bonds instead of the original certificates. “I have
given away the originals to Canara Bank”, he admitted.

Through
the whole meeting, it wasn’t clear what JP Gandhi’s role
was. As per the Stanchart version, Bhupen agreed to stand for
Gandhi’s losses or dues, insisting that he was not aware of
what Gandhi’s connections were. But later, Bhupen denied this.
“All I said was I will stand behind Gandhi”, he claimed.

Bhupen
then advised Narottam, Hiten and Ruia to settle with Stanchart
because unlike the public sector banks, Stanchart would be
commercially flexible.

At
the end of the meeting, Stanchart wanted to inspect Narottam’s
books. It claimed that Bhupen and Narottam resisted the idea. Later,
Narottam relented. Kannan told Narottam, “Can you call up your
staff and tell them to keep the books ready?” As soon as
Kannan said this, apparently one among the Gang of Five was seen
making a call, perhaps to Narottam’s office. The meeting was
over and while lounging outside, Hiten passed a stray comment: “Now
the battle is between the big fish and the small fry.”

After
the meeting, Wasseim Saifi and Iyer went to Narottam’s office
at Vardan Chambers near the stock exchange. It was locked. At 11 in
the night, one Stanchart official reached there with a bodyguard to
catch Narottam in case he attempted to remove any books. He found
nothing suspicious. The next day was Sunday. Stanchart kept a vigil
on Narottam’s offices but discovered nothing.

A
couple of days later, Narottam got himself admitted to Bachha’s
nursing home, opposite Churchgate station. His relatives said that he
was in a state of deep shock and on the verge of a nervous breakdown.
They feared for his life, they said. They gave the wrong name and
address of the nursing home and it was learnt later that they had
exaggerated Narottam’s condition.

Even
as Stanchart was negotiating with Bhupen and his gang, it was
exploring ways to get the CBI involved in the investigation with a
minimum of fuss. CBI was reluctant. So, Stanchart started pulling all
strings. It managed to contact G Ramaswamy, the powerful attorney
general of the government of India. On 24th
May, he put in a request to Vijay Karan, director of the CBI, to set
up a meeting between his department and Stanchart officials. Karan
agreed.

At
12.30 p.m. on 25th
May,
at Karan’s office in the ministry of home affairs at North
Block, Karan and the CBI super sleuth
K Madhavan, met Naslund and
Kannan of Stanchart. Also present were K Jaybharat Reddy, acting
chairman of National Housing Bank and joint secretary (banking).
Karan opened the meeting by referring to Ramaswamy’s request to
CBI to devote some time to Stanchart’s problems.

“Unfortunately,
CBI’s jurisdiction is restricted to public sector banks.
Besides, it has limited resources.” But he invited Madhavan to
suggest ways by which Stanchart’s case could be included.

Madhavan
was reluctant. Then Jaybharat Reddy spoke.

“May
be the public interest of the Stanchart depositors can form the basis
for CBI to intervene”, he said. This line of argument failed to
find favour with the others.

Karan
and Madhavan then jointly suggested that the bank take the following
steps: First, prepare a case in consultation with a Bombay-based
criminal lawyer. Second, lodge a formal complaint with Ramamurthy,
Commissioner of Police, Bombay, and send a copy of that to Madhavan.
Third, take RBI’s assistance. Madhavan promised to keep in
touch with Nat, Kannan and Derrick Reed and help in any way he could.

Meanwhile,
Jaybharat Reddy complained that nobody from the Stanchart management
had met him even once in the past year. He was referring to the case
where the Bank of Baroda, in which he was a director, passed its
annual accounts, though it had an outstanding BR from Stanchart for
Rs 50 crore. It wasn’t clear why Reddy mentioned this in a
meeting called basically to get the CBI to take up Stanchart’s
case.

Stanchart
also kept up its discussions with Parameshwaran. At 10 in the morning
on 28th
May,
Naslund and Kannan stepped into Parameshwaran’s office. They
referred to Nat’s request to involve Stanchart’s officers
in RBI’s investigations to verify the Bank of Karad’s and
Andhra Bank’s transactions.

“That
will be unwise”, said Parameshwaran. He felt that a regulatory
authority like RBI associating with officers of one particular bank
would encourage bad publicity. RBI would be accused of being
partisan, and that too, towards a foreign bank.

“Why
don’t you give me the list of suspected transactions?” he
asked the two Stanchart officers. “On my part I will be
collecting paid cheques and vouchers of Karad’s transactions
and those related to the other banks.” Kannan and Naslund were
satisfied. They were also keen to get leads on where the money had
gone. On this, Parameshwaran’s comment was telling.

“Some
of the money has been used by other banks for rollover or squaring up
past deals”, he said. Later, Hiten would say the same thing in
a different fashion to Stanchart officials. But this trail was
eventually never pursued.

“Is
anything being done about the Canfina transactions?” asked the
Stanchart officials.

“I
will speak to Canara Bank and start joint action”, said
Parameshwaran. He asserted again and again that he was keen on
getting to the bottom of the whole matter. And he had one piece of
advice: “Register all your claims and pursue them.”

While
Stanchart was carrying on a dialogue with CBI, the RBI and the Gang
of Five, it was developing a strange relationship with Hiten, a key
figure in the securities scandal. On surface, it would appear that
the relationship was fairly cordial after the scam was exposed.
On 11th
May,
Hiten wrote to Stanchart which had assessed its shortfall to be Rs
1253 crore[8]
of securities. If the tone of Hiten’s letter is any indication,
he was in a mood to co-operate:

Even
whilst you are continuing with the process of reconciliation in
ascertaining the exact position and further, whilst I am endeavouring
to give you physical deliveries of physical stocks and/or bank
receipts for the above shortfalls identified, I have delivered to you
the stocks, shares and debentures, etc. as listed in the annexure. I
will be delivering to you further shares, stocks, debentures, which
will be listed separately... by way of security towards the above
shortfall and/or further shortfalls which may be ascertained... I
further agree to keep you indemnified against any loss... eventually
upon completion of the final reconciliation... I further agree and
confirm to execute such other documents... that the Bank may require
to give effect to the above.

The
compromising tone of the letter is, however, completely misleading.
Hiten wrote to Stanchart again on 27th
May,
not only retracting whatever he had declared but charging Stanchart
with threat, coercion and much else. According to him, on 18th

May, Ravi Iyer forced him to write/sign the letter backdated to 11th
May.
Here is the dramatic story in his own words, reproduced from his 27th
May
letter, including all the typographical errors:

Your
Mr Ayyer insisted on my attending the his office along with my blank
letter heads in connection with the problems of reconciliation that
you were facing. Accordingly on 18-5-92, I was in his office when
some of my blank letter heads were taken by him and the letter dated
11-5-92 along with two other letters which were dated 12-5-92 and
13-5-92 were drafted, prepared and got typed by your official in your
office and presented to me for my signature. I was not willing to
sign them as the same contained numerous incorrect statements but I
was threatened that unless I signed them, Standard Chartered would
involve me by criminal prosecutions against me and have me arrested
and ruin me. In the circumstances, I who was all alone was compelled
to sign the said letters under threat, duress and coercion. In the
meantime, on 9th
/11th
May under
threat of criminal prosecution arrest and harassment, your Mr Ayyar
forced me hand over to you a pile of shares and stocks which he
stated would be returned back to me at the earliest. In the said
letter at item 4 securities of the value of Rs 45 crore covered by
BR.’s received by you but alleged to be missing from your
records.

Hiten
went on to assert that he had merely acted as the broker for
Stanchart, keeping it informed of the names of buyers and sellers.
For several transactions, Abhay Narottam had acted as the broker for
the Metro Bank and the Bank of Karad. Stanchart had accepted the BRs
of these two banks and made the payments directly to them. Writes
Hiten:

I
acted as your broker only. No question therefore arises of my being
liable or responsible for payments in respect of these transactions
and/or the alleged shortfall claimed by you. I was not bound to
furnish any shares and deben-tures as and by way of security…
Please treat the said letters bearing dates 11/5/92, 12/5/92 and
13/5/92 as cancelled… Please also return the said shares and
securities which have wrongly detained by you...

Stanchart
then played what Hiten feels was a nasty little trick. He had given
four cheques to Stanchart – two of December 1991, one of
February and another of March 1992. The bank presented them in May,
at the height of its dispute with Hiten, and the cheques bounced. On
Sunday, 31st
May,
Stanchart called Hiten to its office for discussions and handed over
a legal notice to him seeking to prosecute him. Hiten says he was
shocked.

In
his letters of 8th
and
15th
June, he claims that he had repeatedly requested the bank to hold the
cheques pending various adjustments. The cheques were not supposed to
have been presented. Indeed, why did the bank take five months to
present the last cheque, which was dated 24th
December?
“Such a long delay of depositing the cheque of such a huge
amount has not been explained by you as indeed there can be no
explanation”, wrote Hiten. Hiten was later convicted in this
case.

Strangely,
this war of letters did not prevent the bank officials and Hiten from
sitting together and sipping cups of coffee, discussing the
money trail. At 4.30 in the afternoon of 1st
June,
Hiten
met a set of Stanchart officials, including Saifi who wrote the
minutes. Hiten revealed a great deal, which was later turned over to
the CBI. For instance, he said that Bhupen, Narottam and Gandhi were
working together as a group, which had created the big hole in
Stanchart. He traced the problem back to mid-1991 – just around
the time of the Parliament elections. This was how the
question-and-answer session went:

“JP
Gandhi approached me to sell units to Stanchart. Bank of Karad would
provide the BRs.”

“But
where did the money go?” asked Stanchart officials. Hiten had
only part of the story.

“The
money was needed to plug a hole created by this group in either Bank
of India or Allahabad Bank whose former chairman was apparently close
to Bhupen Dalal.”

Did
the money go only from Stanchart?

“Even
LIC (Life Insurance Corporation) Mutual Fund may have a gap in its
portfolio.”

Who
was Hiten dealing with?

“Abhay
Narottam was the broker in all transactions with other banks. He had
the power of attorney of Bhupen Dalal till October 1991. He may have
been paid a commission for acting as a front.”

Who
were the beneficiaries?

“JP
Gandhi was the brain behind the whole thing. But he would not have
used the money. Bhupen Dalal and Teju Ruia were the beneficiaries.
Bhupen dealt with various business houses like the Birlas but Teju
Ruia was closest to him. JP Gandhi told me to contact Ruia for all
Karad deals in Gandhi’s absence.”

Hiten
told Stanchart about Teju Ruia’s lavish lifestyle. “He
recently celebrated his son’s marriage over fifteen days.”

Has
part of the money gone overseas?

Hiten
was now shooting in the dark. “Bhupen has a lot of NRI
connections which could have made it easy for him to transfer the
money overseas.” Hiten also asserted that other than the gaps
in Canfina and Stanchart, nothing else in the scam could be
attributed to him.

On
the most crucial question of where the money had gone, Hiten had a
very interesting answer:

“JP
Gandhi and the others would have used about Rs 600 crore – he
doesn’t know how. Another Rs 400-450 crore have been used to
fund the losses of other banks and the rest, about Rs 300 crore, are
in my account.” Stanchart had already picked up securities
worth
Rs 350 crore from Hiten, which he claims in his letter,
were meant to be returned to him.

In
the presence of Stanchart officials, that afternoon, Hiten was in a
mood to repent. Did he realise that what he had done was
unpardon-able? “Yes”, said Hiten. Knowing how devious he
was, Stanchart officials
were far from satisfied.

On
10th
June,
Hiten was
called to Stanchart and interrogated by HH Garrick and Chong Wang
Leong of Stanchart’s Group Security. The interview started at 5
in the evening in the temporary security office and ended at 6.15.
Stanchart was still groping in the dark. The minutes of that meeting
say it all. The bank was still trying to “identify a starting
point of asset tracing”, establish Hiten’s relationship
with the bank, and get information on staff collusion and possible
bribery.

“Hiten
Dalal is a singularly unimpressive character and certainly not one
that would be normally associated with a successful broker”,
says Stanchart’s internal document, recording the meeting.
Hiten had been evasive throughout the interview. Whenever the bank
officials tried to pin him on specific transactions, he had a stock
reply: “I will have to check the records, which my wife and I
are reconciling. The process would take another week or so.”
What he did not add, and what a firm of detectives employed by
Stanchart found out, was that Hiten and his wife were also burning
their books.

Hiten
had been dealing with Stanchart for over ten years. He confirmed that
he had done well for himself all those years. His Stanchart
connection started when he was with VB Desai and continued when he
struck out on his own in 1988. The rest of the interview was
revealing.

Who
did he deal with in the bank?

Only
the dealers.

Did
Stanchart release money before getting the securities?

Yes.

How
many times did this happen?

Not
too often.

Was
the bank carrying positions in its own books on behalf of Hiten?

Yes.

What
was the arrangement?

Hiten
had agreed to a 15% yield for the year ended May. But then the market
flattened out and he told Stanchart that for the coming year there
would be no fixed yield.

Did
he discuss this with anybody in the senior management like chairman
Pesi Nat or executive director R Kannan?

He
had never met them except at the annual Stanchart brokers’
party.

Hiten
also told the Stanchart interrogators that he had bailed out the bank
on two occasions when it had long positions and he was short.

Why
did he help Stanchart?

Hiten
could give no reasons.

Did
he have any social contacts with the bank staff or the dealers?

None,
except the annual brokers’ party.

Had
he ever offered favourable rates or information to the bank?

No.

“I
have been deceived and used by others”, said Hiten.

“What
do you mean?” asked the Stanchart interrogators.

“I
had trusted Bank of Karad... JP Gandhi and Abhay Narottam. I never
realised that they won’t deliver the securities. The bank’s
dealers were pressing for deliveries since January.”

“Would
you have been able to deliver under normal circumstances?”

“I
would have definitely got the stock back by May, the normal month of
reconciliation”, asserted Hiten.

Under
Stanchart’s interrogation, Hiten turned philosophical. “He
seemed resigned to his fate”, notes Stanchart’s minutes.
“He claims he won’t run away from the problem.”

What
would he do now?

“I
would like to continue as a broker”, he said. And then after a
pause added, “though I know nobody will trust me now.”

At
5 p.m. on
2nd
June,
Stanchart
officials went to GV Ramakrishna, chairman of SEBI, who promised to
help them in any way he could. His specific suggestion: “Take
the help of Interpol.” Apparently, a lot of people were
convinced that money had been stashed away abroad. Ramakrishna, then
a sixty-three-year-old bureaucrat with a penchant for armchair
investigation, had no definite information but his suspicions were
strong.

Stanchart
made other attempts at a settlement. One of the persons involved
early in the negotiations was HT Parekh, former chairman of ICICI and
the father figure of the financial sector. It is strange how both
Bhupen Dalal and Stanchart queued separately for help at the doorstep
of an eighty-one-year-old man who was far removed from scam.

By
the middle of May, the needle of suspicion was pointing at Bhupen’s
associates, Narottam, Gandhi and Ruia. Bhupen got on to the phone to
clear his name. He was frantically calling up every person he knew to
help him meet the finance minister, Manmohan Singh and commerce
secretary Montek Singh Ahluwalia. One of the calls he made was to Dev
Ahuja, formerly with Citibank and who thereafter started a financial
services company, 20th Century Finance. Ahuja suggested that Bhupen
contact Deepak Parekh, managing director of HDFC.

Bhupen
called Deepak on a Sunday. Deepak was reluctant to make any
commitments. Bhupen was desperate.

“Nobody
is willing to meet me”, said Bhupen. Can you fix someone for me
in Delhi?”

Deepak
deftly shrugged him off. “I am a small man”, he said. “I
can’t help you meet anyone.” Bhupen kept trying.

“Can
HT Parekh help?” he asked.

“Why
don’t you speak to him yourself?” returned Deepak.

Bhupen
was scared sick of the imminent CBI arrest. But he had a more
immediate worry. As the bare details of the massive scam at Stanchart
started dribbling out, SEBI turned the heat on the BSE to suspend the
scam-tainted brokers. Bhupen was one, operating through two
companies, BCD and Ramdas & Co. With CBI’s shadow looming
over him, Bhupen was desperate to stop at least BSE from suspending
him. Unknown to Bhupen, Nat had already knocked at HT Parekh’s
door.

In
the third week of May, Nat got a call from the RBI governor. He went
alone to meet him. That was strange because for all other meetings,
he had been accompanied by David Brougham, a director on Stanchart’s
board. A few days later, Brougham and Nat were back together at the
governor’s office. “Talk to HT Parekh”, the
governor said. “He may have a solution for you.” What
made the governor suggest this?

The
late HT Parekh, who had been advisor to the LIC during the Haridas
Mundhra scandal, knew the financial markets inside out, was familiar
with all the market players and commanded a great deal of respect
from them. Seen as a practical and honest man and immune to pressure,
he could have possibly seen a solution. He had no stakes and knew the
finance minister well. Before the scam, Parekh had also met Harshad
to see he would contribute to a charity organisation. Harshad was
keener on talking about his cars.

HT
Parekh had started his career with Harkissondas Lakshmidas, one of
the biggest brokers in Bombay, operating in the same league as BCD,
owned by Bhupen’s Dalal’s father, for whom Parekh had
great respect. “He was the king in the securities market”,
he recalls. Parekh was less close to Bhupen, however. “He is
different. He is very clever”, is all Parekh would say.

In
the third week of May, Parekh agreed to meet Nat as he wanted to know
about Stanchart’s involvement. He wasn’t too impressed by
Nat’s replies to his questions. Nat had referred to the Rs 300
crore of securities that Stanchart had seized from “them”
(meaning Hiten). “Bhupen is in the picture”, Parekh told
Nat. “Part of the money may have gone outside the country. You
have got Rs 300 crore but won’t get another Rs 300 crore
without lodging a complaint.” (Nat reported this to his senior
colleagues in Stanchart.) But how did Parekh say all this? Had he at
some stage asked Bhupen to settle the amount? And how did he know the
figure?

Very
coincidentally, several unconnected persons, including Dev Ahuja, had
been referring to a figure of Rs 400 crore. Stanchart officials
pencilled it in their countless calculations of recoveries. At least
two brokers had heard of that figure. In short, Bhupen’s
responsibility was being assessed at Rs 400 crore though there was
simply no basis for it. But what did Parekh actually tell Bhupen at
their first meeting?

“I
am innocent”, Bhupen pleaded. “I have not signed
anything.” Parekh thought a deal could be struck. “Put
some money on the table first”, he told Bhupen. The next day
when Bhupen called him again, Parekh said, “I would like to see
you with the Chartered Bank officials.” Later, to buttress his
claim of innocence, Bhupen sent a brief note detailing the Stanchart
case. On the other side, Nat kept Parekh’s advice of filing an
FIR in mind, pressing him at the same time, to arbitrate. Three days
after his meeting with Nat, Parekh agreed to sit in on the tripartite
meeting.

A
few days later, Brougham, Pesi Nat, Bhupen and Parekh assem-bled at
The Chambers for a settlement. Like all meetings involving Bhupen,
this too ended nowhere. “I don’t have the money. I am not
involved”, he repeated. Bhupen may have talked about a
settlement to Parekh earlier but now, in a formal meeting with the
Stanchart officials, he balked. He clammed up completely. “Brougham
was very keen on a settlement”, says Kannan. “He would
have grabbed if there was any deal in sight.” But Bhupen was
obviously giving no quarter. But that was not
the end of negotiations. Brougham made another attempt.

Around
5th
June,
Stanchart got an inkling that CBI may, after all, look into the scam.
Nat, Brougham, Bhupen and Kannan met for one last time, at the
Belvedere Club at the Oberoi hotel. It was the last meeting Brougham
attended in India, and the first one which he conducted himself,
abandoning his earlier role of an onlooker.

He
opened the meeting with an ominous announcement: “If we don’t
arrive at a settlement within the next twenty-four hours, we will go
to the CBI.” Stanchart had played its card. The last one. One
that could shake Bhupen up. The ignominy of spending not a few hours
but maybe weeks in jail... CBI’s rough questioning... But
Bhupen was unmoved. Brougham pressed on.

He
looked straight into Bhupen’s eyes. “The others are
pointing a finger at you. You will have to take charge of the
recoveries”, he said.

Bhupen
ignored that. He went for a counterattack, his usual strategy right
through his three weeks of negotiations with Stanchart and
afterwards. He attacked Stanchart where it hurt most — their
own lack of checks and balances. He pointed out specific transactions
where Stanchart’s weaknesses were glaring.

“Let’s
not talk of specific transactions anymore”, said Kannan. “Let’s
talk of money.” Bhupen side-stepped that.

Brougham
gave up. In all, the meeting lasted about fifteen minutes. Bhupen’s
stand hadn’t changed an inch. Stanchart had no more cards to
play. It would have to file a complaint with the CBI. A little while
later, Brougham left to pack his bags and Bhupen headed home.

Around
the same time, Kannan had a revealing conversation with one of the
major players in the scam. “Bhupen is perhaps clean after all”,
said this person. He was impressed by Bhupen’s strong,
consistent stance of innocence. “I have decided to stand up and
take responsibility for whatever happens”, Kannan was told.
“What will you do?”

“We
are talking of a fraud here and I am not going to take responsibility
for that”, said Kannan. “If it was a mistake I would have
owned it up. But 80% of the problem here is dealing-room fraud and
the rest is collusion in the back office. I know I have not been a
part of the problem but I can at least be a part of the solution.”

“Yes,
the bank sees your value in that.” Then suddenly Kannan was
offered a bait. “Why don’t you set up your own shop
here?” asked this person. “Like Sankaran.”

Like
Sankaran? The same R Sankaran who was the merchant banking chief in
Stanchart and whom Kannan replaced later? Who had earlier worked for
Bhupen’s firm, Champaklal Investment and Finance before moving
to Stanchart? The same Sankaran who was calling people at midnight to
harangue for hours about Bhupen’s innocence? Sankaran was also
a distant cousin of Kannan but the two were not exactly the best of
friends. Kannan grew curious.

“I
have analysed myself thoroughly. I may be good in a job but not in
running my own business”, he explained. “I am a little
more entrepreneurial than the others but I certainly don’t want
to run my own business. I want to be here for a few more months, find
a solution and leave.”

Strangely,
the other person refused to give up. He pointed out how successful
Sankaran has been. And then he dropped the bombshell. “Why, if
you ask Bhupen he may give you Rs 10-15 lakh. He has helped a lot of
people.”Kannan’s jaw dropped. The very next day Stanchart
was going to file a suit against someone and here he was offered the
bait of borrowing money from the same person for starting his own
venture.

The
next day Stanchart officials were in Madhavan’s office. But
strangely, the FIR was filed a full fortnight later, on the 20th
.
There were two reasons. First, with its limited resources, CBI was
still not confident of taking up the case of a foreign bank,
especially one that wasn’t willing to disclose everything. The
second was Madhavan’s cautious style of working, influenced by
his legal background.

Over
that fortnight, Stanchart officials trooped
down to Madhavan’s office at least thrice, where the
supersleuth would cross a ‘t’ and dot an ‘i’
of the FIR. After every round of correction, Madhavan would ask
Stanchart to take back the draft FIR. He did not want the court to
know that CBI was acting in collusion with the complainant, as
Stanchart’s case would then get weaker. After a couple of
meetings, Madhavan called a CBI officer, SG Gadhe, and again made
further corrections. A few days later, Madhavan, being increasingly
alienated within CBI itself for his publicity-conscious ways,
scheduled another meeting. In that, he included not only Gadhe but
one more CBI officer, Sambhariya. Finally, at 9.30 on the morning of
20th
June,
the
FIR was filed.

Over
the next few days, the entire Gang of Five and its satellites, except
Teju Ruia, were arrested. Ruia suspiciously took refuge in the Bombay
Hospital to escape CBI’s interrogation. All those arrested were
released on bail after one month. But all this was a farce. Stanchart
was still groping in the dark, hurting itself by a disastrous
public-relations strategy. CBI appeared to lose its way in a forest
of transactions. And the Gang of Five looked increasingly
comfortable. It appeared as if a cover-up had begun.

Subsequently,
Stanchart went on a legal offensive. It sued Hiten Dalal for the four
bounced cheques. It also sued Citibank in New York for Rs 117 crore
and planned to sue ANZ Grindlays Bank and BankAm for about Rs 335
crore at Melbourne and San Francisco, respectively. In all, Stanchart
filed twenty-four recovery claims against ten banks and mutual funds
to recover Rs 990 crore. Those sued included NHB, Andhra Bank, Andhra
Bank Finance Services, Canbank Mutual Fund, Canfina, State Bank of
Patiala and Karur Vysya Bank.

Most
of these were shots in the dark.

11

Superbanker

He
ran through the thicket of regulations that separate opportunity from
profits by striking dubious deals with a ragbag of characters from
politics, business and government. In the process, he created a
generation of clones who swore by his leadership and imbibed his
style.

IT
was the middle of June 1992 and Harshad Mehta’s heist and the
Stanchart stream of the scam were fully out in the open. Around that
time the RBI governor’s antennae had caught another signal that
would become the third dimension of the scam. He was tipped off that
Fairgrowth Financial Services, an upstart company started by the late
B Ratnakar, former chairmban of Canara Bank, was in trouble.
Fairgrowth had borrowed money from Andhra Bank but was finding it
difficult to repay. The governor called KR Nayak, chairman of Andhra
Bank.

“What
is your exposure to Fairgrowth?”

Nayak
feigned ignorance. “We have no exposure to Fairgrowth.”

A
few days later the governor called again, more certain this time. He
repeated the question and asked in addition, “Are you fully
covered by securities?”

“Yes”,
said Nayak.

“Are
you holding any Securities Receipts issued by Fairgrowth?”
enquired the governor pointedly.

Nayak
claimed that Andhra Bank Financial Services (ABFSL) was holding
sufficient physical securities with a market value good enough to
cover the money Fairgrowth had borrowed. He lied.

In
reality, ABFSL, a fully-owned subsidiary of Andhra Bank, was deeply
in hock having borrowed money from public sector units and lent it
out to Fairgrowth. The sum was staggering and Fairgrowth was
struggling to return it.

Meanwhile
the RBI executive director in charge of non-banking financial
services, SS Tarapore, got into the act. He knew K Dharmapal,
managing director of Fairgrowth, well. He asked him if there was any
problem. Dharmapal denied that there was. But Tarapore noticed that
he was uneasy. In the next few weeks, Fairgrowth emerged as the third
strand of the scam after Harshad Mehta and Stanchart. In some ways it
was more startling, exposing the high profile, go-getting commerce
minister, P Chidambaram, and the Planning Commission member, V
Krishnamurthy.

The
story of Fairgrowth starts with its founder, B Ratnakar, who died on
2nd
February
1992 at the age of 56, just three months before the scam surfaced. To
some observers, the Fairgrowth scam was inevitable. Fairgrowth was a
dangerous combination of its risk-taking promoter, the scorching pace
he set for his protégés and the dynamic equity market
of 1991-92. Ratnakar, judging by his track record, couldn’t
have done it any other way. His life makes a compelling story.

He
raced upwards in his 32-year career at Canara Bank to become, at 46,
the youngest chairman and managing director of a public sector bank.
He ran through the thicket of regulations that separate opportunity
from profits by striking dubious deals with a varied set of
characters drawn from politics, business and the government. In the
process, he created a whole generation of Ratnakar-clones who swore
by his leadership and imbibed his style of functioning. It was the
pervasive influence of this style that indirectly perpetrated the
scam.

Ratnakar
was the eldest of nine children of an impoverished ticket agent at
Sagar district in Karnataka. A free hostel accommodation in Mysore
and a generous principal who paid the examination fees, helped him
graduate. Until he was selected to join the bank, young Ratnakar had
never worn a pair of trousers. His standard attire was white pyjamas
worn with a shirt. Deep inside him, Ratnakar had a burning desire to
make a mark. This took him through five distinct phases in his
banking career: his stint in Bombay where he tasted early success,
his break in Delhi, extraordinary recognition in Madras, back to
bigger things in Delhi that propelled him to final stardom at
Bangalore, at the Canara Bank headquarters, when he became the
chairman.

Barely
two years after he had joined the bank, Ratnakar opted to work in
Bombay “because the sheer size of the metropolis presents a far
larger canvas and provides for the development of vision”, he
said later. He spent the first year and a half practically living in
the bank. He would sleep on the bank counters at night, find time to
appear for his banking examinations (CAIIB) and study Hindi and
Sanskrit simultaneously.

Around
the same time he married Prema, the niece of C Srinivasa Rao, a
director who had inducted Ratnakar into the bank. Ratnakar’s
father worked for Gajanana Transport Company owned by Prema’s
father. Rao, who treated Ratnakar like a son, arranged the marriage.
He even lent him Rs 5000 to buy jewellery and clothes for his family
in preparation for the wedding.

While
in Bombay, Ratnakar pioneered the house-to-house canvassing of
deposits which “in those days big bankers felt it below their
dignity to do”, he said. Within two years, at the age of
twenty-four, Ratnakar had become the youngest manager in the bank.
But this was just the beginning. “After a thumping success in
branches in Bombay, when I could have rested on my laurels, there was
an offer for people to go to the North to start branches. There were
no takers, but I offered to go Delhi”, recalled Ratnakar. At
twenty-seven, he took up the challenge to set up the bank’s
first branch in the capital where he learned the fine art of doing
business in India. Though a young stripling, clueless about how the
city operated, he soon created a wide network of contacts with
powerful bureaucrats, chiefs of public sector companies and
favour-dispensing politicians – all eager to cut a deal.

In
the next five years, he set up four branches, which was perhaps too
fast a growth. He was shunted off to Madras. “I felt like Field
Marshal Maneckshaw who was dismissed by Krishna Menon but came back
as Army chief”, he said later.

Ratnakar’s
achievements in Madras were truly outstanding. He himself said
proudly, in an interview with Shreyas,
the bank’s in-house magazine, “I did not know a single
person there. From such a situation to reach a stage where people
started talking about me, I consider a great achievement.” At
the Mount Road branch, he took deposits from Rs 1.5 crore to Rs 26.10
crore in just three years. This single branch accounted for 8% of the
total bank deposits in Madras city. It was also the largest branch in
the four southern states. “The success was poignant for me
because I was transferred out of Delhi in anger, and after this, I
had to be transferred back, in a higher capacity”, Ratnakar
told Shreyas.

During
his stint in Madras, the bank used to offer Rs 100 as an incentive to
officers for every lakh of deposit brought in. Halfway through 1972,
it withdrew the scheme, because Ratnakar had clawed in so much, that
they would have had to pay him a whopping Rs 2 lakh as incentive.
Instead, the bank awarded Rs 25,000 to the branch.

As
a regional manager, divisional manager and deputy general manager at
Delhi he expanded the network from 25 branches to 106 and deposits
from Rs 21 crore to Rs 248 crore. As an extrovert he also developed,
during this period, a wide network of contacts among politicians and
businessmen. In two short jumps he became joint general
manager and then, in September 1981, executive director. On 30th
June 1982, he
became the chief of Canara Bank – the youngest ever among
public sector banks.

Ratnakar
was full of innovative ideas, which he articulated effect-ively
through steady, uninterrupted chatter. “If five people were in
a room with him, the others hardly got to speak. Of course, he was a
captivating speaker”, recalled Vijay Dhar, son of late DP Dhar
who was once a top Congress politician close to Indira Gandhi. His
supreme confidence, bordering on bragging, a desire to be at the
centre stage, and his inability to accept criticism or dissent
sometimes irked people. But Ratnakar’s chief feature was his
burning ambition.

ND
Prabhu, who succeeded him as chairman, says that Ratnakar’s
vision was not a dream but a precise goal. As early as 1958, at the
age of twenty-two, just two years after he joined the bank as an
apprentice, Ratnakar shocked Prabhu by boasting that he could become
the chairman. Once he actually got there, in 1982, he set himself up
in competition with SBI, not in terms of deposits – which he
considered a misleading yardstick – but raw profits and
innovations. This generated fierce competition between him and DN
Ghosh, the chairman of SBI.

The
two had completely contrasting styles but were obsessed with each
other, according to brokers closely in touch with both. Any
conversation they started would switch within minutes to discussing
each other’s moves. Ghosh disliked Ratnakar’s bravado and
Ratnakar believed that RBI was unfairly scuttling his ideas and
innovations in preference for Ghosh’s. Despite the supposed
disadvantage, Ratnakar caught up with SBI with alarming speed. In
June 1982, Canara Bank had Rs 15 crore of capital and reserves. Six
years later this had swollen to Rs 241.50 crore – the highest
among nationalised banks other than SBI.

In
1987, his last full year as chairman, the dynamic Ratnakar, by then
dubbed Superbanker, launched credit cards and set up three
subsidiaries – Canbank Financial Services, Canbank Mutual Fund
and Can Fin Homes. Canara Bank had grabbed every opportunity with
amazing speed while being driven by management dictums like “targets
are barriers to creativity because they are based on the past.”
In 1987, Canara Bank, which was a fraction of SBI’s size,
showed a profit of Rs 45 crore, losing by a whisker to SBI’s Rs
45.5 crore profit. But Canfina had squarely beaten SBI Capital
Markets and CanMutual, after a shaky start, raced ahead to create new
records.

KM
Baliga, who first met Ratnakar in 1969 and then went on to become his
right-hand man in the chairman’s office in New Delhi, narrated
how Ratnakar challenged SBI’s lock on the banking business of
the public-sector companies. These companies, as per government
guidelines, were obliged to bank with the public sector banks. “He
used to tell the public sector companies and their parent ministries
that SBI is not even 100% government-owned – 3% of its shares
are privately held. Canara Bank is totally government-owned. So, as
per the guideline, Canara Bank should get a preference.” Such
logic and persuasive powers fetched several plum accounts.

These
examples show his direct contribution. But Ratnakar’s more
pervasive contribution, his true legacy, was in picking up promising
men like Dharmapal and R Kannan and lighting a fire in their belly.
These men have performed for him in commercial banking, merchant
banking and mutual funds, returning the compliment with steadfast
personal and professional loyalty. Ratnakar’s success in
inspiring a generation of top performers in a highly regulated set-up
must rank as one of the most notable managerial successes.

Ratnakar
believed in “hierarchy for administration and equality for
contribution.” This was a brilliant way of injecting incentives
into a rigid system. To promising employees, he gave challenging
assignments, bypassing their seniors. Simultaneously, he observed the
hierarchical structure including scales of pay, thereby keeping
everyone happy. Ratnakar also managed to inspire fierce loyalty among
his subordinates by working with them, thrusting them into challenges
and often finding solutions for them. Here is an example.

On
an overcast day in July 1984 R Kannan, manager in the merchant
banking division of Canara Bank, was on his way from Bombay to Delhi
to sort out a knotty problem with the Controller of Capital Issues.
Roche, an unlisted company, was bringing its stake down to 74% as per
the Foreign Exchange Regulation Act. To do that, it needed to sell
14% of its equity to the public. But as per law, no company with less
than 20% public holding could be listed. But Canara Bank, which was
handling this unique case, decided to file an application,
never-theless, with a provision to cancel the issue if the permission
did not come through.

As
Kannan reached the airport, he saw Ratnakar waiting in the queue for
the Bangalore flight. Kannan briefly explained the case to him. In
Delhi, Kannan discussed the case with a junior official at the
Controller of Capital Issues who doggedly argued against Canbank’s
proposal. Both approached the controller DR Mehta, later chairman of
SEBI, to arbitrate. They didn’t have to. Mehta told them
Ratnakar had already called and argued that in a dispute between the
FERA and CCI guidelines, the former was more important. Apparently,
Ratnakar was in a district 100 km from Bangalore that morning. He not
only found a quick solution but time to call Mehta and convince him.

Another
Ratnakar strategy was to get talked about, glorify the bank and its
achievers so that “others are motivated to identify with the
achievers and set themselves similar or higher goals and ideas. Once
you achieve success, recognition comes to you. Then you have a
captive audience and you get intoxicated because you are watched”,
he used to say. He tried this little management trick on Kannan.

In
1987, Ratnakar decided that though Kannan was an outstanding
performer, he had too low a profile. So, he nominated Kannan, along
with his boss, MV Kamath, for the best performance award in the
merchant banker category. After the awards had been given, during the
bank’s annual business plan conference, Ratnakar sent a chit to
Kannan and a few other executives asking them to speak on what
motivated them to achieve what they had. Kannan was thrust on to the
centre-stage. He spoke for five inspired and passionate minutes,
bringing the hall down. At one stroke Ratnakar had changed Kannan’s
image.

Ratnakar
could not have achieved such high profit by sticking to the fat
rulebook that blocked the growth of Indian banking. He showed scant
respect for regulation (which at times was maddeningly stupid),
dancing dangerously on the line dividing the legal and the ethical.
Naturally, he became the target of thinly disguised suspicion and
contempt in RBI and the finance ministry.

Ratnakar,
on his part, was openly defiant of RBI. In April 1988, when RBI
banned Canara Bank’s portfolio management scheme, he merely
shifted his portfolio, of around Rs 700 crore, to Canfina, under the
Corporate Investment Advisory Services. It is this CIAS holding of Rs
4000 crore which brought Canfina to the brink of liquidation after
the scam. Canara Bank even defaulted a few times on its statutory
liquidity ratio and cash reserve ratio requirements and had to be
fined.

RBI
and the ministry of finance retaliated by scuttling his proposals.
When CanMutual suggested that the mutual fund be managed under an
asset management company, RBI officials laughed off the idea saying,
“Soon you’ll ask for a separate subsidiary for lending
and another for deposits.” The same idea was accepted when SBI,
almost a year later, woke up to the need for Chinese walls between
SBI Capital Markets and SBI Mutual Fund.

With
his inherent pro-growth and pro-business stance, Ratnakar developed a
wide network of friends among the business community and found it
difficult to refuse a loan. Canara Bank was saddled with dud loans
but his ever-helping hand fetched for him gratitude from
industrialists, fellow bankers and friends, who at crucial stages in
their career had been saved by his “innovative”
solutions.

Kapal
Mehra, who controlled Orkay Silk Mills, was once strapped of cash
when Ratnakar rescued him overnight. The chairman of the Transport
Corporation of India, TC Gupta, told BusinessWorld
in
1988 (which incidentally coined the word “Superbanker”)
that when he was hamstrung by Syndicate Bank’s conservative
policy, he had called on Ratnakar who asked TCI to collect a draft
from the bank the next morning. The TCI account switched to Canara
Bank. What drove Ratnakar to break rules and accommodate his friends
was his desire to “always find a solution.” One of the
best examples of this is his friendship with V Krishnamurthy, who was
later accused of having links with both Harshad and Fairgrowth.

In
a closely regulated environment where bureaucratic rules
circumscribed enterprise and commercial judgement, Krishnamurthy, one
of India’s best-known technocrats and Ratnakar, one the most
dynamic banker, made a natural pair. “There were at least two
occasions when Ratnakar helped me in my career when my own abilities
and reputation were at stake”, said Krishnamurthy. “Ratnakar
did things as a deputy general manager which even chairmen of other
banks had not been able to, and we became close friends.”

Soon
after Krishnamurthy took over as chairman of Bharat Heavy Electricals
Ltd. with the challenge of turning around the sick giant, the company
did not have money to pay even Rs 4 crore for staff salaries. Had the
cheques bounced, the staff would have been demoralised and militant.
Said Krishnamurthy: “I went to SBI, my main banker and asked
for help. They refused. I spoke to several other chairmen and they
all said no. Then somebody told me to approach Ratnakar who was then
just a deputy general manager. I asked him and his reaction was an
immediate yes. Ratnakar released the funds first and then wrote for
permission.”

Later,
Krishnamurthy was made the chairman and managing director of Maruti
Udyog Ltd., the sick public sector car company, which had become an
embarrassment to Indira Gandhi. Maruti had two banks on the premises,
“with whom it had run up huge outstandings and had lost their
support”, recalled Krishnamurthy. “I asked, now that we
are reviving the company, would they resume being our bankers? Not
only did they refuse, but one of them even went ahead and sued us to
recover past dues.” Krishnamurthy once again turned to
Ratnakar. Canara Bank became a banker to Maruti.

“So
when Ratnakar was starting Fairgrowth and he asked me to invest and
become a member of his board, obviously I was not going to refuse”,
said Krishnamurthy. Especially since Ratnakar was at a stage when he
had to prove himself in his independent career. Krishnamurthy wanted
to do whatever he could to help him make it. So did KL Rajgharia, one
of the biggest Maruti dealers and another beneficiary of Ratnakar’s
largesse. Ratnakar helped him get a Canara Bank loan which Rajgharia,
however, failed to repay on time.

Ratnakar’s
success earned him as many enemies as friends. This is best reflected
in the mysterious CBI case against him for a Rs one crore house he
built in Bangalore. Ratnakar said he had spent Rs 400 per square foot
to build; CBI estimated the figure at Rs 750 per square foot. The
Preliminary Enquiry Report, prepared by KR Gangadharan, deputy
superintendent of police, CBI, Bangalore, listed 12 other assets
acquired by Ratnakar through the misuse of his position as chairman.

These
included 500 square metres of land at NOIDA (Ghaziabad), flats at
Munish Towers and Manipal Towers, Bangalore, Azad Apartments, New
Delhi, a bungalow in Bangalore, two commercial properties in New
Delhi, property in Palam Vihar, Gurgaon, and one acre of agricultural
land in Mehrauli. This report was filed on 4th

December 1988, barely five months after Ratnakar retired. CBI
actually never filed a charge-sheet. But the case hung over
Ratnakar’s head like a Damocles’ sword.

Ratnakar
turned to several people for help in the CBI case but each attempt to
suppress the case made CBI more determined to pursue it, recalls
Vijay Dhar. Once P Chidambaram, minister in charge of personnel, told
the CBI officials, “There is no merit in this case. I know the
law better than you.” The officials were back with a stronger
case. This and constant brushes with RBI left Ratnakar sadly isolated
and with a conviction that he was being sinned against.

This
conviction took deeper root once he was out of Canara Bank in 1988,
when he was just fifty-two, after serving two terms as chairman. All
through 1989 and the better part of 1990, he was looking forward to
the plum postings promised to him. “I would like to serve the
government in a capacity which can give me some sense of
satisfaction. If that challenge does not come my way I would like to
do something of my own... I would like to do something that would
create an impact”, he said, just after retirement. How
prophetic those words were.

Ratnakar
was rumoured to be considered for the positions of deputy governor of
RBI, the banking secretary and the chairman of to-be-merged Minerals
and Metals Trading Corporation and State Trading Corporation. He was
almost certain to get the latter job but with suspicious timing, a
small article appeared in The
Indian
Express about
the pending CBI case against him. Ratnakar’s goose was cooked.
The irony is that a section of the family that controls the Express
Group later became large shareholders in Fairgrowth.

In
1990, the VP Singh government came to power and Ratnakar, who had
stronger links with the Congress, gave up hopes for a position in the
government. SVS Raghavan, the former BHEL chairman, became the
chairman of the merged STC and MMTC. The only option left for
Ratnakar was to strike out on his own.

On
9th
July 1990, frustrated and
bitter after waiting for a position in the government which would
give him “some sense of satisfaction”, Ratanakar started
Fairgrowth Financial Services with a capital of Rs one crore. Later,
he started five other companies under the Fairgrowth banner:
Fairgrowth Investments, Fairgrowth Home Finance, Fairgrowth Factors,
Fairgrowth Exim and Fairgrowth Agencies. Fairgrowth Financial, the
flagship run by managing director K Dharmapal, was expected to be the
main source of money to finance the other services.

Fairgrowth
started making mind-boggling profits. But suddenly in early February
1992, Ratnakar died. His protégé Dharmapal went berserk
in the great turbulence of the next two months, like Harshad Mehta,
Hiten Dalal and Stanchart. Whether fair or not, Fairgrowth was a case
of too much growth. It had run up huge outstandings with ABSFL and
some of the money was parked with broker Pallav Sheth. The secondary
market was in turmoil, with prices melting away. The Superbanker’s
creation was recording a meteoric fall.

Abhay
Dharamsi Narottam or A D Narottam as he was known, was convicted in
the Canbank Mutual scam in 1999 along with Hiten Dalal.

Harshad
Mehta on his release from jail. The Big Bull finally passed away on
the 31st
of December 2001, while he was still serving his sentence.

The
Late J P Gandhi, he was the grand old man of twisted securities
deals, he worked with Bhupen Dalal for decades and was suspected to
be Dalal's ally in the “swindle” of Stanchart.

Jitu
Shroff, was the man running the broking firm V B Desai. He is known
to be Harshad Mehta's mentor in the stock markets.

Ketan
Parekh in his heyday, he is seen with Australian businessman Kerry
Packer, with whom he announced a joint venture that did not
eventually materialise.

12

The
Fairgrowth Story

It
took just a few months after Ratnakar’s death for his
organisation to collapse. The boundless energy he had released
consumed his own creation. His favoured protégés
engaged themselves in a bitter power struggle.

AS
Fairgrowth hurtled into an abyss, it brought down one of the most
promising experiments of the Indian financial sector. B Ratnakar’s
vision was to establish a country-wide chain of financial
supermarkets under the Fairgrowth brand name – the same vision
he had for Canara Bank when he launched Canbank Financial Services
and CanFin Homes. In Fairgrowth, freed from bureaucratic
interference, his vision could have become a reality.

As
he told Business
Today (in
his last interview to the press) he wanted to have a large office
(around 15,000 square feet) in some major cities under the name
Fairgrowth. “This would be parcelled out into six or eight
offices for the Fairgrowth companies, each occupying about 2000-odd
square feet.” Plus, there would be a branch of Nedungadi
Bank[9],over
which Ratnakar secured control in late 1991. His vision was to create
a structure that would let a consumer/investor use the bank branch to
deposit or withdraw money, invest in stocks through Fairgrowth
Financial or Fairgrowth Investments, take a home loan from Fairgrowth
Home Finance and buy selected consumer goods from the Fairgrowth
Agencies – all under one roof.

Besides,
with his reputed dynamism and innovativeness, Ratnakar was on the
verge of striking alliances with Ratan Tata (for the Tata companies
and to advise on the setting up of a commercial bank) and Aditya
Birla for a joint venture in South-East Asia. Also on the cards was a
four-way venture between Fairgrowth Factors, Vysya Bank, the
International Finance Corporation and DBS, a Singapore based company.

But
from the start, Fairgrowth was based on compromises and adhocism.
Ratnakar picked up a few trusted lieutenants from various outfits of
Canara Bank and put them in charge of different businesses. K
Dharmapal was earlier general manager, running Canbank Mutual Fund, R
Lakshminarayan, executive director of Fairgrowth was an executive
vice-president in Canfina, A Karunakar Shetty, MD of Fairgrowth Home
Finance, was the managing director of Canfin Homes. And then there
was KRN Shenoy, managing director of Fairgrowth Investments, who was
known to be guru of “innovative” money market deals that
sometimes put Syndicate Bank in trouble. Conspicuously absent was R
Kannan, who had left Canfina to join Standard Chartered Bank at a
fancy salary and later brokered Ratnakar’s disguised takeover
of Nedungadi Bank. “Kannan is still enamoured of foreign
banks”, Ratnakar would jokingly comment. “He will come
around soon.”

But
Kannan would probably never have joined. He knew that Ratnakar’s
foot soldiers did not make for a winning team and that Ratnakar’s
own survival was doubtful judging by the way he was puni-shing
himself with more work even after a bypass surgery.

The
only factor that kept the Fairgrowth team together was Ratnakar
himself. But even he could not inspire stability beyond a point as
his staff had differences between them. For instance,
R
Lakshminarayan, based in Bangalore, did not see eye to eye with the
managing director, Dharmapal, based in Bombay. “The Bangalore
office was functioning independently right through”, said
Dharmapal. “At least until February (1992) they were in touch
with the chairman and after he died they continued to operate on
their own. After all it was the registered office.”

There
were other basic compromises. On paper, Fairgrowth Investments was
the one that was supposed to undertake stock market-related
activities like share broking, portfolio management, share shops,
investors’ club, equity research and underwriting. The company
ended up being run by KRN Shenoy, a money-market expert, and
strangely not by Dharmapal who was earlier running CanMutual and was
ranked as a great equity trader.

Again,
it was curious that Dharmapal was entrusted with Fairgrowth
Financial, which was supposed to offer services like leasing, hire
purchase, corporate advice, consultancy and managing public issues.
These were merchant banking activities, resembling Canfina’s
range of services, in which Dharmapal had little experience.

The
boards of each of these companies were like courts where Ratnakar was
the king and a ragbag of characters including business-men,
technocrats, money managers, stockbrokers and political fixers were
courtiers, the only criteria for selection being their loyalty to
Ratnakar. Fairgrowth Investments and Fairgrowth Financial seemed like
Ratanakar’s fan clubs. The directors of Fairgrowth Financial
were Ved Kapoor, owner of Hitkari Potteries and Vijay Dhar, son of
the late DP Dhar, a key minister in Indira Gandhi’s cabinet.
Kapoor, Ratnakar and Dhar had a joint venture called Prerna Motors in
Bangalore, which had the dealership of Telco trucks. Other board
members were
V Krishnamurthy, before he became a member of the
Planning Commission, KL Rajgharia, a big dealer in Maruti vehicles,
Pratap Reddy of Apollo Hospitals, TPG Nambiar, who controls the BPL
Group and Vinod Doshi of Premier Auto.

Krishnamurthy,
having identified himself as a Rajiv Gandhi-loyalist was in the
wilderness during VP Singh’s regime. He was a man in search of
a role when Ratnakar offered him a position on the board. Naturally,
he accepted. Dhar had struck a friendship with Ratnakar when the
latter was a deputy general manager in Delhi, a friendship that grew
over the years. Dhar, who owns the Broadway Hotel in Srinagar and
developed properties in Delhi, was one of those originally involved
with Fairgrowth, along with Rajgharia and Krishnamurthy. Rajgharia
was perhaps the closest to Ratnakar. After he left Canara Bank,
Ratnakar stayed with Rajgharia for more than a year in his Lajpat
Nagar house in New Delhi. That is also where he suffered his first
heart attack.

The
board members at Fairgrowth Investments were a similar motley crew.
Chief among them was garment manufacturer, Pradip Paliwal, whose wife
Rashmi was a garment designer and a close friend of Sterra Sharma,
wife of Captain Satish Sharma. Paliwal owned a company called Palwell
Exports to whom the Bank of India and the Bank of Baroda had advanced
loans. Paliwal knew the system, how the banks worked, how the money
market worked and had more than an inkling about who was going to be
appointed chairman and of which bank. He was extremely close to
Ratnakar, sometimes helping him boost Canara Bank’s deposits.
The other board members were Congress MP Tirath Ram Amla (Vijay
Dhar’s father-in-law), stock-broker Rajendra Banthia and Ved
Prakash who controlled an old finance company called Motor General
Finance.

The
Fairgrowth boards looked like a hodge-podge but it mattered little
then because, thanks to Dharmapal’s trading skills, Fairgrowth
Financial was making good profits. In March 1991, after less than a
year’s operation, Fairgrowth had earned Rs 1.1 crore on a
capital of Rs one crore, even though Dharmapal had made several
crucial errors of judgement. Ratnakar was once again making waves. He
was planning to go public but obviously several powerful people were
against it. The finance ministry sent out a directive that no finance
company with less than three full years of operation would be allowed
to issue shares. Fairgrowth was stopped in its tracks. In September
1991, it issued further shares that took the capital to Rs 5 crore.
Among the allottees was P Chidambaram.

By
early 1992, Fairgrowth was making enormous profits. At the end of
June 1992, when the company took stock, the figures were astoundingly
large for a two-year-old company. Fairgrowth traded in shares worth
over Rs 7000 crore with core market borrowings (money markets and
inter-corporate deposits) of around Rs 500 crore. For March 1992,
Fairgrowth had Rs 89 crore of income of which stock trading fetched
Rs 66 crore, money market trading Rs 21 crore and merchant banking
and bill discounting Rs 2 crore. Against this, the expenditure was
just Rs 8 crore, leaving a staggering pre-tax profit of Rs 81 crore
on which it planned to pay a tax of Rs 38 crore. According to Dhar,
the board had no inkling of what was going on. “Only two
directors understood finance: Nambiar and Rajgharia. In one of the
board meetings, Nambiar asked, “How can you make so much
profit?”

Ratnakar
was unconcerned. He was planning bigger things, in anticipation of
the financial sector being liberalised soon. In late January 1992, he
was talking to merchant banker Vijay Mehta and Harsh Vardhan, who
headed Vayudoot earlier, to start Fairgrowth Airlines. Unfortunately,
a few days later, on
2nd
February,
Ratnakar’s brilliant career came to a dead stop when he
succumbed to a massive cardiac arrest. The main cause: unwillingness
to travel less and inability to lead a more disciplined life. It took
just a few months after his death for his organisation to collapse.
The boundless energy he had released consumed his own creation. His
favoured protégés engaged themselves in a bitter power
struggle.

In
all likelihood Ratnakar had an inkling this would happen. He had
drafted in Sid Khanna, son-in-law of Ved Kapoor and chief of Arthur
Andersen in India, to suggest a management structure for the group.
He formed Fairgrowth Holdings Ltd., a holding company of which key
Fairgrowth managing directors would have board memberships. Under the
plan, which Dharmapal knew of, Ratnakar himself planned to hold 30%
and the three MDs of Fairgrowth Financial (K Dharmapal), Fairgrowth
Investments (KRN Shenoy) and Fairgrowth Home Finance (AK Shetty)
would each have owned 20% and R Lakshminarayan, the executive
director of Fairgrowth Financial, another 10%.

That
this structure was too fragile was apparent within a month after
Ratnakar’s death. The inevitable issue was, now that Ratnakar
was no longer there, who was the number one? Ratnakar’s elder
son, running Fairgrowth Agencies in Bangalore, was too young and not
in the same league as Dharmapal. Increasingly, his wife Prema
Ratnakar’s name became acceptable. But not everybody openly
agreed. After Ratnakar’s funeral, Kannan proposed the name of
RS Pai, formerly with Canara Bank and then chairman of Syndicate
Bank, for the chairman’s position. But Dharmapal had his own
ideas. Two days after Ratnakar’s death he declared, “It
is not a legal requirement to have a chairman” Later, when RS
Pai’s name was brought up at the board meeting in Bangalore,
Dharmapal, normally a calm person, burst out in anger. He claimed
that professionals like him were behind Fairgrowth’s success
and that he would oppose any move to install an outsider. The board
elected Prema Ratnakar as the chairman.

Was
Dharmapal moving independently? One clue was in the share-holding
pattern of Fairgrowth Financial. The capital of Rs one crore at the
start had become Rs 5 crore by September 1991 and Rs 8.6 crore by
March 1992, two months after Ratnakar had died. Dhar later said that
the board did not know the details of this last increase in the
shareholding.

Scores
of new shareholders had subscribed to this capital increase.
Conspicuously absent were brokers like Ajay Kayan and Pallav Sheth
who were the original subscribers. The new entrants were a faction of
the family that controls the The
Indian Express
Group and
S Gurumurthy, a chartered accountant who once used to
write investigative stories against Reliance Industries for the The
Indian Express.

Were
they strengthening Dharmapal’s hands to eventually help him
take over Fairgrowth? No board member was as close to these new
entrants as Dharmapal was. He, however, denied any attempt to control
Fairgrowth. Even if Dharmapal was indeed attempting a slow takeover,
few could challenge him. Other directors recall that he had turned
highly overconfident by April 1992, as he cranked up mega profits in
stock trading through Sheth with whom he had parked
Rs 230 crore.

The
Fairgrowth strategy was simple: borrow from anywhere and everywhere
and invest in the stock markets. It identified two main sources. One
was corporate money – small and big – including the
proceeds of public issues. Since late 1991, Dharmapal was scouting
around for such corporate clients in southern and western India. In
fact, before the scam story broke, Kayan, who was close to Ratnakar
and was holding a large chunk of Fairgrowth equity, felt that
corporate money was fuelling the boom. But the big source was surplus
money from the public sector undertakings and banks. There were two
conduits: Syndicate Bank and the financial service subsidiary of
Andhra Bank, Andhra Bank Financial Services Ltd., located in
Hyderabad. The choice of banks says a lot about Ratnakar’s and
Fairgrowth’s style of functioning.

Vijaya
Bank, Citibank, Andhra Bank and more so, Syndicate Bank where
Fairgrowth Investment’s managing director Shenoy ran the
investments department, were the original gunslingers of the money
markets. Syndicate Bank broke the RBI regulations on buyback deals
and fronted transactions for brokers, giving them clean advances
without any securities. In 1987, it paid Rs 23 crore in penalty to
RBI. It has also been involved in dubious financing of Reliance
Industries and then supporting the Reliance scrip. Syndicate Bank’s
connection with Fairgrowth ran deep.

Contrary
to popular belief, Ratnakar did not really groom
ND Prabhu to
succeed him. He was keen on getting RS Pai, an ex-Canbanker who later
became chairman of Syndicate Bank. After the scam was exposed, Pai
was found to have 35,000 shares of Fairgrowth Financial. Syndicate
Bank, under him, served Fairgrowth’s purpose admirably. In
November 1991, when the market was booming and Fairgrowth, like
Harshad and other brokers, was looking for funds, Syndicate started
accepting money from PSUs under the portfolio management scheme. It
collected Rs 337 crore, of which it turned
Rs 90 crore over to
Fairgrowth Investments. Evidently, the money was a clean advance to
the Fairgrowth Group. Even three months after the scam surfaced, more
than Rs 46 crore worth of shares were still in Fairgrowth Financial’s
name. Syndicate Bank had also routed about Rs 200 crore through
Kishore Narottamdas Amarchand where the ultimate beneficiaries were
two Fairgrowth companies. This amounted to clean credit from
Syndicate Bank.

ABFSL,
like Fairgrowth, was in its infancy. In fact, the two grew up like
twins, though they could not, in some ways, be more different than
each other. One was a fully-owned subsidiary of a rule-bound
government bank. The other was a private sector outfit. Fairgrowth
was born in August 1990. RBI permission to set up ABFSL came
on 6th

December 1990; it was incorporated in February 1991 and started
business on 1st
July
1991. The Andhra Bank chairman was KR Nayak, earlier general manager
of Canara Bank under
Ratnakar’s chairman-ship. ABFSL had the same wide range of
objectives as Canfina or Fairgrowth Financial: leasing, merchant
banking, hire purchase and, of course, purchase and sale of
securities.

It
turned out that neither Fairgrowth nor ABFSL were interested in these
services. ABFSL became a simple lender and Fairgrowth a
borrower-cum-investor. They had cut through a range of financial
activities possible, to hit upon the most profitable and logical
business area. Just like Canfina, Stanchart and Citibank, ABFSL was
merrily circumventing RBI’s guidelines on PMS while picking up
thousands of crores. On the other hand, Fairgrowth, just like
Harshad, Hiten Dalal or Citibank, had found a source of money with
which to play in the market.

The
strategy was that ABFSL would borrow from various PSUs and turn the
money over to Fairgrowth for a fixed return against ‘security
receipts’[10].Fairgrowth
in turn would pump the money into the booming stock markets. Within a
year, ABFSL also started borrowing furiously. By early June 1992,
when the scam exposure froze its operations, it had Rs 188 crore
under the head ‘investment service’ and over Rs 400 crore
as ‘inter-corporate deposit’. This was represented by Rs
493 crore of physical assets, Rs 96 crore of bank receipts and the
rest in bank balances at Hyderabad and Bombay. Fairgrowth, which
picked up Rs 1769 crore, was not the only one using ABFSL money.
Hiten Dalal received Rs 1156 crore, Stanchart got Rs 522 crore,
broker VB Desai Rs 115 crore and National Housing Bank Rs 194 crore.
All of them were using the money to play in the stock markets.

To
be fair to Fairgrowth, it could not have diverted ABFSL’s money
without its knowledge. But after the scam surfaced, ABSFL showed
outrage at what had been going on, adopted a holier-than-thou
attitude and claimed that it had been cheated. “They knew that
the money was going into market operations”, said Dharmapal.
“How else could we offer them returns of 25-30%, sometimes even
40% depending on what the going rate for borrowing was? The
understanding was that Fairgrowth would issue security receipts or
‘trust receipts’ and wrongly declare that bonds or units
had been purchased on behalf of ABFSL. In fact, that money would be
diverted into the market and ABFSL was not supposed to ask for
delivery as long as the interest cheques kept coming in.”

When
the scam story broke on 23rd
April,
like every bank, ABFSL began to hurriedly clean up its operations. It
asked Fairgrowth to deliver all securities mentioned on the SRs at
the end of April. Obviously, these did not exist. The money was in
the form of shares and some of it was parked with brokers. Fairgrowth
could not immediately liquidate its holdings and buy the units and
bonds mentioned in the SRs as the stock exchange was closed due to a
brokers’ strike.

In
late May 1992, as rumours about the fast-growing Fairgrowth being in
trouble began circulating in the market, Dharmapal, like everybody
else involved in the scam steadfastly denied them. In the third week
of May, R Lakshminarayan returned from Singapore. On
24th

May, he came to know about the shortfall and the suspected forgery.
On 28th
May, he told Dharmapal about it. A helpless Dharmapal tried to
suppress the information. Even officials close to him were not told
the truth. Officially, Fairgrowth declared that it had only Rs 3-4
crore worth of outstandings.

Then
the RBI governor called the Andhra Bank chairman,
KR Nayak, and
Fairgrowth’s game was up. On
17th
June, SS
Tarapore and R Janakiraman ordered ABFSL to submit full details of
their outstandings with Fairgrowth. What
ABFSL submitted, failed to satisfy RBI. The next day was crucial. On
18th
June,
Rs 100 crore fell due for payment to ABFSL. Fairgrowth defaulted. On
20th
June,
RBI once
again asked for the outstanding position and the realisable value of
the assets ABFSL was holding. What surfaced was Fairgrowth’s

Rs 240 crore liability towards ABFSL against which Fairgrowth had
lodged Rs 151 crore of units and Rs 70 crore of bonds at Bangalore
and Rs 19 crore of units and Rs 32 crore of bonds at Bombay. This
looked fine on paper. But that was all it was – a paper.
Fairgrowth did not have the assets.

On
25th
June,
exactly
a week after the Rs 100 crore repayment fell due, ABFSL told R
Lakshminarayan that it would sell the securities lying with it and
square off its dues. Lakshminarayan requested them to hold on since
the market was depressed. Instead, Fairgrowth offered ABFSL, Rs 150
crore of bonds and equity shares. It eventually delivered Rs 101.59
crore worth of financial instruments. The next day, RBI officials
descended on the ABFSL offices in Bangalore and Bombay and took
photocopies of the certificates. Three days later, they went down to
Fairgrowth’s Bangalore office and seized the securities. They
had been forged.

Apparently,
somebody from the Bangalore office had crudely added a couple zeros
to increase the value of three UTI certificates. Of the other
securities, allotment letters of 9% HUDCO bonds (Rs 45 crore) and 9%
NTPC bonds (Rs 15 crore) were fake. The Rs 19 crore of units thought
to be lodged in Bombay were backed by a mere acknowledgment from UTI.
Fairgrowth was supposed to pick up the certificates from UTI and hand
them over to ABFSL. It took delivery of the certificates but did not
turn them over. In the end, ABFSL was left with fake allotment
letters, tampered unit certificates and Rs 42 crore of bonds quoted
at 20% discount. Fairgrowth was short by Rs 206.42 crore. As against
this, ABFSL had shares and bonds of Rs 101.59 crore leaving a net
outstanding of about Rs 105 crore.

The
managing director of ABFSL, Y Sundara Babu, flew down to Bombay on
2nd
July,
to collect more
securities. But RBI was not pre-pared to wait any longer. It lodged a
formal complaint on the same day and Fairgrowth’s assets were
attached. The Fairgrowth board met hurriedly at Bombay the next day
where Sundara Babu was a special invitee.

The
board gave an undertaking that it would provide sufficient shares,
receivables and leased assets to cover the gap. The resolution was
minuted and signed by Prema Ratnakar. Fairgrowth’s statement of
assets and liabilities as on
22nd
June
was filed
with RBI. It showed a surplus of Rs 33.54 crore. The Fairgrowth board
met again
on 5th
and
6th

July, in Bangalore and submitted a letter to ABFSL earmarking
securities worth Rs 84.87 crore and shares of Rs 10 crore and
short-term loans of Rs 20.41 crore. RBI ought to have objected to
such earmarking but did not do so. However, the governor turned down
a request to bail out Fairgrowth.

The
ABFSL board met for an emergency meeting at Madras and authorised
general manager, B Srinivasa Rao, to go to Bombay and move the
special court to get some of the Fairgrowth assets which, had been
earmarked for ABFSL, released. On
13th
July,
Rao went
to the Custodian, AK Menon, appointed under the special court to
recover the scam money. He referred him to the well-known lawyer,
Atul Setalwad. Setalwad in turn advised Rao to seek Menon’s
help in moving the special court. ABFSL officials remained in touch
with Menon who promised to make an application to the special court
based on ABFSL’s claim.

The
claim was finalised on 25th
July, and thereafter, Rao and Sundara Babu met Ashok Desai, advisor
in the department of economic affairs at the finance ministry. It was
at this point that Menon suddenly changed his mind and asked ABFSL to
move the special court on its own. After prolonged discussions with
Menon, the attorney general, and Ajit Day, president of the CSE, it
was decided that securities with blank transfers held before the
Special Court Ordinance was promulgated, would be transferred to
ABFSL. This added up to Rs 135 crore. For third party assets lying
with Fairgrowth, which were earmarked after they had been attached,
ABFSL would make an application to the special court to transfer them
in the name of Andhra Bank.

On
19th
July,
ABFSL lodged a formal complaint with CBI and attempted to release
assets that it had held before and
after the Special Courts Ordinance. This was another instance where
criminality over-rode commercial considerations. According to
Dharmapal, Fairgrowth had always had a surplus of assets over its
dues to ABFSL. Even in December, after the BSE sensitive index had
hurtled down to 2000, Fairgrowth’s surplus was over Rs 5 crore.
But the money was not with Fairgrowth. A large chunk of it was lying
with brokers like Pallav Sheth. When the scam surfaced, Sheth’s
dues to Fairgrowth amounted to Rs 105 crore. Between late April and
June 1992, he had paid off some Rs 45 crore. In July, when ABFSL
filed its criminal complaint, Sheth’s dues to Fairgrowth were
still Rs 60 crore out of Fairgrowth’s total dues of a little
over Rs 100 crore to ABFSL.

CBI
had little interest in recovering the money. On 21st
August,
it arrested R Ganesh, an assistant vice-president, who had forged the
unit certificates and S Srinivasan, a vice-president. Later, in a
case filed against CBI, they complained that when they went to the
CBI office at RT Nagar, Bangalore, three officers led by a DSP called

DB Desai tortured Srinivasan. They kicked and boxed him to get a
confession implicating Dharmapal in the forgery. Srinivasan refused.
They then started beating him. The officers threatened to arrest him
and lock him up unless he signed the statement. Srinivasan did sign
it but later retracted. In another police complaint, Gopal Shankar
Iyer, another arrested Fairgrowth employee, claimed that he was
tortured
on 28th

August by the same three officers, to sign a statement implicating
Dharampal.

On
7th
September,
CBI arrested Dharmapal
and Lakshminarayan. Long ago, Ratnakar had escaped the CBI net but
his men were now caught. It was their mentor’s energy,
delegatory style of management and premium on ‘performance’
that had landed them in the scam.

Indeed,
Fairgrowth was not the only Ratnakar creation that was tainted; after
all it was the child of Canfina and CanMutual, Ratnakar’s
earlier experiments. These two were scam-ravaged as well, for reasons
very similar to those that devastated Fairgrowth.

In
1994 Acharya Arun Dev, a controversial Calcutta-based real estate
developer, appeared on the scene as a rescuer. In a deal structured
by Dharmapal, he took over Ratnakar’s stake in Fairgrowth and
ran the company for a while with Nirmal Suchanti, owner of Concept
Communications – a financial advertising agency.

However,
Arun Dev was mired in other problems and sold his stake to Karsan
Patel, a diamond trader. Fairgrowth paid off all its institutional
debts, entered into a settlement with the IT authorities and now has
no outside liabilities. It may become the first scam-affected entity
to be de-notified.

13

A Can
of Worms

The
story of Canfina and CanMutual along with that of Fairgrowth
exemplifies the financial audacity that lies at the heart of the
scam.

LOOK
at these people. In the public mind they were all suspects in the
scam: K Dharmapal, R Lakshminarayan and KRN Shenoy of Fairgrowth, KR
Nayak of Andhra Bank, RS Pai of Syndicate Bank, Ashok Kumar of
Canbank Financial Services, Anil Narichania of Canbank Mutual Fund.
They all had a common professional paren-tage. They were all B
Ratnakar’s men, having worked closely with him either at Canara
Bank, Canfina or CanMutual, the latter two among the most aggressive
and reckless operators in the money and stock market.

Harshad
Mehta, Pallav Sheth and Ajay Kayan made money. Stanchart lost it. But
no money would have been lost or gained if Canfina and CanMutual had
not been making available hundreds of crores of rupees to the market
players. The cash came either from the public sector undertakings
into Canfina or from ordinary households and other banks into
CanMutual. From there, it travelled into the coffers of the parent
bank and into the pockets of a group of select, favoured brokers
along a network of incestuous relationships. In the process, they all
flouted Western norms on arms’ length relation-ships, insider
trading, adequate disclosures and responsibility to their fiduciary
clients. The story of Canfina and CanMutual along with that of
Fairgrowth, exemplifies this financial audacity that created the scam
of this size.

When
the scam surfaced, Canfina was found holding Rs 374.35 crore of
worthless bank receipts/subsidiary general ledgers issued by Bank of
Karad, covering three transactions done through Hiten Dalal.
CanMutual too, was stuck with bounced Bank of Karad BRs for
Rs
103.82 crore in two transactions done with Hiten Dalal. One was
Rs
58.39 crore of an 11.5% central loan of 2008. CanMutual replaced the
bounced Bank of Karad SGL with its own, sold it to Citibank, got it
back and resold it in September 1991 to Stanchart. The SGL bounced
again and Stanchart made a legal claim on CanMutual. Canfina’s
and CanMutual’s money had actually gone to Abhay Narottam’s
account in the Bank of Karad. The CanMutual official involved in all
this was Anil Narichania, assistant general manager. These sets of
transactions are simply illustrative. They don’t represent all
that the Can twins were up to, ever since they were set up.

First
came Canfina, launched in June 1987. Ratnakar picked his youngest and
brightest people to manage it, giving them ideas and allowing them
freedom to operate on their own. One of his most successful protégés
was R Kannan, head of investment banking at Stanchart when the scam
hit the bank. Kannan had honed his skills at Canfina where he was a
merchant banker, starting with making public issues of companies. He
was picked up by Ratnakar from an obscure department in Canara Bank
and posted to the merchant bank. In 1987, when Canfina started
operations, Kannan was a scale III, middle management officer. He
drove himself hard to perform in a fast growing market to become
senior vice-president within a year. In the next three years, he
became executive vice-president and then executive director.

Canfina
was Ratnakar’s answer to SBI Capital Markets, which it upstaged
by servicing clients with dedication and enterprise.
GA Shenai,
then managing director of Canfina told this story to BusinessWorld
magazine
in 1988. Canfina was handling the bond issue of Nuclear Power
Corporation. On the eve of finalising the NPC prospectus, they
realised that one more signature was needed. The prospectus was
scheduled to be filed the next day but the NPC chairman was in Delhi.
Canfina flew one of its officials to Delhi that night. He got the
signature and returned the next morning in time for filing the
prospectus. This was unusual and impressive for a public sector
merchant bank.

The
flip side of such enterprise was recklessness. SBI Capital Markets
and Canfina entered into a mad race to handle the maximum number of
public issues. The competition became an end in itself and Canfina
supported several promoters in making shady public issues. SBI
Capital Markets used the muscle and reach of its parent bank, forcing
companies to hand it merchant banking mandates. Canfina, on the other
hand, identified companies, which ought to have gone public and
actively persuaded them and advised them on projects and financing.
Many of these issues, marketed and promoted by these two, hit the
market in 1984 and 1985, riding the crest of an exhilarating bull run
which brought hordes of small investors into the capital markets for
the first time. Scores of companies took advantage of this to pick up
the money and run. Some of these issues had even been appraised and
funded by the three development finance institutions.

As
a lead manager, Canfina’s operations were visible to the
public. Its recklessness in bond trading was known only within the
closed money market. It was so aggressive that at one stage it
managed to pick up thirteen consecutive bond issues by PSUs, mainly
to boost the deposits of Canara Bank. This area was the preserve of
MK Ashok Kumar, accused of criminal negligence in leaving Canfina
exposed to Rs 374 crore of BRs and SGLs of the Bank of Karad.

According
to one broker, often while other brokers and bank officials were kept
waiting outside the room of the finance director of a bond-issuing
PSU, Ashok Kumar would go in and walk away with the whole issue.
Canfina aggressively traded in them through a network of alliances
with the parent bank, public-sector companies and key brokers. In
fact Canfina’s unwitting purchase of 9% Indian Railway Finance
Corporation bonds in July and November 1991 was one of the most
reckless acts that propelled markets players into a commercial fraud.
These bonds lost value since the interest rates on bonds were
liberalised in April 1991. Covering up such losses was one of the key
motivating factors behind the scam. But more about Canfina later.

CanMutual
had its own can of worms. It was being used as the private fief of a
small group of brokers and the parent bank. This was especially
scandalous because CanMutual claimed to be a high-performing fund,
subscribed to by “small investors”. The funds came from
other banks and brokers. In return, CanMutual agreed to run its funds
according to the dictates of its big “investors”.
CanMutual’s fraud started from day one but was exposed four
years later thanks to the inspection by SEBI under GV Ramakrishna.
From the beginning, CanMutual operated in an unregulated atmosphere,
driven by Ratnakar’s boundless energy. This was apparent even
in the way CanMutual was formed.

At
6 p.m. on 28th
February
1987, Ratnakar sat glued to a television at the Claridges Hotel in
New Delhi, watching Rajiv Gandhi deliver the Budget speech. Gandhi
declared that Indian public sector banks would be allowed to set up
mutual funds. Ratnakar could barely wait for the speech to be over.
He grabbed some stationery and quickly drafted an application to set
up a mutual fund. This was typed out and delivered to the finance
ministry the next morning, putting Canara bank ahead of the queue of
other hopefuls. Canara Bank deserved it. Ratnakar had written to RBI
way back in 1985 asking for permission to set up a mutual fund. But
the bank’s desire to innovate and experi-ment was constantly
stymied by the rule-bound RBI officials. Ultimately, CanMutual
was established on
19th

December 1987, with great enthusiasm.

Apart
from being superbanker Ratnakar’s baby, it
was the first mutual fund outside the giant UTI. Ratnakar carved out
a group from Canfina to set it up, asking K Dharmapal to head the
group. Simultaneously, SBI Capital Markets prepared to set up SBI
Mutual Fund. Both applied to RBI for permission. As the schemes were
being finalised, the tension in the banks was palpable. Ratnakar not
only wanted Canbank’s scheme to be the first but also wanted to
score over SBI in terms of the returns offered. Not surprisingly,
Canbank waited for SBI Magnum to announce its “assured”
return of 12% plus and then announced a 12.5% plus return.

Such
were the competitive energies unleashed by Ratnakar that CanMutual’s
nexus with brokers and its eventually being dragged into the scam of
1992 was almost inevitable. After all, the seed purchases of
CanMutual – done before the fund was formally launched –
were made through Harshad Mehta after a small puja
at his Growmore office on Dalal Street. This was the only link
between Harshad and CanMutual whose officials once used Growmore’s
research base to make investment decisions.

CanMutual
appeared to be a big hit with small investors. It was presented as a
professionally run and efficient outfit. Even after the scam, in a
reply to the Joint Parliamentary Committee’s questions,
CanMutual loftily claimed: “The fund aims at providing a
vehicle to small savers and investors, an access to the enormous
growth potential of the capital market and to maximise the returns on
their investment.” This was a big hoax. When SEBI took a close
look at its operations in 1991, it unearthed an improper collusion
with brokers, inadequate record-keeping and a nexus between Canfina,
CanMutual and Canara Bank, each boosting the others’
performance by rolling around the same money.

CanMutual
paid higher brokerage to Canfina for the Canstar scheme in violation
of the terms of the letter of offer. It indiscriminately transferred
money from one scheme to another, for which the board of trustees
apparently gave blanket permission though SEBI inspectors could not
find any evidence of it. The transfers helped the fund to bail out a
scheme from over-trading. This, of course, meant that the
unit-holders of one scheme benefited at the cost of others. Canshare
announced excellent results and a first-year bonus. The biggest
benefi-ciary was Canara Bank itself since it was the biggest
subscriber to Canshare and Cangrowth.

CanMutual
trumpeted the steroid-boosted performance of Canshare, luring more
and more small investors to subscribe to schemes. Along with this, to
ensure a thumping success of its new schemes, CanMutual diverted
money into them from the previous schemes. The game went on, despite
SEBI’s objections, till late 1991, when the regulator
temporarily stopped the Cantriple scheme.

CanMutual’s
nexus with big investors including the parent bank and its false
claim that subscriptions had come in from small investors is not new.
It started with the inaugural scheme, Canshare. A broker who
accompanied Canbank officials on the promotion meetings in the south
recalls that they faced empty meeting rooms and came back
discouraged. Canshare collected merely Rs 4 crore from the public.
Ratnakar was unwilling to admit failure, so he began to canvass
subscriptions. One of his industrialist friends from Bangalore
invested Rs 5 crore. Canara Bank itself made some investments and the
sub-scription figure was forced up to a respectable Rs 23 crore.
Canshare went on to become successful and created a demand for growth
units of mutual funds. Later, another scheme, Canstar, collected a
record Rs 1000 crore by using similar means. Canara Bank was a big
investor in each of the schemes, using the mutual fund and Canfina
for boosting its deposits.

Till
1990, CanMutual had no means to rationally decide what to buy and
sell. It did what the brokers said. CanMutual did not have a panel of
brokers nor did it set exposure limits. For its securities deals it
did not even have deal slips till April 1991. Somewhere down the
line, the brokers simply took over – literally. Ajay Kayan and
Utsav Parekh, aver that Hiten Dalal used Narichania’s room as
his own. “Sometimes Hiten used to sit on Narichania’s
chair while Narichania would sit on the other side of the table as if
he was the outsider there”, says Parekh.

Hiten
was the biggest dealer for Canfina and CanMutual put together but
there were others too, like Kayan, Parekh and Pallav Sheth. Some of
these brokers milked the fund dry at the expense of common investors
who were handed down dividends that barely kept pace with inflation.
Mutual funds like UTI and CanMutual were playing with thousands of
crores in the high-yield bond market and the cream-topped equity
market. There, thanks to insider trading and the natural advantages
of being big aggressive investors, they had the chance to double or
treble their profits annually. Till the scam surfaced, one of the big
mysteries was where all the profits were going. The money had
obviously gone into the personal accounts of a few selected brokers.
So much for a government-owned mutual fund’s love for the small
investors. The biggest equities broker for CanMutual was SK Jhaveri,
whose public face was Pallav Sheth (18.38% of turnover). Kayan and
Parekh did 16% through three different firms.

It
is virtually the same story with Canfina. Scrutiny by Canara Bank and
the RBI-appointed auditor Shankar Aiyar & Co. found out that its
back office, where transactions are processed, was a complete mess.
Brokers’ contract notes and cost memos were missing, forward
contract notes for 11.5% 2010 central loans were not available in a
few cases, Hiten Dalal, its biggest broker, had not issued contract
notes in many cases and counterparty names were not disclosed in
contract notes by brokers.

Canfina
had no exposure limits for brokers and banks, had no system of
reporting outstanding forward contracts or ready forward contracts
and no systematic records of BRs. Brokers (Harshad and Hiten) often
took positions for themselves and then scouted for counterparties.
Under SEBI’s orders, Canfina was forced to suspend its merchant
banking
operations on 20th
July
1992.

Still,
top Canbankers and Canfina executives
showed an amazing loyalty to Canfina. As it teetered on the brink of
liquidation in the summer of 1992, ND Prabhu, the former chairman,
felt angry and helpless. Prabhu retired in early 1992 and the new
Canara Bank chief, J V Shetty, was alien to the unique risk-taking
culture of Canara Bank. “The bank always encouraged its staff
to take risks and anyone who did it was confident that the bank will
stand behind them”, said Prabhu. But it is precisely such
institutionalised and senseless risk-taking that destroyed
Fairgrowth, CanMutual and Canfina.

For
instance, Canfina, which had a Rs 10 crore capital, decided to
organise a safety net to the Reliance G-series debenture issue of
Rs
500 crore in 1987. The safety net, jointly provided by the Allahabad
Bank and VB Desai, was an arrangement to buy back the debentures if
the price fell below a certain range. Within a few days it was
obvious that the G-Series and safety-net schemes were disasters.
Investors began to queue up to sell their shares, and Allahabad Bank,
after watching the crowds for a day, panicked and stopped the
buyback. VB Desai’s offer folded up even faster.

Canara
Bank, claimed that it continued the buyback, but it was scared enough
to restrict it to one centre at Mahim, a Bombay suburb. Even there,
things worked at a snail’s crawl and on the first day when the
crowd became unmanageable, the bank had to call in the police. It was
the first and last safety net offered by a large company. The
concept, borrowed from the British Petroleum disinvestment issue in
the UK and proposed by the Vaghul Committee on money markets, died an
early death.

Prabhu
later claimed that the concept was sound and that Canfina actually
made money on the deal. But what stands out is Canara Bank’s
culture that encouraged its subsidiary, with a capital of just Rs 10
crore, to take on a huge risk which would have made it bankrupt, had
it not tricked the investors and run the scheme at only one branch in
the Bombay suburb. RBI came down heavily on the bank but Prabhu was
unfazed.

Prabhu
was shocked too, with the way Canfina had treated Ashok Kumar, the
biggest bond trader in the country. Ashok Kumar, lean, dark and as
defiant as a crusading outlaw, looked angry and hurt that the bank
made no efforts to defend him. But there was little JV Shetty,
chairman of Canara bank could do, though as former chairman of the
Calcutta-based United Bank of India he surely knew about the
bank-broker nexus and suspect deals. After all, C Mackertich, a big
broker for Canara Bank, Canfina and CanMutual, was also an important
broker for the United Bank of India.

Shetty
discovered that as on 31st

March, Canfina had Rs 3162 crore in its portfolio management scheme.
It broke all key RBI rules governing PMS. The same person had control
of own investments and clients’ investments. Canfina did not
disclose either its liability towards portfolio clients nor was it
reflected in its balance sheet. It had not even booked losses on its
bond portfolio. On the strength of such dubious financial statements,
Canfina declared a profit of Rs 100 crore and was planning a public
issue at premium.

Canfina
was liberally used by the parent bank and CanMutual. It provided the
bulk of the subscription to CanMutual’s Candouble, Cantriple,
Canstar and Canpremium schemes. Canfina subscribed to the PSU bonds
on the condition that the PSUs made a deposit with Canara Bank. It
had Rs 300 crore parked in fixed deposits and ran a huge current
account with Canara Bank. Despite such clear evidence of Canara
bank’s lock on Canfina, the bank gave evasive answers to the
JPC’s query on its control. What crowns Canfina’s fuzzy
replies is the account of its romance with Bank of Karad which
started in 1988.

Did
Canfina assess the financial standing of the Bank of Karad? asked the
JPC.

Answer:
The assessment of the financial standing is not made by Canfina.

Did
Canfina know the capital of the Bank of Karad at the time of the
commencement of business?

Answer:
This aspect was not looked into by Canfina.

Canfina
then followed up with an arrogant reply, which also looked ignorant.
It told JPC that securities transactions in money markets ran into
hundreds of crores of rupees and as such it does not have any
relation with the paid up capital of the counter-party bank. This is
wholly untrue. It is the Bank of Karad’s small equity compared
to its huge liability to Stanchart, Canfina and CanMutual that forced
RBI to liquidate it, jeopardising everybody’s claims.

For
some strange reason, Canara Bank was showing remarkable confidence to
the outside world. Chairman JV Shetty told the press on 30th
May
1992 in New Delhi, that the massive fraud was just “confusion”.
This innocuous confusion arose “because there are several
banker’s receipts which have to be reconciled involving a
network of banks.” Shetty had been appointed as the chairman
just
a few months before. He was not expected to know much.

Shetty
could only bring himself to admit that Canfina would lose some money
but that it was premature to assess the loss. According to a Business
Standard report
of 30th
May
1992, “vehemently denying that Canfina was involved in any
misdeed, he said that it was merely acting under the traditional
convention of bankers’ trust for each other. The portfolio
management clients of Canfina are standing by it.” This
statement sounded hollow a few weeks later when it was clear that
portfolio clients were putting pressure to return their money.
Canfina had sunk too deep for Shetty to play the lifesaver.

On
20th
May 1992, Shetty, Canara Bank’s executive director
K
Lakshminarayan, Canfina’s managing director AP Rao and
executive vice-president Ashok Kumar met Hiten Dalal, Abhay Narottam,
Bhupen Dalal, TB Ruia and others at The Chambers at Taj Mahal hotel
to sort out where the money had gone. As it happened in the case of
Stanchart’s discussions, the three-hour meeting merely led to a
lot of finger-pointing. Hiten Dalal and Abhay Narottam pointed out
that JP Gandhi had taken the bulk of the money. TB Ruia admitted to a
liability of Rs 70 crore but strangely, he would later go scot-free.
This group met again a few days later in the presence of CanMutual’s
main brokers but Bhupen Dalal and others stuck to their ground and
Canfina and CanMutual were forced to file First Information Reports
on 20th
June. Following this, Ashok Kumar and Anil Narichania were arrested.

Canfina,
CanMutual, Harshad and Fairgrowth operated in a climate
of ignorance and lack of regulation. Once at an RBI meeting of bank
chairmen, ND Prabhu even asserted that “RBI has no control over
my subsidiary, Canfina.” SEBI’s power to control mutual
funds came much later and even then brokers were not being monitored
closely enough. The experience demonstrated the need for
comprehensive legislation to regulate the financial markets. Absence
of such regulation turned even seasoned bankers and dealers,
reckless, arrogant and blinkered. The players themselves had to have
an internal system, which kept an eye on the sharp practices.
Citibank and other foreign banks, by not being victims of the scam,
while following general market practices, showed how.

14

The
Buccaneer Bankers

Citi’s
basic strategy was bend the rules for a fast buck. If charged deny
it. If caught say sorry and try to do it again.

IN
the beginning, everybody called it a stockscam. The stockbrokers
labeled it bankscam. And Harshad Mehta, who was illegally using bank
funds to invest in stocks, came up with his own original sticker:
Citiscam. “Citibank was the beehive of illegal activity”,
he charged after being released from jail in late September 1992. It
would turn out that Citibank was not alone in the crime. The
practitioners of the fine art of indirect malpractices were the
buccaneering foreign banks. Citibank though was the smartest.

Harshad
had a running battle going with Citibank and its set of loyal
brokers. So the finger he points could be slightly crooked. But
Harshad was also among the biggest players and the best informed.
Discounting his bias, he could not have been totally off the mark.
Either way, there is great irony in Harshad’s accusations and
Citibank’s denial. Harshad’s actions were bigger and
cruder versions of Citibank’s practices. Whether or not Harshad
accepted the similarity, he was the flip-side of Citibank. The
difference was in the degree of sophistication, scale and speed.

Citibank
played in the money markets and stock markets; so did Harshad. Both
needed a big source of funds: Citibank had money from its portfolio
clients; Harshad used bank funds and money from public sector
companies. Citibank took positions and was offering two-way quotes;
Harshad did this too. Citibank and its brokers used institutions like
UTI and other mutual funds to support its positions; Harshad was on
the same track. In short, he was a broker who behaved like a trading
bank. Like Citibank.

That
was also where the big difference lay. Harshad did not want to remain
a broker forced to fund himself by devious means, whereas Citibank
always wanted to use brokers as a front. If the scam story had not
broken, Harshad would soon have institutionalised his business,
making massive public issues and investing the money through
publicly-quoted companies. Citibank was a dominant player in the
securities business but used brokers like VB Desai and C Mackertich
as fronts. (It even bought over Desai’s company, Havelock
Leasing, and renamed it Citicorp Securities and Investments Ltd.).
Harshad refused to act as anybody’s front. Clearly, Harshad and
Citibank were moving in opposite directions while driving the same
money machine. When they collided, Harshad crashed while Citibank, he
felt, went scot-free with minor bruises. That explained Harshad’s
outrage.

Citibank
was as unique as Harshad, apart from the fact that it was an
institution with clearly articulated goals and a definite corporate
philosophy while Harshad was an untamed individual. Citibank was the
biggest, shrewdest and the most profitable bank and therefore towered
over the markets. It stood out after the scam as well, by insisting
that it was squeaky clean, smugly disdainful of the central bank, JPC
and outraged fellow market players. But as bits of information
dribbled out about the bank and its operations, it truly emerged as a
four-letter word.

When
the scam surfaced, the focus of attention had immediately turned to
Citibank. Such was its dominance in the money markets that
everybody’s first question was: “What is Citibank’s
role in the scam?” Soon, this gave way to bewilderment when the
bank started portraying itself as Saint Citi. The second question
was: “How did it manage to escape?” There were no
answers, that is, apart from two articles in Business
Today in
June 1992, which pointed out Citibank’s role as part of a
cartel, hidden losses in its portfolio management schemes and that
Stanchart’s money had somehow landed up with Citibank and the
Bank of America. But there was little real proof then of Citibank’s
wrongdoing.

The
evidence appeared in August – more than three months after the
scam surfaced – from official sources. The mildly-worded third
report of the Janakiraman Committee, appointed by RBI to probe the
scam, was ambiguous about a host of things. It was, however,
categorical about Citibank. At last, as long suspected, it was caught
playing the money game in its own buccaneering way – from a
simple skirting of RBI regulations to actually breaking them.

Citibank,
the committee discovered, issued bank receipts even where it could
use the subsidiary general ledger facility, did not issue BRs on
security paper, issued BRs signed only by one signatory and had not
maintained proper records for verification of the signatures of the
issuing banks’ officials. Apart from all this, for a bank that
was proud of its systems and procedures, Citibank’s own records
were not clean – contract notes and delivery orders for the
bulk of the securities deals were conveniently missing.

These
were the doors leading to other serious, possibly criminal, actions.
For instance, on 18th
September
1991, Citibank was holding an SGL form of CanMutual which had bounced
on 27th
May
1991. Citibank, with full knowledge that the SGLs issued by CanMutual
had bounced, sold the same to the Stanchart. Stanchart was still
holding one of these bounced CanMutual SGLs worth Rs 44.58 crore. It
filed a criminal case against Citibank in New York for this and two
other transactions. This was settled out of court.

But
Citibank’s suspect deals were all in its PMS, which probably
ran on the principle of “heads I win tails you lose”. If
Citibank made a loss, the PMS client bore it; if there was a profit,
Citibank decided whether to give it to the client, to keep it for
itself or to give it to the broker. Citibank managed to get money
from public sector under-takings like Air India, UTI, Indian Railways
Finance Corporation, Vijaya Bank, and IDBI and private sector
companies like Aditya Birla’s Grasim Industries by offering
them guaranteed returns under PMS.

In
sourcing the money, Citibank had violated RBI’s stipulation
regarding reserve requirements and while deploying it, milked client
accounts. As was done by a host of banks like Stanchart, Grindlays,
Andhra Bank and others, Citibank too exploited the PMS scheme to
escape the SLR and CRR requirements that apply to all deposits
accepted by banks. Its technique was simple. Though the clients’
books show such portfolio money as deposits with the bank (and,
therefore, attract the reserve requirements), Citibank showed the
transactions done out of the portfolio money as individual ready
forward transactions executed on behalf of the clients.

But
violation of the reserve requirement was the least of Citibank’s
problems because other banks were doing it too and so the RBI found
it impossible to penalise Citibank alone. What put Citibank in a
unique dilemma was the basis on which it has deployed the cash.
Depending on the answer, it had a choice between getting caught for
violating US laws or returning the profits made out of client
accounts.

The
crucial question was whether Citi had promised fixed and guaranteed
returns to its clients. RBI regulations prohibited it from doing so.
Citi had cleverly used terms like “assured”, “indicative”
and “benchmark returns”. Other bankers and RBI inspectors
did not see any difference. One foreign banker said, “It is not
as if anyone guarantees a return on a stamped paper. It is all the
same thing.” If Citibank had not assured fixed returns, then
the clients stood responsible for all the profits and losses made by
Citibank. But Jerry Rao, chief of Citibank could not come up with any
instance of the bank paying more than its benchmark return. Thanks to
its treasury skills and a booming equity market, it would have made
more than the 14%-16% fixed return it had promised. Instead, Rao
insisted that “none of our clients will lose the principal
amount.” This too was false.

Citibank’s
house broker, Ajay Kayan, pointed out himself that losses suffered by
Citibank in November 1991 were dumped on to their PMS clients.
Another broker admitted, on condition of anonymity, that the bank has
been retaining all profits made above the fixed returns. He claimed
that this was something the clients clearly knew and understood,
i.e., the return on portfolio would not be higher than that assured
by the bank.

There
were, in fact, two definite cases of the bank offering fixed returns.
In a statement made at the annual general meeting Telco in October
1992, Ratan Tata, Chairman, declared that the company had parked Rs
85 crore with Citibank under the PMS for a “guaranteed”
return of one percent above the return on the units of UTI. The
second evidence was more incriminating and was in the form of a
letter written by Citibank’s Delhi-based assistant vice
president on 31st
January 1992, to the Power Finance Corporation, assuring a fixed
return of 14.25% on the Rs 150 crore they were planning to invest.
Caught red-handed, Citibank quickly dissociated itself from the
letter, blaming its own employee – a common practice among
foreign companies.

Assuming
Citibank was giving only fixed returns, what happened to the money
its traders made in excess of those returns? Those profits have
either been eaten up in Citibank’s own losses or have been
passed on to affiliated brokers. As an RBI inspection report of 1989
states:

The
rates for purchases/sales of securities by the Investment department
on the bank’s Investment Account from the Customer Securities
Unit (on behalf of the fiduciary clients) are not (more) favourable
to the fiduciary clients than the prevailing market rates on those
dates thereby implying that the bank is making a profit from its
fiduciary clients.

This
clearly indicts Citibank for profiting from client accounts. It was a
common market practice to make such profits. SBI Capital Markets did
it and so did Syndicate Bank, Canfina and Grindlays. So why was
Citibank not taking shelter under “market practice”?
Because milking client accounts was a serious violation under the US
laws and, therefore, more damaging to Citibank than breaking
guidelines of the central bank of a Third World country.

The
Janakiraman Committee has highlighted one specific case of milking
customers leading to massive windfalls for brokers.
On 8th

April 1992, Citibank sold Rs 26.50 crore of mutual fund units, GIC
Rise II, to
its two favoured brokers, C Mackertich and Stewart & Co. Both the
brokers sold these units the very next day to another member of
Citibank’s cartel, Canfina, for Rs 40.50 crore, each of them
making profits of Rs 14 crore on a single day. On
11th
April, a similar transaction was made with the brokers and Canfina,
with GIC Rise
I. This time the profits were even bigger – Rs 17.38 crore each
for the two brokers. Finally, on
20th

April, Citibank
sold Rs 26.50 crore of GIC Rise II to C Mackertich, which the broker
sold to Canfina on the same day for Rs 50 crore, making a profit of
Rs 23.50 crore. In all, the two Calcutta brokers made a staggering
profit of over Rs 89 crore in just three transactions spread over
twelve days.

Citi’s
profit in 1991-92 was just over Rs 138 crore. Surely, it would not be
giving away Rs 89 crore for nothing. According to the committee, this
was “compensatory payment to the broker.” Compensating
for what? Possibly for taking off bond and equity losses from the
bank’s books. This would have been fine except that Citibank
sold these GIC units from out of the portfolios of its clients. In a
stinging indictment, the committee noted “if any loss is
suffered by Citibank, it has been at the cost of the fiduciary
clients, whose best interests the bank was required to protect.”

Apart
from baring Citibank’s nexus with these two brokers, this deal
violated US laws which required banks to keep the clients’
portfolio money at arm’s length from the revenue stream of the
banks’ own operations and that of brokers. The discovery that
Citibank was passing profits to favoured brokers indicated that
Citibank’s milking of client accounts could not be detected in
isolation. Its deals had to be read along with the two brokers’
books.

Citibank
was one of the biggest traders of securities – more than Rs
215,000 crore or 17% of the market in 1991-92, says the committee.
Much of it was ready forward or buyback transaction, in violation of
the RBI stipulation which prohibited ready forwards in bonds and
units. Citibank claimed that since they were done on behalf of its
clients there was no violation. Actually, what Citibank was doing was
common. Everybody else, too, was doing ready forwards in bonds and
units. It would have been so convenient for Citibank to claim that.
But it baffled everybody by continuing to be obdurate and claiming
that it had done no wrong. No other bank took this strangely
righteous stance on ready forwards.

One
undisclosed PSU had placed money with Citibank between August 1990
and 1991 for periods ranging from two days to 182 days, at rates
ranging from 12% to 28%. The maximum amount outstanding at any point
was Rs 50.68 crore. Curiously, Citibank had contract notes of only Rs
50.42 crore of transactions. It, however, did another
Rs 450.20
crore worth of deals with PSU money for which it had no contract note
and delivery orders and no papers of custodial services as it was
required to provide. That apart, nine items of deposits showed in the
PSU’s books did not appear in Citibank’s books at all. It
ignored the charge that it was using PSU money to play in the market
and keeping the profits to itself – exactly what Harshad had
done.

Clearly,
the Janakiraman Committee’s findings sullied Citibank’s
clean image. Yet, with surprising arrogance, it continued to dismiss
the committee’s findings. India head, Jerry Rao alternated
between anguish and righteous indignation when discussing charges of
wrongdoing. This was curious because he surely knew that violations
and misuse of the PMS were nothing new. In 1989-90, an RBI inspection
report pointed out that Citibank was not following its own
International Fiduciary Standards Manual prescribed by its head
office, which orders a clear-cut segregation between the assets of
the bank and that of its clients. The bank was caught offering
guaranteed returns and accepting funds for a period of less than one
year.

Citibank
did respond to these charges but RBI found it unsatis-factory. On
18th
January
1991, RBI
finally wrote to the bank that “If the irregularities/adverse
features recur, we may be constrained to review the position of the
bank continuing to undertake such business.” In reply, a
vice-president of the bank, wrote to RBI on
2nd
February
that “we will be following the RBI guidelines...” The
above sequence of events and RBI’s wrath clearly establishes
the nature of Citibank’s Indian practices. This gave birth to
one of the great mysteries of the scam: why did it continue to dig in
its heels when the charges were grave enough for it to at least
suspend some of its bank officials if not sack them?

Perhaps,
with its profit-driven outlook, Citibank simply could not afford to
be shamed, despite proof of malpractices. That would have meant
abandoning its basic corporate strategy. According to brokers,
treasury officials and former deputy governor, Amitav Ghosh, Citibank
has been the high priest of high-risk high-profit strategy through
creative interpretations of the RBI guidelines. The bank itself
supported dynamism that meant rule-bending. “We have regulatory
problems all around the world”, admitted AS Thiyagarajan who
was, till early December 1992, the area manager (India, Sri Lanka,
Nepal, Bangladesh) in charge of the treasury operations. When the
chairman of Citicorp, John Reed was in India in September 1992, he
told Thiyagarajan, “If you have done something wrong, please
confess.”

But
there was simply too much at stake for him to come clean. Citibank’s
level of treasury operations, its PMS deals and the bank’s
nexus with certain brokers were largely built up by Thiyagarajan. Two
of his brothers ran a Bangalore-based broking firm, Megastocks, whose
biggest deals are with the same C Mackertich and Stewart & Co. –
Citibank’s house brokers. Megastocks though, was not a broker
for Citibank and according to one spokesperson for the bank,
Thiyagarajan had submitted himself to an internal probe.

There
was one small possibility of Citibank admitting to some of the
charges. Thiyagarajan and Rao were no friends. When the scam
surfaced, outsiders felt that Rao would use this opportunity to cut
Thiyagarajan down to size by making him admit to at least some of the
lapses for which he was responsible. Not only did this not happen,
Rao even launched a strong defence of the bank and Thiyagarajan in
public. Eventually RBI asked Thiyagarajan to leave the country. He
has since been spotted in Singapore and Indonesia. According to some
market sources, he actively plays in Indian stocks.

Citibank’s
practices and Rao’s spirited defence owed to the bank’s
internal culture, which sets a high premium on winning. Besides, its
head office in New York may have made a strategic decision not to
admit to another regulatory problem, particularly in a Third World
country. Or very simply, it could be that Citibank got trapped in its
self-image, of being a smart, aggressive strategist in a dull
financial world girdled by regulations. After all, with vertically
shooting profits (Rs 138.12 crore in 1991-92 as compared to Rs 58.61
crore in the previous year), it was the envy of the entire banking
community.

That
was the main difficulty in grappling with Citibank: the huge gulf
between what it would love to be seen as, and what it was. It would
also like to be viewed as loyal to India. When foreign banks came
under a vicious attack in late 1992, Rao appeared bewildered and
troubled. He attempted to lecture journalists on how committed
Citibank was to India. “Is it a crime to be successful in this
country?” Rao asked repeatedly. “Maybe we were too smug
because our books were in order and we had made profits. I think
that’s where we went wrong”, he said, explaining the bad
press that Citibank seemed to get in the months after the scam
investigation began. “We have invested so much money in this
country. We haven’t taken out dividends from India for four
years”, said Rao. “Our head office spends crore of
promotion money overseas. We have nurtured and developed the
non-resident Indian investment in India. We have started a software
export company. We have brought the Digital Equipment Corporation to
India. Surely our success cannot be our albatross.”

This
sounded impressive and JPC members certainly were impressed. But all
this was glib talk. Rao never said how much Citicorp remitted in
other forms if not as dividends; did not say that his great love for
NRIs was underwritten by the simple arithmetic of arbitrage: it could
borrow low and invest high, getting a straight spread of 5% or more,
which was very lucrative by any standards.

The
problem with Rao was also that he probably never had a firm grip on
the bank’s dealings. In August 1992 he said, “Our
customers have not lost money.” In a press statement, Citibank
said, “It is Citibank India’s policy to mark-to-market
the public sector bond portfolios. Therefore the portfolio has no
hidden losses.” Then in end-November 1992, the bank sent out
letters to some of its PSU clients saying that bonds held for them in
the PMS were being marked downwards to market price. This would
involve a shocking “loss of principal” to some of its
clients and contradicted Rao’s assertion that “none of
our PMS clients have suffered any loss in principal.”

But
more important, Rao conveniently ignored how Citibank undermined
India’s international credibility at the height of the balance
of payments crisis in 1990. When India was right under the hammer of
US trade representative Carla Hills, Rao, the master strategist,
surprised everybody by taking up India’s case and speaking
against the US threat of trade sanctions. Citibank was running
full-page pro-India advertisements, proclaiming its 90-year history
in India. But its real face was exposed in 1990, when a severe
foreign exchange crisis hit India and the country needed a boost of
confidence. Citibank inserted a damaging condition in the letters of
credit that sought to isolate the obligation of honouring an LC to a
particular branch in Bombay.

When
The
Financial Express exposed
this obnoxious condition some time in November 1990, Citibank first
publicly denied the story, then tried to bully the correspondent and
the newspaper, and finally came up with a lame explanation. It told
RBI that the clause was merely demarcating liability and was inserted
at the instance of the head office in New York. RBI did a snap
inspection and found Citibank’s claim false. RBI felt that the
clause sent negative signals
about the country’s ability to honour its foreign exchange
commitments. On 17th

December 1990, RBI directed other banks not to insert similar clauses
in their LCs. On 22nd
December,
Citibank was told that even if its head office had instructed it to
insert such a clause, it had to seek RBI’s permission to do it.
The Citibank official responsible for this, Aditya Puri, was
transferred. He is now the CEO of HDFC Bank. Later, Rao would merely
shrug and say, “That was badly handled.”

Apart
from Citibank’s “patriotic” spirit, what was
significant about this episode was its gun-slinging ways when it came
to dealing with regulation. It never felt the need to check with RBI
on grey issues. For instance, it was satisfied with its own legal
interpretation of RBI’s PMS guidelines. It had no qualms in
violating it. Citi was obviously familiar with RBI’s style of
supervision. For instance, RBI did not know of the LC clause and Citi
would have escaped if the media had not written about it. Citi’s
basic strategy: bend the rules for a fast buck, if charged deny it,
if caught say sorry and do it again.

In
the BR reconciliation meeting called by RBI after the securities scam
had been exposed, it displayed a similar attitude. While Stanchart
had brought voluminous printouts and other banks were prepared to
sort out the mess, Citi’s treasury chief, Ramesh Kumar, told
RBI officials: “We got your letter too late. We are not
prepared.” This angered ND Parameshwaran, chief of the
Department of Banking Operations and Development. “This is not
the way to behave. You should have come prepared. The formats were
prescribed several days ago”, he rebuked. When Stanchart
officials pointed out “We have outstanding dues from Citibank”,
Citi officials said, “We cannot say. We don’t know. We
will have to check.”

Citibank
would have run into major problems with RBI a long time ago if only
RBI had played and behaved like a central bank is expected to. In May
1990, it conducted a thorough inspection, which dredged up gross
violations, which in the US would have led to severe penalty and mass
sacking. Citibank had been deflating its reserve requirements, SLR
and CRR, which is viewed by all central banks as a very serious
violation. In fact, what was scandalous was that in spite of the
previous inspection report having pointed out the same violation,
Citibank refused to change.

Citibank
did securities deals at artificial rates and issued BRs against BRs
without having adequate physical stock and violated two critical PMS
conditions: it virtually guaranteed returns and used PMS money for
less than one year. It paid Reliance Petrochemicals, one of its
fiduciary clients, Rs 6.3 crore without ever receiving delivery of
securities and the transaction was subsequently reversed. RBI said
that this was probably done to bail the company out of financial
difficulty and contravened the one-year lock-in period rule for the
PMS. So did Citibank’s call money investments done out of money
received from UTI, IDBI and Vijaya Bank.

Citibank
also allowed its clients to enjoy credit facilities well beyond the
sanctioned limits, through the bill-discounting route. It exceeded
the credit exposure to individual/group borrowers (worked out on the
basis of foreign funds deployed by them in Indian business) by
wrongly computing the amount of foreign funds deployed. It lent money
against shares and debentures to investment companies of Premier
Automobiles and Raymond Woollen Mills to help them acquire/retain
controlling interest in violation of RBI guidelines. Finally, in a
cunning contravention of its obligation under social banking,
Citibank included ineligible “automobile loans” to
self-employed persons to show an impressive priority sector advance
of 15.4% of total advances. If such loans were excluded, the figure
would slump to just 3.6%, which was far below the obligatory 10%.

The
public sector companies were prohibited from putting money into the
PMS run by foreign banks. Citibank, as usual, found a way. It got
Vijaya Bank to raise money from the public sector companies and route
it through three different accounts. Vijaya Bank indicated yields of
11.25-13% to its clients, while Citibank assured a uniform yield of
13% to Vijaya Bank. The two banks struck a cosy deal under which they
shared equally, any profits made above the indicated rate of return.
Since there was no agreement with Vijaya Bank’s clients to pass
on the profits, this clearly amounted to milking customer accounts by
both Vijaya Bank and Citi.

Despite
such range and depth of violations, RBI deputy governor Amitav Ghosh
never met Rao formally to discuss the findings of the 1990 inspection
report, though there was some correspondence between the two.
Citibank officials argued that differences with the regulatory
authority are “usual” and that the bank was engaged in a
dialogue. That was fine except that this dialogue had been going on
for two years. RBI’s inspection reports were sent to the
compliance department in Citibank’s New York headquarters,
which could not be bothered. Clearly, it was part of the bank’s
official strategy to take chances with regulation to boost profits.

Citibank’s
division heads in India were reporting straight to their chiefs in
Singapore. So, the division heads were on par with each other, with
Rao, the head of the consumer bank, being the first among equals.
According to insiders, these chiefs differed on what strategy the
bank should have for India. Thiyagarajan felt that money management
and financial services were the greatest thing going, not consumer
banking or corporate lending. Rao violently disagreed with him and at
one meeting yelled at him saying: “You will bring ruin upon the
bank.” Later, Rao’s own area, consumer banking, created
equal embarrassment for the bank as the treasury did.

Citibank’s
big act in the money markets was not premeditated. The bank was
strong in corporate lending and had been positioning itself in India
as a retail bank, launching credit cards, automated teller machines,
consumer financing schemes and financing high net-worth individuals.
This strategy, marshalled by Rao, was consistent with its focus in
the Asia/Pacific region. But in India it was perhaps a few years
ahead of its time. It invested heavily in building a consumer
franchise but in its zeal, ended up making a few embarrassing slips.

For
instance, after its smooth-talking salesmen did a lot of high
pressure indiscriminate selling of car loans to meet stiff targets,
the bank was faced with the threat of major defaults. In 1990, it had
to appoint professional debt-chasers. In some cases, it even had to
use thugs to reclaim the cars. This backfired badly in early 1992
when strongmen hired by Citibank stopped former chairman of the
Electronics Commission, Dr PS Deodhar, and tried to snatch away his
car, mistaking him for somebody else. Deodhar created a shindig,
causing major embarrassment for Citibank.

There
were no such slips at the treasury division. In 1991, when the money
markets and stock markets were undergoing convulsions, a foreign bank
with superior skills had a great chance to make killing. Citibank was
well on its way to doing so when interest rates became turbulent.
There
were two rate increases, one on 5th
October
and another on 17th
March,
that lopped off 10-35% of the market values of government securities
and PSU bonds held by Citi on its own account and
in the accounts of its clients’ portfolios. The losses would
have been in hundreds of crores. This is where Citi’s strategy
of using brokers came of use.

It
called its loyal brokers and asked them to take the bond losses by
buying them off at high rates. The brokers were then compensated
through profitable deals at the expense of Citibank’s clients.
In early September, even when Rao appeared cocksure that he was
clean, he added a rider: “Our Achilles’ heel is broker
accounts. Broker-nexus is the penumbra.” That also answers a
nagging question: despite RBI inspection reports and the Janakiraman
Committee unearthing startling facts, did everything about Citibank
come out in the open? The answer lay buried in the books of
Citibank’s brokers.

Citi
started the practice of making brokers work for it. It developed a
set of loyal brokers and got them to sell deals to the Indian banks.
It compensated them by giving higher brokerage and extending other
facilities including routing, parking broker positions and giving
credits. “It had a conscious strategy of promoting select
brokers”, says Ashwin Mehta. “They decided where the
profits would go”. What helped was that money markets had no
electronic board, had no floor (so there was no ceiling on profits).
Brokers brought information on opportunities and helped generate mega
profits. All this was fine except that “as the oldest treasury
operation in this country”, says a former BankAm bond trader,
“Citibank took it as its birthright to get every profitable
deal. The brokers were first supposed to take it to Citi.” If
they did not fall in line, they were blackballed.

One
such broker had this to say: “To Thiyagarajan and Ramesh Kumar
and other smart kids who considered themselves high priests of money
markets, brokers had to be a kowtowing lot of monkeys who would peer
at them through the large glass partitions of the eighth floor of
Sakhar Bhavan, Citibank’s treasury office in Nariman Point in
Bombay. Every once in a while, one of these swollen Citibank heads
would pop out and sermonise the squirming brokers on what a broker
is, what his limitations are and how he should be loyal to the hand
that feeds him.” The loyal ones were Hiten Dalal, VB Desai and
DS Purbhoodas of Bombay and C Mackertich and Stewart & Co. of
Calcutta. It was these brokers’ books, which carried Citibank’s
suspect deals.

Said
a former chief of a British bank: “Citibank’s culture
anywhere in the world is to shake up the market by introducing
competition and improving services. But it is over-aggressive. If not
controlled properly, it is like a cancer, eating up the system
itself”, In India, Citibank may not have eaten up the system
but left a pervasive influence. Its aggressive ways spawned imitators
across the banking sector. One of its strategies was to appoint close
relatives of powerful people in government services, a trick that all
foreign banks later followed. Of course, there was no evidence that
it has used all these connections but then there has been no
systematic probe either.

It
was a long and impressive list when the scam broke. Paresh
Sukhtankar, vice-president, is the son of DM Sukhtankar, secretary,
department of revenue, Maharashtra; Sandip Sen, assistant manager, is
the son of SC Sen, director of the National Hydroelectric Power
Corporation; Sriram Chander, manager, is the son of N Sriram, general
manager of SBI Mutual; S Sridhar, vice-president, is the son of
R
Srinivasan, former chairman of Allahabad Bank and Bank of India;
Ramchandra Nayak, manager, is the son of PR Nayak, former deputy
governor of the RBI; Rahul Singh, assistant vice-president, is the
son of Duleep Singh, former chairman and managing director of
Rashtriya Chemicals and Fertilisers, etc.

BankAm
was Citibank’s first cousin. It did all that Citi did but with
a vital difference. “BankAm had just two PMS clients”,
said Vikram Talwar, chief of the bank in India, a US green-card
holder who thought that the scam was not worth bothering about. His
only problem with the scam was that his trip to Johannesburg got
cancelled after the scam was exposed. Talwar was forced to leave his
position as country head after RBI refused to clear his application
for a new contract that would have started on
1st
December
’92. Talwar
claimed that BankAm’s head office at San Francisco banned the
Indian unit from the PMS and so it had nothing to hide, unlike
Citibank.

Nobody,
however, banned
BankAm from using brokers to fund its bond losses. For instance, on
31st
October,
it sold
a 9% IRFC bond to Andhra Bank for Rs 102.48 and bought it back for Rs
90, making a profit of Rs 12.48 crore on a single day. No wonder
Talwar could proudly claim that BankAm had adjusted its investments
to the prevailing market price, taking losses if necessary. BankAm,
like Citibank, continued to insist that it had done nothing wrong
despite the fact that the Janakiraman Committee left nobody in doubt
about its gross violations. Among other things, BankAm sanctioned
working capital to Polyolefins, and
20th
Century
Finance,
to be used by these companies for playing the stock market.

BankAm
also sanctioned clean loans to Harshad without any authorisations. It
claimed these were “clerical errors”. In another set of
transactions, BankAm bought bonds for Rs 100 crore when the market
price was Rs 80 crore. Why would BankAm take a loss of Rs 20 crore?
Because it was compensated in another set of deals with the same
broker. But BankAm told the RBI inspectors that its loss was a result
of a misunderstanding: it got 13% bonds instead of 17% ones! Such a
crude attempt at lying by a world-renowned bank stunned the banking
community but served to goad a lethargic and diffident RBI to take
some action.

RBI
should have acted long ago against these two US banks. “PMS
violations were taking place for a long time”, says Ghosh. “We
had conducted inspections in May 1990 and had warned Citibank about
its operations. I had spoken to Jerry Rao and Vikram Talwar and asked
them to behave. We felt that PMS is in direct conflict with the
interest-rate directive. After this inspection I issued detailed
guidelines for PMS, including the lock-in period and that each
placement should be treated as a separate transaction with a lock-in
period.” That was in 1989. The banks flouted the guidelines and
the RBI did no follow-up.

As
Citi and BankAm continued to dig in their heels against the
Janakiraman Committee’s findings, RBI gave the two banks a long
rope. They took more than two months to file their replies though
they were far quicker to issue press releases asserting that they had
done nothing wrong. Meanwhile, RBI had a new deputy governor, DR
Mehta, who stepped into Ghosh’s shoes a good ten months after
Ghosh left. Mehta was keen on taking decisive action against the
foreign banks. Once the RBI had evidence that Thiyagarajan was
interfering with the scam investigation and working at concealing
facts, he asked Citibank to remove him.

In
early December 1992, hot-shot Thiyagarajan was transferred out of the
country. After fifteen years at the bank, he was put in a function
where he no longer lorded over the market or made profit-boosting
decisions. He was posted to the global securities operations of the
bank at its head office in New York. From there, he quietly exited
the bank and reappeared in the Southeast Asia. Jerry Rao was
transferred to London as the head of consumer banking, from there to
some technology functions in California and was quietly eased out. He
came back to India to launch a software company MphasiS, merged that
with BFL Software and now heads MphasiS BFL. This was the way
Americans handled their operations in the Third World country: get
around the rules to make super profits, if get caught, protest loudly
and then quietly transfer key employees and start afresh. This is
exactly how Enron acted ten years later.

Talwar,
the green card-holding chief executive of BankAm was eased out too.
The bank was told that its application for a renewal of Talwar’s
term, which was expiring on
30th
November
1992, would not be cleared. BankAm officials asked if Talwar could
stay on as
advisor. RBI refused. It wanted Talwar out of the country. At last
RBI was seen acting like a central bank should, with all the powers
that it had. Still, it was obvious that rather than RBI governing the
foreign banks, it is they who have governed RBI. The long story of
RBI bungling makes for a fascinating story.

15

The
One-eyed God

“RBI
guidelines are just that, guidelines. Not the law of the land.”

IN
the old business district of Bombay they stand face to face: the
twenty-eight-storey building which houses the Bombay Stock Exchange
and is the heart of India’s capitalist system, and a kilometre
away from it, the Reserve Bank of India, the country’s central
bank and supreme monetary authority. This proximity is deceptive. BSE
is a market, humming with brokers and jobbers who are driven by a
welter of information, trying to make a fast buck. RBI is an ivory
tower, full of self-important officials who are information-averse
and market-blind. The gulf between RBI and BSE is a thousand times
wider than the physical distance.

This
mattered little, until 1990. RBI had direct jurisdiction over banks,
which were the biggest traders in government securities, public
sector bonds and units. This market was invisible unlike the bazaar
in and around BSE. BSE published the prices of traded scrips every
day. RBI published buy/sell quotes only of securities issued by the
central government while for state loans and PSU bonds there were no
published quotes at all.

From
the market-end, this gulf was bridged by Harshad Mehta who used funds
from the money markets to stock markets. From the regulators’
side, the leap across this great divide was made by the RBI governor,
S Venkitaramanan when he asked investment institu-tions in early
March 1992 whether the bull run at BSE was a good reason to book
profits.

The
governor’s move was radical by the central bank’s
standards. Was he trying to fashion a new expanded role for RBI? He
argued “if speculation sucks money away from the productive
sectors, the central bank can surely step in and enquire.” This
was logical but was unconventional. RBI had never before been
bothered by such extraneous factors. The assumption was that stock
markets were inherently speculative and had little to do with the
banking system. There was only one officially recognised link between
the two: banks could provide loans against shares subject to high
margins.

Harshad
took advantage of this complacency and ignorance and utilised bank
funds for stock market operations. Neither RBI nor the banks were
aware of this. This was partly due to faulty supervision within
banks. Plenty of evidence surfaced after the scam to show that RBI’s
inspection arm – the Department of Banking Operations and
Development – had been digging up dirt on banks and brokers
year after year, but the top brass simply failed to understand the
gravity of the findings.

The
scam was the result of a whole set of market practices. Banks were
executing sales through false bank receipts without holding
securities. Brokers were using banks as fronts to fund themselves,
and public sector money was spewing into the banking system to be
diverted through brokers into the stock market. Each of these
practices was in clear violation of the RBI regulations. But what
came as a stunner five months after the scam surfaced, was the
revelations that none of these practices were new. Though the scale
and intensity of the scam may have stunned even market players, many
of these practices dated back to 1979. It was the turbulence in the
financial markets in 1991-92 that had scaled up the practices and
made the players reckless.

Through
all this, RBI acted like a one-eyed god; its other eye was often
closed and when opened occasionally, it merely winked.

Concrete
and detailed knowledge about the bank-broker nexus, deals struck at
artificial rates, misuse of BRs, routing transactions, using PSUs’
money – in fact, all the factors that lay at the heart of the
1992 scam – dated back to at least 1986 and earlier. On
20th
October 1986, Augustine Kurias, an outstanding officer in DBOD, in a
note to the
chief officer, KK Mukherjee, named two banks that had issued BRs
without sufficient balance. The banks: Allahabad Bank and Bank of
Karad. They had purchased non-existent securities and included them
under their statutory liquidity ratio obligation. Syndicate Bank and
Andhra Bank were the sellers.

Central
banks everywhere in the world impose penalties on banks that are
caught violating reserve requirements like the SLR. Syndicate Bank
was forced to pay Rs 23 crore in 1987 for falling short in its SLR
cover. But then, RBI itself was responsible for indirectly
encouraging
this fraudulent practice. It mandated that securities held before
29th

March 1985, could be valued at cost, market value or book value, at
per the banks’ choice. In 1991, the BR Act was changed and SLR
was
calculated at cost or face value of securities, whichever was lower.
This was a great incentive. Using a BR, banks could buy a bond which
was quoted at say, Rs 80 at artificially high rates say, Rs 95 which
became the higher cost price and gave it a bigger SLR cover. Banks,
Kurias discovered, were also circumventing the senseless artificial
call money ceiling of 10% through ready forward transactions in units
or other high-yield securities.

But
the most glaring practice that Kurias and two inspectors, Sushil
Kumar and SS Kannarkar, unearthed in 1986, which was at the core of
the 1992 scam was Andhra Bank’s nexus with VB Desai & Co.,
owned by Jitu Shroff. Kurias wrote:

The
deals of the brokers are being dealt as if they are deals of the bank
by issuing its own BRs, issuing/receiving RBI cheques, thus creating
an impression in the market that it is dealing on its own behalf...
Banks are doing name-lending and undue favour to brokers... It is
providing certain facilities to brokers which are not made available
to any other customer... the bank has issued BRs without having
adequate balance of that loan in the brokers account.

Shroff
would indicate Andhra Bank as the buyer/seller in a deal and get the
bank to pay/collect on his behalf. Had he undertaken this operation
independently, the cheques would have had to be routed through the
clearing system, resulting in a delay of a couple of days. He would
have had to have a float running into crores of rupees or an
overdraft, both of which were costly.

VBD
was not alone. Andhra Bank did such deals for Bhupen Champaklal
Devidas and AD Narottam. These brokers enjoyed overdraft facilities
from the bank against which they would deposit securities and shares.
The deposits were often far in excess of loans, meaning that Andhra
Bank was actually offering safe custody facilities to the brokers for
their assets. For this and for name-lending, Andhra Bank charged a
commission of 0.005% which was too low to meet the cost of
operations. Like the Standard Chartered Bank and Canbank Financial
Services, Andhra Bank did not “have any register to watch the
retirement of BR, there is no system to obtain specimen signatures of
officials of other banks authorised to issue BRs and to verify the
same”, revealed Kurias.

These
practices were highly irregular and left massive scope for
manipulation – of course, a scam. Indeed, Andhra Bank was found
to have done some large transactions on oral instructions from VBD,
some of which were not entered into the registers due to “oversight’.
But what was most significant and a forerunner to the Bank of Karad
and Metropolitan Co-operative Bank issuing dud BRs to Stanchart, was
a similar practice discovered by Kurias. Andhra Bank was issuing SGLs
or BRs without adequate security balance in VBD’s account.
“This is a very serious irregularity on the part of the bank.
In one case the bank relied on the correctness of records of the firm
rather than its own”, said the RBI inspectors. The bank’s
defence was that since all the parties concerned had executed their
respective roles without any complaint, the transactions were deemed
to be in order. This seemed fine until the music suddenly stopped in
1992.

Andhra
Bank had been putting through sales “again relying upon Shroff
that he would provide the particular security when demanded. In all
probability the purchasing bank (Bank of Karad or Allahabad Bank)
must be computing the security purchased by it for SLR purpose”,
noted the RBI inspectors, “which means that the bank has helped
the broker in committing a fraud in generating non-existent
securities. This may lead to a chain of transactions if the
securities are sold by the purchasing bank by way of BR issued
against the original defective BR.”

Kurias’
other discovery was that banks were using brokers to dress up balance
sheets and artificially boost profits. For instance, Syndicate
Bank sold to Andhra Bank Rs 15 crore of bonds at Rs 97.75 on 31st

December 1985 and repurchased them on the same day at Rs 91.30 thus
making a profit of Rs 96.75 lakh on the date of the balance sheet.
The deal was reversed on 6th
January,
and the bank suffered a loss.
Andhra Bank’s (Fort branch) books showed that it had acted on
behalf of VBD. This, however, did not affect the broker as his books
closed during the Hindu Samvat
year-end. Syndicate Bank’s profit in 1984 was
Rs 5.07 crore
and in 1985 Rs 5.98 crore. Without the Rs 97 lakh, the bank would
have shown a fall in profits.

Syndicate
Bank used to get money from PSUs like the HUDCO, the Oil Industry
Development Board, the Rural Electricity Corporation and the Army
Group Insurance Fund to give yields at 11.5%. When it bought or sold,
it issued BRs in the name of these PSUs. The securities purchased
remained in the bank’s name and income earned on them, even if
higher, was not passed on to the clients. This system was a
forerunner of the rampant misuse of the portfolio management scheme.
Indeed, Kurias perceptively concluded: “the whole operation
partakes the character of deposit acceptance under the garb of
investment portfolio management.” Like Andhra Bank, Syndicate
Bank too had poor records to back up what it was doing. “The
record seems to have been maintained... so as to confuse anybody
except those who create it.”

The
fuel for these practices was RBI’s own directives. With
admirable clarity, Kurias noted that, some of these irregularities
directly emanated from the banks’ eagerness to improve their
profitability in the over-regulated environment in which they found
themselves.” But at the same time, he sets the perspective
right by adding, “good intentions cannot justify any violations
of the existing laws/regulations. We may bear these trends in minds
in framing or amending the regulations in future... favours shown by
Andhra Bank or inflating profits by Syndicate are definitely
fraudulent practices. Central office may consider initiating suitable
action.”

Despite
an RBI inspector blowing the whistle so strongly, the top brass in
the central bank did not act. The normal course of action would have
been to suspend the brokers and treasury officials, penalise the
banks severely, find out how widespread these practices were and
issue strong guidelines. RBI did nothing, apart from issuing vague
directives, which were completely ignored.

On
18th
February
1987, the misuse of PMS came to light when The
Indian
Express published
a news item titled, “A mockery of RBI interest policy”.
It described how banks were accepting PMS money as deposit but
cleverly keeping it outside SLR and cash reserve ratio requirements.
Such deposits fetched guaranteed fixed returns for the PSUs, which
were higher than the interest rates set by the RBI. This was an old
technique and used for different purposes. But it set off a long
debate within RBI.

On
31st
December
1984, Canara
Bank was found to have been indulging in a similar practice with
HUDCO to which it sold and then bought back securities against BRs.
An RBI report of early 1987 states, “In other words, the bank
is borrowing funds from these institutions, under the garb of
portfolio management, at a rate of interest dictated by the lender of
funds, thus circumventing RBI directives on interest rate on
deposits. Our Bangalore Regional Office has recently been advised to
instruct the bank to stop such practices forthwith.” Not only
did Canara Bank not stop it but other banks soon followed its lead.
Had RBI been clearer about its policy, this would not have happened.

For
instance, KK Mukherjee, who was on deputation to Ghana, wrote a note
on
21st
Feb 1987, in which
he adopted a more liberal view. “It may neither be desirable
nor appropriate to put a blanket ban on dealings in govt securities
under buyback arrangements as this would impede the growth and
development in the market in gilts.” Mukherjee saw such
transactions as perfectly in order as long as the deals were done at
market rates and no sales were effected unless the same were actually
held on the investment portfolio either in actual form or SGL
balance. Executive director, UK Sarma, had a slightly different view
as reflected in his
27th

February 1987 note:

The
buyback arrangement at predetermined price is an ingenious way of
operating free interest rates on short- term funds. The arrangement
is a dubious way of bypassing the RBI directives on CRR/SLR and
interest rates on deposits. If sly and indirect flouting of the RBI
directives is to be curbed, as it should be, we will have to advise
such banks to give up such arrangements. Alter-natively, freeing of
interest rates on short-term deposits may have to be reconsidered so
that all banks can compete on equal terms, without the inhibition of
directive violation.

This
was followed by a meeting held on 24th

March 1987 between the deputy governor (supervision) Amitav Ghosh,
executive director Bagai, Mukherjee, advisor-in-charge SS Tarapore
and joint chief officer SJ Thaker. Ghosh said that buyback deals in
violation of interest rate directive had to be curbed, adding that
this was specifically discussed by him and another deputy governor, C
Rangarajan, with the governor RN Malhotra. Both Bagai and Mukherjee
argued for a pragmatic approach with the latter noting that since the
scope for raising additional resources and deploying them at
profitable rates was very restricted, buyback deals were one of the
avenues for improving the profitability of banks. The meeting ended
with a consensus that buyback deals should be allowed to continue,
subject to virtually the same conditions listed by Mukherjee in his
21st

February note.

Thereafter,
in April 1987, RBI issued a circular that merely said “while
legitimate portfolio management could be undertaken, operations under
the cover of portfolio management which, in effect, violate the
directives on interest rates and reserve requirements would invite
the consequences falling on infringement of these directives.”
This general warning was ignored. The banks continued with PMS.

It
was too tempting not to. PMS offered a double advantage: the money
was (illegally) free from the low-yield, statutory reserve
requirements while the income came from stock markets (share trading
or financing margins). This income was high at any point of time,
since it was usually backed by insider knowledge. Banks were freely
accepting money for less than one year and were guaranteeing fixed
returns – above the normal interest rate on one-year bank
deposits. This was done with the full knowledge of RBI. Throughout
the period 1987-90, RBI repeatedly issued warnings. Market players
contemptuously turned a deaf ear.

On
11th
April 1988, Mukherjee warned the banks to stop buyback deals. On 20th
December
1988, in a letter, Ghosh warned the banks that RBI had come across
instances of banks offering assurance of higher returns through their
portfolio management structure and ordered banks to strictly follow
the PMS guidelines. On 2nd
May
1989, the DBOD wrote that “in spite of our cautioning the banks
time and again... instances have come to our notice that in some
cases the fund entrusted was for a short period of 30 days and the
investment transactions were notional rather than real...”

This
letter spelt out four crucial rules for future PMS deals: no
guaranteed return, funds to be accepted for a minimum of one year,
transactions to be at market rates, and proper accounting and
documentation. Since investment banks found these rules unrealistic,
PMS continued with impunity and, in fact, was stepped up as the
turbulence of 1991-92 dramatically increased the need for funds. The
banks spotted a loophole and stepped up their PMS. The loophole was
in treating the PMS deposits as short-term cash used for specific
deals, with the risk wholly borne by clients. This new interpretation
of PMS was neither presented to nor approved by RBI. It was merely
backed by legal opinion picked up by some foreign banks. This is
another example of how poor was RBI’s grip on the system.
Despite the circulars, the banks never felt the need to consult RBI
on such a sensitive issue, nor was RBI tuned to what the market was
up to.

Clearly,
the extensive documentation by committed RBI officers on the way
banks and brokers exploited loopholes, was a waste. Their efforts
were undermined by successive executive directors, deputy governors
and the governor, whose job it was to understand the wider
ramifications of market practices. They didn’t, because they
either did not have autonomy, or, from their ivory tower, were out of
touch with brokers who were actually driving the markets.

Among
the biggest factors behind the scam was RBI’s supreme disdain
for brokers as entities. One inspection report of 1991 even suggested
that the “abolition of brokers in the securities market, as was
done in call money, may help removal of middlemen who indulge in
unhealthy practices. The role of brokers could be played by RBI or
the DFHI.” Even in 1992, few had bothered to understand the way
Harshad Mehta’s mind worked. He was a broker who was competing
with banks. All his actions – legal and illegal – were
actually variants of what banks had been doing. These ranged from
trading without securities, taking trading positions, procuring
short-term funds from companies and routing call money through his
own accounts. Harshad felt all this was legal. “I was not a
bank. So I was not guided by RBI rules. That was my advantage”,
he said later. In fact, RBI was so market-blind that Harshad was not
even a recognised broker of the RBI! “I applied for enrollment
as an RBI-approved broker three years ago”, he said in 1992.
Though he did not get it, it did not stop banks from accepting his
contracts. Later RBI rules stopped being relevant altogether. Banks
said that any broker accepted by SBI would be acceptable to them.

Banks
and brokers knew that RBI top officials were either ignorant or could
be influenced. RBI was then dominated by RN Malhotra who, as
governor, was more bothered by issues like priority-sector loans than
listening to the market signals, slack-cop Ghosh as the deputy
governor and the academic minded, articulate C Rangarajan, who later
became the governor. Ghosh had a completely free run over a large
section of RBI, including banking supervision. He retired in January
1992. If there was anybody knew about the malpractices and could have
stopped the scam it was Ghosh.

When
Ghosh’s sensitive and powerful position came under the
spotlight in 1992, he first went on the defensive and later blamed
the foreign banks for having masterminded the scam. “The RBI
was a little soft because we wanted to develop an active bond market.
I agree that the checks and balances were not suitably in step with
the liberalisation but RBI then believed, when it is a new market let
them free for sometime and then regulate. Since there was no fraud or
criminal conspiracy, we gave the banks some leeway”, he said.

Ghosh
wasn’t speaking the truth. Firstly, Kurias’s report
specifically mentioned that Andhra Bank had “helped the broker
(VBD) in com-mitting a fraud in generating non-existent securities.”
Secondly, banks were using PMS to make money at the expense of their
clients, when all they were supposed to get was a fee. Thirdly, PMS
deposits bypassed reserve requirements – a serious offence
anywhere in the world. Fourthly, RBI failed dismally to see that the
bank-broker nexus, deals at off-market rates and deals against
non-existent securities were not isolated cases but constituted a
scam.

In
fact, Ghosh himself admitted that RBI should have acted long ago
against the two US banks, the Bank of America and Citibank. “We
inspected Citibank in May 1990 and had warned them. I had spoken to
Jerry Rao (of Citibank) and Vikram Talwar (of BankAm) and asked them
to behave. The foreign banks are not very respectful to the RBI’s
directives, because they have a lot of influence in Delhi and are
powerful internationally. I think the problem is dual control over
the banking system. That has to stop.”

Ghosh
suggested “stern action should be taken against some foreign
banks, the licenses of at least one or two banks should be withdrawn…
but the situation should be explained in detail to their head offices
and their central banks before such action is taken. These banks are
openly defiant even of the RBI appointed committee’s findings.
If any Indian banks had dared to do so in their countries, they would
have been asked to pack up and leave.” All
this bombast sounds very impressive but Ghosh was only playing to the
gallery. As he neared retirement in late 1991, he himself was keen on
joining one of the foreign banks as advisor. He told Venkitaramanan:
“I want to join the Local Advisory Board of ANZ if you clear
it.” The governor suggested him to drop the idea because it did
not seem proper for the deputy governor to join the very bank he was
supervising, immediately on retirement.

“PD
Ojha is in BankAm and there is PK Kaul in ANZ. So what is wrong in my
joining?” asked Ghosh.

The
governor called Bob Edgar, chief of Grindlays and asked: “Are
you proposing Ghosh’s name for a position in your advisory
board?”

Edgar
was surprised. “I am not considering it at all.”

Ghosh
refused to give up. He came back to the governor and said, “Vikram
has agreed to make me a member of the advisory board.”

The
governor asked Talwar: “Have you proposed Ghosh’s name?”
Vikram said he had.

“But
I will not agree”, said the governor.

Ghosh
charged Venkitaramanan with being unfair. The governor said, “I
have given you a position that gets you an RBI house in Napean Sea
Road and a car and good salary. Why do you want to join a foreign
bank?”

Ghosh
then went to the finance minister, Manmohan Singh, and the secretary,
department of economic affairs, Montek Singh Ahluwalia, and
complained about the governor. But nothing came of it. Three months
after he retired, Ghosh claimed that the cooling off period after
retirement was over. “Now I can join anywhere.” The
governor said he should wait at least two years. Soon after, the scam
surfaced.

Under
Ghosh and Malhotra, banks made a habit of violating RBI guidelines.
The 10% ceiling on call money was never observed, buyback deals,
which were prohibited, became the heart of the market; brokers were
banned from dealing in call money but they were ubiquitous; foreign
banks were prohibited from dealing with PSU money but they created a
front and dealt with the PSUs anyway.

Finally,
as detailed before, all critical conditions of PMS were violated by
all. RBI framed certain rules and regularly carried out inspections,
but it was ultimately soft on the crooks and granted legitimacy to
market practices like not providing depreciation on investments;
using the PMS to park losses; entering switching deals at inflated
prices; and year-end sales of securities to brokers at high prices to
be bought back later. Foreign banks were quick to take the cue. As a
Citibank executive told us in 1990, “RBI guidelines are just
that, guidelines. Not the law of the land.”

When
Venkitaramanan became the governor in December 1990, the scenario
changed. Not because he was a zealous rule-enforcer but because, for
the first time in decades, an RBI governor was using market
intelligence. This owed to his very long and colourful career as a
civil servant. Venkitaramanan, the son of a poor school teacher, was
a leftist activist in his college days. So, despite topping the civil
service examination, he was not given a posting. He appealed to the
then chief minister of Tamil Nadu who in turn called up the Prime
Minister Jawaharlal Nehru. Nehru ordered that Venkitaramanan be
immediately inducted into the cadre. Since then, he has had a varied
career, shaped by his close contacts with businessmen and
politicians. He has been particularly close to AC Muthiah, the
Ambanis of Reliance Industries, the Hindujas and Rajiv Gandhi, often
taking decisions that seemed to favour them. His chief instincts have
been to keep his ear to the ground and to act fast and decisively.

Tipped
off by a market source, he initiated an investigation on 20th

March 1991, into the use of false BRs. Based on a quick scrutiny, the
DBOD produced a report on 25th
March. It showed nothing. Later it prepared a detailed report in two
parts. The first was completed on 31st

May 1991, and was based on the inspection of twelve banks. This
report was withdrawn by DBOD officials and submitted along with
another report on 16th
June 1991. The first report detected serious irregularities only in
the UCO bank. With supreme ignorance the report stated: “It
cannot be stated that the banks were putting through transactions to
provide business to brokers and that the transactions
were otherwise not warranted.”

The
second report outlined serious malpractices but named no bank. This
led to the issue of the first-ever circular by RBI on treasury
operations, on 26th
July
1991. However, the malpractices escalated enormously, precisely after
the circular was issued, though Indian and foreign banks sent in
routine compliance reports right until the end of December 1991. One
month later, Ghosh retired. It was a critical time. Harshad was on a
rampage in the stock markets and money market players were bleeding,
thanks to the coupon hikes.

In
1986, it was still all right for RBI to continue to be blind. Caught
in the choppy seas of the 1991 transition, it looked puny and had
simply no clue to the extent of the bank-broker nexus, the loopholes
in the Public Debt Office and the misuse of PMS money. What started
as an inter-bank market had long lost that character. The market
included the financial institutions, mutual funds, PSUs, private
companies, investment companies and, of course, brokers. Multiple
players and complex deals were compounded by RBI’s self-imposed
limitations: “We have access to only the banks. We cannot
inspect the brokers’ books”, said ND Parameshwaran, chief
of the DBOD. But the central bank of a country surely has the power
to arm-twist brokers to disclose the true nature of their deals. The
DBOD would not even consider this.

The
result: though RBI inspectors were on the mark till 1989, the
turbulence of 1990-92 left them floundering. It was indeed revealing
that Harshad Mehta was not caught exploiting some small co-operative
bank, but the blue-chip SBI (97% of whose shares were held by RBI),
and National Housing Bank, another RBI subsidiary. He was playing
with the central bank’s money!

This
complete breakdown of supervision led to the scam and tarnished RBI’s
reputation. But the scam was also an opportunity to change things. “I
am aware that RBI inspectors have to be as good as those they are
inspecting”, admitted Venkitaramanan who retired on 21st

December 1992. RBI’s promotional policy has ensured that 90% of
officers have aged their way up from the lower ranks. “RBI
needs to
be proactive and respond much faster”, he said.

Things
hardly changed despite two scams and humungous bad loans in the
nationalised banks’ portfolio. There has been some
reorganisation to create a sharper focus on supervision but it has
been merely cosmetic.

16

The
Witch-hunt

It
was bad enough that a gigantic scam took place. It is as incredible
how ham-handed the scam investigation has been.

A
few weeks after the scam story broke, CBI joined RBI
inspectors
in the probe. Before these two agencies arrived on the scene, the
Income Tax department was already investigating Harshad Mehta. Three
months later, in August, came another investigating body: the JPC.
Finally, overseeing all these agencies were the eagle eyes of the
Prime Minister’s office. That seemed like an impressive line-up
of detectives and you would have hoped lots of disclosures, greater
clarity and comprehensiveness. Sadly, it became a case of too many
proverbial cooks and nobody knowing the recipe.

This
was partly because each investigating agency had a very distinct aim.
CBI was interested in proving criminality. The Income Tax department
was looking for concealment of income. RBI was attempting to figure
out what had happened from the banks’ angle and the JPC was
looking for some deeper enlightenment. These aims could have been
combined to produce a complete view of the scam. Unfortunately, the
investigative agencies were petty enough to not want to co-operate
with each other.

RBI
appointed a probe committee whose members were
CP Ramaswami
(Income Tax officer), YH Malegam (partner in the accounting firm SB
Billimoria), EN Renison (retired CBI officer),
VG Hegde (legal
advisor) and Vimla Vishvanathan as the member-secretary. The
committee was headed by deputy governor,
R Janakiraman. This was
a motley crew. It was not known what specific roles each of the
committee members played but there is little in the Janakiraman
Committee reports either from the tax angle or from the angle of
criminality despite the presence of Ramaswami and Renison.

Worse,
none of these agencies was specifically entrusted to look at the scam
from a commercial point of view: finding out where the money had gone
and how much was commercially recoverable. CBI, for instance, could
not be bothered whether Harshad could pay back what he owed to the
banks or where the Standard Chartered Bank money had disappeared.
Neither was this a part of the JPC’s brief. RBI assumed that
recovery was the responsibility of the banks. The banks were in turn
paralysed by the course of the investigation.

Market
players were put under tremendous pressure from these different
agencies. In the normal course the best defence for the accused would
be to point a finger at the market place: RBI knew what was happening
but failed to stop it. But in the highly confused atmosphere after
the scam surfaced, there was no scope for these arguments. Brokers
were bullied into submission, bank officers got pilloried,
politicians, who control everybody’s lives in India, got away
scot-free, criminality got mixed up with violations of rules while
many key players in the scam simply escaped the net. All this is best
exemplified by the CBI investigation.

In
May 1992, a few days after the government announced its decision to
hand over the scam investigation to CBI, RBI governor,
S
Venkitaramanan, called Vijay Karan, director of CBI: “I hope
you are giving me a good officer.” Karan said, “I’ll
give you the best. It is Madhavan.”

K
Madhavan, joint director in CBI, was seen as an upright officer who
had the opportunity or responsibility to work on some of the most
controversial cases, chiefly the Bofors scandal which has enthralled
the nation for over two decades. The moment it was announced that
Madhavan would handle the scam cases, the credibility of the
government rose. The truth would now be out. Or so everyone thought.
Venkitaramanan even suggested that Madhavan be made a member of the
Janakiraman Committee.

However,
not everybody was comfortable with getting Madhavan involved. Cabinet
secretary, Naresh Chandra, for one, objected to the idea on two very
valid grounds. The impression was: Madhavan talks (among others, to
the press) and he loves histrionics. Besides, there were rumours that
the Prime Minister himself was not too happy with the way Madhavan
had handled the Bofors case. In the end, Naresh Chandra’s
objections probably turned out to be partly justified. In its attempt
to prove criminality, CBI, at least initially, substituted charges
for evidence, humiliation and harassment for interrogation and
conspiracy theories for investigation. The first month of
investigation and the very first FIR is testimony to that.

CBI’s
cases of corruption are grafts, kickbacks, secret accounts, misuse of
power and forgery. The scam, in comparison, was extremely complex.
CBI never felt the need to understand that this was no ordinary case
of fraud, where a linear relationship could be easily established
between an event and individuals who could have profited from it. CBI
had to deal with a tangled skein of complex transactions woven by the
warp of individual greed and the weft of commercial convenience.
Within that, the Harshad Mehta case was the simplest. Harshad had
taken money with a promise to deliver securities but diverted it for
his own use. Madhavan, perhaps driven by his love for drama, overdid
his pursuit of this simple case of fraud.

CBI
went hammer and tongs at SBI, driven by a conspiracy theory. This
created enough of heat and dust but made CBI laughing stock among
knowledgeable bankers and brokers. Not that they dared to laugh; they
were too scared that CBI would strike at them next. In its FIR, CBI
alleged that the deputy managing director, CL Khemani, and two other
SBI officials fixed the time and price of transactions in a manner
that defrauded SBI and “caused wrongful gain to HSM (Harshad
Mehta) group and wrongful loss to SBI.” In support of this, CBI
provided only one piece of evidence: during 1991-92, SBI had
transactions worth Rs 41,252 crore out of which Rs 17,573 crore were
with the HSM group. The rest, said CBI, were transacted through
fifteen brokers, yielding an average of Rs 1579 crore per broker as
against Rs 17,573 crore in Harshad’s case.

There
are two charges here. First, that Khemani had fraudulently fixed
prices to enrich Harshad and second, that a favour was shown to
Harshad as reflected in the huge Rs 17,573 crore of deals with him as
opposed to a small average deal of Rs 1579 per broker. Take the
second charge first. It shows incontestable arithmetic skills of
averaging but little else. In fact, the figure of the average deal
per broker, like all averages, hid more than it revealed. Between
April 1991 and March 1992, apart from Rs 17,000 crore of deals with
Harshad, SBI had done transactions worth Rs 10,000 crore with the
Delhi-based Naresh Aggarwala and Rs 5136 crore with DS Purbhoodas of
Bombay, con-trolled by Harshad’s arch-enemy, Hemendra Kothari.
SBI’s dealings with twelve other brokers were just a few
hundred crores, making nonsense of the exercise in averaging. CBI did
not bother to question either Aggarwala or Kothari on “wrongful
gains”.

The
second charge was more complicated because it involved “fixing
prices”. Actually, there were so many prices in the money
market that it looked as orderly as
a 19th
century
Indian bazaar. However, SBI had an answer to the price-fixing charge.
Investment decisions at SBI were taken by a committee that included
Khemani as well as managing director PV Subba Rao. CBI had no
definite details of how the timing and pricing of any deal,
sanctioned by the investment committee, was a loss for SBI and gain
for Harshad.

In
fact, at the core of the Rs 17,000 crore transactions, was a
Rs
600 crore double ready forward deal which involved four move-ments of
buying and selling, making it Rs 2400 crore. This was rolled over
several fortnights. If rolled over five times, it leads to a volume
of Rs 12,000 crore from what is essentially just a Rs 600 crore
transaction. Besides, in a double ready forward deal, the two parties
exchange securities. SBI stood to lose nothing in a double ready
forward. The volume had nothing to do with the fraud. The real
possibility of losses was in outright transactions, which SBI did
mainly through brokers such as DS Purbhoodas and Naresh Aggarwala.

SBI
certainly stood to be defrauded if Harshad failed to deliver what he
promised or was unable to return the money. But who ought be blamed
for it? Khemani had headed a central office function where the
investment committee decided how to deploy the bank’s funds.
The actual transactions were done through the branches, which were
operationally under R Sitaraman and not Khemani. So, if the branch
had falsified papers to cover up for Harshad, did it automatically
make the officers at the central office conspiring criminals?

SBI’s
systems were also to blame. The division of functions between the
central office and the branches made little sense if nobody is
responsible for either. As the head of investment operations, Khemani
ought to have installed appropriate systems, including periodic
verification of stock and the buck ought to have stopped at his desk.
But that was a managerial issue, not a criminal one. In the heat of
May and June 1992, as CBI was let loose like a bloodhound, Khemani
seemed the right person to attack. A deputy managing director of SBI
behind bars? It created the desired stir that was typical of
Madhavan’s work.

During
the interrogation, CBI asked Khemani: “You were in charge of
the investment division. How is it possible that you did not know
that your subordinates had this deal going with Harshad?”

Khemani
replied that it was not his job to know. His job was to strike the
best deal for the bank. The actual transactions were supposed to be
put through by Sitaraman. “What can one do if he tells me that
he has received delivery of certain securities when he hasn’t?”

The
CBI officer then came out with this gem: “If you wanted to
exercise control you could have gone to the branch and done it. Why
didn’t you?” An exasperated Khemani gave up. In the first
few days in custody, Khemani, a mild-mannered soft-spoken person was
kicked and abused during questioning and was made to sleep on a hard
floor, causing him severe abdominal pain.

Other
SBI officials were similarly harassed. Subba Rao, the MD, had joined
the investment committee only four months before the scam. CBI
ransacked his house. His eighty-year-old mother-in-law was stunned at
the invasion. CBI ordered Subba Rao to go to the SBI office for
further investigations. The old lady who had been watching the
arrests of Harshad and senior SBI officials such as Khemani on
television, thought Subba Rao too would be jailed. She went to the
door to see him off. A few minutes after Subba Rao reached office, he
got a call informing him that she had expired.

RL
Kamat, the treasury officer responsible for bringing Sitaraman back
from south, went through a different ordeal. Kamat’s daughter,
who was also a bank employee, was engaged to be married. The family
had made several sets of jewellery, which were kept in a SBI locker.
CBI sealed it. Despite pleas and protests that a part of the gold was
out of the daughter’s own money, CBI refused to relent.

Not
all cases of raid were as grim – some were downright funny. One
such was the raid on Jitu Shroff of VB Desai and Co. We will let the
CBI panchnama
describe the raid and their haul in all its glory. Following are the
extracts from the panchnama
prepared on 17th
June by RD Samant and CR Kunetkar, both master key holders and head
clerks at SBI main branch, Bombay.

“We
the above mentioned panchas
were present in safe deposit vault office of SBI main branch when
Shri PK Mankar, PI CBI ACB Bombay came along with Jitendra (Jitubhai)
Shroff at about 11.40 hrs. He had come to break open the locker No.
2967... A Godrej & Boyce Mfg. Co. Ltd. man was called and
appeared before us today at 12.05 hours. We all went inside the safe
room and locker No. 2907 was opened by the Godrej servicemen with the
help of tools and drilling.” And then comes the climax. “Only
one rupee coin was found inside the locker... The one rupee coin was
given to Mr Jitendra Shroff.”

Similar
raids were conducted on 13th
June at Shroff’s vault in Bank of India. There the haul was
equally rich. “One old paper photo of God was found.”
Shroff seemed to be especially superstitious about one-rupee coins.
The safe deposit vault at Union Bank of India yielded a ten-gram
silver idol and a coin. A raid on the Syndicate Bank locker revealed
a precious Rs 101.

In
Delhi, CBI discovered that over and above the Rs 32 lakh “bribe”
that Harshad had paid to V Krishnamurthy, he was also given
Rs
40,000. Harshad’s Delhi books showed that. CBI triumphantly
waved it as another example of bribe. Unfortunately, for CBI, apart
from the princely sum involved, this new evidence referred to the
wrong person. The money had gone to a Growmore employee in Delhi
whose name too was V Krishnamurthy!

The
charitable explanation for CBI’s bungling is that it lacked
resources, had to produce quick results and that its hands were tied.
But what about RBI, the watchdog for the banking sector and is,
therefore, expected to have expert knowledge? If RBI had been
sleeping for ten years in the run-up to the scam, then post-scam, it
was groping in the dark. It acted in haste, was partisan in its
approach to banks, showed little understanding of the markets and was
unwilling to use unconventional means to get at the truth. The
initial reports of the Janakiraman Committee showed a similar
attitude.

Just
after the scam story broke, RBI called for a meeting of all banks to
reconcile their outstanding BRs. The meeting exposed the extent of
fraud in Stanchart, Bank of Karad and Metropolitan Co-operative Bank
and crystallised the scam for RBI. What it had was a mass of
transactions done by Harshad. It also had a set of people who were
left with dud BRs, who were identified as the victims and those who
had issued the BRs were the cheats.

RBI
inspectors went from bank to bank picking on deals that looked
suspicious. The first of the six-part Janakiraman report barely
scratched surface. It listed SBI’s relationship with Harshad
and certain dubious transactions done by each of the banks. The
second and the third reports were also mountains of transactions that
even money market brokers could decipher only after repeated reading.

Among
the most dubious contributions of the Janakiraman Committee was its
novel way of calculating trading volume. Every ready forward
transaction (buying/selling) was counted twice and a double ready
forward four times. The first report, which highlighted the nexus
between Harshad and SBI pointed out Rs 17,000 crore of transactions
(buy and sell) between the two. Except for Rs 215 crore of securities
bought and an exact amount sold, all transactions with Harshad were
on a ready forward and double ready forward basis. The committee’s
arithmetic allowed it to tot up huge volumes that Harshad built up
with SBI by rolling over his deals. The volume enhanced suspicion
about Harshad’s nexus with SBI. But the committee never
bothered to find out whether SBI had made a profit or loss in these
transactions.

Ready
forward deals are just sales/purchases done to buy and sell back at
specified prices. “If the transactions are genuine, there would
be no loss to SBI”, said a securities broker. In double ready
forwards, the two parties first exchange securities and later reverse
the transactions to get back their original securities. Here too,
prices and time frames were fixed in advance and there was virtually
no risk of loss. “It is precisely in those massive volumes of
transactions with Harshad Mehta, that SBI made profits”, said
an SBI official. The normal spread in ready forward deals used to be
between 1%-1.5%. Assuming that as the average rate, SBI had earned Rs
200 crore in its Rs 17,000 crore deal with Harshad.

The
committee also showed a great passion for numbers. The reports were
replete with tables and statistics, some of which drew gasps of
horror at their gross errors. The third report put out outstanding
balances in the portfolio accounts of various institutions as at 30th
June
1992. By that time, lot of PMS deposits had been repaid. So RBI
reported that bank subsidiaries had just around Rs 458 crore as
outstanding. Just two months earlier when PMS was flourishing,
Canfina had thousands of crores in its portfolio. The foreign banks
were collectively shown to have a portfolio of Rs 1386 crore, when in
fact, Citibank alone would have had had a portfolio of that size a
few months earlier. The report ranked the top three banks’
running portfolio accounts (Citibank’s share: over 50%) based
on the banks’ own submission, without mentioning that several
banks which large PMS portfolios had not submitted their lists,
making the rankings misleading. The error that caused the most
heartburn was brokers’ volumes.

The
committee meticulously compiled a list of brokers who had more than
Rs 5000 crore of transactions in 1991-92. The name of DS Purbhoodas
was missing from the list. This stunned people familiar with money
markets. Kothari’s firm was an old well-established broker with
a reasonably large business. Besides, as Ajay Kayan’s associate
in Bombay, it had closed thousands of crores worth of deals. In fact,
transactions with SBI alone amounted to over Rs 5000 crore. So why
did the firm not figure in the Rs 5000 crore club?

RBI
officials explained that the firm’s name on its contracts had
been recorded with different spellings (DS Purbhoodas in one place
and DS Prabhudas in another and so on) and got fragmented in the
computer-driven compilation process. This was a callous explanation,
which only showed how RBI officials were completely out of touch with
the market. If they had even an elementary knowledge of the market
players, the error would have leapt out at them. When Kothari’s
name did not figure in the Rs 5000 crore plus list, all other brokers
were deeply incensed at what they thought was a partisan omission.
One of them sarcastically remarked: “In a turbulent year if DSP
has not even managed to do Rs 5000 crore of transactions, he should
wind up his broking business.” The report also said that
Citibank’s main brokers for its Rs 215,000 crore of
transactions in 1991-92 were Hiten Dalal, C Mackertich and Stewart &
Co. Strangely, Stewart & Co., did not figure in the Rs 5000 crore
list.

These
bloomers occurred because the committee did not talk to the brokers
about volumes, deals and the nexus. It spoke only to the
institutions. This was consistent with RBI’s general approach
of treating brokers at best as a necessary evil. The DBOD chief,
ND
Parameshwaran, was extremely diffident in even considering punitive
action against brokers. “We don’t regulate them”,
he said, cutting off links to the most vital reservoir of relevant
information and market intelligence.

The
scam forced DBOD to discover for the first time, decade-old practices
in the money market that it was supposedly overseeing. For a brief
while, the RBI top brass worked in tandem with CBI. There was
widespread suspicion that RBI governor S Venkitaramanan briefed CBI
about CL Khemani’s involvement in the scam and the possibility
of Bhupen Dalal having a hand in the disappearance of Stanchart’s
money. The governor denied this. At the same time RBI made no effort
to protect the interests of SBI and other banks. Indeed, the
Janakiraman Committee’s misinterpretation of Harshad’s
trading volume with SBI quickly found its way into CBI’s first
FIR.

RBI’s
actions on other fronts were also confusing. In May 1992, the
governor had called his one and only press conference to deny a
report in The
Times of India that
the size of the scam was around
Rs 5000 crore, with little to
back his denial. He also ruled out the possibility of any bank going
into liquidation. Within weeks, Bank of Karad and Metropolitan Bank,
which had issued dud BRs to Stanchart, were liquidated. Bankers
thought the action was premature. It served little purpose beyond
showing that RBI could act decisively.

Under
Venkitaramanan, RBI was indeed aggressively decisive. It demolished
these two tiny banks, forced SBI and UCO Bank chairmen to go on
leave, appointed a probe committee, appointed special auditors to
four foreign banks and forced SBI and ANZ Grindlays to repay
Rs
1200-odd crore to the National Housing Bank. Was RBI playing to the
gallery or shifting the blame from itself’? Did its actions
help recover the lost money or boost the market’s confidence?

RBI’s
arm-twisting of SBI and Grindlays to pay back NHB, the money credited
to Harshad’s account, was intriguing. As the second report of
the Janakiraman Committee proved, NHB was no innocent bystander. It
had no deal tickets for its transactions, no confirmation of deals,
no record of BRs. The Janakiraman Committee said: “There has
been a total abdication of responsibility by top management regarding
fund management by NHB.” The RBI was never asked to explain why
NHB was the only one allowed to secure its money among the various
claimants to Harshad’s wealth.

RBI’s
aggression vanished when it came to dealing with foreign banks that
had flouted PMS guidelines with impunity and bilked public-sector
companies. Only the amazing obduracy of Citibank and the Bank of
America and others pushed it into taking a tough line and asking that
treasury chief of all foreign banks involved in the scam be sacked.

If
RBI’s reactions to the scam ranged from boldly decisive to
hesitant, the various arms of administration displayed a complete
lack of co-ordination. The finance ministry, which ought to have been
the nodal co-ordinator along with RBI, was not only caught unawares
by the scam but down-played its magnitude ever since. When the scam
was debated in Parliament in its April 1992, none of the top
bureaucrats in the finance ministry were around. The first reaction
of the finance minister Manmohan Singh was that matters should be
left to RBI to handle. He was even reluctant to make a categorical
statement in Parliament. Some members of the opposition and of his
own party seized upon this weakness and bayed for his blood.

Then
the banking division of his ministry prepared an ordinance, under
which a special court was set up to try scam-related cases and a
custodian was appointed to acquire the assets of those accused and
notified by the court. This crucial ordinance was drawn up and issued
without consultation with the investment division, the market
players, the stock exchanges, SEBI or the institutional investors.
The secretary, department of economic affairs, Montek Singh Ahluwalia
was in charge of both banking and investment divisions. He was
supposed to have considered all implications before issuing the
ordinance. Since he was flitting in and out of New Delhi, the
investment division (under which falls the stock exchanges) did not
know what the banking division was doing.

Once
the ordinance was out, “tainted shares” (shares and
assets belonging to those notified under the act) became a major
issue. Some time in the third week of June 1992, UTI entered the
scene. It turned the market topsy-turvy for Rs 3 crore of shares,
bearing the seal of Harshad Mehta and lying with the SHCIL. UTI wrote
to SHCIL not to accept the tainted shares, causing panic among those
who had legitimately bought shares from Harshad and other notified
brokers.

Since
many scamsters had sold their shares in the market after 23rd
April,
thousands of innocent investors were caught holding tainted shares
even though they had paid good money and received delivery through
the stock exchange settlement mechanism. To clear these shares,
investors were forced to complete a long-drawn process of obtaining
certification under a procedure set out by the Courts. Some investors
spent the next six to seven years or more chasing affidavits in order
to complete the certification process.

Meanwhile,
the Income Tax department also queered the pitch by launching a spree
of property attachments. Its officials took the stand that even if
the court accepted the transactions of notified persons as genuine,
the department’s own attachment order would stand. It slapped a
Rs 10,000 crore tax order on Harshad and his wife. All this left the
banks, victims and, therefore, the real claimants to the assets,
bewildered. Meanwhile, the enforcement directorate was sniffing
around to claw back funds that were diverted overseas. As per law,
their claims ranked higher than those of the banks.

The
finance ministry continued to act callously. On 16th
May 1992 Manmohan Singh met all bank chairmen. The scam, which had
dented public confidence, surely ought to have been at the top of his
agenda. Instead, the minister and the bank chairmen pretended that
the scam was an isolated case of fraud and it was back to business as
usual. Singh said that the scam was the “collective failure of
the banking
system and we must accept responsibility for it.” Having made
that token comment, he quickly moved on to earth-shaking issues like
computerisation and customer service. Later, in the UK, the finance
minister would declare that the scam had been blown out of
proportion. What he meant was never clear. But it certainly showed
callous disregard for the scandalous events in the marketplace and
for the Janakiraman Committee which had listed rampant rule-breaking
and how thousands of crores were sloshing around illegally with
brokers when a severe credit squeeze was on.

The
most useful details came from the JPC hearings – but not due to
the efforts of the JPC members. Most of the members were completely
uninterested in understanding the markets or the financial system.
They rarely asked any probing questions, nor did they understand the
ramifications of many answers. Those who showed some interest and
knowledge – mainly members of the opposition – were also
biased and judgmental, pursuing their pet hates. But the JPC
revelations were significant because it caused such fear among
government officials and banks that they did not dare to lie. Brokers
continued to fudge, but much less than they would have.

Yet,
out of the reams of information that emerged, nothing was truly
sensational or could be deemed a breakthrough. That was because there
was simply no strategy either at the collective or at the individual
level to deal with such a large and complex issue. The JPC started
off by calling for truckloads of general information and data which
nobody read. Later, some members appeared to be quite clued in about
certain specific banks, transactions or brokers but they remained
completely silent and disinterested about others. All this ensured
that there was no systematic pursuit of truth.

If
only the JPC members had first done their homework by talking to the
right brokers and bank treasury officials, they would have narrowed
their focus. In fact, the JPC got very close to the real can of
worms, prised it slightly open and left it at that. This was the PMS.
Few JPC members realised that it was the key to unlocking the
intricacies of the bank-broker nexus, political involvement and the
huge illegal gains made by foreign banks. JPC heard of the suspect
transactions in September 1992 from public sector officials. One such
session revealed that the petroleum minister, B Shankaranand had
extended influence on the Oil Industries Development Board to give
PMS money to Canfina. The JPC missed the significance by assuming
they were just another set of irregularities. So, Citibank, the
kingpin of dubious PMS deals, certified itself lily white, took
advantage of the JPC members’ ignorance, lectured them
forcefully and walked out triumphantly.

Their
ignorance led to some hilarious situations as thirty members with
different political inclinations, of whom just about five had some
financial understanding, went about their interrogation. One of them
asked Harshad, “Do you know any ministers?” The answer
was “No”. Yet the next question, read straight from a
little piece of paper, was: “If so, when and where did you meet
them?”

Funnier
still was the grilling of the Grindlays’ officials. One JPC
member picked up a sheaf of papers submitted by the bank and with a
frown of concentration declared: “I notice several entries here
which say, GIFTS.” He ran down the page, reading out all the
entries and the amounts entered against them. And then he glared at
the bank officials. The Grindlays’ officials began to sweat,
wondering what the member had detected. Then they looked at the paper
and relaxed. What the member was pointing out was not gifts given out
by the bank but an internal acronym for Grindlays’
Instantaneous Funds Transfer Services (GIFTS).

One
broker was subjected to the same set questions from different
members. He wondered if this was a form of intense and clever
probing. Soon he realised that many of the members had been given the
same questions to ask. So irrespective of whatever explanations the
broker offered, the same questions popped up again and again.

Probably,
the course of investigation was dictated by an invisible hand, high
up in the administration. Nothing exemplifies this better than the
continued detention of Harshad, who was treated like a circus animal,
dragged from court to court, from Bombay to Delhi and back. For over
100 days, Harshad was continuously interrogated, first by CBI, and
then by the enforcement directorate. This kept him in full public
view as an undertrial demonstrating that the government was acting.
It almost seemed that the investigative agencies, who otherwise kept
information from each other, were working in tandem to keep Harshad
behind bars, under orders from the top. In fact, CBI had been
following a general strategy of imprisonment by relay so that public
attention was kept sufficiently riveted.

Harshad,
his brother Ashwin and SBI officials were arrested on 5th

June 1992. On 22nd
June, everybody except Sitaraman and Harshad were released. So by
23rd
June,
the scam as pursued by CBI, would have lost its sting. With unerring
timing, super sleuth Madhavan pulled out another FIR on 20th
June,
relating to the Stanchart stream of the scam. The timing was
suspicious. Stanchart’s FIR was ready by the evening of 5th
June,
when the bank had its last meeting with Bhupen Dalal at the Taj Mahal
hotel. Yet, the FIR was filed two weeks later. On the 23rd
,
CBI arrested Bhupen Dalal, Hiten Dalal, Abhay Narottam, JP Gandhi and
others to reinforce the impression that CBI was at it, especially
when the Parliament was in session.

On
17th
July,
CBI gave an undertaking to Justice Sam Variava that it would complete
its investigation and would not seek further detention of Harshad who
was supposed to be a free man on 30th

July, his birthday. But suddenly CBI pulled out an FIR dated 11th
June.
It was the UCO Bank bill discounting case, which had helped Harshad
Mehta use Rs 50 crores. Up to this point Madhavan was in charge. On
20th
July,
Madhavan resigned, provoking speculation that the government had
asked him to slow down.

To
counter that impression, CBI, headed by the acting chief
SK
Datta, cobbled together another FIR which involved the Power Finance
Corporation. This was dredging up history. Harshad got PFC money in
1990-91 to play the markets and returned it later. The deal violated
RBI and ministry guidelines but nobody lost any money and nothing
remained outstanding. On 30th
July,
the day Harshad was supposed to be released, CBI went back on its
word and put up a fresh remand application arguing that another 16
banks were being investigated and Harshad would be required in that
connection. By this time, CBI had managed to file 11 FIRs but only
Harshad was behind bars. He was put back in custody until 13th
August.

Harshad’s
family thought that CBI had run out of cases against the Big Bull.
But by that time another arm of the State got into the act. On 30th
July,
the enforcement directorate told the court that it intended to arrest
Harshad whenever he was released on bail. So on 13th

August, 1992 when Harshad was released by Justice Variava, the
enforcement directorate arrested him in connection with foreign
exchange violation. Such tactics continued until the fourth week of
September when Harshad was finally released.

Harshad’s
ally, Krishnamurthy, faced a similar pre-trial punishment. In
mid-July 1992, even after his links with Harshad and Fairgrowth
became open, Krishnamurthy insisted on staying put in his job. His
main source of political strength, deputy chairman of the Planning
Commission, Pranab Mukherjee, “absolved him from any
involvement in the securities scam”, he claimed. “I
invested Rs 2 lakh in Fairgrowth Financial Services (FFSL) in August
1990 when I was not holding any government office. I made the
investment out of retirement benefits received as the chairman and
managing director of the Steel Authority. I was one of the original
directors of FFSL. My shares begin with the 0 series. My association
was not unusual because I was considered a management expert.”
Krishnamurthy was on the board of Escorts Financial too and had
resigned from there and Fairgrowth after becoming member, Planning
Commission.

The
other charge against Krishnamurthy was that he had taken a cheque of
over Rs 32 lakh from Harshad. It was seen as a bribe because Harshad
had taken no collateral from him. But a bribe by cheque? Questions
like these were summarily brushed off. CBI was let loose on
Krishnamurthy with amazing viciousness. He and his son were dragged
to the Tihar jail, tarnishing the reputation of one of India’s
best managers.

It
could not have been that an honest government was attempting to book
a dishonest official. If Krishnamurthy was corrupt, there were
hundreds of corrupt politicians, bankers and public sector managers
in this country. Why Krishnamurthy? There were at least four
theories. First, Madhavan had just resigned and the government was
suspected of scuttling the probe. It needed something big with which
to respond to the charge that it was tying Madhavan’s hands.
Krishnamurthy was an old foe of Madhavan. So, by attacking him, the
government could silence Madhavan’s sympathisers. Second,
Narasimha Rao had been systematically cutting down to size all those
who were close to Rajiv Gandhi. Krishnamurthy was one. Third,
Krishnamurthy was involved with Pranab Mukerjee in formulating the
economic policies of the Congress before the 1991 elections.
Apparently, they had differences with Narasimha Rao. The fourth
theory was that a senior bureaucrat, who later became the governor of
a state, was settling a personal score.

When
Mukherjee became the deputy chairman of the Planning Commission,
Krishnamurthy was made a member in charge of infrastructure though he
was actually an industry expert. He was regularly absent from the
commission’s meetings. On the morning of 20th

July, somebody from the PMO called up: “Put in your papers or
we will put CBI on you.” The next morning he came to the
Planning Commission, got his resignation letter typed and left for
the Indian Institute of Technology for their annual function.
Mukherjee was away in Patna and expected back later that evening.
Krishnamurthy had resigned as per orders from the top. But still CBI
was let loose on him. The same CBI, however, showed little interest
in nabbing obvious suspects, especially those in the public sector
companies who were turning money over to finance brokers and foreign
banks.

The
trial by various other agencies followed a familiar pattern: passing
judgements even before the trial had started. It was almost a
witch-hunt. The CBI inflicted it physically; and some JPC members
used their position to settle private scores by demanding action
against those who figured in their private hate lists. This reached
an absurd height when the RBI governor himself was made the target.
After having played a key role in initiating the investigation into
false BRs, stopping Harshad and exposing Fairgrowth, the governor
found himself being painted as the villain of the piece, months
before he faced the JPC. The finance minister was under pressure to
sack him. The minister, however, steadfastly backed him.

Eight
months of witch-hunt left everybody bewildered and helpless. The
casualty was truth and justice. Despite the probe being
multi-pronged, several people who played a crucial role in the scam
escaped the net.

17

Who
Won, Who Lost, Who Got Away

For
fudging books, laws anywhere in the world attract criminal
prosecutions. Nothing happened to Citibank. Or to many others.

FOLLOWING
the witch-hunt of scores of people involved
in the scam, some
lost face, their money and their market
position – like V
Krishnamurthy, Harshad Mehta and Bhupen Dalal. The lives of many
junior officials were ruined. Others managed to escape. This number
is quite large and includes foreign banks, government officials,
ministers and bureaucrats. For months after the scam was exposed,
fingers remained pointed at brokers. Only the third report of the
Janakiraman Committee highlighted the role of institutions,
especially the two US banks (BankAm and Citi).

Although
many businessmen, officials and ministers were deeply involved in
some aspect of the scam or other, the probe did not net any big fish
other than commerce minister P Chidambaram who was an unwitting
scapegoat and V Krishnamurthy, a politically expendable bureaucrat.
The list of those who got away includes industrialist TB Ruia and SN
Chaturvedi and brokers like Jitu Shroff. The officials and ministers
remained anonymous. They were the real big winners. Besides, all
those who were involved in the core of the scam – the portfolio
management schemes – escaped for lack of conclusive
investigation. The biggest of these was Citibank.

One
half of the scam was what fuelled it, or the supply side –
surplus money that Citibank, Stanchart, Canfina and others picked up
from the big PSUs by offering them portfolio management schemes.
Kickbacks were involved in PSUs parting with thousands of crores and
in the loop were ministers, chairmen and finance directors of these
companies. This was also where politicians came in and directed the
money to their favoured brokers and banks. However, the only
politicians somewhat implicated in the scam were B Shankaranand
(under whom Oil Industries Development Board had parked surplus money
in PMS) and the minister of state for finance Rameshwar Thakur. A
host of other ministers and PSU officials and so-called “ethically
conscious” foreign banks got away scot-free. They would have
been exposed if PSU officials were intensely grilled and their trail
of evidence followed through. It never happened.

In
fact, even simplistic questioning by the JPC members generated enough
prima
facie
evidence of collusion between banks and officials of the National
Hydro-electric Power Corporation, Air India, Indian Railways Finance
Corporation, National Thermal Power Corporation and Power Finance
Corporation. But nobody was quite interested in probing the PMS
trail, which was the primary source of the scam. Was it simply
lethargy or because of the numerous relatives of top government
officials and politicians that are strategically employed by foreign
banks.

Citibank

In
1993, four key executives from Citi’s treasury who had earlier
been transferred, ‘had to resign’. These included AS
Thiyagarajan, Citibank’s treasury mastermind whom the bank had
‘promoted’ and posted to the New York office in November
1992. Why the resignations? Citibank, which had until then refused to
admit to any wrongdoing, refused to comment on why Thiyagarajan had
quit. Privately, however, senior Citibank officials were looking for
more “evidence” against him and his team. The bank had
changed its strategy, and was now trying to pin the blame on
individuals. It had also decided to close its notorious PMS schemes
and asked many clients to take back their money at a substantial
loss. But there was no sign of the bank suing Harshad as it had
threatened to, when he called Citibank the “beehive of illegal
activity.”

Citi
could have been easily hauled up by RBI, the Federal Reserve Board
and the Securities and Exchange Commission of the US. It showed one
set of transactions to its clients and another set to RBI and JPC,
clearly proving that it fudged its books, perhaps both the sets.
Amazingly, for a foreign bank, it also had deals with ‘dummy’
customers and ‘dummy’ counterparties and also between
these two mythical parties. It also had deals where there are no
counterparties! Some big deals with Stanchart exist in Citibank’s
books but not in Stanchart’s.

Citi
entered into a number of ready forward deals which were recorded in
personal computers “operated by the traders and were not
entered in the main frame computer system...the back-up and
operations departments remained unaware of these contracts nor were
the same subjected to audit”, says the Janakiraman Committee
report. As per the committee, “forward commitments aggregating
Rs 14,758 crores booked during 1990-91 and till 29th

June 1992 on the PC were not brought into the main frame computer
system. Information regarding these unsettled contracts and certain
particulars regarding the in-house transactions are not given to the
fiduciary clients, thereby impairing transparency”, noted the
committee. In that case not only Citibank’s clients but even
JPC on which Citibank dumped reams of information, was misled. For
fudging books, laws anywhere in the world specify criminal
prosecutions. Nothing happened to Citibank.

Meanwhile,
a team of officials from the US Federal Reserve Board arrived to
check Citi’s books. Surprisingly, they went away without
talking to anybody but RBI officials. Despite clear suspicions of
insider trading and bilking customer accounts, the SEC of the US also
seems disinterested in probing Citi or talking to the officials of
its Indian counterpart, SEBI. In February, Citibank sent another team
of investi-gators. Nobody knows what they found.

For
years, people have asked where did the scam money go? It went
nowhere. It was right here, in PMS, used up in funding huge losses of
some key players. However, despite our writing about this in the
media, Janakiraman Committee did a hasty job, JPC did not understand
it and the special auditors appointed to probe foreign banks missed
the commercial cunning that laced hundreds of suspect PMS deals.
Sensing that most investigators were missing it, Citibank continued
to assert, with the help of an unctuous and hustling PR agent Roger
Pereira, that it did nothing wrong.

However,
that assertion was easily challengeable by late 1993 when with the
help of three leading securities brokers, we analysed Citibank’s
PMS transactions and came up with many interesting leads. These
transactions could have alerted RBI of corrupt practices by other
banks and financial institutions, the Income Tax authorities of
possible tax violations and the US regulatory agencies of violation
of fiduciary responsibility. Besides, evidence clearly pointed to a
sophisticated ring of financial accommodation Citibank was running.

We
already know that scores of public sector units and several large
well-known private sector companies put money into PMS through smart
foreign banks and brokers. Power Finance Corporation turned over Rs
150 crore to Citibank for a meagre return of 14.25% per annum. Among
the most heavily churned portfolios, PFC was made to transact
vigorously with virtually all Aditya Birla-BK Birla companies like
Century Textiles, Grasim, Indian Rayon, Indo-Gulf Fertilisers,
Mangalore Refinery, etc. But two suspicious transactions done on 25
May 1992, one month after the scam broke, stand out.

On
that day, Citibank bought on PFC’s account 9% IRFC bonds worth
Rs 1.7 crore in face value from Vasavdatta Birla and
Rs 2.82
crore of the same bonds from Neerja Birla. This would have been
insignificant but for two facts. The deals were done at Rs 100 when
immediately before and after that date, Citibank had transacted
millions of 9% IRFC and 9% HUDCO and 9% NPC bonds for its PMS client
PFC in the range of Rs 89-97. The second fact: Neerja Birla is the
late Aditya Birla’s daughter-in-law and Vasasvdatta Birla his
daughter. Even assuming the market rate to be Rs 90, around which
Citibank did deals in the 9% IRFC bonds, Citibank made PFC pay out Rs
45 lakh extra to the two Birlas. Was it the bank’s way of
conferring personal favours to the Birlas? The treasury officials who
did these dubious deals had conveniently gone during the scam
investigation.

PFC
also figured in Citi’s deals with its favourite brokers
C
Mackertich and Stewart & Co. As per the third Janakiraman
Committee report these two brokers made a huge Rs 89 crore profits in
five deals in GIC Rise I and II. Three of them were with Citibank’s
client PFC. Surprisingly; PFC never questioned Citibank about these
gifts at its expense. Neither did CBI. PFC, of course, was the same
client that Citibank had promised a guaranteed return to but later
disowned it (in a letter by Raj Mittal one of its junior employees).

GIC
Mutual Fund’s Rs 25 crore accounts started in December 1991
when the stock prices were already rising. Of all things, Citibank
got the mandate from GIC Mutual to buy equities. GIC Mutual itself
was supposed to be an expert in investing money in bonds and equities
– at least that it is why it was set up and allowed to raise
money from the public. Why was it turning over the money to Citibank?
“Because the money market was down at that time”, said SK
Mitra, then chief executive of GIC Mutual. “Others like UTI and
BSE too had accounts with Citibank.” The problem with this
explanation is that portfolio schemes were supposed to be run for at
least one year. Clearly, the temporary downturn in money market could
not be an argument for GIC Mutual to invest Rs 25 crore for a whole
year.

Citibank
invested the GIC money mostly in equities like Chettinad Cement,
Indian Rayon and Reliance, between February and April – the
last stage of the equity boom. Mitra claimed that GIC got an overall
return of 20%. The nexus of Mitra, C Mackertich and Citi would be
repeated across many situations. GIC Mutual jointly sold Citicards.
In a highly unusual and unprecedented move, the George Soros and
Purnendu Chatterjee combine acquired a chunk of government-owned GIC
Asset Management when no other nationalised mutual fund has such a
foreign holding. Chatterjee’s key link in the Indian market is
Ajay Kayan of C Mackertich, Citi’s house broker. Mitra now
heads the finance function at the Aditya Birla group. It was a nice
little clique.

Of
the 80-odd portfolio accounts that Citibank had, only a handful were
churned and abused. Over the years, Citibank had a roster of top
clients – the Birlas, for instance, in the private sector and
the public sector companies – whose money Citi was managing. If
there was an issuer like PFC or GIC whose instruments would not sell
easily, Citibank placed the instruments in the portfolio of its
clients. In return, Citibank wanted the money to come back to it to
be managed.
On December 13th
,
14th
and 17th
1992
Citibank placed GIC Rise II with its portfolio clients Grasim (Rs 50
crore) Bindal Agro (Rs 25 crore) and Indian Telephone Industries (Rs
25 crore). About a week later Rs 25 crore came back to Citibank as
GIC Mutual became its portfolio client. Citi then picked up the GIC
Rise II units and sold it in smaller chunks to
other banks, brokers and financial institutions.

PFC
needed money in early 1992. Citibank picked up its 17% bonds and
promised to place it with its clients. When the issue was subscribed,
PFC put the whole Rs 150 crore back into portfolio account with
Citibank at a guaranteed return of 14.25%. In 1991, UTI was strapped
for cash when there was massive repurchase of units. Citibank funded
the repurchase. In return for the bailout, Citibank got UTI to put
money in its portfolio. Harshad Mehta had a similar round-robin
scheme going. He invested Rs 20 crore in the Rs 49 crore raised
through the Boinanza scheme with the understanding that BoI Mutual
will buy the Big Bull’s scrips.

Such
circular incestuous relationships have meant losses for primary
shareholders – the government in case of PFC, unit holders in
case of GIC Mutual and shareholders in case of private sector
companies. Grasim’s shareholders have been less lucky than
Neerja and Vasavadatta Birla. Grasim had investments of over Rs 395
crore at the beginning of the year and over Rs 330 crore as on 31st
March
1992 – an average investment of over Rs 360 crore throughout
the year. On this Grasim has earned Rs 33.33 crore – a return
of just over 9%. This was scandalously low especially since Grasim
itself was paying an interest of 18% on the Rs 155 crore of
debentures issued in 1991-92.

Probably,
somewhere down the line Citibank lost control on the burgeoning PMS
volumes and the criss-cross of relationships. It also needed to hide
its own and its brokers’ losses. So, it dumped huge amount of
13% Coal India and DVC bonds into the portfolios of virtually all its
clients. These bonds were quoting at around Rs 75 and in any case
were illiquid. CIMMCO of SK Birla was being asked to take such bonds,
which meant a 30% loss in principal. Builders Rahejas were even
planning to sue Citibank for breach of fiduciary duties. On 2nd
April
1992, Citibank sold shares of four public sector companies to
Varahgiri Investments (owned by the Rahejas) even before these shares
were quoted. After months of bluster, Citibank decided that it was
better to
pay off the portfolio clients in full rather than create more bad
blood. It brought in $150 million for this, indirectly admitting that
it had recklessly traded on clients’ money. By then it was
probably sure that the SEC would not probe it.

The
most glaring blotch in Citi’s books was hundreds of “dummy
customer” trades. Citi said that it was an accounting fiction
created to match a block sale made from more than one-client
accounts. It first booked the sale on dummy customer accounts and
then squared it off against matching transfers from clients’
accounts. If so, the dummy customer account should always stay
balanced. In fact, according to the records presented to the JPC, at
the end May 1992 the dummy account showed an excess sale of over Rs
10,000 crore.

Brokers
who traded with Citibank offered us several explanations. First, it
was probably where some of the bond losses of Citi and its PMS
clients were parked. That is why the account showed an oversold
position. Second, the real names were probably substituted with
“dummy customer”. The third explanation is more mundane.
Citibank may have simply lost track of the voluminous transactions
and slipped up in transferring sales from customer accounts to
extinguish the oversold position of dummy customer. In any case, JPC
and RBI never asked why a reputed foreign bank, claiming to have
great systems would have thousands of crores of transactions in dummy
customer accounts.

Of
course, Citibank was not the only one whose accounts were
questionable. Bharat Petroleum had invested over Rs 100 crore in six
lots with Stanchart between February and March 1992. Other oil
companies deposited money in Citibank, ANZ and Stanchart. Canfina had
received portfolio funds from Nuclear Power Corporation
(Rs 294
crore) Housing and Urban Development Corporation
(Rs 240 crore)
and PFC (Rs 226 crore), and other PSUs. Unfortunately, the
investigating authorities showed little zeal in pursuing these
accounts.

There
was a compelling tax angle too in Citibank’s operations that
could have been open to scrutiny. The bank had not calculated profits
and losses for each client separately. Neither did it have separate
records of long-term and short-term capital gains as they apply to
individual clients. It pooled the entire portfolio money entrusted to
it and was, therefore, liable to deduct tax on the profits made,
before distributing them to clients. Citibank did not do this and
could have been hauled up by the tax authorities.

Equally
scandalous was the behaviour of the various public sector financial
institutions. Whether they were supposed to lend money to industrial
ventures (IDBI), invest small investors’ money (UTI) or make a
decent money from capital markets (GIC Mutual Fund), these august
institutions all queued up to Citibank to entrust it with their
money. IDBI confessed to JPC that it invested about Rs 450 crore in
PMS. It opened ten accounts with Citi between 18th
September
1991 and 16th
April
1992 in a period of acute capital shortage and especially when it had
its own trading desk. RBI did not ask why. Neither did JPC.

So,
while the image of foreign banks appeared tattered, the two
buccaneering US banks escaped with minor bruises. Citibank got away
for two reasons. One, its PSU clients were uninterested in filing
suits against it for negligence in carrying out its fiduciary duty.
Two, there was no investigation into the books of brokers and banks
together. In fact, bankers are surprised that Citibank showed a large
number of deals as direct when the whole market knew that it always
dealt through brokers.

Among
the most astonishing cases of Citibank misusing PMS money was the one
where it overdrew from the account of an undisclosed PSU client as
much as Rs 237.74 crore. Citibank said that it had concurrent
buy/sell commitments against such overdraw. While the sell orders
materialised, Canfina (on anything concerning Citibank, the names of
Hiten Dalal, Canfina and the two Calcutta brokers crop up) failed to
take up their purchase commitments. Citibank had to honour its sales
commitment, leading to an overdraft. Citi perhaps got away by cooking
up a story. Look at one apparently unconnected evidence in the
Janakiraman Committee report. It involves the same Canfina and the
same Rs 235 crore[11].

The
Citibank buy/sell deal mentioned in the case of overdrawn account was
actually due in June-August. If that is so, why should the client
account be overdrawn on May/June? Securities brokers suspect that
Citibank may have been holding outstanding BRs of May/June to be
liquidated against August buying by Canfina. When Canfina backed out,
Citibank was left holding the Rs 235 crore “overdraft”.
If true, this also explains why Citibank could claim in May, after
the BR reconciliation that it had no outstanding BRs and that its
books were clean.

In
1993, when things started getting hot, Citi quietly started settling
with its clients, especially after a few well-known
ones sent it legal notices. It wrote off Rs 105.95 crore for the year
ended 31st
March
1993. Eventually the bank wrote off some $150 million.

Foreign
banks like Citi made obscene profits by exploiting the Indian
loopholes, violating guidelines and influencing decision-making in
Delhi through powerful local advisory boards but escaped virtually
untouched. In money markets, they did 80% of transactions using
sophisticated systems and highly connected employees to exploit the
weaknesses of ignorant, slow Indian banks and PSUs. Sadly, the only
Indian bank which could have kept these four in check, SBI, also lost
heavily and was dragged through the mud, thanks to its fraudulent
deals with Harshad. As RBI cracked down on them in late 1992, the top
four banks (Stanchart, Citi, ANZ and BankAm) began the New Year with
new chief executives. However, the easy exits of the heads of foreign
banks eliminated the important trails. CBI hardly called Stanchart
and Citibank’s top officials as witnesses. Amazingly, whatever
little criticism foreign banks had to endure was countered by a
supportive, semi-knowledgeable foreign press that blamed the Indian
attitude to foreigners[12].

Stanchart

A
few months after the scam broke, every market player insisted that
Stanchart’s losses and claims were grossly exaggerated. The JPC
as well as the Janakiraman Committee indicted the bank, but it still
projected itself as the injured party. Six years later, Justice
Variava rose above the anti-broker bias of other committees and came
up with the startling truth: Stanchart cannot prove three-fourth of
its losses!

Stanchart’s
foreign insurers too did not buy its claims. Under pressure from
re-insurers, a team from London made several trips to India to ferret
out information and identify witnesses. The case was to go into trial
in October 1998, but in September the parties opted for a settlement
under the Alternate Dispute Redressal mechanism. One condition of the
deal is complete secrecy; but surely the Reserve Bank of
India had the right to ask for the details.

Finally,
Stanchart’s goose was cooked on 24th
December
1998 when in a hard-hitting judgement, Justice SN Variava exposed its
lies, exaggeration and false claims. The judge reiterated what the
JPC report and RBI had already documented. That Stanchart’s
treasury was run by stock broker Hiten Dalal. For six years the bank
had claimed that it was cheated by Hiten Dalal of Rs 1233 crore until
Justice Variava threw out its claims of nearly Rs 800 crore because
it could not prove the losses.

“Truth”,
as Justice Variava wrote, “has a habit of creeping out”,
and the relentless cross-examination of MP Rao forced it out. As the
judge identified, it was a Catch-22 for the bank. Either the bank’s
top management out of greed for higher profits, wilfully flouted the
RBI rules and tossed out prudent banking practices by entering into
an arrangement with Hiten Dalal, or, Stanchart was “the worst
run and most negligent” bank, and this would be “ground
for closing down such a bank.”

In
fact, the judge stalled the bank’s attempt to follow the
standard technique among foreign banks, that is, whenever caught
breaking rules, smoothly convert the issue into one of
employee-fraud. A few junior officials are sacked, some penalties are
paid and it’s business as usual. Justice Variava concluded that
it is impossible to believe that dealers by themselves had flouted
limits and did anything without the blessings of top management.
Stanchart appealed against Justice Variava’s judgement and the
case may go on for several more years at tax-payers’ expense.

Looking
back, what was most shocking was the injustice caused by Stanchart’s
false charges against Mount Banking Corporation of London, run by
owners of Indian origin. Bank of England closed it down when
Stanchart charged that a vast amount of money was siphoned out of
India into that bank. Eventually, since no wrongdoing and transfer of
funds from the country was proved, Stanchart came out with a public
apology and Mount Bank filed a defamation suit against Stanchart. On
Stanchart’s allegations, RBI had also hastily closed down Bank
of Karad and Metropolitan Co-operative bank. Meanwhile, little has
been found to nail Bhupen Dalal who, in his methodical and meticulous
manner, has now built up a whole library of scam-related documents.

In
fact, Stanchart and ANZ among others were caught crediting
non-convertible rupee cheques coming from Russian banks to Indian
accounts and transferring it abroad. Investigation agencies suspect
that part of the money has been used for funding terrorist
activities. This was another scam that seemed to have caught RBI
unawares. That investigation went nowhere after the trail led to a
relative of a senior Vishwa Hindu Parishad office bearer.

In
the legal tussle between the National Housing Bank and ANZ Grindlays
Bank, the Supreme Court asked the latter to deposit the disputed
amount of Rs 912 crore along with interest at 18% per annum pending
final settlement. The total amount that ANZ Grindlays (since taken
over by Stanchart to form Standard Chartered Grindlays) was supposed
to cough up, would amount to Rs 1522 crore. The Supreme Court’s
ruling essentially set aside ANZ’s plea that the bank be
relieved of its undertaking given to NHB that it would pay 18% on the
disputed amount.

ANZ
had earlier given an undertaking that if Justice SN Variava were to
rule in favour of NHB, the former would pay 18% interest on the
amount. The dispute between the two parties began over a payment of
Rs 506 crore made by NHB to ANZ in March 1992 for the purchase of
securities. The amount, however, got diverted to the account of
stock-broker Harshad Mehta, the key figure in the securities scam.
Though the cheque was drawn by NHB in favour of ANZ, the latter had
argued that it was normal market practice to deposit such cheques in
a broker’s account if he carried the same and claimed to be the
beneficiary of the amount. However, the plea was disputed by NHB. ANZ
subsequently paid back the amount in November 1992 subject to the
understanding that an arbitration proceeding be held on the issue.

The
arbitration award, which was passed in April 1997, went against NHB.
The housing bank was told by the three-member panel of arbitrators
that it would have to return the amount to ANZ along with 18%
interest thereon amounting to a total of Rs 912 crore. Subsequently,
on NHB going on appeal to the Special Court, ANZ had agreed to pay
the same 18% rate of interest if the court ruled in favour of the
former. In April 1998, the pendulum swung in favour of NHB when the
Special Court set aside the arbitration award. ANZ later filed an
appeal before the Supreme Court and another application to relieve
the bank of the undertaking to deposit the interest amount.

The
coupon-hike scam

Who
else got away? The players in two sub-scams: insider-trading relating
to the two coupon-rate hikes of government securities and
dis-investments of public-sector shares. The coupon-rate hike story
was intriguing but got much less attention than it deserved. It was
linked to the forces of change that turned the financial markets
upside down in 1991-92. It was a great year to gamble as the
government itself created betting opportunities by repeatedly
emphasising that the banking system must move to a market-driven
interest-rate structure. This meant that the artificially low coupon
rates on government securities were to be hiked. These were credible
signals. Both Manmohan Singh and Narasimha Rao appeared personally
committed to a sharp turn away from a regime of subsidised interest
rates. Besides, the International Monetary Fund, to which India was
queuing up, insisted on freer interest rates, which meant higher
rates.

If
you guessed correctly that the interest rate was about to go up, or
better still, knew when it would happen, you could draw up a contract
to sell the securities before the hike. When the interest rate
actually went up, the price of securities dropped and you could buy
them back at the lower price and complete the delivery. There were
two such increases in the coupon rate in 1991-92, in a space of six
months. With surprising coincidence, a set of banks and brokers
dumped hundreds of crores of government loans before each of the two
coupon-rate hikes. Did they know exactly when it was coming?

The
first time, they sold Rs 550 crore of bonds to SBI on 20th

September 1991 for delivery on 5th
October, which was two days after the coupon-rate increase came into
force. Why did SBI buy? In a long note
signed by the deputy general manager, RL Karnal, SBI convin-cingly
established its innocence. The story starts in April 1991 when SBI’s
coffers were overflowing with oil import money, especially deposits
from Indian Oil Corporation.

On
20th
September,
when the Rs 550 crore deals of SBI took place, it was sitting on Rs
4307 crore of IOC money. Since this was a straight deposit, it
automatically created a statutory liquidity ratio liability for SBI,
which it wanted to meet by buying 180-day treasury bills. On 7th
August
1991, SBI wrote to RBI requesting it to give it Rs 1000 crore of
11.5% central loans on a ready forward basis. SBI received a reply
more than a month later. On 27th
September,
well after SBI had done the kamikaze deals, RBI turned down its
request for the Rs 1000 crore ready forwards.

Meanwhile,
SBI was not sitting pretty. It continued to submit bids for 182-day
treasury bills. But on 18th
September,
RBI rejected bids made by all banks and financial institutions. Along
with that, out went Rs 500 crore of SBI’s bids. This led the
bank to scramble for other securities to meet its SLR needs. Two days
later, on 20th
September,
SBI bought 11.5% 2010 securities of Rs 550 crore of face value at
Rs
100.83 for delivery on 5th

October[13].
By 3rd
October,
when the coupon hike came, the market value had fallen to Rs 97. In
just two weeks the SBI had lost almost Rs 22 crore. The brokers who
sold the bonds were Naresh Aggarwala and Hemendra Kothari.

SBI’s
explanation that it had no option but to do the deal on 20th

September is unchallengeable because it did try to do a ready forward
with RBI and later tried to buy treasury bills and failed on both
counts. But there are two serious flaws in the story. First, on 20th
September
when SBI did the loss-making deals, the entire market knew of a
coupon hike!

On
18th
September,
Wednesday, the news of the coupon-rate increase reached the
secretariat of all bank chairmen. All state governments wanting to
issue loans got into the act. The Tamil Nadu government had written
to all banks in its state requesting them to subscribe to its loans
at the new 12% rate. The next day, i.e., 19th

September, the news had spread to states like Orissa and Kerala. SBI,
despite knowing that a hike, to take effect from the next fortnight,
had already been announced, continued to trade at the old low rate.

The
second problem with SBI’s logic was its timing. It claims that
it was forced to buy Rs 550 crore of securities because of the dagger
of the SLR dangling over its head. However, the dagger could not have
fallen in September. SBI’s SLR requirement was necessary only
for the fortnight beginning 21st
September.
This could have been achieved any time up to the fortnight ending 5th
October.
Indeed, the value dates of SBI’s transactions were of 5th
October,
proving conclusively that for some other reason SBI rushed to make
the deals on 20th
September
in the garb of meeting SLR liability.

SBI’s
story of the second coupon hike is an extension of the first. Between
October 1991 to February 1992, the IOC deposit kept rising, to reach
Rs 5272 crore by the end of February 1992. That and the normal growth
in SBI’s deposits created fresh SLR targets to be met. In
January and February, treasury bills of Rs 950 crore had matured,
leaving a balance of Rs 800 crore on that account plus a long-term
ready forward (LTRF) position of Rs 500 crore in the first week of
February. The LTRF position was whittled down to Rs 350 crore by the
third week of February on rumours of a possible coupon hike. For the
rest of the SLR cover, SBI had to buy securities outright.

It
bought Rs 375 crore of securities through Naresh Aggarwala on 6th

March, with a value date of 21st
March.
Then it bought another Rs 200 crore of bonds on 9th
March
and 12th
March
all from the Bank of America. All these transactions were for a value
date of 21st

March. Meanwhile, on 17th
March,
the government hiked the coupon rate from 12% to 12.5%. SBI again
suffered losses. However, these were not the dubious transactions.
Those were done on 15th
March
and 16th

March with value dates of 18th
March.
These deals were not investigated, nor were the brokers and
counterparty banks questioned. There is enough circumstantial
evidence to raise the suspicion that some banks and brokers knew
about the 17th
March
coupon-rate increase.

There
was a major row between RBI and the ministry of finance over the 17th
March rate increase. RBI had been stalling it but the ministry was
keen on pushing it through. Eventually, the governor told the finance
minister to take his own decision. For the first time in many
decades, the announcement of a coupon-rate increase came from the
ministry, not from RBI. The chief of a foreign bank, later forced to
leave the country, knew about this row between RBI and the ministry.
He may have even “advised” the ministry that since the
market was expecting a hike since January, the hike should come later
rather than sooner, so that “speculators are taught a lesson.”
Did this do-gooder bank chief know exactly when the rate would be
hiked?

Too
many got away

At
the edges of scam territory were industrialists several of whom used
Harshad to rig up their own scrips, a collusion perfunctorily
discussed by JPC. Will the same thing happen this time too? Since
late 1991, when the new-issue pricing was to be freed, these
companies were looking forward to issuing fresh shares after first
rigging up their secondary market prices. Gujarat Ambuja, one of
Harshad’s favourites, shot up to Rs 600 and the company
announced an IPO at Rs 200 a share with warrants at Rs 400. The
promoters of GACL continued to hold Harshad in high regard well after
the scam broke.

Industrialists
also diverted bank loans and money raised by repeatedly discounting
the same bills, for speculating in their stocks. In October 1992,
when RBI had all but banned bill discounting, top industrialists
ganged up to put tremendous pressure through the ministry of finance
and the Prime Minister’s office to resume the practice. The
governor stood his ground.

Among
the biggest winners in the whole scam was TB Ruia. He was a class by
himself for having admitted to have taken Rs 125 crore of Stanchart
money and Rs 70 crore of CanMutual’s. By some miracle, this
fashionable businessman was never under pressure and continued to
live in great style, with a fleet of cars, including a Rolls Royce. A
few months after the scam was exposed, he got himself admitted to
Bombay Hospital and conveniently escaped CBI arrest. Later, CBI
posted a guard in front of his cabin, who was used by Ruia to run
petty errands for him. “Ruia even managed to get out of the
hospital to travel to Delhi by an Air India flight one night and even
travel overseas later”, said a source. In November, a full six
months after Ruia’s involvement became known, CBI moved in to
arrest him. It was pure farce. When mere suspects were beaten up and
abused, Ruia having admitted to theft, was given a seaside cabin in
the CBI office in White House, Bombay. Later charges against him were
dropped altogether.

Peripheral
to the scam were lawyers, accountants, etc., the most interesting of
whom is Bansi Mehta, a former president of the Institute of Chartered
Accountants of India. Mehta, highly respected in the accounting
profession, was connected to several institutions neck-deep in the
scam. He was the trustee of Canbank Mutual Fund, director of Canbank
Financial Services and auditor of Fairgrowth Financial and Bhupen
Dalal’s company, Cifco. He was also associated with several
Birla companies. Apparently, his firm had signed Fairgrowth’s
financial statements as true and fair but later withdrew it when the
Fairgrowth forgery became publicly known. His role was never probed.

Intriguingly,
the late SS Nadkarni, chairman of IDBI, wanted the same Mehta
included in the expert panel set up by RBI to suggest a mechanism of
bond trading. Amitav Ghosh wanted the RBI governor to appoint Bansi
Mehta to audit UCO Bank after the investigation into the misuse of
false bank receipts had started. Mehta, sure was a special person.

Among
brokers who have had a miraculous escape was VB Desai & Co., a
firm that figured in all RBI inspection reports for having done
strange deals with Andhra Bank, the Syndicate Bank and Vijaya Bank.
Shroff even bailed out Harshad just before the scam story broke by
getting Allbank Financial Services to buy ACC shares off Harshad at
Rs 10,000. According to money market players, VBD could well have
acted as a front for deals that were actually meant to benefit
Citibank or brokers close to it. Curiously, VBD always managed to
escape any kind of close enquiry – in the past and for its
involvement in the securities scam.

A
corollary to the big fish getting away is the small ones getting
caught. Indeed, the common thread running through the post-scam
scenario is junior officials getting the axe, though in almost all
the cases they have acted for the benefit of institutions they were
working for. C Ravi Kumar and S Suresh Babu alone have been blamed
for the mess at NHB despite the fact that there was an active
chairman, executive director, advisor and government directors. Of
course, later even these two officers escaped even though JPC
established that they had been bribed. AN Bavadekar who was hauled up
along with Hashad Mehta and the other accused in May 1992 is at worst
guilty of countersigning a few cheques issued by SBI’s treasury
department. SBI was not even able to provide him a description of his
job profile. Nine years later his life and career are completely
destroyed and the trial seems no signs of going anywhere. It is the
same with his colleague K Kailasam.

Citibank
cleverly guarded itself. But when Power Finance Corporation produced
a letter belying Citibank’s claim that it had never guaranteed
returns, Citibank blamed a junior official in Delhi for it – a
standard technique of foreign companies. Stanchart’s first
reaction was to indiscriminately sack and demote its junior employees
irrespective of their role in the scam. It took the bank a much
longer time to revamp its internal controls. The nine years of trial
at the Special Court in Bombay, has never required the presence of
its top brass as witnesses. Air India has suspended just two
middle-level officers for its PMS deals. The list goes on.

In
the scam, banks were acting in concert with the brokers to fund each
other and cover each other’s losses. Yet the investigation
focused primarily on the brokers and only a few bank officials like
those of SBI. Many top bankers escaped interrogation and arrest
despite having driven their institutions straight into the scam. KR
Nayak, chairman of Andhra Bank, was allowed to retire, despite Andhra
Bank Financial’s huge exposure to Fairgrowth. Allahabad Bank
and its subsidiary, Allbank Finance, did several suspect deals with
the Calcutta-based broker C Mackertich. Allahabad Bank’s
chairman, RL Wadhwa, retired a month before the scam broke and was
never questioned.

More
intriguing is the case of JS Varshneya, former chairman of the Punjab
National Bank, also a director in Harshad’s Growmore Asset
Management and an advisor to the National Housing Bank. Varshneya was
allowed to retire into oblivion. RS Pai, chairman of Syndicate Bank,
which openly favoured Fairgrowth and Reliance Industries, was simply
asked to go on leave. The JPC ought to have found out who or what
stopped CBI from asking all these bank chairmen a few tough
questions.

Other
chairmen continued to stay on despite having led their banks into
suspect deals. For instance, the big dad of the financial sector
Industrial Development Bank of India had a deep nexus with Citibank.
Its chief SS Nadkarni, later chief of SEBI, was not looked at with
suspicion. IDBI had ten different portfolio accounts with Citibank.
While continuing to be the owner of some units, IDBI physically
handed them over to Citibank, which then traded in them. This meant
that “units which were held by the customer in his own
investment portfolio were now held by him as an investment of his PMS
account”, says the Janakiraman report. This is a clear case of
illegal collusion between two venerable institutions. Nobody was
hauled up.

Most
of the brokers have done fairly well for themselves. Ajay Kayan has
continued to do fairly well moving in and out of his large
speculative positions and investments. He was named as bear operator
in Scam 2001 but there is hardly anything yet to pin on him. The
professionals, depending on their competence have done well too. Alok
Aggarwal, head of BankAm’s treasury is now in Reliance. KR
Bharat and Prashant Purkar left Citibank, went to ITC Classic and
from there to the sharp-shooting Peregrine which went bust.

Bharat
ended up in Credit Suisse First Boston, which was smack in the middle
of Scam 2001. Fast-talking S Ramesh Kumar joined Reliance Capital
from Citibank, left for Times Guarantee and faded away. Bhupen Dalal
was acquitted from several cases, but has never recovered to rebuild
a business that was shattered in just a few months after three
generations of efforts. Jerry Rao resurrected himself as software CEO
(MphasiS BFL) and so did Vikram Talwar, former head of BankAm.

Those
who passed away

Even
before the scam investigations were on, two key players, MJ Pherwani
and B Ratnakar, passed away. With Pherwani’s demise, it remains
a mystery what exactly happened in NHB and why the man, who had
blacklisted the Mehtas while he headed UTI, went out of his way to
help Harshad. Had Pherwani been alive the very expensive dispute
between ANZ and NHB may not have happened. The same goes for B
Ratnakar, whose demise two months before the scam broke, allowed
Nedungadi Bank to be passed on to the hands of a BSE broker. It
remains mired in controversies with RBI watching from the sidelines.
Ratnakar’s protégé K Dharmapal died in April
1999, distraught and entangled in the huge mess that Fairgrowth was.
Bhupen Dalal’s able lieutenant JP Gandhi, central to the trades
attributed to the Dalal-Stanchart group, passed away too. Another
important blow to the scam investigation was the death in a road
accident of SG Ghade, a Deputy Inspector General of CBI. With his
exit, an important link to the scam investigation vanished.

Among
others to have expired were three SBI officials. One of them was
genial CL Khemani, a heart patient, who was an accused in the SBI
case, but against whom CBI could prove nothing. When we met him in
mid-1992, a shattered Khemani, who had made huge money for SBI, said:
“If CBI arrests me again, I will commit suicide.” The SBI
Chairman when the scam broke, MN Goiporia died quietly in his
retirement after being forced to quit by the ministry of finance. RL
Kamat, who had gone to Palani to nab Sitaraman under instructions
from Khemani, was dealt cruelly by fate for his efforts. Gold
ornaments kept in vault for his daughter’s wedding were frozen
and were yet to be released. He died a few years ago.

What
about Harshad Mehta who indirectly wreaked so much havoc? He wanted
to be a Citibank or Merrill Lynch but lost everything – image,
money and his heroic market dominance. But Harshad did not lose his
sense for drama, the ability to spring the big surprise and his
pathological bullishness. The day he was released from 110 days in
captivity, in September 1992 he was being celebrated like a war hero.
Outside the unfinished third floor of Madhuli, six gun-toting
policemen were sitting around. Inside, a celebratory mood gripped the
Mehta household. Relatives, friends, employees and fellow brokers
streamed in and out as Harshad spent his waking hours posing in front
of the video cameras of ATN, Eye Witness and Newstrack and talking to
countless magazines and newspapers. His untrammelled optimism after
110 days of ordeal and what he was going to face was queer.

But
he immediately dropped out of public consciousness while continuing
to live in a dream world of his own. “The whole game is one of
perception”, he said. Juggling perception and reality like a
deft magician, Harshad was clear in his own mind that he has done
nothing really wrong because other more respected institutions, too,
have done equally criminal acts. “Everybody was in the scam. In
the end what made the difference was who had the time to cook the
books and use influence and who didn’t”, he says.

He
also appeared more introspective. What were his drawbacks? “I
am more imaginative than practical. I did not have the chance to work
in a disciplined environment. For three years I was a clerk in New
India Assurance. I did not have the qualification to build things
professionally. I was going on as if there is no tomorrow.”
Well, his vision of tomorrow was inverted and his sense of reality
fractured. His eyes brightened when he talked about the future. He
wanted to make Rs 5000 crore of profits. So, what did he do towards
that? He planned a comeback in 1998, a splashy re-entry by doing the
same old thing in the same old manner. That’s the bridge to
Scam 2001.

18

Harshad’s
Return

In
the grand dramatic style that was his hallmark, Harshad stunned the
nation by stating in an affidavit that he and his brother Ashwin had
paid Rs one crore to the PM.

What
was Harshad, the most high-profile member of 1992 scam doing all
these years? Restless and daring, he has been up to a lot of tricks:
like charging a Prime Minister with accepting a bribe and rigging
stock prices.

It
was the afternoon of 16th
June
1993. A few men huddled behind the closed doors of room 262 at
Bombay’s Taj Mahal hotel were getting ready to create history.
Around 3.30 p.m. the phone, busy throughout the afternoon, rang once
again. It was a last ditch effort, but too late. At 4 p.m. Harshad
Mehta, his brother Ashwin and their flamboyant lawyers Ram
Jethmalani, Mahesh Jethmalani and a few others marched out to the
Ball Room of the Taj. Harshad, the symbol of the biggest-ever
financial scandal, was about to stun the nation again by answering
one of the big unanswered questions about the scam.

Since
April 1992, there were plenty of revelations of intricate
transactions, the huge wealth of brokers, the violations by banks and
there were dramatic arrests. But the spiciest question remained
unanswered: were politicians involved? When Harshad faced the JPC in
November 1992, that was what everybody wanted to know. But Harshad’s
lips were sealed. He said “Never have I got any favour from a
single politician nor have I paid any politician.” He made a
similar declaration about bureaucrats.

On
16th
June 1993, just over a year
after he was arrested, Harshad spoke out. And in the grand dramatic
style that was his hallmark. Harshad stunned the nation by stating in
an affidavit that he and his brother Ashwin had personally paid Rs
one crore to PV Narasimha Rao. It was a donation for the then PM’s
Nandyal by-election – a transaction brokered by then Congress
MP, the late Satpal Mittal and his son Sunil Mittal who now heads
Bharti BT. Harshad provided a lot of corroborative details. He said
that he had gone over to the PM’s Race Course Road residence on
4th
November 1991 with his brother and Sunil Mittal. After the usual
pleasantries and Harshad’s discourse on the stock markets, they
handed over a suitcase containing Rs 67 lakh to the PM, who allegedly
instructed that the money should be kept with his officer on special
duty RK Khandekar.

The
Mehtas described in dramatic detail how they lugged
Rs 67 lakh in
a suitcase from Bombay to Delhi, how they forgot to leave the key to
the loaded suitcase with the PM’s secretary Khandekar, how the
PM was impressed by their idea of swapping government debt against
public sector’s equity, how he touched the bag and blessed
them... The next day, the Mehtas sent over another suitcase
containing Rs 33 lakh.

The
PMO flatly denied the charge and tried to discredit the brokers’
allegations. There was no record of Harshad’s entry to the PM’s
highly-guarded residence. Some of the biggest newspapers in the
country, questioned whether Rs 67 lakh fit into a soft luggage case.
Harshad held a second press conference to demonstrate how the cash
could, indeed, be packed in a suitcase of similar dimensions. He also
distributed a tape of his conversation with Sunil Mittal in which he
pleaded for help and had trapped Mittal into speaking about their
visit to the PM’s office.

What
did his so-called contribution to the PM fetch? In January 1992, when
Harshad and a couple of his sub-brokers were facing disciplinary
action by BSE, he approached his newfound friends at the PMO. He
claims that instructions came down from Khandekar to minister of
state for finance Dalbir Singh from there down to Paul Joseph who was
then joint director (stock exchanges) and a BSE governing board
member. At the board meeting, Joseph played his part and took strong
objection to tough disciplinary action against the broker and Harshad
was let off leniently. That incident enhanced his reputation of being
powerfully connected. Predictably, however, Joseph denied having
received any instructions regarding the meeting.

But
why did Harshad suddenly charge the PM with corruption? He privately
told us that there were attempts to frame him under the dreaded
COFEPOSA. Harshad feared for his life because he knew too much. Also,
once remanded under COFEPOSA, he could have been buried in jail as an
under-trail for the next decade or more.

But
there was one question for which there were no answers: why was there
no deal between Harshad and the PM? If Harshad Mehta was a crook and
swindler, Rao was no angel. He was widely believed to have been
involved in a crude forgery that attempted to smear
VP Singh and
his son Ajeya Singh for holding illegal foreign accounts. He was
steeped in the patronage-favour-payoff and deal-making culture of
Indian politics that embodies two crucial codes. First, everybody has
a price and two, nobody squeals. Despite widespread corruption, even
minor politicos don’t get caught, let alone Members of the
Parliament. Prime Ministers getting caught or even being publicly
accused by a stockbroker is out of the question, because there is
always a deal. If there is no deal, then there is the brute force of
the State and its various arms to silence an attempted blackmail. So
why did the State fail to suppress Harshad? Why was there no deal
between the PM and him? What follows is the chain of events and
interpretation according to the Mehtas.

According
to them, when Harshad was in jail (between 4th
June
and 22nd
September),
they received various feelers to pay and settle all their problems.
Demands ranged from Rs 50 crore to Rs 200 crore, part of the money to
be paid abroad. The message carriers varied from a religious leader
to small time political functionaries. Harshad was apparently against
the idea of paying money. Besides, assets of twenty-nine entities
controlled by the Mehtas had already been frozen and attached; they
did not have that kind of money free. The demand was accompanied by
threats. One of them was: Harshad would be indefinitely
kept behind bars. Indeed, for over 111 days, CBI, enforce-ment and
income tax departments worked in tandem to keep Harshad in jail when
others were released after a month in custody. During the last stage
of his custody, Ashwin got Harshad to write out the various payoffs
they had made.

All
through this, did CBI, Rao’s aides, top bureaucrats and some
politicians know that the PM was “involved”? Harshad was
arrested on 4th
June.
As early as on 12th
June,
Mohan Khandelwal, Mehtas’ man in Delhi was interrogated by the
CBI officials. He was later quizzed
by the CBI chief SK Datta. Khandelwal revealed everything.
Apparently, his statement to Datta was not recorded. The government
perhaps wanted to make Khandelwal an ‘approver’ (State
witness), to make Harshad the scapegoat and exonerate the
politicians. K Madhavan, heading CBI’s investigation in Bombay,
apparently refused to go along with the third part of this strategy
and resigned. As part of the same plan Hiten Dalal, Bhupen Dalal and
a whole lot of others were arrested and jailed.

While
Harshad was in jail, the Mehtas claim to have contacted Sunil Mittal.
Mittal apparently told them that he had suddenly become a pariah and
could not get past the PM’s secretary. Later, Mittal himself
became inaccessible to the Mehtas. All this while, the PM’s
aides and CBI were watching the situation, perhaps convinced that
Harshad would not speak out. At one stage Harshad claims he was
apparently told to explain the Rs one crore payment, as having been
made to the late Satpal Mittal, father of Sunil Mittal. This was most
convenient because dead men do not speak. Then, on 11th
November 1992, Manmohan Sharma, secretary to Satpal Mittal,
apparently contacted Harshad at Holiday Inn, Delhi. Harshad was to
appear before JPC, the next day. Sharma, worried for himself and
Sunil Mittal, requested Harshad to stay mum. Harshad told him that he
and his family were afraid of a backlash and assured him of his
silence.

Around
this time, the crisis management team close to the PM may have
decided that it was better to step up the pressure on Harshad and
keep him cornered, rather than rely on his good senses to keep quiet.
It was at this time that the Mehtas suspect that the plan to
implicate them in the narcotics business began to be hatched. The
Mehtas knew that allegations of drug trafficking would destroy them
completely. “We decided to collect and arrange all evidence”,
said Ashwin Mehta calmly. The Mehtas were also scared for Harshad’s
life. They recorded his testimony on videotape and ran to star
lawyers the Jethmalanis. The war of nerves was escalating. But before
that, Manmohan Sharma was supposed to have appeared on the scene. He
apparently spent about an hour with Ashwin Mehta in late January 1993
and requested them to stay away from political games. Mehta claims to
have told him that all they are doing is compiling the evidence they
already had.

On
9th
February, CBI called Harshad for interrogation and asked him about
the Rs 45 lakh cash withdrawals on 4th
November
1991 from ANZ Grindlays Bank, Sansad Marg branch. According to the
Mehtas, CBI avoided asking about their 4th
November
meeting with the PM. Harshad replied that he could not recall the
reason for the withdrawals. Then the Income Tax department asked
Harshad to clarify the Rs 45 lakh question under oath. The Mehtas
felt that CBI and IT were working in tandem to trap them: CBI’s
interrogation is not admissible as evidence but a statement made to
the Income Tax department under oath can be used by anybody including
CBI. If only Harshad repeated to IT authorities under oath what he
told CBI (that he did not remember what he did with the money) that
would have exonerated the beneficiary of the money, in this case,
allegedly, the PM.

To
thwart the CBI-IT combine (that had earlier trapped
R Sitaraman,
the SBI officer who was hand-in-glove with Harshad) Harshad’s
lawyer Mahesh Jethmalani wrote a letter to SK Datta, the CBI chief,
pointing out that the cash withdrawals were politically sensitive in
nature and that Harshad could disclose them only if he got immunity
from political persecution. Datta, past his retirement age, had been
holding his job on extensions. Under Datta, CBI attempted to
discredit K Madhavan, lied about Harshad’s Swiss bank accounts
(more about this later), tried to implicate him in narcotics and
refused to pursue some obvious trails. When Jethmalani’s letter
reached him, he kept mum and the JPC was not informed.

When
IT authorities interrogated Harshad between February 18-22, 1993 he
steadfastly refused to answer questions relating to the cash
withdrawals. According to the interrogation transcripts, Harshad
wanted to consult his lawyer before he answered, asked for more time
and put the IT’s ball in CBI’s court: “I can answer
the question after receiving a reply from CBI on my request for
immunity.” When Harshad’s camp managed to stymie IT, CBI
had to return to the scene. It despatched an officer to talk to
Jethmalani. Nothing came of it. Five days later CBI replied that it
could not offer any kind of immunity.

The
Mehtas believe that the strategy to implicate Harshad in narcotics,
silence him on the payoffs and pressure him through interrogation
began to slow down after Jethmalani’s letter. But there were
four FIRs and fifteen raids after 17th
February.
During the raids, the CBI officers did not pick up any papers. They
were looking for cavities and hidden areas in the house.

Meanwhile,
was a deal being worked out? Harshad and his lawyer Mahesh Jethmalani
refused to admit it. If so, it fell through because on 14th
May,
three months later, Jethmalani’s letter to CBI appeared in
Business
Standard.
It is likely that the Harshad camp had leaked the letter in order to
force the issue out. In fact, the presence of Ram Jethmalani –
who was more a politician, loved publicity and was never shy of
controversy – made it clear that there would be a fight and not
a deal. There is nothing Ram Jethmalani likes more than a politically
sensational issue.

Once
Harshad’s letter was publicised, the momentum began to build
up. In a remarkable coincidence, the day Business
Standard was
going to press with the story about Jethmalani’s letter,
Manmohan Sharma was back in Bombay. Sharma and the Mehtas are
believed to have had a two-hour lunch at Copper Chimney, a well-known
restaurant close to Madhuli – the Mehtas’ residence.
Sharma was apparently conciliatory and soft. The Mehtas say they
asked him why he had suddenly changed his stance. He replied that
environment keeps changing. Sharma confidently told them that even if
they spoke, nothing was going to happen to the PM. Sharma did not
reveal who he was acting for. The Mehtas perhaps decided to sit tight
unless they were sure that the moves were coming from the highest
level. This was one of the last and weak efforts at a deal. When
nothing was worked out, the Mehtas, egged on by the flamboyant
Jethmalanis, called a press conference and dropped the bombshell. And
true to the PM’s astute calculations, nothing quite came out of
it.

Meanwhile,
doubts surfaced about the exact time at which the Mehtas went to the
PM’s residence. Very mysteriously, Harshad contradicted himself
over this several weeks after his revelations, indirectly
strengthening the PM’s case. Was Harshad trying to let off the
PM as part of a deal? Nobody knows, but the heat was suddenly off
Harshad Mehta and the narcotics charge was never brought up again.

Same
actor, same role

For
three years after that startling event fizzled out, Harshad lay low.
Then over the next two years he attempted three comebacks and ended
up rattling the market each time with his shenanigans. Twice he had
allegedly introduced benami
shares
into the market, paralysing the system. The third time he appeared as
a glorified tipster aided by mesmerised newspaper editors and
managers. The amazing thing is that each time he has been helped by
the same set of six odd brokers about whom the regulator has been
surprisingly benign – until recently.

Harshad
first planned a comeback in December 1996. The market sensed
Harshad’s hand in the sudden spurt in the prices of three
Jindal group shares. Both the Jindals and Harshad Mehta denied the
rumours, but market operators insist that Harshad’s play in
Jindal Strips, Saw Pipes and Jindal Iron & Steel had fizzled out
in a few weeks with losses to the Jindals. Harshad told The
Times of India in
January 1997 “first of all let me tell you, I don’t want
to be involved in any pulling or pushing of prices.” That
resolution, if true, was soon abandoned.

On
3rd
March
1997, he appeared on a Rediff-chat announcing plans for a comeback.
Playing on investors’ greed, he grandly announced that the BSE
sensitive index would touch 7000. Simultaneously, he announced plans
to set up a website to dispense tips and analyse corporate trends. If
Harshad
had paid careful attention to that chat, he would have anticipated
his problems. It was clear that while he still attracted incredible
public interest, the blind adulation of the past was missing. There
were too many who were downright disbelieving. For instance, someone
asked him – “Would you consider yourself gainfully
employed or otherwise between occupations? How do you pull off the
lifestyle in spite of claiming that you are broke...?” There
was more in this vein, but Harshad was undeterred. He decided that
the public at large and the retail investors were his constituency
and so his comeback should be through the media. His strategy: use
important media fixers to get himself columns in important newspapers
to dispense his tips and opinions.

At
the top of his list was The
Times of India,
the very paper that undid him in 1992. He almost made it there with
the help of some top managers but for the strong objections raised by
then editorial advisor HK Dua. However, he managed to gatecrash into
another Times
Group
paper the Navbharat
Times.
His friendly media brokers fixed his columns by peddling two
arguments. One, circulation would soar as Harshad’s charisma
would have investors rushing to buy up their newspapers. Two, so long
as Harshad was merely an accused in the scam, what was so wrong in
his being a columnist? BSE had also hung on to this argument to avoid
expelling the broker. Harshad Mehta had more than one card on the
BSE, which are only suspended. His newspaper columns and website set
the market buzzing again.

As
an investment columnist, his technique was essentially the same: work
at rigging a stock along with the management by putting out a tip in
the market and creating endless hype. Harshad positioned himself as a
champion of the small investors but attracted speculators and some
retail investors as he took BPL from Rs 40 to Rs 400. However, his
well-laid plans went haywire. At the peak of his leveraged position,
India conducted a nuclear test in June 1998. Foreigners panicked,
pulled out money and the market simply melted. He did not have the
endless supply of bank funds to sustain his positions. When the
bottom fell out, brokers operating for Harshad Mehta failed to pay up
plunging BSE into a payment crisis. The crisis was clumsily hushed by
BSE officials, a few brokers and the companies whose shares were
being rigged.

Harshad
Mehta’s reputation as the born-again messiah of small investors
was simply a myth created by a set of spin-doctors. SEBI’s
investigations later showed that the Big Bull was merely a brazen
market manipulator, ramping up prices through a set of seven front
companies and eighteen brokers. These companies had cornered 70% of
the total stock traded in BPL Ltd. and 50% of deliverable trade in
Videocon and Sterlite. Clearly, small investors were not exactly
rushing to invest their money in the four Harshad scrips; the
majority was watching to see if his magic would last.

Unlike
1992, Mehta’s hype and media columns had obviously failed to
enthuse investors. All it did was to generate very short speculative
transactions by other operators who made a quick buck but were not
left holding the ramped up stocks. The bulk of the stock seems to
have remained within Harshad Mehta’s cartel of twenty-odd
brokers. Since 1998 was different from 1992 (no access to bank
funds), he floundered within six months. SEBI began an excruciatingly
slow and hesitant investigation into the June 1998 payment problem.
Even when it had clear evidence of price manipulation, it dithered
and delivered its verdict only in April 2001 after the Ketan Parekh
scam suddenly turned the spotlight on SEBI’s long list of other
inactions.

Harshad
Mehta was not the only scam-accused to have attempted repeated
comebacks. The same set of BSE brokers like Rajendra Banthia, Ajay
Kayan and, of course, Ketan Parekh, who figured in the 1992 scam have
been involved directly and indirectly in the scam of 2001. SEBI has
been aware of Banthia’s close links with Harshad Mehta and the
CBI investigations against him but allowed him to become the
treasurer of the BSE and later its vice president.

In
1995, Banthia was involved in a huge inter-exchange operation (in
Pune and other exchanges) to hammer the Reliance scrip. SEBI
investigators, after a two-year effort, had categorical proof to link
Banthia with the 1995 price manipulations. Though action was
initiated against other exchanges, the broker was allowed to get
away, ostensibly due to his political connections. SEBI did not even
ask him to step down from the powerful BSE post.

In
the payment crises caused by Harshad’s price rigging, Banthia
played a lead role in BSE’s bail out of Harshad’s
brokers. BSE denied that there was a payment problem and refused to
declare a single defaulter. The SEBI chairman, DR Mehta was also
perceived as an active supporter of the BSE bailout operation, even
while the more efficient NSE declared six brokers as defaulters.

SEBI
was not alone in failing to check Harshad Mehta and his cronies. The
finance ministry, under the Congress as well as the United Front
government was well aware that a coterie of brokers with large
inter-exchange transactions has openly manipulated markets. Yet, it
did nothing to instil confidence in the regulatory process.

The
Press Council of India, in response to a complaint filed by Manubhai
Shah, managing trustee of the Consumer Education and Research Centre
of Ahmedabad had passed orders against newspapers who legitimised
Harshad Mehta’s manipulation and helped him influence investors
by publishing his columns. Until then, the Council, which had brought
out a code of conduct for business journalists way back in 1996, had
simply stood by as Harshad openly misused the media.

No
longer just an accused

Editors
and smart media managers were keen to launch Harshad as the
investment messiah with the argument that Harshad was merely an
accused and had not been convicted. The excuse was no longer valid.
In September 1999, Justice MS Rane convicted Harshad Mehta, in a
relatively small Rs 38 crore Maruti Udyog case, dealing him a big
blow. Finally, Harshad was no long the main accused in the securities
scam, he was convicted.

He
now has twenty-seven cases filed against him, has been convicted to
five years rigorous imprisonment in one, has been acquitted in two
and has appealed to the Supreme Court against his conviction. He has
also appealed against SEBI’s life time ban against him from
capital market activities because of his 1998 shenanigans.

His
hair has thinned and is streaked with grey, the face is a little
tired and the frame a few kilos bulkier. Yet on the day of his
conviction Harshad Mehta continued to smile. When he told the media
horde “We have faith in the judiciary. We will appeal to the
Supreme Court.” He wasn’t just putting on a brave face
after being convicted in the first completed scam case. That was
quintessential Harshad, the first superstar of the stock markets, an
eternal optimist. In June 1992, when he was released from 110 days of
custody, he told Sucheta: “Congratulations. You have broken the
story of the decade.” It was typical Harshad, an infectious
ability to revel even in the glare of negative publicity. It is this
quality that saw him make repeated attempts to recapture the
limelight. What will he do next?

19

Justice
Delayed

The
biggest function of the Special Court over the last seven years has
been to decide whether notified persons could leave Bombay for even
short trips.

What
an excruciatingly painful experience the scam
investigation and
trial have turned out to be. The court,
CBI, RBI, Income Tax
department, the Custodian, the Enforcement Directorate… all
have ensured that the wheels of justice move at a snail’s pace.
Remember, under a hastily drafted ordinance, all cases relating to
the scam were supposed to be heard only by the Special Court. There,
some 600-odd civil cases are pending. The number would have been
larger but for the sensible decision of some foreign banks to write
off their losses instead of pressing charges. Very few cases have
been heard or have reached a conclusion. At the current pace, the
trial would carry on for the next two decades.

CBI
has filed seventy-two charge-sheets for criminal offences, of which
only four have gone anywhere. CBI quietly abandoned several important
trails. Investigation into Goldstar Steel, which involved Prime
Minister Narasimha Rao’s sons and Hiten Dalal is in limbo, as
is the case against former union minister B Shankaranand who was one
of the two ministers who resigned in the aftermath of the scam.

Of
the cases that have come to some conclusion, the first, convicted
Hiten Dalal for bouncing of cheques that Stanchart had sent for
clearing five months after the date of issue. Hiten, in turn, sued
Stanchart and its officer for perjury, contempt and for giving false
evidence against him. He claimed that the cheques were not meant to
be deposited and were given as a sort of surety against a deal which
was later completed. On 11th
July
2001, the Supreme Court
dismissed Hiten’s appeal and convicted him to one year’s
imprisonment. It was the first Supreme Court conviction of the 1992
scam. The second criminal case was about just Rs 11,000 involving
State Bank of Saurashtra. The trial went on for a few months and led
to the acquittal of the accused. The third, involving Rs 30 crore of
‘Cancigo’ units of CanMutual, led to a seven-year
conviction of Hiten Dalal and S Mohan, a Canfina employee. The
Supreme Court has stayed the matter.

Then
in September 1999 Justice MS Rane dealt Harshad Mehta the first big
legal blow by convicting him in a relatively small
Rs 38 crore
Maruti Udyog case. As scam cases go, this one involving
misappropriation of funds was insignificant – the money had
come back to Maruti which itself was reluctant to pursue the case.

A
day before the judgement, Harshad’s lawyers were extremely
confident of an acquittal. For Harshad, who had already attempted a
failed comeback as a columnist-and-market operator, an acquittal
would have given him a chance to claim that this was an indicator of
how all twenty-seven cases against him would eventually be settled.
Since none of the other cases was anywhere near completion, nobody
would have been any wiser for a few more years and by then, the
general public, notorious for its short memory would have lost all
interest in the 1992 scam. In fact, Harshad’s brazen comeback
in 1998 was based precisely on the plank that he was merely an
accused and not a convict. Justice Rane’s judgement put paid to
that argument.

Much
of the litigation is civil disputes, which are now meaningless. In
this nine-year period, the disputed money would have more than
trebled and the saving in terms of time and cost of litigation would
have been a bonus. In retrospect, foreign banks that quietly wrote
off their losses and settled claims without publicity seem really
smart. The nationalised banks did not have the luxury of taking such
decisions.

The
scam happened under a creaking system and poor regulatory framework,
making the hundreds of disputed transactions extremely complicated.
It has been difficult for Judges to understand them without some
expert help, but the court never sought any. The Judges have been
trying to unravel intricate securities deals while conducting the
hearings. Ironically, after seven years of this learning experience,
Justice Sam Variava was elevated to the Supreme Court and Justice
Rane who succeeded him retired soon after. The Special Court is now
headed by Justice SH Kapadia along with Justice DK Trivedi. There is
now a loose division of the civil and criminal cases; Justice Kapadia
is largely in charge of the civil cases barring a few where he is
hearing both the civil and criminal charges. Justice Trivedi has most
of the criminal cases in his court.

As
the litigations trundle along, the prosecution faces other
handi-caps. Several key accused or witnesses have passed away; all
members of the initial investigation team of CBI have been
transferred, promoted or have retired. The country heads and treasury
chiefs of all foreign banks have all quit and many are no longer in
the country.

In
contrast, scores of middle and junior level officers of Indian banks,
people with no clout have been implicated in the scam, often for
technical offences, have simply been destroyed. Many of them are
either innocent or guilty of nothing more than negligence. For them
justice is nowhere in sight, their careers have been ruined and they
have been bankrupted by the sheer cost of defending themselves.
Abandoned by their organisations, most of them have no funds to
ensure legal defence or deal with the slow and often corrupt
investigation process.

The
Custodian has attached properties, money and shares of the accused
but most of it remains locked up. There are 39.5 million shares
registered in the name of ‘notified’ parties of which the
majority belong to the Harshad Mehta Group. The total value of
registered shares in the Custodian was at one time Rs 658 crore.
There are 18.9 million unregistered shares with the Custodian and
8.07 million benami
shares. They belong to approximately 300 companies. The Custodian had
also set up an expert ‘disposal’ committee to advise it
on the sale of shares belonging to notified persons. But this too is
caught up in litigation. An apex court verdict in January 2001 seemed
to signal a final green light for the sale, but the accused have
filed another last ditch appeal causing another
delay.

In
what sounds straight out of Ripley’s Believe-it-or-not,
the biggest function of the Special Court over the last seven years
has been decide whether notified persons could leave Bombay for even
short trips (this included the suburb of Thane which is an hour long
drive from Bombay). By 30th
October
1999, the Special Court disposed off 14,927 such applications. Such a
stringent condition was not applicable even to the accused on trial
for the
devastating serial bomb blasts which rocked Bombay in 1993.

Each
application involved a cost of around Rs 10,000; it needed an
affidavit in four copies, lawyers’ fees and at least ten
minutes of the court’s time to look at the application and
dictate an order. Often, the procedure took longer because the Judge
used to interrogate the accused on their reasons for travel and
sometimes rejected permission. Sometimes the court worked out a rough
cost of the trip and asked the accused to deposit approximately that
amount with the Custodian. Occasionally, the accused have simply
dropped their travel plans when faced with these conditions. Finally,
in response to an application by Bhupen Dalal in 2000, the court
dropped all restriction on travel by the accused within the country.

The
court also hears innumerable applications from the accused asking the
Custodian to release money for their lawyers’ fees. The Harshad
Mehta Group alone has probably moved 50 such applications over the
years.

Soon
after the court began its hearings in 1993, there was a need to flush
out benami
shares.
These were shares held in street names by the scam-accused in 1992,
which they are believed to have dumped in the market soon after
investigations began, in order to recover money. Anybody who bought
the shares with the stamp of a scam-accused on the transfer deed,
needed to have the shares certified as clean after proving that the
transaction was bona fide. The shares could have been passed to a
genuine buyer through as many as ten accused persons. In one case, an
investor needed thirty-two such statements. Often brokers simply
refused to oblige because their records were in CBI custody. As
usual, some brokers found a way around the problem and quickly
dematerialised the shares.

Clearly,
there was enormous scope for a clean up. The certification process,
permission to travel and disposal of shares and assets with the
Custodian had no business taking up the court’s time. As for
civil cases, if the court chooses to use some expert advice, the
600-odd cases can be settled or be persuaded to be settled through
withdrawal or the filing of consent terms. But this requires a
thorough study, application of mind and decisive action.

Had
the scam investigation been a public inquiry, it would have attracted
more participation from the affected investors and emboldened people
to come forward with information and evidence. Justice MC Chagla, who
conducted the Haridas Mundhra trial, which was the first big
financial scam of independent India had said in 1956: “After
very anxious consideration I have decided that this enquiry should be
held in public. A public enquiry constitutes a very important
safeguard for ensuring that the decision will be fair and impartial.
The public is entitled to know on what evidence the decision is
based. Members of the public will also be in a position to come
forward at any stage to throw more light on the facts disclosed by
evidence. Justice should never be cloistered – it should be
administered in broad daylight.” He also decided to take
evidence on oath so that “those who gave evidence did so with a
sense of responsibility and the knowledge of the consequences of
giving false testimony.” The Mundhra enquiry was wrapped up in
two years including the appeal to the Supreme Court.

In
contrast, the JPC insisted on a closed-door investigation with a
selective briefing to journalists at the end of each day. The
investigation lost its relevance ever since. We now have another
scam to deal with and another JPC to probe it which has chosen to
follow exactly the same procedure as the 1992 hearings. Are we going
to get anything other than a cover up? Look at what we got last time.

The
farce of JPC

JPC
members fumbled through a mass of documents and furiously debated
whether to call ministers for questioning – as if that would
throw any light on where the money had gone and how. Strangely,
nobody wanted to address this question. The JPC report was the result
of unseemly horse-trading that did precious little for the system.
The most startling trail that got lost was Harshad’s open
allegation at a press conference that he had bribed Prime Minister
Narasimha Rao.

Harshad
was summoned to the JPC hearings again on 30th
June
1993 following his allegation against the PM earlier in the month. He
admitted to having paid several politicians, but claimed that he
could not furnish proof. He also admitted that his charge against the
PM was an act of desperation to protect himself from harassment. He
promised to reveal the names of other politicians he had bribed, only
if he was given immunity. Asked what sort of immunity he was seeking,
Harshad told the JPC, “Immunity from various unjust
investigations that are going on one particular path to chase me.”
Despite his vivid testimony about cash withdrawal from State Bank of
India and ANZ Grindlays, carrying it on an Indian Airlines flight to
Delhi and his narration of how the payment resulted in immediate
gains to himself in the form of leniency by BSE on over-speculation,
his charge was ignored.

In
a note attached to the JPC report, some opposition MPs
(in 1992)
including Jaswant Singh, George Fernandes, S Jaipal Reddy, Gurudas
Dasgupta and others complained about how, other than Harshad Mehta,
no other witness connected with the bribery episode could be examined
by the Committee. They grumbled about CBI’s non-co-operation
and blamed it for arriving at “conclusions with unnatural
haste.” They finally disposed off the issue by demanding “in
this entire matter of allegations of payment of Rs 1 crore by Shri
Harshad Mehta, there is need for further detailed investigation under
the Commission of Enquiry Act. We also hold that the findings of such
enquiry ought to be submitted to the Parliament within six months of
institution.”

However,
this note was countered by another one from loyal Congress MPs which
said that “there were several inherent contradictions”
in Harshad Mehta’s testimony and that “the records
available with the Committee do not substantiate the allegations”
made by Mehta about bribing the PM. They charged that he could not
substantiate his charge of ‘political patronage’ having
allowed him to ‘wriggle out of the problems faced by him in the
Bombay Stock Exchange.’ Thus, the most serious charge against a
sitting Prime Minister, backed by substantial proof was dismissed.

Another
cover up involved Romesh Bhandari, the then Governor of Tripura. He
had allegedly masterminded a conspiracy to malign some political
leaders by attempting to link them to certain payoffs from the
foreign accounts of Harshad Mehta. Here too the Congress loyalists
argued that the issue did not fall within the purview of JPC’s
terms of reference. A note from the opposition MPs pointed out that
Bhandari had obtained “affidavits, even from a foreigner and
smuggler relating to the Committee’s work”, and withheld
information about hawala
transactions of Harshad Mehta from the Committee. The MPs charged
that explanations from the government on the issue were ‘wholly
unsatisfactory’ and demanded a report to Parliament on the
issue within six months. Nothing ever came of it.

The
third case relating to Narasimha Rao involved his sons and a
Hyderabad-based company called Goldstar Steel and Alloys Ltd. In
April 1992, scamster Hiten P Dalal withdrew Rs two crore from his
account at Andhra Bank and paid the money to Goldstar, through Andhra
Bank Financial Services. Deposing before the JPC, Goldstar’s
managing director N Krishna Mohan said that the money was meant to
shore up subscriptions to its rights issue, which was floundering and
scheduled to close
on 11th
May 1992.

Narasimha
Rao’s son PV Prabhakara Rao was closely connected with Goldstar
and it was clear that Hiten’s generosity was influenced by that
connection. Goldstar offered various flimsy explanations, which were
discredited by JPC’s investigation. It ordered an inquiry by
SEBI, which concluded that an inspection of Goldstar’s records
and books of account were justified to verify details of the money
received by the promoters.

The
JPC too asked for an inquiry by a joint team comprising SEBI, CBI,
Department of Company Affairs, RBI and Central Board of Direct Taxes.
Ultimately, the only person who paid a price for the Goldstar
investigation was the former SEBI chief GV Ramakrishna. His fair and
impartial report apparently angered the PM and he was summarily
kicked upstairs to the Planning Commission.

The
JPC report was also highly unusual. Though the core report was
submitted as the unanimous views of the group of MPs, the crucial
issues connected with the bribery allegations against Narasimha Rao,
his sons’ shenanigans with Goldstar and Romesh Bhandari’s
machinations were all dumped under the head – “other
issues”. There were six notes attached to the report by
different combinations of MPs. The BJP led opposition moaned and
castigated the inaction with regard to “other” issues and
the slowness of CBI. KP Unnikrishnan, thought that several of the
comments were far too harsh and had pinned blame where none was
applicable. He argued for several sensible systemic changes instead
of a witch-hunt. CPI MP, Gurudas Dasgupta, attacked the nexus between
industrialists and brokers, named names and made specific allegations
against several bureaucrats and bankers for having acquired
promoters’ quota shares and levelled serious charges against
the then RBI governor S Venkitaramanan and Secretary of Economic
Affairs Montek Singh Ahluwalia.

How
were the MPs persuaded to attach notes instead of a formal dissent?
As Gurudas Dasgupta said in his ‘note’, the JPC had
arrived at its consensus on the basis of “minimum agreed
points” and “I thought I should go with it so that a
unanimous report, even with its limited and partial findings, can
make the necessary impact in the country.”

Nothing
of that sort happened. The JPC report made its mandatory headlines
for a few days and then sank without a trace. All the MPs, including
those from the opposition were probably so weighed down by the
gruelling task of producing the report that they failed to follow up
on their own recommendations and demands. In the end, JPC never tried
to understand the scam and its report appears more a tool to malign
individuals like Manmohan Singh and S Venkitaramanan. Among its
dubious achievements is blindly accepting CBI’s half-truths and
not circulating K Madhavan’s letter explaining why he resigned.

CBI,
ED and other agencies

Instead
of quickly completing the probe and filing charge-sheets, the Central
Bureau of Investigation,
acting as the government’s handmaiden, was busy spreading
stories that CBI joint director
K Madhavan resigned because he
could not get a promotion and that Harshad was financing the
narcotics trade. It also repeatedly held back crucial information
from JPC. Madhavan embarrassed CBI and its chief, by telling the
committee that his suggestion to probe the foreign accounts of the
scamsters was disregarded. As if to save face, CBI crudely planted a
report on the night of Sunday, 14th
February
1993 in government-owned news agencies such as Doordarshan, PTI and
UNI. It said: CBI had frozen Harshad’s Swiss bank accounts. The
Indian Express
checked with the Swiss authorities and discovered it to be untrue.
CBI made a cruder attempt to fudge, stating that some accounts were
frozen earlier but had since been released. This too, said The
Indian Express,
was a lie. Continuing to wield its main weapon, CBI arrested K
Margabanthu former chairman of the United Commercial Bank and kept
him in custody for weeks together.

The
Enforcement Directorate had
submitted specific infor-mation about the foreign money received by
Harshad Mehta and several others involved
in the scam. For several years the matter lay buried until, all of a
sudden, in July 2000 it came up for hearing at the City Civil Court
in Bombay. The court ordered Harshad Mehta, his brothers Ashwin,
Sudhir and Hitesh as well as two associates Niranjan Shah and Jairaj
Java to appear for a day-to-day trial from 20th
July
2000. Ironically, eight years after the scam, ED was pleading with
the court for additional time because it “planned to file 31
complaints.” Additional Chief Metropolitan Magistrate Usha Iyer
rejected ED’s plea to defer the trial in which the ED had
alleged that shares worth Rs 11.1 million were bought by Harshad by
using $400,000 which formed
part of the hawala
money.
These shares were attached.

The
Reserve
Bank of India could
have acted with a greater degree of authority. After all, it had
evidence of fudging books, skimming illegal profits and concealment
of information. For instance, it had found out that “the entire
accounting of the purchase and sale transactions in NHB’s books
was fictitious.” That is a serious charge but there was no
follow-up action.

In
June 1994, RBI finalised penalties against thirty-five banks for
various violations in the securities scam including PMS schemes and
misuse of ready forward transactions. It slapped a paltry penalty of

Rs 147 crore on twenty banks and asked all thirty-five to
maintain an additional Cash Reserve Ratio of 10% on incremental
deposits. Citibank was made to pay the highest penalty of Rs 50.5
crore, Standard Chartered 34.2 crore, HongKong and Shanghai Banking
Corporation Rs 17.9 crore, Bank of America Rs 11.6 crore and State
Bank of India Rs 11.2 crore. Others such as American Express, ANZ
Grindlays, British Bank of Middle East, Deutsche Bank and Banque
Indosuez were fined between Rs 2-3 crore each.

The
securities scam trial is an example of how not to deal with financial
scandals and should prove useful as a reference when the trial of
Ketan Parekh comes up. One decision out of twenty-seven cases against
Harshad Mehta is a pathetic record by any standards. Huge amounts of
money remains blocked up, the Custodian has not been able to
liquidate shares seized by the office, despite several bull runs
since 1992. Some of those shares have now turned completely
worthless.

One
fallout of the scam was that SEBI got statutory recognition. But
since the scam investigation meandered and SEBI never lived up to its
role as an alert watchdog, Harshad could make several attempts to
come back. More interestingly, the ground remained fertile for
another bull run and the rise of a new operator.

20

Ketan’s Kamaal

The
market learned ‘KP’ was not interested in doubling or
trebling his money. He wanted it to go up 10 times in a year.

While
the new JPC will surely write reams to justify its
expedition
(like another JPC did last time), Scam 2001 was
fairly simple.
Money picked up from half-a-dozen companies, a couple of banks and
money procured from private (mainly NRI) sources and put into a few
select, bubble stocks that lost 95% of their value forcing a chain of
huge defaults. There were, of course, smart bear operators and a
novel sting operation by a dotcom company to speed up and colour the
climatic collapse, but the essence of Scam 2001 was all Ketan Parekh
and his massive, uncontrolled over-trading in the equity market. Who
is this man, how large were his exploits and how did he manage to go
from anonymity to stardom to notoriety in just two years?

Parekh,
a shy and quiet member of a decades-old traditional broking company,
had been a reasonably big punter for a few years but hardly anything
was known about him. According to a gratuitous piece in Business
Standard
in March 2001: “His grandfather Narbheram Harakchand and father
Vinod were highly esteemed guides and mentors to fumbling newcomers.
It was but natural that Parekh follow the path charted out by his
predecessors and try to better their efforts. Following the rule of
natural progression, this young man could too often be seen at Tata
Engineering and Bajaj Auto counters in the trading ring of the BSE,
pitting his wits against the best of those days.”

But
his early attempts to play big ended in disasters, mainly due to bad
luck and a choppy market. His acolyte in Business
Standard said:
“However success was not always served on a platter. The highs
had downfalls too. He suffered a major debacle in the post-Pokhran
scenario. It was dabbling in Associated Cement Company (ACC) that did
it.” In early-1999, after a couple of big ‘operations’,
he finally emerged as a mesmerising messiah for promoters,
institutional investors and retail punters, ramping up a string of
shady companies to stock market stardom.

By
the middle of 1999, Ketan had acquired a unique sobriquet that says a
lot about the scope for manipulating the Indian market system:
One-man army. Through the initial bull run of 1999, an awe-struck
market heard of Parekh’s single-handed exploits starting with a
pariah software company called Pentafour Software (now Pentamedia
Graphics) and moving on to Global Telesystems, Aftek Infosys,
Himachal Futuristic, Zee Telefilms, etc. Whispers about his endless
sources of committed cash mainly from the loyal diamond merchant
community began circulating. The market learned ‘KP’ was
not interested in doubling or trebling his money. He wanted it to go
up ten times in a year. His wealth was whispered to be in thousands
of crores. How did he do it?

Modus
operandi

The
first step was the same basic trick in any stock operator’s
handbook: picking up substantial stakes from promoters at a large
discount to the market price and put the stock in ‘play’[14].
The rest of Ketan’s steps, however, were different. All
operators have to neces-sarily think of an exit. To protect
themselves from being saddled with dud stocks if something goes
wrong, they usually have an understanding with the promoters to sell
the stock back to them. Having seen this technique from close
quarters, Ketan knew that this was the Waterloo for many operators.
Most Indian promoters refuse to honour their commitment if things go
wrong. Thanks to his long years in the market after he qualified as a
Chartered Accountant, he knew both the financial and business details
of hundreds of companies and what their owners have been up to in the
market. He developed strong likes and dislikes about promoters and
refused to deal with many of them. Unlike Harshad, who too struck
deals with promoters but wanted to build a constituency among the
masses and probably exit when they bought, Ketan knew his key focus
ought to be on institutional investors.

Ketan’s
family broking firm, NH Securities, had been an institutional broker
but one factor that could have reinforced his strategy was his
traumatic experience in mid-1998 when in the wake of India’s
nuclear tests, foreign institutional investors went on an
indiscriminate selling spree. The market had gone up steadily since
the beginning of the year, encouraging speculators to build a huge
long position just before the Budget scheduled on 1st
June. On 11th
May,
India conducted a nuclear test that cut off aid and scared
foreigners. The market revived a bit after that unnerving event but
following Yashwant Sinha’s disastrous Budget, it went on a
sharp slide as the FIIs sold heavily (because they were
disillusioned) and UTI sold desperately (because it was bankrupt and
had to pay dividend for June-end). Many speculators (including
Harshad Mehta) lost their shirts.

Through
that event, Ketan once again realised how powerful the institutions
were. It is they, who could make or break the market as well as
individual stocks. So, he would identify stocks, take them up to a
point and dump them on to fund managers’ laps. He had to
anticipate beforehand whether he could create enough appetite in a
particular stock for fund managers. Blend these three – choice
of promoter, need for an exit (promoter buyback being a no-no) and
focus on fund managers – and you have Ketan’s game plan.
The timing was perfect too.

As
the BSE sensitive index spiralled up lazily from 2800 levels as 1998
rolled past, India became a hot destination again. Foreign
institutional investors started pouring money into undervalued Indian
companies, most notably Indian software companies. The index zoomed
up from 3600. As the months went by, the boom seemed more real, as
the market shrugged off both the uncertainty of elections and the
Kargil war. Barring minor corrections, the index went from around
3000 at the beginning of the year to 5000 at the end as the world
waited nervously for a Y2K mishap. Then beginning 2nd
January, the market leapt to 6150 on 14th
February,
its final lunge upwards coming on the back of a global mania over TMT
(telecom, media and technology), including dotcom stocks.

Over
that one year, lot of people made loads of money, although very few
retained it. But nobody had a year like Ketan Parekh. Sources close
to him say, he made thousands of crores through deals in at least
twenty companies that ranged from obscure Sony Infosys or Sriven
Multitech to high-profile Satyam Computers, Zee Telefilms and
Ranbaxy.

It
started with a dud stock like Pentafour, a ‘profit making’
software company quoted at a P/E of about 2. Ketan picked up the
stock, generated massive liquidity and exited when
government-controlled mutual funds and retail investors got in.
Following this, Ketan struck a deal with the late Parvinder Singh of
Ranbaxy. To the amazement of fund managers and pharma analysts
tracking it, Ranbaxy went up steadily on whispers of a research
breakthrough that nobody but Ketan seemed to know about. It could
have attracted charges of insider trading but nobody probed. Ketan’s
lock on Ranbaxy was so strong that later he could get its investment
subsidiary, Vidyut Investments to be a parking lot for some of
Parekh’s shares in Global Trust Bank, later flipped over to
Nirma.

This
was followed by an endless procession of rigged up stocks, most of
them small software companies that eventually ended up in the
portfolio of mutual funds and retail investors whose market values
have dropped by 95% since. Obscure companies like Aftek normally
trade on very thin volumes. How did Ketan entice big investors to buy
them? By generating massive trading volumes and inter-exchange
arbitrage deals. This artificially generated volume took care of fund
managers’ basic criteria of stock selection – liquidity.

These
companies, which were put into play by Parekh also ensured media
attention with a string of announcements such as – large
contracts/assignments, acquisitions, exports, turnover and profits.
These were carefully timed to ensure the maximum price benefit. As
prices started rising rapidly, fund managers were lured in, at
successive stages. Many other punters had travelled the same route in
the past, but Ketan stunned everyone by the audacious size of his
operations. He took big stakes in at least ten major stocks, mostly
software companies, eventually called the K-10,[15]
and
took the scrips up 10-20 times. He tried to repeat this with media
stocks in late 2000 but the market was collapsing by then.
Eventually, Ketan probably got out of dozens of his shady software
stocks but stayed focused on three ‘core’ stocks in which
he had built massive positions and where he was personally very thick
with the promoters: Global Telesystems, Himachal Futuristic
Communications Ltd. and Zee Telefilms.

HFCL
had converted India’s first attempt at telecom liberalisation
into a joke, by putting in bids worth Rs 85,000 crore for their basic
telecom licenses in a few states under minister Sukh Ram in 1994. Its
shares were languishing at a lowly Rs 40 after ace speculators
Harshad Mehta and Ajay Kayan had made a few abortive attempts to ramp
it up. Ketan got into the stock at the beginning of the 1999 bull run
and ramped it up to Rs 2500 in a little over a year. Somewhere along
the way, HFCL made a private placement, marketed aggressively by
India’s most ‘ethical’ broking firm First Global
Securities. Fund managers fought with each other to get a piece of
the action. Australian magnate Kerry Packer apparently bought a 10%
stake that enhanced HFCL’s credibility. A section of the market
expressed private doubts about whether any money actually came in.

Zee
was spectacularly rigged up to Rs 1500 (par value of Re 1), when it
was quoting at a P/E of 250 and yet the KP camp followers were
spreading the word that it will hit Rs 10,000. Their slogan was: dus
ka ek aur ek ka dus.
That meant that a Rs 10 face value share would be split into 10 of Re
1 each and then each of these Re 1 share would zoom up to Rs 10,000.
Friendly mutual funds like UTI and some FIIs came in at various price
levels to mop up stock or book profits in order to fine-tune the
operation. Global Telesystems, an obscure and shadowy manufacturer of
fax machines till 1998 was magically transformed to a new economy
company, going up from Rs 80 in March 1997 to Rs 3550 by March 2000.
DSQ Software was taken from Rs 250 to Rs 2500 in about six months.
This is one stock that was dropped from Ketan’s portfolio
because promoter Dinesh Dalmia’s penchant for large-scale
speculation on his own account probably outran Ketan’s appetite
for manipulation[16].
So, Ketan essentially did all that an operator in India does though
on a much larger scale: price rigging, manipulation, circular trading
and dumping stocks into the portfolio of friendly fund managers.

Along
the way, KP also picked up a large stake in a bank because he
probably needed more money for his ramping operations. Offering a
justification on his behalf, the same Business
Standard piece
said: “As part of a diversification strategy that every stock
market professional has to adhere to, Parekh made a foray into the
banking sector too. The possibility of banking emerging as an
Internet or technology play on the lines of HDFC Bank and ICICI Bank,
was what drew him to Global Trust Bank (GTB). He now holds a huge
stake in GTB, officially four per cent, but rumoured to be much
higher.”

To
the adoring crowd of software czars, whose shares were soaring under
the KP magic wand, was later added the film and TV crowd. Suddenly
the A (Amitabh Bachchan Corporation) to Z (Zee Telefilms) of
entertainment was part of the KP circle, including the notorious Tips
Industries. One of the key promoters of Tips had a murder charge
against him. The public issue was lead managed by Parekh’s
invest-ment banking outfit – Triumph International.

Amitabh
Bachchan Corporation Ltd. was a disastrous attempt to brand a
superstar and build a thriving company around him;, but the plan had
gone badly awry. When ABCL caught Ketan’s fancy, through the
mediation of
MP Amar Singh and others, it was being sued by creditor banks and had
declared itself sick. Ketan coughed up the money to pull ABCL back
from the clutches of the Board of Industrial and Financial
Reconstruction. At the time of the 3rd
March crash, there were plans to take ABCL public by cashing in on
Bachchan’s astoundingly reinvigorated stardom as host of a
television game show,
Kaun Banega Crorepati.

A
grateful ‘Big B’ was soon
inaugurating garment shops owned by Ketan’s relatives. The
ambitious juggernaut rolled on. By the end of 1999, he had invested
in half-a-dozen media companies, some of them eager to jump into the
market with dodgy business plans. Over the next one year, he invested
in Tips, Balaji Telefilms, Mukta Arts, UTV, B4U, Mid-day Multimedia,
Minhaz Merchant, HFCL Nine Network and Pritish Nandy Communications,
etc. In March 2000 at the height of Nasdaq and Indian market boom
Ketan Parekh, Vinay Maloo and Australian tycoon Kerry Packer got
together to launch a high-profile venture capital company called KVP
Ventures. Though KVP reportedly stood for Ketan, Vinay and Packer,
market wags claimed that it stood for Ketan V. Parekh and was
entirely his show. Though his influence over the market rivalled that
of the one-time Big Bull Harshad Mehta, Parekh had remained
resolutely low profile. Very little was known about him. After the
market crashed in March 2001, the fawning Business
Standard article
would enlighten us: “Despite his penchant for making money,
Parekh is extremely religious. His is a familiar face at the St.
Michael’s Church at Mahim every Wednesday. Frequent pilgrimages
with friends is a routine he finds time for. Yet, every man has his
fancies. Parekh too has his. Las Vegas is the place he loves to
holiday in. The love of the roulette holds him enthralled there. Here
the killer instinct takes over no matter what price he has to pay.”

That
gives us a clue but the fact is, unlike the ebullience and charm of
Harshad Mehta with whom he is inevitably compared, Ketan Parekh was
quiet and serious. There were other differences too – no flashy
cars, media hype or flamboyant parties. It was as though Ketan, who
was the youngest of Harshad’s associates in 1992, had learnt a
lot from Harshad’s meteoric rise and fall. After all, one of
his closest advisors was Ashwin Mehta, Harshad’s low-profile
brother.

All
that changed in January 2000. It was around the time that Ketan threw
his famous Millennium bash in Bombay to announce that he has
‘arrived’. The guests, comprising the new software czars,
media barons and bigwigs from the financial world assembled for a
champagne reception at the Taj Mahal hotel’s Sea Lounge
restaurant. They were then ferried in high-security catamarans across
the sea, to Parekh’s seaside bungalow at Mandwa – a short
ride off the South Bombay coast.

Suddenly,
the reclusive Parekh was going the Harshad way with vengeance. He
started making media headlines with regularity, sometimes in tow with
an odd mix of personalities like Australian magnate Kerry Packer,
politician Amar Singh or Vinay Maloo of Himachal Futuristic. His
other friends were Manoj Tirodkar of Global Telesystems and Subhash
Chandra of Zee. Rumour has it that Tirodkar presented him with a top
of the line Lexus (it was Lexus too that had made Harshad famous).
Not to be outdone, Maloo of HFCL apparently gave him an extravagant
Cadillac, custom-fitted with multiple tele-visions and assorted
gizmos. Also, like Harshad, who wanted to buy up all the offices at
Maker V in Bombay’s business district of Nariman Point, Ketan
agreed to pay a hefty premium over the market price to purchase one
of ICICI’s buildings for Rs 75 crore. The deal fell through
when Ketan went bust.

Ketan’s
alleged connections across various political parties made him appear
untouchable. An Income Tax raid in early 2000 was suddenly converted
into a search, but the market remained nervous. Many compared Ketan’s
coming out bash with a similarly lavish party by the bull operators
on
9th
April
1992
just before the securities scam revelations ended Harshad’s
famous bull run.

If
he was convinced that he could replicate his success in software with
the entertainment stocks, he certainly lived his belief. Ketan,
coming from a traditional broking firm and Jain family, would spend
far too much time partying and making merry with film industry
bigwigs, stars and starlets. It was this, say his industrialist
friends, which finally did him in. “He would be out partying
until 3.30 p.m; he simply lost his grip and unaware of the market
forces shaping up to destroy him”, says a friend whose shares
he helped ramp up to dizzy heights.

One
estimate of his wealth when the market was at its peak, was Rs 3000
crore. Strange, he would finally still need a bank and hundreds of
crores from corporate houses to keep him afloat. Blindsided by the
meltdown in TMT stocks, overconfidence in his abilities and dazzled
by the entertainment world, over the next one year Ketan would break
all his cardinal do’s and don’ts that had made him such a
successful operator. He unmade himself as fast as he made it.

What
went wrong?

The
domestic market and Nasdaq began to run out of steam in March 2000
and then went on a long slide. By mid-2000 the IT mania began to run
out as sanity returned around the world. According to sources, Ketan
had no illusions about the fact that most of his stocks were
overvalued. For instance, at a price of Rs 1500 and a P/E multiple of
350, Zee was not exactly cheap. In fact, as early as the Diwali of
1999 he had completed many of his ‘operations’ (picked up
large stakes at a low price, traded vigorously and placed them with
funds) and did not find anything undervalued. People who knew him
said that he was a savvy market operator who booked profits regularly
and slipped in and out of his large position.

But
strangely, Ketan seemed to have fallen in love with a few companies –
a cardinal sin in the stock market: Zee, HFCL, Global Tele and maybe
Satyam. When the Nasdaq and Indian markets started tanking through
the second half of 2000, Ketan was stuck with massive holdings in
these scrips. At one time, his position in HFCL was almost 60% of the
total carry forward position in BSE. His trading and investments were
spread over a dozen companies but mainly in Panther Fincap, Triumph
International and Classic Credit. But many of his bets were played
out in the grey market of Kolkata, the den of unbridled off-market
speculation. As these shares fell from their lofty perch, Ketan
supported them with bouts of buying and selling. Why didn’t he
get out of these losing positions? Two reasons. One, he was no longer
a trader. He was an insider with these companies, forming deep
personal-bonds with the dominant owners Vinay Maloo (HFCL), Manoj
Tirodkar (Global Tele) and Subhash Chandra. Two, his own logic was
simple: If I am holding so much of stock of each of these companies,
where would the selling come from?

In
December, after several rounds of battering that the TMT stocks
suffered, his grip began to weaken. Fund managers sitting on large
losses and punters holding losing positions, were looking forward to
the January effect – FIIs pour money into Indian equities after
fresh asset allocations in the beginning of the year. Indeed there
was a spurt in January, some backing and filling and then a sharp
speculative rise up to 15th
February,
two weeks before the Budget. As the index pierced the falling
trendline from February 2000, there was a buzz that the market would
move to a new orbit. However, ominously, the software stocks were not
participating in this rally. This was the beginning of the end of
Ketan Parekh. A calculated assault by a bear cartel and some
institutional selling created a powerful downdraft in K-10 stocks.

The
bear cartel included a couple of the savviest old players in Dalal
Street like Radhakishan Damani. Soft-spoken and extremely sharp,
Damani has made more smart bets than anybody has for years. Adept at
both sentiment-driven trading and research-driven investment, he is
easily the wealthiest investor in India, with large stakes in
multinationals. He had been out of the market for over a year during
the maniacal bull-run. Aghast and intrigued that puffed up stocks
like HFCL and Global Tele could be taken to four digits in a year,
bears like Damani have been biding their time to make money by
short-selling. They started building a short position since early
2001.

Sensing
continuing weakness for TMT stock all over the world and seeing no
immediate catalyst for the broader market, the cartel moved in for
the kill in January and February. Institutional investors, till then
the mainstay of Ketan, were exhausted too. They were nursing large
losses and need only a gentle persuasion to start selling in a global
environment of gloom. That was converted into a landslide, climaxing
in a panic sell off after the Budget had created a mood of optimism.

On
28th
February,
Sinha unveiled what
was dubbed an outstanding Budget. Even as his Budget speech was being
broadcast on television networks the Sensex soared to 4247, a record
gain of 177 points. The next
day, the market remained surprisingly volatile, (movement of over 160
points) and inched up with a gain of twenty-five points. Even then,
there were whispers about a serious payment crisis, but nobody knew
if the post-Budget rally would allow Ketan and his band of brokers to
tide over their losses. It did not happen. Ominously, the software
stocks were trashed. Infosys Technologies having closed at Rs.6258.40
on the 28th
of
February fell 9% the next day to close at Rs.5682.70 similarly Satyam
fell almost 10% from Rs.347.00 on 28th
February
to Rs.312.65 on 1st
March.
HCL Technologies and NIIT met the same fate – falling 7% and 6%
from Rs.622.65 and Rs.1242.60 on the 28th
February to Rs.577.15 and Rs.1169.95 on 1st
March,
respectively.

Even
as The
Economic
Times was
getting Ketan to dispense wisdom on the Budget, it became clear that
the crisis was unavoidable. The next day broke his back and his cabal
of operators. Shedding the entire post-Budget gains, Sensex went down
by stupendous 176 points, on massive bear hammering. For the week
ended 2nd
March 2001, the value of short-sold stocks went up by a huge Rs 64
crore.

Jerked
out of its sleep and prodded by the ministry of finance, SEBI pounced
on the bear operators and launched an inquiry into their trades. It
banned short sales and increased margins, encouraged the broker
directors from the Bombay and Calcutta Stock Exchanges to resign.
Three settlements of the Calcutta bourse were completed under highly
dubious circumstances. The bears were probably working on inside
information about Parekh’s extremely weakened position by then.

The
then president of BSE Anand Rathi was suspected to be one of them.
Rathi had asked the BSE’s surveillance department for
information on the trading positions of various players and details
of the big operators on the Black Friday of 2nd
March.
On 5th
March, SEBI got hold of the audio-tapes that indeed seemed to indict
Rathi. He resigned on 8th
March.
By then Ketan’s problems were full-blown. There was payment
crisis in Calcutta Stock Exchange and fears of default on BSE too. He
did try to make valiant attempts to hold up his stocks, inspired by a
temporary rise in Nasdaq on March 6th

but the avalanche of selling by retail investors was too much to
handle. Ketan’s game was over.

The
opposition parties in Parliament were demanding an expla-nation from
government and Finance Minister Yashwant Sinha had to agree to a
detailed debate in the Rajya Sabha on 13th
March.
Even as the debate was raging, on 13th
March,
the bears fired another salvo. Tehelka.com,
funded by First Global Group, exposed a defence bribery scandal
through a sting operation, filmed on videotape. Curiously, Zee News,
never known for doing investigative stories, took extraordinary
interest in the Tehelka
tapes, re-running them for hours and days together. Infosys
having
closed the day before at Rs.4452.40 came down to Rs.4283.10 on the
13th
March.
Similarly, Satyam fell to Rs.203.55 having closed the previous day at
Rs.212.80. Himachal and Global reeled under the pressure closing at
Rs.230.75 and Rs.159.30 having closed the previous day at Rs.274.65
and Rs.189.60, respectively.

From
January till a few days after March, Ketan continued
his rescue operation for his beloved Global Tele, HFCL and Zee. For
some strange reason, KP, the savviest of market players, was
repeating the cardinal mistake that has killed many operators before
him: fight the market. In desperation, he turned to two main sources:
banks and his favourite promoters. He was funded by an obscure
co-operative bank from Gujarat called Madhavpura Cooperative Bank and
the highly visible new bank called Global Trust Bank. By early March
’01 when he was neck-deep in losses, he had access to a
phenomenal Rs 2000 crore from these two banks and his favourite
promoters.

Global
Trust Bank, which he had bought into as a “diversification
strategy that every stock market professional has to adhere to”
(according to the Business
Standard
profile), had already emerged as the key to Ketan’s operations
from late 1999. He ramped up its price, took a large stake in it and
used the bank to fund himself and his associates. GTB’s
exposure to the various known entities of Ketan Parekh was over Rs
250 crore. Interestingly, GTB chairman Ramesh Gelli has been on
record to say that under the RBI norms his lending to Parekh cannot
exceed Rs 100 crore.

At
least a dozen KP companies/associates figured among the top 100
borrowers of GTB; apart from these, almost all his companies used for
trading had accounts with GTB. Most of the K-10 companies and their
many shell/investment companies also had accounts with the bank. Most
of these entities had depository accounts with GTB too. Eventually,
GTB provided for Rs 70 crore of losses on the Scam 2001 and changed
the top management. Ramesh Gelli, chairman and the key promoter quit
under a cloud, blaming the media. But Ketan’s real quarry was
Madhavpura Bank.

Madhavpura
would issue pay orders to three finance companies owned by Ketan,
Classic Share & Stock Broking Services Ltd., Panther Fincap
Management Services Ltd., and Panther Investrade and Management
Services Ltd., which had accounts in BOI. BOI discounted these pay
orders for a hefty fee and credited them. Ketan had a line of credit
of Rs 200 crore from Madhavpura Co-operative Bank against which he
had pledged securities worth Rs 300 crore plus – mainly the
K-10 bubble stocks.

On
8th
and
9th
March, BOI discounted pay orders of Madhavpura Bank for Rs 65 crore
presented by Classic Share & Stockbrokers,
Rs 20 crore
presented by Panther Investrade and Rs 52 crore on account of Panther
Fincap. That added up to Rs 137 crore in all. In the normal course,
the pay orders would have been cleared on the following two days.
March 10th
and
11th
were
holidays. On 12th
March
at 11 p.m. RBI discovered the true state of the bank and declared
Madhavpura a defaulter and asked pay orders of Rs 75 crore (not Rs
137 crore) to be returned unpaid on 13th
March.
By then, BOI had already credited the amount on the assumption that
pay orders had been credited. Shockingly, RBI ordered two pay orders
of Rs 62 crore to be returned as late as 20th
March.

However,
when Madhavpura Bank was declared a defaulter on 12th
March, it refused to honour pay orders of Rs 137 crore, which were
already discounted by BOI. BOI turned on the heat and summoned Ketan
for several meetings, demanded that he make good the loss. Ketan
pleaded that he cannot because of the ongoing Income Tax raids.
However, he brought in Rs 7 crore and the liability was down to Rs
130 crore.

The
bank began to follow the money. It had gone into Nakshatra Software
Pvt. Ltd., Chitrakoot Computers Pvt. Ltd. and Goldfish Computers Pvt.
Ltd. The money transferred to these companies was large enough to
arouse suspicion. Classic Share & Stock Broking moved Rs 249
crore to Chitrakoot computers, Panther Fincap trans-ferred Rs 160
crore to Goldfish Computers and Panther Investrade shifted Rs 260
crore to Nakshatra Computers. These were obviously part of a
complicated web of shell companies, bank accounts and brokers, which
allowed KP to suck out large chunks of money from the banking system
and hold up the price of his favourite scrips.

Eventually,
SEBI found out that Ketan borrowed Rs 798 crore from the bank through
eleven of his firms such as Saimangal, Nakshatra, Goldfish,
Chitrakoot and Luminent Investments, etc. Other than these, two
brokerage firms Mukesh Babu Securities and Suresh Maniar were also
lent Rs 200 crore and Rs 50 crore each, for transactions done on
behalf of Ketan. As per RBI’s regulations, Madhavpura was not
supposed to lend over Rs 15 crore. As against this, it admitted to a
Rs 200 crore exposure, which is really just a quarter of its real
lending to the broker.

Faced
with Rs 130 crore default, BOI asked Ketan to transfer the title to
the stocks pledged with Madhavpura but he was reluctant, claiming to
be able to arrange for a separate collateral. Probably, Ketan was
simply rotating funds between BoI and Madhavpura for several months
based on the shares pledged, without additional investment. Through a
combination of over-draft facilities from Madhavpura Bank and the pay
order discounting facility from BOI, Ketan may have been able to buy
an entire week of funding to finance BSE settlements, merely by
paying the cost of these facilities.

As
he was struggling to juggle his huge positions, along with
Madhavpura, Ketan was very generously funded by the companies he had
ramped up. On 8th
and
9th
March,
Zee Telefilms and its affiliate Siticable routed Rs 225 crore into a
company called Digital Superhighway and Briggs Trading Pvt. Ltd., two
investment companies of the Subhash Chandra-controlled Essel. This
was flipped over the same day to Parekh’s firm Classic Credit.
All these entities had accounts in Global Trust Bank.

Zee
Telefilms began to fund Ketan Parekh around January this year. In two
transactions – one in January (Rs 90 crore) and another on 9th

March (Rs 50 crore), it transferred another Rs 140 crore to Ketan’s
companies – Panther Fincap and Panther Investrade through three
other finance companies – Ganjum Investments, Churu Investments
and Prajatma Investments. On 8th
and
9th
March,
HFCL transferred Rs 150 crore to Digital Superhighway and from there
on to Ketan’s Panther Fincap. Clearly, Ketan, Vinay Maloo and
Subhash Chandra were so thick with each other that HFCL had no qualms
about routing money to Ketan through a Zee Group investment company.
Further, between 28th

February and 8th
March
in a series of separate transactions HFCL routed another Rs 154 crore
to Parekh’s Panther Fincap and Classic Credit, through yet
another investment company called Burlington Fincap Pvt. Ltd.

Thus,
from Zee and HFCL alone, Ketan Parekh got Rs 669 crore to pay brokers
who operated for him. About Rs 250 crore went to a single Calcutta
broker called Sanjay Khemani. HFCL’s generosity to Ketan Parekh
included funds raised through the non-convertible debentures issue,
subscribed to by UTI and a loan of Rs 150 crore from ICICI. Zee too
is understood to have received institutional funding in the same
period, which was routed to Parekh. Other beholden promoters whose
stocks he had rigged, also chipped in for the ‘Save Ketan’
operation. Kopran borrowed from UTI and directly lent Rs 78 crore to
Classic Credit brokers in the first week of March.

None
of this, however, was enough to save Ketan. Short of Rs 130 crore in
pay orders, BOI filed complaints with the Central Bureau of
Investigation and the Income Tax department against Ketan Parekh. The
Sensex crashed by 147 points as Ketan was interrogated, arrested and
detained for the next fifty-two days.

Once
the JPC investigation started, people close to Ketan Parekh launched
a scurrilous personal attack against us, using a couple of friendly
newspapers. The attack included allegations that we were close to
bear operators. (Ironically, a big bear operator in SEBI’s
eyes, First Global’s Shankar Sharma himself has been sending us
abusive emails and has filed a defamation suit against Sucheta!).
When Ketan was released from CBI custody on 21st
May,
he had a peculiar argument to peddle – to the same journalist
in Business
Standard.
He admitted that he “got carried away” and that he had
“no one else to blame my own judgement.” Nevertheless he
was “contemplating filing a Rs 5000 crore defamation case
against BOI.” Enthusiastically prodded by the paper, he also
came up with the novel idea that the entire issue was blown out of
proportion and there was no criminality involved. What did the future
look like, asked the paper. The Big Bull’s startling response:
“One thing is certain. There is no sense in trying to be a
bull. It’s foolish to be bullish, if I may say so.” Some
anti-climax.

21

Play It
Again Sam

Exactly
nine years after Harshad Mehta’s over-trading split apart the
creaky Indian equities and debt market, the Indian stock market and
its mammoth, nation-wide trading system was brought to the brink of
disaster in March-April 2001.

Finance
Minister Yashwant Sinha, announces a great Union
Budget but the
stock market collapses. The biggest market
operator goes bust and
is put behind bars by the CBI for questioning. There is a run on a
co-operative bank. Some junk stocks that had run up 10-15 times crash
to 5%-10% of their peak value. Many brokers go bust. Preliminary
investigations unravel a scheme of parking stocks and price rigging
in a nexus between banks, brokers, stock operators, mutual funds and
companies. The broker-members of the BSE governing board, including
the president are deeply mired in controversy. The regulators, RBI
and SEBI are found sleeping. A JPC is appointed to probe all this.

No,
we are not talking of Scam 1992. We are talking of Scam 2001. And
just as a high-profile Delhi-based newspaper owner had said in 1992
that the scam was a figment of journalists’ imagination, a few
“intellectuals”, tried to suggest that there was no scam
in 2001, no wrongdoing at all.

However,
in a remarkable repetition of history, exactly nine years after
Harshad Mehta’s over-trading split apart the creaky Indian
equities and debt market, the Indian stock market and its mammoth,
nation-wide trading system was brought to the brink of disaster in
March-April 2001. At the centre was Ketan Parekh, a quiet, one-time
buddy of the voluble Harshad.

Sure,
there are big differences between the two. As opposed to the first
revelation of Harshad Mehta helping himself to Rs 500 crore (later
turned out to be Rs 660 crore) from SBI, Ketan Parekh’s default
was Rs 130 crore. Unlike banks and PSUs, a lot of money this time
openly came from the private corporate sector. Also, the 1992 scandal
enveloped National Housing Bank, Citi Bank, ANZ Grindlays, Standard
Chartered and two smaller banks. This time it is only three banks.
Still, there are startling similarities.

Harshad/Ketan
: In
this age of sequels it should not be surprising that Ketan Parekh
closely followed the footsteps of Harshad Mehta. He lacked Mehta’s
flamboyance and charisma or the ability to rationalise his price
rigging with theories such as “replacement cost”, but he
was supposed to be more sure-footed and his clout was far more
widespread. Ironically enough, Harshad’s brother Ashwin Mehta
has been Ketan’s close advisor, and both the Bulls operated
through a close group of relatives and friends. Like the
Harshad-Ashwin duo, Ketan’s business operations were aided by
his cousin Kartik. One interesting similarity: Ketan was an accused
in one of 1992 scam cases too. (Canbank Mutual Fund Case-3 of 1996).

SBI/
BOI: SBI’s
discovery of a Rs 660 crore black hole in its books led to the
unravelling of the 1992 scam. Nine years later, it was the Rs 130
crore hole at Bank of India, which led the trail to Madhavpura
Mercantile Co-operative Bank and to Ketan Parekh and thousands of
crores of market losses.

UTI:
Mutual
funds played the exact role that several other Indian banks played in
the 1992 scandal. Many funds had portfolios stuffed with K-10 scrips.
At the centre of allegations about the Ketan-MF nexus was UTI. In
1992, three JPC members, George Fernandes, Rabi Ray and Jaipal Reddy
had pointed out how UTI was “used by the unscrupulous among
industrial houses for their manipulative games and for many other
illegitimate deals…”, and had called for a full
investigation. Nine years later, UTI’s flagship scheme US-64
remains outside the supervisory purview of SEBI. BJP MP Kirit Somiaya
has been alleging this repeatedly but the JPC is slow to probe. UTI’s
investment in Ketan’s favourite bubble stocks like DSQ
Software, Global Telesystems, Zee Telefims and HFCL, its sudden
subscription to Rs 50 crore worth of debentures of HFCL all aided
Ketan Parkeh and his gang of promoters. Also, as SEBI’s
preliminary inspection report said that UTI had provided a
“benchmarking” of prices to the speculators. UTI
involvement went so deep that eventually US-64 had to annouce
suspension of sale and repurchase of units for six months. UTI chief,
PS Subramanyam had to resign.

Hiten
Dalal/Nirmal Bang: In
place of the shadowy, little-known and reticent Hiten Dalal, we now
have the low-profile Nirmal Bang who ran massive transactions through
five cards and affiliate companies. This gave him hefty exposure
limits, which were used by speculators and big operators. Like Hiten,
Bang did not move stocks, but was indispensable to anyone who did.
His clients ranged from articulate, abrasive and arrogant Shankar
Sharma of First Global Securities to quiet operator Nemish Shah and
innumerable day traders across the country.

These
players kept their own books spotless and routed most of their
speculative operations through Nirmal Bang and his companies. For
instance, First Global paid Rs one crore to Bang’s companies in
brokerage alone last year. This translated to a trading turnover of
about Rs 1000 crore. Like Hiten Dalal, Nirmal Bang preferred to keep
an extremely low profile. He is never quoted in the press and is
never photographed.

Fairgrowth/GTB:
Global
Trust Bank was a fast-growing bank as opposed to Fairgrowth which was
a financial services company. But both were headed by go getting,
razor sharp bankers, professionals-turned-entrepreneurs. They both
had a tragic flaw – for both the end justified the means. The
dynamic former chairman of Canara Bank, superbanker late B Ratnakar,
took Fairgrowth on a path of scorching growth. GTB’s chairman
Ramesh Gelli, like Ratnakar, powered his way up the banking system to
become the first entrepreneur-banker. A small difference was that
Ratnakar was credited with foisting a host of “cowboy bankers”,
as someone famously called them, on to the banking system, many of
who ended up as key players in the 1992 scam. Ramesh Gelli, on the
other hand, was the only star in his team.

Banks/Brokers,
FIIs: Citibank,
Stanchart, ANZ Grindlays were the key players of 1992 against whom
JPC had demanded stringent penalties including suspension of
licenses. This time, among the key players were foreign broking
outfits and FIIs involved in price rigging and were conduits for
unaccounted Indian money flowing in and out of the stock market.
Besides, Citi has left a rich legacy. Under scrutiny in 2001 are
Credit Suisse First Boston headed by a former Citibanker and First
Global, owned by former Citibankers. SEBI investigations unearthed
five overseas corporate bodies registered with CSFB, which were
operating mainly for Ketan Parekh. They have apparently transferred a
whopping Rs 2900 crore abroad in the fifteen months until March 2001.

FIIs
will provide the missing link between brokers and businessmen whose
stocks were ramped up. They have been known to offer the safety of
their anonymous sub-account for stock operations by Indian
industrialists. Some have even offered a package deal, which included
the setting up of overseas accounts and companies and several trading
options. So far, however, SEBI has refused to probe the issue of
Participatory Notes (an omnibus financial instrument representing
specific underlying securities purchased in the Indian market) abroad
and their links to Ketan Parekh’s operations.

Co-operative
Banks: The
shenanigans of Madhavpura Mercantile Co-operative Bank and other tiny
banks make for obvious parallels with the Metropolitan Co-operative
Bank and Bank of Karad of 1992. Incidentally, even after commenting
on the role of co-operative banks and small private banks in 1992,
JPC had made no recommendations about tightening supervisory control
over these banks. RBI’s supervision continues to be slack. The
difference is that this time Madhavpura is being bailed out as part
of a self-serving political decision pushed by LK Advani, who is the
MP from Ahmedabad.

Poor
Systems: The
scam of 1992 happened because of poor systems. It was the same in
2001. While the market system underwent far-reaching changes after
1992, it failed to move into the next phase of reforms that should
have included rolling settlements, uniform settlement dates across
twenty-three stock exchanges (to reduce reckless arbitrage) and a
reduction in the number of bourses through mergers or closure. The
supervisory structure was weak too. As it happened, these systemic
loopholes allowed brokers to create a trading bubble with a finite
amount of money by rolling trading positions from one stock exchange
to another. In 1992, BSE with a daily turnover of Rs 300 crore or so
accounted for two-third of national trading and NSE did not exist. At
its peak in 2000, BSE and NSE together logged volumes of Rs 12,000
crore a day. The powerful broker lobby scuttled various attempts to
introduce reforms with the argument that these huge trading volumes
would vanish. It was these massive trading positions moving unchecked
from one exchange to another that fuelled the scam of 2001.

RBI/SEBI:
The
JPC of 1992 specifically held RBI responsible for ignoring warning
signals since 1986. It said: “red alerts were ignored, reports
consigned to the back-burner and market intelligence treated with
disdain.” This statement could well be cut and pasted in the
JPC report on Scam-2001. The deputy governor named in the last JPC
report and other officials were not touched. The department of
supervision, initially envisaged as a powerful and independent
supervisory agency dwindled into just another sleepy RBI department.
It was headed by a deputy governor, who was on his second extension,
and unknown for initiating any stringent supervisory action. Scam
2001 was brought about by SEBI’s inability to check the utter
lawlessness of the Calcutta Stock Exchange or the brazen price
ramping by Bombay-based operators.

JPC
II: There
is a sense of déjà vu in another JPC probe. The
previous JPC’s composition and its meandering investigation
achieved almost nothing and had dwindled into horse trading to decide
who would be indicted and who should be let off. Several of its main
recommendations were diluted until they were ineffectual. Serious
charges of bribe taking against Prime Minister Narasimha Rao and his
sons’ involvement in the Goldstar-Andhra Bank scandal were
relegated to the many notes attached to the main report. The role of
industrialists also appeared only in the notes and was promptly
ignored. After all politicians understand better than anyone else the
role of industry in greasing the wheels of government.

Corporate
Nexus: In
the 1992 scam, some businessmen were closely associated in price
ramping with Harshad Mehta. As JPC said, it came across “various
instances of close nexus between prominent industrial houses, banks
and brokers.” Last time names like Reliance Industries, Apollo
Tyres and United Breweries cropped up. Nothing happened to them. In
1998, BPL, Videocon and Sterlite Industries were found to have
colluded with Harshad in ramping up their share prices. But again
nothing happened to these promoters (until mid-2001). Probably,
emboldened by the regulators’ lack of action, Ketan Parekh and
companies like Zee, HFCL, Global Tele and others embarked on the most
brazen saga of price rigging and price support. Ketan was also funded
by Ranbaxy, Kopran and Nirma. The various dimensions of this nexus
are still being unearthed. One of the companies, DSQ Software, is a
bizarre case, ripe for all sorts of probe. We have described it
later. Meanwhile, here is a snapshot of the key players in Scam 2001.

Credit
Suisse First Boston

In
Scam 1992, the foreign banks played a major role. In 2001, it was the
turn of FIIs, allowing the use of their sub-accounts and foreign
broking firms (claiming higher ethical standards and better code of
conduct than their Indian counterparts). For years, it has been
whispered that the sub-accounts of FIIs were conduits for Indian
money (that had gone out) coming back into Indian markets through
Participatory Notes and Overseas Corporate Bodies. At various times,
Enforcement Directorate and Income Tax department wanted to
investigate it, but the ministry of finance stopped it. Now SEBI
offers proof if JPC wants to investigate.

SEBI
suspended Credit Suisse First Boston (I) Securities Pvt. Ltd. in
April 2001, after discovering that it has repatriated a phenomenal Rs
2900 crore between March 1999 to March 2001 through five
Mauritius-registered OCBs operating for Ketan Parekh: Brentfield
Holding Ltd., Kensington Investments Ltd. and Wakefield Holdings,
European Investment and Far East Investment. The last two had an
issued and paid up capital of just $10. The first three were given
introductions to bank accounts by Triumph International, a Ketan
Parekh company.

Large
chunks of Ketan’s sales were through CSFB and curiously enough,
CSFB was willing to credit the money for these sales on the payment
date itself without waiting for the official stock exchange pay-out.
One example: for a sale of three lakh shares of Adani Exports, Rs 25
crore payment was made on the date of sale even though the shares
were credited the next day. This led to another discovery. All these
deals were inexplicably charged differential brokerage rates. It is
only when SEBI correlated the brokerage paid with the time period
between payment to the client and the receipt of funds from pay-out,
that it became evident that this included a financing charge. SEBI
has provided several examples where Ketan Parekh obtained funds for
7-14 days from CSFB and paid interest in the guise of differential
brokerage.

Next,
SEBI matched these sell orders, which were apparently funding
transactions with the buy orders on BSE. It was in for another
surprise. It found that on the other side were brokers operating for
Ketan like Triumph International, Milan Mahendra, Hem Securities,
Omega Equity, CJ Dalal, Indsec Securities, Visaria Securities and
Vyomit Shares. So, the suspicion is that Ketan was selling from an
FII sub-account through CSFB and buying as an Indian investor. If
this is true, the implication is that money has gone out of India in
the garb of FII sales and shares have been delivered here.

One
interesting sidelight of this operation is how such huge volumes were
transacted using the automated system without disturbing the price.
Brokers call this the ‘1,2,3 system’ of manipulating the
automated order-matched system. Identical buy and sell orders in
terms of scrip, price and quantity for such collusive transactions
were first keyed into respective computers. After this, the dealers
got on to the telephone and hit the buy/sell button on the count of
three, synchronising their trades to a few seconds. (So much for the
huge volumes before badla
was banned!) SEBI unearthed such deals in Adani Exports and Shonkh
Technologies at BSE and in Global Trust Bank and Zee Telefilms on NSE
with volumes ranging from 1.6 lakh shares to 14 lakh shares. The
cumulative value of such funding deals on the BSE and NSE aggregated
to Rs 1813 crore in the January-March 2001 period alone, according to
SEBI investigation. While payment was released through CSFB’s
own funds, delivery of shares and repayment were ensured through the
settlement mechanism of stock exchanges.

CSFB
claimed that these were normal transactions and that it had insured
its risk by demanding immediate delivery. However, it could not
explain how the differential brokerage rates tallied with funding
charges on obviously synchronised deals. Why were the OCBs selling
K-10 shares and Ketan’s brokers buying them? CSFB made the
astonishing claim that Ketan Parekh had been asked to find a buyer
against his sales because his trades were so large. SEBI called the
explanation unconvincing and said that it only seemed to substantiate
the charge of collusion with CSFB. The transactions were structured
in such a manner that Ketan Parekh, suspected SEBI, received
short-term funds while the Settlement Guarantee Fund of stock
exchanges secured the payment to CSFB in case Parekh defaulted.
Hence, the subterfuge of synchronised trades.

SEBI
found more damning evidence of CSFB’s role. It did large
proprietary trading on its own account and for Kallar Kahar, a
Mauritius-incorporated company owned by it and registered as a
sub-account. Kallar Kahar had only a two-dollar share capital at the
time of registration, which was later increased to $100. As on 12th
April 2001, most of its capital was in the form of US $ 267 million
participating redeemable preference shares. Who were the subscribers?
Will JPC ask CSFB?

Interestingly,
a large chunk of Kallar Kahar’s transactions were only in Ketan
Parekh’s scrips, and the pattern of trading included the use of
Participatory Notes in order to hide the identity of the purchasers.
SEBI’s preliminary findings do not rule out front-running by
CSFB also on their own account and in the Kallar Kahar account.

CSFB
had similar dealings with Calcutta broker Ajay Kayan who was
investigated and accused in the securities scam of 1992 and was
extremely close to Citibank. Incidentally, CSFB’s India chief
KR Bharat is an ex-Citibank employee and was one of the seven people
who were asked to leave the bank during the scam investigations.

Sachin
Tendulkar of the market

Every
scam throws up a few extremely colourful characters. While Ketan
Parekh was the icon of Scam 2001, the most colourful was certainly
Shankar Sharma, who along with his wife Devina Mehra own one of the
fastest-growing and savviest brokerage firms in India, First Global.
A sharp and articulate couple, Shankar and Devina alternately wrote a
weekly column in Business
World,
which was all about ethics, transparency, accountability and
governance. The firm, known for its contrarian views and highly
irreverent style, unabashedly called itself the “Sachin
Tendulkar of the securities industry” in its representation to
SEBI. Its self-image (as appearing on its website) is: “frankly,
we never have, and never will, benchmark ourselves against
competition, because there isn’t any.” That sounds less
like Tendulkar and more like Mohammed Ali.

Indeed,
theirs seemed an amazing success story, based on guts,
entrepreneurship, vision, research and hard work. Sharma is an MBA
from the Asian Institute of Finance, Manila, who worked in Citibank
until he chucked his staid investment banking job after 1990 to
become a stockbroker. He started as a sub-broker and slowly worked at
acquir-ing his own broking membership. About Devina Mehra, First
Global’s website says (she holds) “seven gold medals from
Lucknow University in Mathematics, Statistics and English Literature
(holder of a 60-year record) – and then, it gets even better –
gold medallist from IIM-Ahmedabad, Class of ’86!” She met
and married Shankar at Citibank and joined the hurly-burly world of
stock broking.

Their
background already made them unusual, but they quickly attracted
attention with hard-hitting, sarcastic, irreverent and often funny
research reports and commentaries. They claimed their business was
underpinned by high-quality research and fundamental values. In the
next five years, they notched up an unbelievable growth record,
without being too dependent on domestic institutions for business. As
they claim on their website: “On a ‘Buy’
recommendation from First Global, millions of dollars of foreign
money moves into stocks. For example, our ‘Buy’ on Telco
(at Rs.150-160) saw something like $60 mn of buy orders flooding in
through us – we bought about 4-5% of Telco! And our ‘Buy’
on Himachal Futuristic saw purchases of something like 12.5 mn shares
– around 20% of the company – by Foreign Institutional
Investors (FIIs). We have almost entirely, bought Vikas WSP’s
28% FII holding. That’s the awesome power of First Global’s
research – no other firm in the business rivals it, Indian or
foreign.”

By
2001, First Global was among the top five stock broking firms, by far
the favourite broker of many FIIs. They had opened offices at London
and Dubai, obtained deemed FII status themselves (later scrapped by
SEBI) and were in line to get trading membership at the New York
Stock Exchange. Their research now also focused on the world economy.

Their
alert minds were also playing godfather to start-ups. They had
invested in car designer Dilip Chhabria’s company (DC Motors),
hoping for a splashy listing, claiming that it would be “better
than Infosys”. Another innocuous investment of theirs, however,
made a different kind of splash. They acquired a 5% stake in
Tehelka.com,
the website that shook up the Indian political establishment by
exposing on video tape, corruption in defence deals. The stake was
later hiked to 15% and Sharma was working at organising the second
round of funding for Tehelka.

By
2001, they were making stupendous amounts of money (apparently paid
taxes of Rs 50 crore). Of course, not all of it was through staid
brokerage obtained by offering the best research. By 1998, they were
showing signs of frustration that most of their (right) calls were
sells, whereas clients were always looking for what to buy. Maybe
that realisation was the turning point for this smart couple. The
next year they came out with a string of buy recommendations that
outdid even the most mindlessly bullish analysts.

It
certainly fetched them megabucks, but a large part of it was earned
exactly the way the rest of the financial world does: placement of
equity at rigged up prices. Using their goodwill, they did a
blitzkrieg private placement of 10% of the equity of HFCL, a highly
controversial company run by Vinay Maloo and Mahendra Nahata, raising
Rs 735 crore at Rs 1050 a share.

HFCL’s
chairman Vinay Maloo, of course, was a close friend and associate of
Ketan Parekh, so close that HFCL shareholders’ money was put at
Ketan’s disposal to help him meet his speculative losses.
Shankar and Devina believed that the placement was all their effort,
although Ketan possibly had a considerable role to play in
“influencing” fund managers. On its part, First Global
put out a sketchy and unconvincing research report, which started out
admitting that HFCL was a high-risk scrip. It had fallen 85% in 1996
and had already soared 2000% in 2000 (thanks to Ketan’s kamaal)
when they were flogging it. It touched a dizzy Rs.2553 in March 2000
and fell to below Rs 80 in mid-2001. Sharma claimed that he still got
his clients the best deal, buying the stock well before its peak and
exiting before the crash. Great, but then this was no better than a
punter entering and exiting a stock irrespective of such heavy stuff
like free cash flow, return on invested capital and fair value –
central elements in First Global’s vaunted research. It was
also totally out of line with their view about other investment
bankers and analysts for being opportunists. But it certainly earned
them a fat fee.

Remarkably,
alongside some truly outstanding research, one of First Global’s
favourite stocks remained Global Tele, another controversial company
and among the top three favourites of Ketan Parekh (along with Zee
and HFCL). Global Tele moved from nowhere to Rs 3550 and dropped to
around Rs 100 in mid-April 2001 but has remained a ‘Strong Buy’
of First Global. Everybody, who has had a nodding acquaintance of
what Global Tele’s business and its key promoters are all
about, were intrigued. And so were analysts and fund managers. Did
the same considerations that drove them to be bullish about Global
Tele, also play a role in their two crown achievements like calling
Telco a Buy at Rs 239 with a target price of Rs 1000? The
stock is now Rs 60. Vikas WSP, a discovery of First Global for the
FIIs, as exposed by The
Economic Times,
neither had a professional set-up nor even a wage bill worthy of a
decent company. First Global moved the stock from Rs 80-90 levels all
the way to Rs 1400 and it later fell to Rs 200, despite great
profitability.

On
2nd
March,
when the finance ministry ordered SEBI to investi-gate the
post-Budget crash, the stock exchanges identified First Global as one
of the four firms, which allegedly indulged in massive bear
hammering. Exactly eleven days later their investment in Tehelka.com
made became the subject of much speculation.
The Tehelka
tapes were intriguingly released at exactly the same time that
Parliament was debating the payment crisis on the stock markets. Did
Shankar and Devina know about the Tehelka
investigations?
Was that why they were bearish? And were the tapes released at the
same time as the debate in Parliament to create more chaos? They
vehemently deny all three charges.

Devina
Mehra claimed on television that they are minority shareholders of
Tehelka (just 15%). But First Global was Tehelka’s
sole
financier for which their 15% stake was in line with the way dotcoms
were funded. Tehelka had virtually no revenues. How did it finance
the sting operations on cricket (courtesy, Manoj Prabhakar) and
defence deals, the latter costing about Rs 30 lakh? And how could
Shankar and Devina not be calling the shots as the sole financiers?
If they did, they surely knew about the investigation. They deny it.

Interestingly,
First Global tried to organise funds for Tehelka from KVP Ventures, a
so-called venture fund set up by Ketan Parekh, Vinay Maloo and Kerry
Packer. Negotiations fell through and instead, Zee Telefilms
initially agreed to take a 26% stake. Zee News took the lead in
repeatedly broadcasting the tapes to the world, even as it pretended
that Ketan Parekh and Scam 2001 did not happen.

The
SEBI investigation on the market crash unearthed First Global’s
strange practices, large speculative trades and curious business
associates. From being a research-driven, ethical and accountable
broking firm, First Global was suddenly seen as speculators,
attempting to manipulate the market, suspected to be front-running
their client’s transactions and supping with shadowy brokers
like Nirmal Bang. At least, that is what the SEBI report points out.

Once
exposed, First Global adopted a policy of countering every charge
against them with great aggression. It abused the Income Tax officers
(for which Sharma was arrested), SEBI and all journalists who did not
toe the First Global line. Sharma called The
Economic Times a
rag and shot off a barrage of abusive and often childish emails at
us, calling us corrupt and stupid and “ready to wag our tails
before SEBI, which was acting on behalf of a totalitarian regime.”

In
fact, immediately after they were targeted as a ‘short sellers’
and ‘manipulators’ they held a press conference denying
any short selling and claimed to be actually net buyers during a
three-day period around Budget time. When more details of their large
short positions came out, they charged that they were being
victimised because of their association with Tehelka. They claimed in
another press conference and several press releases that SEBI’s
report was full of falsehoods, wrong data and foolish
interpretations.

First
Global had six associate firms: one each at UK and USA for its
membership applications there, a Mauritius-based investment company
for arbitrage in GDR/ADRs; First Global the portfolio manager, First
Global the Depository Participant and finally Vruddhi Confinvest
India Pvt. Ltd. which is its proprietary sub-brokerage firm.

SEBI’s
investigation found that even though they themselves had memberships
at BSE and NSE, many proprietary trades of Shankar Sharma and Devina
Mehra were routed through the Vruddhi, Bang Equity Broking and Bang
Securities Pvt. Ltd (a sub-broker of Nirmal Bang). Bang in turn
introduced Sharma to Palombe Securities and Finance, a non-descript
broking firm that too through another entity called CSL Securities.
Because of these complex introductions, Palombe and CSL Securities
split the brokerage earned from Sharma, which was Rs 30 lakh for the
year 2000-01. The routing of trades and the payment of brokerage fees
to these small-time firms, prima
facie,
indicated an attempt to hide large market operations, said SEBI.
First Global’s explanation to SEBI was that the firm traded
through Nirmal Bang when they had exhausted their trading limits
under SEBI norms, but SEBI’s investigation found such routing
even when exposure limits were available on their own cards.

SEBI
charged that First Global was a heavy net seller in the Jan-March
2001 period (particularly between 12th

February and 16th

March) on BSE in stocks like Global Telesystems, HFCL and Satyam. At
one time, HFCL sales alone amounted to 18% of the net sale position
on the exchange. Vruddhi had large forward sales position in volatile
scrips like Wipro, Satyam, MTNL, State Bank, HFCL and Infosys when
the market was tanking according to SEBI. The sales were covered
between 28th

February and 28th
March.
The depository records show Vruddhi did not hold these shares. They
were naked short sales. SEBI asserted that although its
investigations were hampered by the search and seizure operations of
the Income Tax department, its own findings clearly indicated
“structured arrangements in the garb of arbitrage trading,
collusive trades, attempts to depress the market, and prima facie
violations” of various regulations
including those on fraudulent and unfair trading practices. First
Global continued stonewalling and ranting against SEBI and other
authorities while the ban on its brokerage business forced it to
close down most of its offices. It subsequently, benefited from
bleeding heart media reports (that never got into the facts) and also
from SEBI’s carefully planned inaction in persuing the mountain
of evidence despite explicit JPC’s recommendation to do so.

The
quiet operator: Nirmal Bang

Until
SEBI identified Nirmal Bang as one of the big operators in the run up
to Yashwant Sinha’s much-acclaimed Budget, few outside the
trading community had heard of the man. Yet, as Sucheta wrote in The
Indian Express
way back in January 2000, Nirmal Bang was as important to large
market operations as the more glamorous and better known names such
as Ketan Parekh or Nemish Shah. Unlike them, Nirmal Bang did not make
prices move but he was indispensable to the process of doing so. His
multiple cards and sub-broking entities created a nation-wide network
that was a magnet for day traders and the fastest way of spreading
the word that a certain stock was ‘in play’. Moreover, he
had this nice habit of managing his finances through a delicate
balancing of cash flow and never hassling clients for margin
payments.

Bang
operated through five entities: Bama Securities Ltd., member of NSE,
Nirmal Bang Securities and Bang Equity Broking, both members of BSE
and two sub-broking firms, Bang Securities and Nadi Finance and
Investment. These were registered sub-brokers to three entities –
NBS, BSL and Suresh Rathi Securities.

SEBI
investigation has documented reams of Bang’s transactions by
his multiple trading entities as evidence of heavy short sales in the
period leading up to Budget 2001. It has also pinned down these heavy
sales to specific time slots when they were clearly geared to
precipitate a collapse in stock prices with a clear “manipulative
intent”. For instance, on 2nd
March 2001, in the space of seven minutes between 12.35 to 12.42 hrs,
when the Global Telesystems price were in the throes of a 16%
collapse, three of the Bang brokerage firms had sold several lakh
shares – a clear attempt to create panic in that counter.

Bang
was a magnet for the biggest and best in the business. Whether it was
ace speculator Ketan Parekh or a research-driven Shankar Sharma, each
distinctly different in their operating styles from the other, they
all traded through Bang. Yet, Bang himself remained determinedly low
profile. He stayed away from the press, never appeared on television
and even the elaborate attempt of The
Indian Express to
photograph him came a cropper. Nobody knew what he looked like and
they captured the wrong guy on film. His speciality was his curious
mix of clients and an ability to juggle all their interests and
operations without a conflict.

SEBI’s
sleuths found that Shankar Sharma, chief of First Global Securities
was a big client of Bang. Sharma’s companies had entered highly
curious ‘synchronised trades’ of over Rs 50 crore with
Vruddhi Confinvest
India Ltd. a proprietary sub-brokerage outfit of First Global. These
trades were conducted between 20th
February
and 2nd
March
and the orders had perfectly matching scrips, quantity and prices
leading to a suspicion of manipulative circular trades. SEBI says
that there is a “definite pattern of circular trading between
First Global and the Nirmal Bang group for proprietary trades of
Shankar Sharma, which have been structured by synchronising the order
entry.” The convoluted routing of deals, said SEBI, raised the
suspicion of front running, since First Global was a big dealer for
domestic and foreign institutional investors. First Global had
claimed that it was purely a way of transferring business to suit
exposure limits on their cards.

Palombe
Securities, a sub-broking firm, told SEBI that its “main
business was jobbing and investment on its own account and
introducing clients to other brokers and sub-brokers, earning
broker-age through these introductions.” One Bhaskar Hingad
runs the firm, and it had an oddly complex relationship with leading
market operators. One of its directors was a former associate of the
late Manu Manek, a big bear operator who, during the 1980s used to be
the kingpin of BSE.

Palombe
was well connected and had trading terminals of Nirmal Bang’s
various entities installed at its office. It was also very close to
Ketan Parekh who conducted a big chunk of his operations through the
firm. Yet, it is Palombe who introduced Shankar Sharma to Nirmal
Bang; that too through yet another firm called Consortium Securities.
Palombe Securities and CSL shared the credit for introducing Shankar
Sharma to Bang Securities and split 50% of the introductory brokerage
of Rs 30 lakh in the year 2000-2001. SEBI also found instances of
liberal transfer of funds between Palombe, Nirmal Bang and Shankar
Sharma, underlining the closeness of their relationship. It was
Palombe again who introduced Ketan Parekh to CSL or the Consortium
Group, which then went on to become a large operator for Ketan.
Consortium had three entities with memberships at the BSE, NSE and
the Delhi Stock Exchange and sub-broking outfits, registered with
Vikram Kenia Securities and Bang Equity Broking. Palombe in turn, was
a client of CSL, and its accounts in the Consortium books show that
after the end of February 2001, when its balances were down to zero,
it has had serious payment problems and has been maintaining debit
balances.

SEBI’s
limited review of the CSL Group’s records indicated the need
for a detailed inquiry into its large trading operations on its own
account as well as for Ketan Parekh, First Global, Palombe Securities
and Nirmal Bang. For instance, CSL’s bank accounts show large
unsecured loans of over Rs 10 crore from five corporates including
four companies belonging to HFCL and one belonging to Max India. SEBI
and the Department of Company Affairs need to probe these for
diversion of funds. Apart from this, Omega Finhold an associate of
CSL received inter-corporate funds from some companies, which were
again used for Ketan Parekh’s operations.

These
investigations would nail down broker-corporate nexus – how
companies divert their money for their market operations. The
Videocon, BPL, Sterlite nexus with Harshad Mehta may seem puny
compared to what was going on in Scam 2001.

Anand
Rathi, one of the most suave and dynamic Presidents of BSE, attained
the dubious distinction of being the second successive BSE chief to
be forced out of office for having misused his position as the head
of the exchange. Rathi was accused of having used and passed on
market information to short sellers. A tape containing Rathi’s
conversation with surveillance officials was leaked to the press and
SEBI forced him out. However, he admitted to no wrongdoing and
insisted that he resigned only to maintain the dignity of the
exchange. The irony: just as Rathi’s predecessor, Jaswantlal
Chotalal was asked to resign a few days before his term was supposed
to end in 1998, Rathi had to go just before he was scheduled to end
his term at the end of the month.

The
two situations were similar. In June 1998, the BSE president as well
as other broker-office bearers had allowed a set of brokers to break
into the trading system at the dead of night and insert synchronised
trades to cover up a large default. At that time, BSE officials were
trying to defuse a payment crisis caused by the rampant price rigging
in BPL, Videocon and Sterlite by Harshad Mehta on his celebrated
return to the market.

There
were two charges against Rathi, a former senior executive of Aditya
Birla, who witnessed a meteoric rise between 1997 and 2001. The first
was his misuse of official position to access trade information,
which gave him specific knowledge about the financial difficulties of
stockbroker Ketan Parekh. The second was that he may have passed this
on to brokers who were present in his office during the phone call
and that they then indulged in heavy short sales and knocked the BSE
Sensex down by 177 points.

22

Nothing
Official About It

Losses
in the grey market of Kolkata could be easily around Rs 2000 crore
while the official defaults have been clumsily papered over.

The
nerve centre of the Scam 2001 was not Mumbai, the
financial
capital but the decrepit City of Joy, Kolkata. In fact,
most of
the action was not even official but took place in the huge grey
market that has flourished for decades in the city. Kolkata was the
largest illegal trading centre in the country, and its money power to
finance private trading positions was completely disproportionate to
its sick economy. According to one estimate, losses in the grey
market on account of collapsing K-10 stocks could easily be around Rs
2000 crore, and the official defaults have been clumsily papered
over. The CSE story if properly investigated will prise open the role
of the exchange, UTI, SEBI, Ketan Parekh and one notorious company,
DSQ Software and its promoter, Dinesh Dalmia.

If
the CSE attracted speculators and financiers from across the country,
it was because the “unofficial” business was conducted as
smoothly as the official trading. That attracted hefty badla
rates, which were normally paid out in cash without a hitch. The
official and the unofficial businesses were so closely intertwined
that trying to understand one without the other is meaningless.

In
fact, to some Kolkata punters, there was nothing unofficial about the
huge speculative market. Its badla
sessions were openly done until mid-March 2001. Even after the
crisis, Kolkata operators were lamenting the fact that for the first
time in decades, CSE had failed to conduct the ‘badla’
session as scheduled on Thursday. One such operator was baffled when
asked if he was referring to the unofficial badla
session. To him, the only difference between the official and
unofficial sessions was that one was a “computer
ka badla”
(carry-forward transactions through the automated system) and the
other was a “computer
ke
bahar
wala badla”
(transactions outside the computer system). Both were equally
sacrosanct. The unofficial market achieved this level of sanctity
only because SEBI determinedly looked the other way even when
unofficial badla
sessions were conducted right on the floor of the exchange with the
business press routinely publishing the rates.

Like
elsewhere, the payment crisis at CSE was because of huge positions in
the free-falling K-10 scrips. The losses in unofficial trades alone
were about Rs 2000 crore. The outstanding position of the top six
market operators was more than Rs 150 crore each. This did not
include industrialists from Mumbai who traded through the big firms.

The
situation on the official market was just as bad. The CSE
authorities, which had claimed that a Rs 96 crore payment problem for
the 1st
March settlement had been resolved, admitted a week later that Rs 40
crore still remained unpaid. They claimed to have invoked bank
guarantees to bridge the gap. For the settlement ending 8th
March,
CSE admitted to a Rs 15 crore gap, but knowledgeable Kolkata
operators refused to believe this figure. They suspected that things
were much worse and pointed out that the settlement was done at a
location outside CSE, because the office-bearers feared that some
operators may become violent.

Even
then, the whole attempt to manage the pay-in problems and defaults
were amazingly ham-handed. CSE accepted shares of a few volatile
scrips as collateral against margins, scrips which were part of
Ketan’s list of favourites, such as HFCL, DSQ Software, Zee and
Global Tele. CSE was also guilty of accepting post-dated cheques for
margin payments instead of debiting brokers’ accounts and these
were clearly not worth the paper. Many of these cheques bounced and
exacerbated the crisis. Several influential brokers were allowed to
continue trading even when their financial difficulties had become
apparent. It failed to check brokers who had already exceeded their
exposure limits and used capital deposited against exposure limits as
margin payment. No wonder that the Rs 500 crore margin claimed by the
President Kamal Parekh when the scam first hit CSE, simply vanished
upon closer inspection. Even if the bourse had deactivated the
terminals of defaulting members a little earlier, the damage would
have been better contained.

The
bizarre stories emanating out of Kolkata would be hilarious if they
were not so repulsive. When JPC called Kolkata officials for a
briefing in late June 2001, CSE’s executive director Tapas
Datta narrated this wonderful story about how the bourse’s
margin calculation system had a serious flaw (bug). When the value of
margin payable went above a certain number (the ED called it ‘number
of fields’), the margin payable simply showed up as zero. The
exchange blamed it on the software supplier who absolutely denied the
charge. The upshot of the incredibly convenient ‘bug’ was
that the margins of the largest brokers, later declared defaulters,
could not be correctly calculated. The bourse apparently realised the
enormity of the flaw only when it was hit by huge defaults.

A
big source of losses in CSE was money investors had put in for steady
return in badla
financing (financing carry forward trades) in Mumbai. Many BSE
brokers were taking money from clients on the pretext of investing in
the official badla
but were routing the money to Calcutta’s unofficial badla
market since the rates were much higher (24-30% compared to 10-12% in
BSE).

When
the K-10 scrips were collapsing, the safe money that clients thought
they had put in badla,
was diverted to fund the huge losses of speculators. Many BSE brokers
themselves used up the badla
money to complete their pay-ins. Client losses may have run up to
about
Rs 600 crore. These brokers were issuing fake contract
notes or client confirmation orders of these transactions, keeping up
the pretence that the money was safe. Most of the transactions never
got routed through the official systems of BSE and NSE and were just
internal entries of the brokers. So, the clients are not secured by
the exchange.

The
CSE scandal is an obvious case of not only SEBI’s supervisory
failure, but a shameful collusion between UTI, SEBI and CSE that let
off the operators and gypped the unit holders of UTI. This put
enormous pressure on a tattered UTI and led to the exit of Chairman P
Subramanyam in disgrace in early July. There has been no pressure on
SEBI so far. It knew all about CSE’s misdemeanours. Several of
its inspections had grossly indicted the bourse, but SEBI failed to
initiate corrective and disciplinary measures. Its report on the
payment crisis and the last three inspection reports list most of
CSE’s scandalous practices and yet it joined hands with UTI to
bail out CSE and the notorious operators who controlled it.

When
CSE was teetering under the weight of collapsing junk stocks of Ketan
Parekh, UTI stepped in to buy a large chunk of DSQ shares pledged by
Dinesh Singhania, former CSE president who defaulted. It also bought
large and inexplicable chunks of HFCL, Zee and Global Tele in March
2001, but apparently not from CSE. For this alone, the top UTI top
brass needs to be sacked.

Consider
how similar was UTI’s role to that of Shriram Mutual Fund. In
June 1998, Shriram Mutual Fund bought 1,20,600 shares of Videocon on
BSE to bail brokers on the verge of default while furthering Harshad
Mehta’s comeback attempt with price rigging as his main
operating strategy. On 2nd
February 2000, SEBI decreed that Shriram Mutual Fund’s actions
were ‘detrimental to the interest of its investors; asked the
Fund’s sponsors to pay up the price difference of Rs 19 per
share between the purchase price and market price of Videocon shares;
asked the Managing Director and two of his executives to resign and
ordered a change in the composition of Shriram’s Board of
Trustees. Now what did UTI do in Kolkata in March-April 2001 that was
any different to Shriram Mutual’s role?

On
9th
March
UTI, bought 13,30,000 shares of DSQ Software to bail out CSE, at Rs
189, a big discount to the ruling market price, according to UTI’s
executive director BG Daga. Daga also said that shares worth Rs 25
crore were bought directly from CSE – to help the bourse
complete the controversial settlement No. 148 – shares
belonging to defaulting broker Dinesh Singhania.

Now,
UTI already held large quantities of DSQ, of which around 56 lakh
shares were purchased at an average price of nearly Rs 2000 in
February-March 2000. It was only in Jan-Feb 2001 that it had begun to
sell small chunks of the scrip (five lakh shares). In fact, UTI’s
average holding price for the 23.7 lakh DSQ Software shares that it
owned was approximately Rs 760.

From
its bailout level of Rs 189, DSQ Software went down to a third in
July 2001 when UTI closed the exit door of US-64. This meant a loss
of Rs 25 crore to unit holders in one bailout deal alone. Even though
UTI bought at a discount to market, it was surely obvious to
everybody that all shares associated with stock broker Ketan Parekh
would continue to drop for several weeks more. UTI’s decision
to bail out CSE looked even more controversial considering that it
slashed payout on its MIP-95 and MIP-96 schemes to five per cent; and
that it was already discussing a second bailout of the US-64 scheme
with the government. The US-64 faced a shortfall of over Rs 6000
crore bet-ween its Net Asset Value and its repurchase price. So, if
Shriram Mutual Fund was punished for bailing out stock brokers at the
cost of its unit holders, then so should UTI. In the Shriram case
SEBI had said that the purchase price was “not in the best
interest of the investors and were made for extraneous
considerations”. It also said that “schemes of the mutual
fund were not handled in a prudent, diligent manner” as
expected from a fund run on “professional lines”.

All
this applied to UTI’s decision to bail out CSE and its
operators as well. What made it more galling was that the bailout was
supervised by none other than a divisional chief of SEBI with Daga of
UTI acting as an observer. Moreover, the SEBI Chairman himself
oversaw the entire bailout effort. Daga’s argument was that
UTI’s deal was “not similar” to Shriram’s,
because the shares were the property of CSE and not the brokers and
the cheque was paid directly to the exchange. Nevertheless, a broker
had pledged the shares and UTI’s action, by causing a loss to
its unit holders, had betrayed its fiduciary functions. Secondly,
Daga said that Shriram Mutual Fund had bought above the market, while
UTI’s acquisition was at a discount. Within weeks that argument
seemed laughable when the share price went down to almost a quarter
of its value. Thirdly, Daga says that CSE offered him shares of three
other companies but UTI had only picked up DSQ Software. Great stock
pick, after bailing out brokers holding HFCL, Global Tele and Zee
Telefilms in March! Except that DSQ and its promoter was probably
involved in some sort of a fraud.

The
CSE bailout showed that UTI could not be bothered about
responsibility to small savers from whom it was picking up cash while
SEBI was more interested in solving the problems of thieves rather
than acting as the cop. It is one thing for the stock market
regulator to make efforts to avoid a contagion effect, and quite
another to do so at the cost of unit holders of UTI.

UTI,
already bailed out once at the cost of the general public, had
drastically cut the returns on its monthly income schemes and
aban-doned the Rajlaxmi scheme, leaving many a little girl in the
lurch. Also, if SEBI had wanted to rescue CSE, it ought to have
approached the finance ministry instead of going along with a
surreptitious deal with UTI. The question is, when a mutual fund
transgresses its fiduciary duty in consultation with or at the
request of the regulator, who will play the cop? May be JPC, which at
first did not want to investigate UTI.

Investigations
into CSE will not only bring out into the open the punters’
positions in K-10 scrips and the rescue efforts UTI and SEBI mounted
for them. It will reveal a lot about the corporate angle in the scam,
most notably a key member of the K-10 portfolio, DSQ Software. For
the last three years, DSQ and its managing director, Dinesh Dalmia
has made more news for his stock market operations than for his
management skills. The scrip rose to a dizzy Rs 2800 last year, to
hurtle down to around Rs 50 in end-June. Dalmia was known to be a big
speculator in the unofficial market at Kolkata and many of the top
defaulters of CSE were found stuck with massive quantities of DSQ
Software shares some of which UTI very generously picked up.

Dalmia,
son-in-law of OP Agrawal of Ganapati Exports against whom there are a
variety of revenue cases, has led a chequered life, making and losing
huge amounts of money at different times. An inveterate gambler in
stocks, he had a chance to straighten things for himself once for all
when, in 1999, DSQ attracted the interest of private-equity fund of
Bank of America and Ketan Parekh. BankAm wanted a majority stake and
Dalmia was supposed to step down from the DSQ board while continuing
to be an investor with a 5% holding. The new owners would use the Rs
220 crore coming into the company to clear DSQ’s loans,
contingent liabilities (bank guarantees). However, all that happened
was that the stock was rigged up to Rs 2800 and Ketan Parekh probably
made lots of money on several rounds of buying and selling. Dalmia
did not step down, BankAm exited, no professional lasted long enough
and whatever money came into DSQ went right back into the market. But
among the most startling stories of Dinesh Dalmia’s shenanigans
is DSQ Software’s fictitious takeover and increase in its
capital and circulation of fake shares!

Dalmia
wanted to meet Sucheta on 25th
May
2001, because he said that he wanted to clarify ‘certain issues
and misconceptions’ about DSQ Software. He said the company was
debt-free and was among the only Indian companies to have paid back
all the money it owed banks and institutions (it had been listed as a
defaulter with half a dozen banks including Indian Bank and HDFC
Bank). Among other things, he said that he was now off speculation
and determined to focus exclusively on running his company (like
Arjuna in Mahabharata,
he said). He was confident that DSQ would be another Infosys.
Dalmia’s determination seemed impressive. That was in the
future. Before that there were some niggling clarifications to be
made. Why had the company’s capital increased Rs 30.5 crore to
Rs 47 crore in March and if he had acquired a company during that
time, why was it such a secret? Dalmia said that DSQ had acquired a
San Jose, California-based company called Fortuna Technologies. He
claimed that all disclosures were made to the six stock exchanges on
which DSQ was listed. Could one get some details? He assured that it
will be emailed the very next day. He went silent. Sucheta wrote to
him a dozen times asking for the information. His replies, coming
from his office were a range of excuses: he was abroad, he was
unwell, finally he said that under the agreement with Fortuna
Technologies, the takeover could not be announced until the employees
of Fortuna were transferred to DSQ. What about disclosure to Indian
shareholders and stock exchanges? He simply stopped replying.

Intrigued,
Sucheta asked SEBI, BSE and NSE for information. SEBI’s
executive director Partip Kar confirmed that the company had not
informed SEBI about the acquisition/merger; he also said that there
were indications of a violation of the listing agreement and the
takeover rules. SEBI would investigate the matter further, he said.
BSE, as usual, did not bother to reply and NSE said that DSQ may have
violated listing rules. It said that it was in dialogue with the
company to get the details and planned to initiate some disciplinary
action. A fund manager from Chennai also wrote in to say that no
information was available with the Madras Stock Exchange when he
checked for it.

DSQ’s
website said nothing about the acquisition or the increase in
capital, even though the site was updated until April 2001. There was
no mention of Fortuna at all. Instead, right until April, there were
press clippings about its negotiations and re-negotiations with San
Vision Technologies of the US. At that stage, the Fortuna
Technologies’ acquisition got really intriguing. Firstly,
Fortuna was not in San Jose, as claimed by Dalmia but in Sunnyvale,
California. Secondly, a decision to issue 1.5 crore shares on
preferential/private placement basis to certain OCBs was made at a
board meeting on 10th
November
2000. Then at an extraordinary general meeting on 11th
December, shareholder approval was sought for the acquisition of
Fortuna Techno-logies Inc. by issuing 1.4 crore shares.

Subsequently,
the company announced to its board of directors at a meeting on 12th
January
2001, that 1.40 crore shares had been allotted at Rs 675 each, in
dematerialised form to three Mauritius based companies –
Technology
Trust (60 lakh shares), Softee Corporation (40 lakh shares) and New
Vision Investments (40 lakh shares). These shares bore the
distinctive numbers 33250001-47250000. The distinctive numbers were
important as future events unfolded.

It
was unclear if these companies in turn owned Fortuna or how Fortuna
was ever acquired, but the allotment of shares itself was queer. DSQ,
armed with an auditors’ certificate confirming the allotment,
informed the NSDL that shares bearing the distinctive number
mentioned should be credited to the three Mauritius based companies’
accounts. NSDL in turn said that the shares could be credited only
after DSQ receives in-principle listing approval from all its stock
exchanges.

On
28th
May
2001, CSE received a listing application form DSQ wrote to all
exchanges stating that they had received 10 lakh equity shares in
physical form bearing the distinctive numbers 43250001-44250000 from
Harish Biyani, one of the defaulting members, against his payment
liability. Since these were within the band of numbers allegedly
issued to the Mauritius-based companies, it would appear that DSQ
issued at least some shares with the same distinctive numbers twice –
once in physical form to some Kolkata brokers and a second time to
the Mauritius-based companies. The question is, was DSQ printing
share certificates to bailout Kolkata brokers who had lost heavily
due to excessive speculation in DSQ shares? How much of this was
punter Dinesh Dalmia’s responsibility? Also, were the 13.3 lakh
shares purchased by UTI from broker Dinesh Singhania (through CSE) in
the same distinctive number band? And finally, why was Dinesh
Singhania so adamantly reluctant to part with information?

Finally,
the clincher came after Sucheta’s article appeared in
The
Indian Express.
Remember, DSQ had passed a resolution allotting 1.4 crore shares at
Rs 675 each to three Mauritius-based companies to acquire Fortuna.
The managing director of Fortuna Technologies, TC Ashok, emailed her
saying “I would like to clarify that the three Mauritius
companies you mentioned in your article neither own Fortuna, nor
Fortuna owns them.” He says: “I own Fortuna USA 100 % and
Fortuna USA does not own any other company.” Instead he owns
Fortuna Technologies India Pvt. Ltd., which works exclusively for
Fortuna USA. The question then is who did Dinesh Dalmia allot 1.4
crore shares to in a hush-hush EGM last December? Also, what kind of
governance and disclosure practices are reflected in his getting away
with such falsehoods?

The
mystery of DSQ Software shares did not end here. Suddenly, in June
there was a flurry of activity on the CSE to have the same 10 lakh
shares of DSQ (within the band of 1.4 crore allotted for the
takeover) deposited by the stockbroker Harish Biyani released to him.
Biyani, who until recently had no money at all and was declared a
defaulter for his inability to pay Rs 30 crore to the bourse,
suddenly offered to cough up a hefty Rs 26 crore (in installments) as
a settlement. The condition was that his suspension be revoked, his
card reactivated, the balance money waived and the controversial DSQ
shares which were in CSE’s custody released to him. Kolkata
operators believe that somebody is desperate to get the DSQ soft
shares released to hush up the problem of duplicate numbers.

This
is one story that has all the dimensions of Scam 2001: a software
company that had a meteoric rise, a shady promoter, nexus with
operator – part of K-10 list, massive losses for retail
investors, a suspicious bailout by UTI, violation of company laws,
violation of listing rules, and possible fraud of duplicate shares.
It has all the key ingredients of Scam 2001 and most of it happening
thanks to the fertile unofficial market of Kolkata. That, at least,
is official now.

23

Epilogue

Deaths
of key scam characters, Reserve Bank’s abysmal bank
supervision, its curious support for Global Trust Bank, another inane
JPC report, the DSQ Software saga and media manipulation

India
has had two major financial market scams within a
decade. Neither
of them has been resolved. Investigations of both have meandered to
a farce. Little money has been recovered. Compared to the initial
drama of arrests and media frenzy, key culprits among regulators,
politicians, mutual funds, banks and government officials have not
been penalised. Some brokers and speculators central to the scams
have had their lives disrupted for a while but their ill-gotten
wealth has not been systematically tracked down and they continue to
trade through regional stock exchanges. The regulators have been
repeatedly caught sleeping but heads have not rolled. Meanwhile,
several personalities from the previous scam have expired. We offer
an insight about the key developments since 2001 when our last
edition appeared.

For
whom death tolls

As
Mumbai was only half way through its New Year celebrations on 31st
December 2001, the central character of the scam of 1992 was
suffering a massive heart attack. The scam investigation had already
taken a toll on the 47-year old former Big Bull. His hair had thinned
and was streaked with grey and the years had added several kilos to
his large frame; worry lines marked the once ebullient face as
Harshad struggled to keep his natural smile in place. The heart
attack ended all that.

At
the time of his death, Harshad had been locked up in the Thane
Central Jail on the outskirts of Mumbai with his brother Sudhir Mehta
for company. The court had rejected their bail plea in a case
alleging that they misappropriated 27 lakh shares of several blue
chip companies then valued at Rs 250 crore. He was moved to the
Thane Civil Hospital when he complained of chest pain. He suffered
another massive heart attack right in the hospital. After a strenuous
attempt to revive him, he was declared dead at five minutes past
midnight. Thus ended a-rags-to-incredible-riches-to-notoriety story
that had gripped the imagination of the nation for two short years in
1991-92 and turned Harshad into the first superstar of the stock
markets. It was an unlikely end for an eternal optimist, one who had
the ability to revel even in the glare of negative publicity. And for
a short time he had converted his big dream of untold riches, flashy
cars and a super luxury apartment into reality. He wanted to be the
Pied Piper leading investors to mega riches. Is there a message in
the fact that his last moments were in a jail cell and a government
hospital?

In
fact, even his death was not without controversy. Harshad’s
lawyer, Mahesh Jethmalani tried to give the entire episode a new spin
and a political colour. He alleged that three persons Kailash Gupta,
Sameer Jani and Dinesh Shah had in fact siphoned off a large chunk of
money realised through the introduction of benami
shares but were let off. He alleged that the three had powerful
political links and had used their clout to scuttle a police
investigation into the deal. He openly alleged in the court that the
high profile DCP, Sanjay Pandey, was transferred because he was on
the trail of these three persons. The Court directed the CBI to
follow up Jethmalani’s allegations. It led to nowhere.

Many
of those involved in the Scam of 1992 have escaped the law or are
caught up in endless litigation. But the death toll among them is
also remarkable. By late 2004 barely half a dozen cases had run the
gauntlet of litigation and been decided by the Supreme Court of
India. Hiten Dalal is the only dramatis
personae of
Scam 1992 who has been convicted by the court. Most others have
simply moved on to answer their maker. It’s a long list
starting with MJ Pherwani and including MN Goiporia, CL Khemani, RL
Kamath (all of SBI), SG Gadhe of CBI, K Dharmapal of Fairgrowth and
JP Gandhi, a trusted lieutenant of Bhupen Dalal and key to
unravelling the trades involving Standard Chartered, Bank of Karad
and Metropolitan Cooperative Bank.

On
28th
September
2001, Nirmal Bang, a broker who facilitated massive trades between
the various scam-accused, died in a car crash when the tyres of his
car burst. Bimal Gandhi, a 41 year old, successful stockbroker and
owner of Dil Vikas Finance and Eldorado Investments, had committed
suicide in mid-2001. Before that Ajay Thakker killed himself in April
2001. Thakker used to collect large amounts of money from small
depositors, and ran a successful business lending it to the film
industry. He was lured by the illusion of higher returns
from the stock exchange. The many deaths and constant changes in the
CBI team broke the continuity of the investigation. In complex
financial matters it is the best recipe for destroying any chances of
resolution. Consequently, the meandering trials seem set to roll on
for at least another decade with only unfortunate death promising a
final closure.

Another
bank collapse

In
2001, Madhavpura Mercantile Cooperative Bank (MMCB) went bust
following Ketan Parekh’s uncontrolled speculation. But Global
Trust Bank (GTB), another beehive of speculators, brokers and shady
businessmen, seemed to have escaped, thanks to its deep political
connections in Andhra Pradesh and covert support from the RBI. But it
survived only for three more years. GTB was run by Ramesh Gelli, a
high-profile banker who had earlier headed Vysya Bank. He was the
only banker ever to be honoured with a Padma Shri. GTB’s
banking licence was in fact granted to Jayanta Madhab and not to
Gelli. Madhab was initially on GTB’s board but returned to
Assam soon after. Jayant Gelli quickly mobilised his diamond trader
friends and they cobbled together its Rs 100 crore capital through
some complex financing arrangements. The red flags over GTB’s
operations started going up in 1999. It may seem outrageous, but the
RBI clearly knew how bad things were as far back as in 1999-00 but
tried to paper it over. Ironically, the first revelation came from
RBI’s own Department of Supervision (DoS) but it was forcibly
diluted. That inspection report had touched on every critical issue
that eventually contributed to GTB’s collapse including lending
to Ketan Parekh, as well as some high profile companies and several
investment companies belonging to the promoter group. It gives us an
idea about the way the bank was being run.

The
report drew attention to serious irregularities in the accounts of 18
firms of the Ramesh Gelli group and ‘‘suspected money
laundering’’. Here is one dubious case. In 1999-00, GTB
wrote off Rs 82 crore, exactly half of which (Rs 41.23 crore) was in
connection with a single account called Petro Energy Products Company
India (PEPCO). It was allowed to remit money abroad for a second-hand
refinery, although land for the project was not acquired, technology
was obsolete and the project feasibility doubtful. Who was the real
beneficiary of the remittance and the write off? The RBI inspector
suggested this be investigated because the bank had made no serious
effort at recovery. The inspection report listed 10 other companies
where GTB had written off loans within a year, without serious
recovery efforts.

Two
sets of industry groups were flagged by the inspection for their
special relationship with GTB in 2000. One was the problem exposure
of Rs 150 crore to several Balaji group companies such as Balaji
Distilleries, Balaji Hotels, Balaji Industrial Corporation, Jayaswals
Neco, and a further loan of Rs 46 crore to Pearl Distilleries (60 per
cent owned by the Balaji group). GTB allowed these companies to
recklessly run up bad loans, divert funds within the group to pay off
creditors and even subscribed to their Preference Shares and
Debentures, in order to help ‘evergreen’ the loan
accounts.

Another
large term loan was to diamond merchant Bharat Shah’s company
Rhiday Real Estate (Rs 43 crore) to finance a Rs 72.49 crore
commercial complex in Mumbai (Trambak Court). The bank floute all
prudential guidelines to lend money to the rich Shah and the loan had
already turned bad by 2000. It had a huge exposure to Bharat Shah’s
companies such as Beautiful Diamonds (Rs 46 crore default), B.
Vijaykumar & Co (Rs 131 crore exposure in 2000) and Crystal Gems,
while the security cover on these loans was abysmal. Many of these
loans had turned bad even then.

Telltale
signs of GTB’s links with speculators were clear in 2000 when
GTB made its infamous preferential allotment of 148 lakh shares worth
Rs 125.80 crore to institutions like IFC Washington, Sun F&C,
Kotak Mahindra Finance and Prudential ICICI Fund. Subscribers also
included the infamous Nishkalp Investments, the subsidiary that
brought down Tata Finance. Nishkalp, which turned out to have
extremely close connections with a crony of Ketan Parekh, was the
single biggest investor with a Rs 50 crore allotment. Interestingly,
it also had an overdraft facility of exactly Rs 50 crore from GTB,
which had also been rolled over several times. Instead of
investigating GTB’s relationship with Nishkalp, RBI supervisors
wanted the inspection report to delete specific names and replace
them with generic references.

Other
big allottees were Ketan Parekh entities Nakshatra Software and
Chitrakut Computers. On 22nd
December 2000, Ramesh Gelli had explained with a flowchart how
Chitrakut and Nakshatra had funded their purchase of GTB’s
preferential shares. Both were funded through money from MMCB and
Bank of India (BOI) among others. So, when the bank was placed under
moratorium on 24th
July 2004, Ketan Parekh’s dues to the bank were nearly Rs 240
crore, without including bad loans to crony industrialists in the
scam of 2001.

GTB
wasn’t merely an overzealous lender that chased business
indiscriminately, but the very hub of Ketan Parekh’s
activities. All his corporate cronies, their investment companies, as
well as Parekh’s own network of investment firms had accounts
at GTB, as did First Global and its satellites. Post-scam
investigations revealed how money has been rapidly and repeatedly
transferred between various accounts of this group, within a single
working day. GTB lent large sums of money to Zee Telefilms and HFCL,
which promptly diverted it to Ketan Parekh. All this has been glossed
over during the post-scam investigations because of Gelli’s
powerful political links. In fact, just when the scam was beginning
to unravel there was an attempt to suppress the entire mess. To bury
its bad loans GTB attempted a merger with UTI Bank.

Although
Ramesh Gelli was asked to step down in April 2001, he continued to
run the bank by proxy. As Sridhar Subashri, GTB’s former
executive director and a close confidant of Gelli wrote to a
newspaper, ‘‘anyone in the banking sector would be
aware’’ that even after Gelli stepped down from GTB ‘‘he
continued to guide decisions of the bank through his sister, Parimala
Anand’’ (a director) and his son Girish Gelli who became
a director in November 2003. Sudhakar Gandhe, who took over as GTB’s
Executive Director, was close to Gelli too. Yet, RBI eagerly accepted
Gelli’s fiction of having distanced himself from the bank.

RBI
was protecting GTB for three years even after it had full details of
GTB’s operations. In fact, in February 2004, a confident Gelli
was re-inducted into the GTB board and it may have been business as
usual – clearly with tacit approval from the RBI. Sucheta then
wrote to former Finance Minister Jaswant Singh asking how Gelli could
be back without a full exoneration. She was told that her concerns
were being “addressed by the RBI”. Prompted by the
Finance Ministry, the RBI seems to have induced Gelli to resign
again, and it told the media that its permission hadn’t been
sought.

The
subsequent revelation about the size of the problem makes RBI’s
benign attitude to Gelli and GTB, scandalous. Since GTB’s
capers and deep connection with the scam were either clearly
identified in the RBI report or known to the central bank from other
sources, we can only conclude that the regulator was napping –
whether by design or by default. In 2003-04, Gelli attempted to get a
foreign private equity fund to take control, with the full support of
RBI. GTB’s managing director Sudhakar Gandhe told newspapers,
“All the problems of the past have been sorted out.” The
pretence ended just 10 months later when the bank was placed under
moratorium and forcibly merged with the Oriental Bank of Commerce.
But even that raised many issues. Did OBC, a publicly listed bank,
conduct due diligence and that too over the weekend? Can we believe
that the NPAs of GTB have been crystallised at around Rs 1,200 crore
and no new skeletons will pop out? Why was RBI desperate to keep
scam-infested GTB alive and protect the reckless management? The saga
of GTB takes us to the dark side of the Indian financial system –
extremely poor regulatory oversight by an opaque, often slothful but
Teflon-coated central bank.

Unaccountable
regulators

If
RBI was seen to be sleeping through the scam of 1992, it was SEBI’s
turn in 2001, which was entirely a stock scam. SEBI was guilty of
ignoring over-speculation or failing to investigate the colossal
volumes of Ketan Parekh. Had it established an audit trail of
transactions across bourses, it would certainly have hit upon
Overseas Corporate Bodies (OCBs) and doubtful practices such as
foreign investments through Participatory Notes issued abroad. It
would also have led to GTB, which formed a hub for Parekh’s and
other scamsters’ financial operations. GTB’s operations,
central to the stock scam of 2001, were happening right in RBI’s
domain. Every investment company of the Parekh group had an account
at GTB and enjoyed generous funding by the private bank. Also, most
investment companies of the big corporate groups whose shares were
manipulated by Ketan Parekh (nicknamed the K-10 companies) banked
with GTB, allowing funds to move in and out of several firms
belonging to Ketan Parekh and his cronies in a single day without
anyone getting the slightest inkling about the nature of the deals.

The
scam of 2001 as also the scam of 1992 exposed RBI’s gross
supervisory laxity. Despite banning banks from funding brokers and
restricting their capital-market exposure, RBI failed to oversee
banks, there is also evidence that RBI turned a blind eye to the
dubious tricks of the GTB management and deliberately ignored many
warning signals that ultimately led to its collapse. For instance,
senior RBI officials worked hard to tone down words like
‘ever-greening’ or “NPA investments” to help
change the tenor of the DoS inspection report, referred to earlier.
The watering down process involved shifting the strictures regarding
loans to Ketan Parekh, First Global, and diamond traders from the
main report to the annexures. Although the inspection was completed
in September 2000, the report was released only in January 2001,
because RBI’s officials may have wanted to help GTB bag an
insurance licence, say our sources. As an aside, it is probably worth
noting as per a model perfected by foreign banks (see chapter 14),
several
RBI officers had their children working for GTB.

The
DoS referred all the charges to the central office for action. There
is no evidence of action by the central office. It could have
questioned GTB (as in the 1992 scam) and discovered Ketan Parekh’s
nexus well before the bubble burst. RBI’s Hyderabad office had
unearthed clear evidence of ‘self dealing’ in the bank’s
shares by the promoter group, through a pattern on clean short-term
loans to a range of brokers. This too was never investigated.

Among
the many red flags RBI chose to ignore were price manipulation and
accumulation of over five per cent of the equity of GTB by a market
operator. DoS had written to SEBI about “unusual activity in
the GTB scrip” and the allegation that an operator was holding
more than five per cent of GTB’s equity.

SEBI’s
subsequent investigation in late 2000 and early 2001 showed that
there was definite price manipulation and clear indication that a
group of companies/operators acting in concert held more than five
per cent of the equity. RBI still went ahead and granted “in
principle” approval to the merger of GTB and UTI Bank despite
the DoS raising these suspicions. The manipulated price of GTB was an
important factor in deciding the merger ratio. SEBI wrote to RBI
giving it details about its findings by which time the merger of the
two banks was underway.

The
RBI insisted that “investigation into price manipulation does
not fall within its purview”. What about GTB’s exposure
to brokers, which had worried the DoS? Its official line was “the
RBI regularly monitors the stock market exposure of banks through
quarterly audits. We take appropriate measures if necessary.”
Till GTB went bust, what steps did RBI take? Nothing effective.
Meanwhile, GTB chairman Ramesh Gelli claimed in a television
interview that the bank’s exposure to stockbrokers was strictly
within prudential norms and that its exposure to any individual
broker could not exceed Rs 100 crores.

Yet,
the list of the top 100 accounts of GTB contradicted Gelli’s
claim. GTB’s exposure to just two firms belonging to Ketan
Parekh, at the time of the merger announcement, was over Rs 100 crore
and at least six other GTB accounts were either operated by Parekh’s
brother or his cousin, acting in concert with Parekh. GTB also had
exposure to at least four other companies, which were part of the
Parekh circle of influence. Curiously RBI’s quarterly audits
did not throw up all this exposure, which, according to Gelli’s
own statement, would fall outside the prudential limits.

Through
this period RBI issued letters of support, endorsement and
reassurance on behalf of three private banks — ICICI Bank,
Centurion Bank and GTB. In September 2003, RBI issued a press
statement captioned “RBI welcomes cleaning up of balance-sheet”
of GTB. It commended the bank for having made “special efforts”
in recovering non-performing assets (NPAs) “in accordance with
RBI guidelines”. RBI went out of its normal reticent way to
emphasise that while the financial statement showed an overall loss,
the bank had made an operating profit. GTB had reported a net loss of
Rs 272 crore (at end March 2003) and provisioning of Rs 309 crore.

The
central bank’s eager and sweeping endorsement, even as GTB was
in a deep mess, was stunning. Was it designed to enable the
management to bail out by bringing in a strategic investor? The next
big alarm rang in late 2003 when three of the bank’s directors
including chairman of the audit committee Venkappa M. Agadi, quit.
The two other directors who left were JV Shetty, former chairman of
Canara Bank and SB Ghosh, a former senior partner of Price Waterhouse
Coopers. These directors had serious differences with the management
and auditors regarding loan loss provisions. The bad loans at that
time were (under) estimated at Rs 350 crore, requiring a fresh
capital infusion of Rs 250-300 crore. The bank accepted their
resignations but no explanation was offered to investors.

If
GTB made “special efforts” to clean up its balance sheet,
as the RBI was eager to tell the world, why had the three directors
in its audit committee resigned just before the results were
declared? The GTB management put out the excuse of age factor to
explain the exit of Agadi, who headed its audit committee. But what
about JV Shetty and SB Ghosh? Did the provisioning that was
‘welcomed’ by RBI look fishy to the experts? RBI did not
question the ‘independent’ directors about their exit
probably because it was on the bank’s side. This makes a
mockery of corporate governance regulations and the role of
directors. Ironically, NR Narayana Murthy who headed SEBI’s
second Corporate Governance Committee was also a director of the
RBI’s central board. Maybe SEBI should scrap its corporate
governance code, which only forces the better run companies to
observe endless compliance and disclosure regulations.

Even
as RBI was busy issuing a certificate to GTB, there were cases of
fresh lending to shady companies. Were the directors who resigned
upset about this? Did they discover bad loans far in excess of the
disclosed levels? They apparently had disagreements with the GTB
management about continued support to a television network company
and a large south-based group, which already had plenty of bad loans
in GTB’s books.

The
RBI also seemed to have forgotten it was not the bank’s only
regulator and that GTB’s depositors were not the only
stakeholders. The bank was listed on the stock exchanges and subject
to SEBI regulation. Moreover, SEBI had recently moved GTB to the
Trade-to-Trade segment, to curb excess volatility. The RBI press
release, propelled the GTB scrip up 7.8% on the day it was issued,
despite its huge losses. Wasn’t the RBI responsible for helping
the scrip move up, on false grounds, as it later turned out? And did
the central bank, which has a deputy governor on SEBI’s board,
discuss the release with SEBI before it was issued?

RBI’s
role in the Nedungadi Bank case was also equally shocking. While it
was common knowledge that Rajendra Banthia, a close crony of the late
Harshad Mehta, had a free run of the bank, RBI pretended to know
nothing. Banthia was Vice President of the Bombay Stock Exchange in
1998, when it had notoriously opened the trading system in the middle
of the night to enter fictitious trades and avoid a major market
default. He was also responsible for inducting a former BSE President
and public representative on the Nedungadi board.

In
fact, he has been under investigation since the 1992 scam. The RBI
representative on the Nedungadi Board slept peacefully even when
Banthia was officially inducted on the board in December 2000. It was
only after the scam surfaced that RBI’s inspection unearthed
illegal “arbitrage” trading worth Rs 1352 crores through
three firms connected with Banthia, which had caused a loss of Rs 95
crore to Nedungadi Bank. The ‘arbitrage’ was nothing but
a license to indulge in a rampant churning of stocks without leaving
any open positions and the bank board knew the three firms allowed to
do such trades belonged to Banthia. Following hectic recovery efforts
Banthia made good some of the losses, but still owed the bank Rs 34
crore. The JPC was told that he held over 45-50% of the bank’s
equity, although only 20% was officially held. RBI did nothing even
when there were regular press reports detailing Banthia’s
background and misdeeds for over a decade.

RBI’s
laxity goes back a long time and is mainly due to its ivory tower
approach to supervision. It does not seek market intelligence and
invariably misses major scams until they are well beyond control.
However, unlike SEBI, which has often come in for scathing criticism,
the RBI has been protected by its silence and banking secrecy laws.
RBI officers always escape responsibility. In 1992, despite clear
evidence of having ignored the diligent reports of an upright officer
Augustine Kurias, who had spelt out lawlessness in different aspects
of the securities industry, nobody was held responsible.

RBI
failed to gauge the extent of the rot in finance companies and the
cooperative banking sector. It gave a provisional banking licence to
CR Bhansali, after having rejected applications by the Tatas and
Birlas. It failed to act decisively in the Nedungadi Bank case for an
entire decade and quickly ordered a merger with Punjab National Bank
to avoid controversy. It forgot to regulate Overseas Corporate Bodies
(OCBs) that it had registered, often with a $10 capital. And they
merrily manipulated the stock market leading to another scam. The
Madras High Court has called the RBI “gullible” (in the
case involving Mercantile Credit Corporation) and accused it of
failing to “act with vigour, range, depth and speed that the
law required of it, for protecting the public interest”.

Yet,
the RBI, India’s most opaque regulator, is never held
accountable. RBI also ensures that its regulatory lapses are not
scrutinised. For instance, an immunity clause in the amalgamation
scheme of GTB with OBC precludes any suit or legal proceedings
against the centre, RBI, OBC and GTB for anything done in good faith
or in pursuance of the Scheme.

The
GTB saga also showed up SEBI in poor light. From mid-2004 large
investors were found selling GTB stock in block deals on the bourses,
right up to the declaration of moratorium on July 24th.
Were they privy to inside information about failure of the
restructuring efforts by inducting private equity investors? The
capital market regulator has never investigated these sales or
initiated any action. Instead, from July, SEBI’s ban on Ramesh
Gelli and his group on participating in the market came to an end.
Technically, he was free to go ahead and set up the turnaround fund
that he already announced.

The
Department of Company Affairs (DCA) is supposed to be another key
regulatory agency overseeing corporate actions. When the Joint
Parliamentary Committee (JPC) asked questions about corporate
irregularities, DCA came up with outrageous indifference. As per
current practice, Regional Directors (RDs) and Registrars of
Companies (RoCs) are nominated by SEBI on the Governing Board of
stock exchanges. The JPC had asked whether RDs and RoCs could take
action if there is any unreasonable speculation in the market. The
DCA Secretary replied that, “each time there is a movement in
the stock market if you rush to a company and invade it, that kind of
tendency is not the right kind of stance to adopt. It should be based
on some solid information”. The JPC emphasised that when the
price of a company’s scrip increased abnormally, it should ring
alarm bells that something wrong is going on and DCA should initiate
inspection. The DCA Secretary said: “we are contemplating on
your observation that when we are there in the stock market, why do
we not take action. There is a lot of truth in what you are saying.
We will keep that in mind”.

A
Serious Frauds Office was set up under the DCA and the notorious DSQ
Software case was transferred to it for investigation. But the SFO is
rarely seen nor heard of since its inception. DCA suffers not only
from intent but also shortage of manpower and infrastructure. It has
reportedly referred eight cases of suspected malfeasance by chartered
accountants to the Institute of Chartered Accountants of India. But
nothing happened. DCA admitted to the JPC that though they have
powers to prosecute chartered accountants, it has hardly been used.

The
New Old JPC

If
experts and officials have such a ham handed approach, you can hardly
expect ignorant politicians to do any better. But that does not
prevent them from messing around. On 26th
April 2001 the BJP-led government, under pressure from the opposition
parties agreed to set up another JPC to investigate the market crash.
In fact, the setting up of India’s second ever JPC to
investigate a financial scam was the result of political haggling.
Tehelka had exposed bribery in defence deals that threatened to bring
down the government and the opposition parties were baying for blood.
A compromise had to be worked out. So, the government agreed to form
a JPC for the stock market crash and only an inquiry commission to
investigate Tehelka.

However,
it made sure that the 30-member, multi-party JPC was crippled from
the start. It was headed by Prakash Mani Tripathi, a retired
Lieutenant General who knew little about the intricacies of the stock
market. What made this JPC rather unique was that it included several
politicians who used to openly fraternise with many of the brokers
and companies who were to be investigated in the scam! Quite
obviously, they lost no time in making their sympathies clear.
Besides, they were reluctant to expand the investigation to cover the
two main sources of the scam: the business houses who colluded with
the scamsters and UTI. The scam investigation meandered along
sloppily as deals and bargains were allegedly struck in the
background.

We
thought the scam of 1992 was audacious. The scam of 2001 was more so.
We thought JPC of 1992 was docile. The JPC of 2001 beat it hollow
with its insipid probe and supreme inaction. It sought three
extensions and made sure the key scamsters were let off. Before
submitting its inane report on 19th
December 2002, it questioned regulatory agencies including RBI for
being lax in governing co-operative banks. A draft report leaked to
the media had accused the upright UTI Bank chief (P.J.Nayak) of
planning personal gains from its proposed merger with GTB. There was
enormous embarrassment when he promptly handed in his resignation and
went on leave and his name, correctly did not figure in the final
report. It indicted SEBI for lack of alertness that led to the
withdrawal of Rs 1900 crore by the Reliance group from the market in
less than two weeks, leading to the market crash. JPC also criticised
SEBI for failing to avert the payment crisis on the Calcutta Stock
Exchange (CSE), despite being aware of the irregularities. In October
2002, JPC zeroed in on Ketan Parekh as the main culprit behind the
stock market scam, the CSE payment crisis and the problem of MMCB.
Ketan’s interrogation was almost benign, no doubt influenced by
various interests working within the JPC.

Intriguingly,
JPC never probed GTB’s role and why the RBI failed to detect
it. In fact, some questions asked in connection with GTB were
downright laughable. For instance, it was asked whether GTB had
diverted any funds and if so to whom? Since banks rarely divert funds
themselves, the categorical answer was a bland negative. It would
have been logical to ask whether RBI’s inspections threw up
irregularities involving Ketan Parekh, First Global Finance, Zee,
HFCL and others.

One
of the JPC members Nilotpal Basu of the CPM, writing in the communist
party mouthpiece People’s Democracy, admits that JPC
failed to “establish the nexus between brokers, bankers and
most importantly corporate entities”. Basu alleges that JPC was
“severely handicapped” because it did not get the
“required support” from regulatory and other bodies. If
this was so, JPC, led by a chairman (never heard of in any context
before or since the JPC) and a band of self-serving politicians, was
really a non-entity.

Although
armed with sweeping powers to call for witnesses, the JPC was unable
to unearth anything consequential or recommend significant systemic
changes. It couldn’t even force the regulators — SEBI,
RBI, DCA – to do a much more focused investigation.

One
example is JPC’s finding on the role of OCBs and sub-accounts
of FIIs. It concluded that there was no regulatory framework to keep
an eye on OCBs. They were neither registered nor regulated by SEBI.
The former SEBI chairman had categorically said that OCBs were not
SEBI’s responsibility. The RBI contented that OCBs were not
under its regulation either. The Committee’s persistent query
as to which authority is responsible for OCBs drew a blank!

In
the end, JPC did not add anything to our knowledge of the scam and
exonerated several key players, by selective identification. It named
Ketan Parekh as the key player in the scam, gave Yashwant Sinha, the
then finance minister, a clean chit, falsely hung former finance
secretary Ajit Kumar for the UTI collapse and blamed SEBI and finance
ministry for not being vigilant. It also pointed to the nexus between
Dinesh Dalmia of DSQ Software, broker-directors of CSE, officials of
Stock Holding Corporation and UTI. It washed its hands off the scam
by suggesting that SEBI or the DCA should further investigate the
nexus between corporate bodies and brokers.

The
DSQ Saga

Every
stock market scam involves some top market operators or brokers (such
as Ketan Parekh), banks who are willing to fund it (GTB, MMCB) and
industrialists who are closely connected with both. There have been
many industrialists in this last category but none as spectacularly
brazen as Dinesh Dalmia of DSQ.

His
shenanigans are simply astounding. He issued 14 million new shares to
three Mauritius-based companies without informing stock exchanges or
shareholders about the 50% increase in capital. These shares were in
turn delivered as a payment by his brokers during the CSE crisis.
Fortunately for Dalmia, this obvious case of fraud was not being
pursued by regulators with any seriousness.

He
had the distinction of being under investigation by almost all
investigative agencies you can think of – Enforcement
Directorate (ED), Serious Frauds Office (SFO), SEBI and the police.
With incredible deftness in manipulating the regulators and courts,
he has continued to escape the long arm of the law. DCA allowed him
to compound several offences, refused to investigate the quality of
his audited accounts and made no attempt to remove him from
management despite having the powers to do so.

He
has even pulled off a bigger scam. Even as Sucheta was breaking the
news of his many shenanigans over a series of articles –
Dalmia simply demerged the US and European subsidiaries of DSQ
Software, renamed them as Total Infosystems and sold off their main
business contracts to Scandent Network Pvt Ltd, controlled by Ramesh
Vangal in mid-2002. Dalmia pocketed Rs 145 crore, leaving a shell
company listed and traded in the market!

None
of the regulatory agencies, mutual funds that held DSQ shares or
those championing corporate governance have bothered to question the
sale of these assets. Soon after, Dalmia attempted to take over a
Texas-based tele-marketing company called Aegis Communications Inc,
through an offshore company called AllServe Systems. This was
happening even as the regulators were investigating his involvement
in share price manipulation at the CSE and the dubious preferential
allotment to three Overseas Corporate Bodies.

Dalmia
pulled off a scam similar to DSQ Software even with DSQ Biotech.
While investigating his forex violations in DSQ Software, the ED
stumbled on similar dealings and worse in DSQ Biotech Ltd, earlier
known as Square D Biotech and renamed as Origin Agrostar Limited in
October 2001. The shares of loss-making DSQ Biotech shot from around
Rs 50 in January 2000 to a phenomenal Rs 907 by February 2000. In the
first week of March 2000, Dalmia made a preferential issue of
80,30,000 shares worth Rs 220 crore to four OCBs including Deutsche
Bank International, (22 lakh shares), Societe Generale (11 lakh
shares), AJ Finance Ltd (30 lakh) and Greenfield Investments Ltd
(17.3 lakh). The ED smelt a rat when it discovered that the shares
were allotted at Rs 275 each, when the ruling scrip price was over Rs
800.

Interestingly,
the company “received” barely 30% of the money against
the preferential allotment and has made no effort to collect it
either. The ED also found that two of the OCBs, AJ Finance and
Greenfield Investments belonged to Dalmia himself (AJ apparently
stands for his relative Ajay Jhunjhunwala). By September 2000, DSQ
Biotech’s scrip was crashing and Dalmia needed to deliver
shares to various stockbrokers. He asked the National Share
Depository to dematerialise shares allotted to Greenfield and AJ.
Within seven days after they were dematerialised, the shares were
transferred to DSQ Holdings, Dalmia’s family holding company.
But five well-known brokerage firms were delivered physical share
certificates leading a direct trail to DSQ Holdings and confirming
that Dalmia was distributing the shares allotted to two OCBs on a
preferential basis.

DSQ
Biotech’s books needed to reflect the receipt of money for the
preferentially allotted shares. So Dalmia resorted to an absurdly
simple trick to simply circulate his funds. He went to Kolkata and
opened 13 new bank accounts. He then moved money from DSQ Biotech to
each of these companies from its account at the same branch. Each of
these companies then entered into a series of transactions with each
other to camouflage their trail and finally routed the money back to
DSQ Biotech. The question remains, what was the deal with the other
two OCBs, Deutsche Bank International and Societe Generale? Their
custodial agent, Standard Chartered bank has made no effort to pursue
the deal although they have not received their shares or made full
payment for them. The stock exchanges where the DSQ Biotech scrip was
listed were clueless about all this. The exchanges have suspended the
scrip from trading for non-compliance with listing rules.

Dalmia
obviously thought he is regulation-proof. His easy manipulation of
the equity capital of his companies demonstrates his enormous
confidence about being able to beat the regulators. Indeed, Dalmia’s
tricks at DSQ Software as also DSQ Biotech were discovered mostly by
chance. In DSQ Software, it was an ill-judged boast by Dalmia to
Sucheta that he increased his capital to acquire the San Jose based
Fortuna Technologies that led to the unravelling of his fake capital
expansion and showed that it was unconnected to any overseas deal. In
DSQ Biotech, the ED stumbled on his mischief while investigating DSQ
Software. Finally, in September 2004, SEBI finally cracked down on
Dalmia in its harshest order ever. The regulator barred Dinesh Dalmia
and DSQ Software from accessing the capital market ‘in any
manner’ for 10 years and has asked him to buy 1.3 crore shares
circulated in the secondary market without listing and to hold them
in a separate demat account until the capital of the company is
permitted to be reduced. He has been asked to deposit the value of
Rs1.30 crore shares calculated at Rs 630 crore (at an average price
of the shares in the settlement when they were fraudulently issued),
in a separate escrow account, until various police and investigative
agencies, including the CBI complete their investigation.

SEBI,
again for the first time ever, also punished the four reputed
‘independent’ directors on DSQ’s board. Mohammed
Ghulam Ghouse, B.K. Pal, K.M. Venkateshwaran and Brig (Retd) V.M.
Sundaram have been debarred from the capital market for five years
for failing to exercise due diligence and in the process abetting
Dalmia’s ‘‘large scale fraudulent activities’’.
SEBI’s actions stop at the fraudulent preferential allotment of
shares while Dalmia’s fraudulent sale of DSQ’s assets,
market manipulation, violation of company law and foreign exchange
violations are unpunished. Today, Dalmia is wanted by the Kolkata
police, has a red-corner Interpol alert issued against him and is
absconding from the country. It is not quite clear if he will ever
face actual punishment.

Where
is the Money?

Four
years later, what is significant about Scam 2001 is that there isn’t
even a pretence at recovering the money. In Scam 1992, the bank
accounts of the brokers were frozen, their shares and assets seized
and auctioned off through a Special Court. And yet, India’s
legal enforcement and accountability is so pathetic that almost
nobody has been punished. Here is a scandalous story. The Custodian,
set up under the Special Courts (Trial of Offences relating to
transactions in securities) Act of 1992, has the first right over the
assets of all persons notified under the Act. One of the few scam
accused whose liabilities was not even under dispute was the T B Ruia
group. In a consent decree filed in 1995, the group admitted to
receiving over Rs 18 crore from the Bhupen Dalal Group and agreed to
pay it to the custodian but defaulted on payments. The Custodian’s
office in Mumbai said that T.B.Ruia’s admitted liabilities
exceeded Rs 64 crore which went up to Rs 100 crore after interest
calculations. But there was no action.

Then
in 2001 GTB had acquired Rs 74 crore worth of property (some 23,000
square meters of land) belonging to Killick Financial Services in
Mumbai in enforcing a guarantee provided by it to three companies –
Filtrona India, Millennium Caribonum and Lodestar Slotted Angles.
Further, Killick Nixon, the parent company had similar debt-asset
swap deals with ING Vysya bank, of which one that was signed in 1999
was worth Rs 105 crore. Killick Financial Services and Killick Nixon
both belong to T B Ruia. How were these properties outside the
Custodian’s reach? Wasn’t it strange then that a notified
party, owing money to the Custodian, continued to have large
unattached assets, that it used to provide guarantees to GTB and ING
Vysya Bank for other stock market transactions? Did all the
authorities forget about the existence of the Custodian and the 1992
Act?

But
in 1992 there was at last an official custodian. In Scam 2001 there
is not even any organised effort at recovery. This time, no accounts
were frozen. Worse, kingpin Ketan Parekh managed to buy time by
offering to repay banks without actually bothering to do so. He was
granted conditional bail in the MMCB case by committing a staggered
repayment of Rs 882 crore that he siphoned out of the bank. He didn’t
make even a single one of the promised payments. In the BOI case he
made an initial payment of Rs 9 crore. Later the bank signed a
staggered repayment deal giving him a generous moratorium of four
years before repayment began. Meanwhile the Rs 130 crore that he owed
the bank has been fully provided by the bank in its accounts and the
Chairman who did this deal, has retired.

More
intriguing was the case of Mukesh Babu, a low-key broker for Ketan
who had got Rs 225.63 crore from MMCB. Neither SEBI nor RBI initiated
action against him, though JPC says that he admitted a liability of
Rs 225.63 crore to SEBI. The NSE certified that he has no liabilities
to the exchange (since SEBI had not flagged him as being under
investigation!). Empanelled with UTI and other leading institutions
Mukesh Babu continued to do uninterrupted business for three years
after the scam without any pressure to repay MMCB.

Sucheta
asked the UTI chairman, M Damodaran, how could Mukesh Babu continue
to get business from UTI. He said that his vigilance department had
found no investigation pending against him. He was also under the
impression that Mukesh Babu’s name did not figure in the JPC
report. Moreover, there seemed to be a deliberate effort to dilute
his role and references to him in the JPC report itself. For
instance, page 27, para 4.35 of the JPC report notes under an
asterisk that Ketan Parekh owes Mukesh Babu Rs 100 crore, but not
that he in turn owes it to MMCB. Curiously, the RBI report to the JPC
has a lower estimate of what Mukesh Babu owes. How and why is JPC’s
and RBI’s estimate of Mukesh Babu’s debt so much lower
than his self-confessed liability to SEBI? And why has there been no
effort to recover the money when Mukesh Babu was still getting loads
of institutional business well after the scam?

Interestingly,
by the time the Action Taken Report was submitted to Parliament in
2003, references to Mukesh Babu had been dropped entirely! Could
Mukesh Babu’s hefty liability of Rs 225.63 crore vanish due to
oversight? Three years after the scam, he continued to run his
business as usual with nobody worrying him about repayment. Again,
action followed an article by Sucheta in the Indian
Express.
Today, he still hasn’t repaid the money, but at least his
brokerage business and his depository business have been suspended
until investigation is complete. While many other have escaped
regulatory action even now, some key players in the scam have even
been exonerated. However, between July-October 2004, SEBI issued a
series of orders indicting or suspending many brokers and big players
involved in price manipulation of scrips in the pre-scam days.
Whether these orders will stand scrutiny in Securities Appellate
Tribunal (SAT) remains to be seen.

Media
manipulation

An
interesting aspect of the Scam 2001 was the close nexus of scamsters
not only with reporters but also publishers and senior executives of
media companies. This was partly due to Ketan Parekh’s focus on
media and entertainment stocks. Sections of the media were busy
courting Parekh. Many of them made public issues with his support and
were naturally favourably inclined towards him when he stood exposed.
In these situations, the links went to the very top. As we wrote
earlier one editor suddenly turned into an expert on bulls and bears
and got an edit page space in a leading daily. His view: bears
destroy the economy and bullishness is good. The same editor was
trying to raise private investment for his two-bit publishing
company. The cover page of his investment information memorandum
proclaimed equity participation from the Ketan Parekh Group as its
selling point.

A
media company, which publishes a popular tabloid had its issue
lead-managed by Parekh’s investment banking company at the
height of his popularity. Its shares obviously sold at a high
premium. A whole raft of business journalists were planting reports
on behalf of the scamsters in leading business dailies. Their editors
chose to turn a blind eye even to specific information against their
staff. Many well known newspapers and so-called firebrand editors
operated like hired guns on behalf of the scamster-lobby and were
willing to print smear campaigns against those who tried to expose
the operators. Sucheta received emails warning her that she would be
the subject of such a smear campaign if she didn’t stop
writing. The threats turned out to be true.

After
the Scam of 1992, we thought we had seen the worst of the kind of
threats and intimidation that the corporate sector could indulge in.
But Ketan Parekh, their industrialist cronies and Shankar Sharma of
First Global showed us how much worse it could get. In April 2001 we
filed a complaint with the Press Council of India against The
Asian Age for
a slanderous piece of writing against us. In November 2003, the Press
Council ruled in our favour. The paper wrote to the Press Council
that its nasty, motivated report had “not intended to malign”
us but it never bothered to publish the Press Council ruling as
required under the order. Unfortunately, the Press Council itself is
toothless and can do nothing about it. Meanwhile, Shankar Sharma of
First Global filed a civil and criminal defamation case against
Sucheta and the Indian
Express.

SEBI’s
action against First Global and Shankar Sharma’s arrest
attracted many sympathisers including India’s best-known
editors and columnists who blindly assumed that First Global was
being persecuted for having funded Tehelka. Most of them were not
business writers. Worse, they were neither familiar nor interested
about the facts – facts concerning First Global before
Tehelka
happened. This is documented in a SAT order. Facts such as a 1999-00
RBI annual inspection report of GTB had documented highly irregular
lending to First Global. The RBI report listed 46 instances of how Rs
354 crore was released to several investment companies based on oral
sanctions, with names like Panchal Components and Appliances, Vitra
Trade & Agencies, Top Gear Leasing & Finance, Vruddhi
Confinvest India, UD&MD Agencies, Naulakha Financial Services and
Mohan Fiscal Services. The money was used to buy the shares of HFCL,
whose promoters were thick with Ketan Parekh and whose stock Parekh
was ramping up.

First
Global also got a hefty overdraft of Rs 44.5 crore from GTB to buy
HFCL equity. Instead of placing the shares directly with foreign
institutions, First Global’s investment outfits first bought
the stock at Rs 1050 a share and resold it to the foreign
institutions at a premium of Rs 10 to Rs 25. The ED sent a notice to
First Global about this, a week before
the
Tehelka expose, a fact that the Delhi High Court has underlined while
rejecting charges of harassment that the editors were exercised
about.

Indeed,
while bleeding heart columnists were bemoaning that First Global had
to close down due to government vendetta, it has been doing business
in the US and UK. On
8th
September
2003, it released a research report on the same scam-tainted HFCL
that had crashed by then from Rs 2500 to Rs 8. It recommended the
stock
as a strong buy, calling it the biggest turnaround story in India and
comparing it with a similar opportunity to buy Dell Computer!

As
all these examples show, the saga of the twin scams will linger
forever. The participants would die, continue to run their business
until caught out, then dropping off from the limelight, some will try
to make daring comebacks, but most would be running surreptitious
operations, flying under the radar of regulators. Nothing would be
resolved. Hardly anybody would be convicted. No money would be found.

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315,
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1BRs
were issued by banks who sold securities but were unable to deliver
them immediately. They specified what had been sold and that money
was received from the buying bank while the securities were to be
delivered later. Once the delivery was made, the BR stood
discharged.

2The
reconciliation could be done only by getting hold of a statement of
outstanding SGLs which would show the securities that SBI was
supposed to get. When banks buy and sell a government security, they
rarely exchange paper. They exchange SGL notes which are presented
to the PDO. The selling bank issues the SGL notes to the buying bank
which then deposits them in the PDO. The PDO would then debit the
selling bank’s account and credit the buying bank. Under the
system, if bank X has to sell 11.5% 2010, it would have to have a
positive balance of that as per the PDO’s books. If not, on
presentation to the PDO, it’s SGLs will “bounce”.
If it is holding SGLs, as Khemani thought the SBI did, it’s
PDO balance should reflect this.

3
As
described earlier, SGLs were issued as a substitute for actual
securities. Very often BRs replaced SGLs. A BR would confirm that
the selling bank had sold the securities at the rates mentioned
therein. The BR was designed to avoid the SGL bouncing. Through a
BR, a bank could put through deals even if their PDO balance was not
positive. This wasn’t possible if the transaction took place
through SGLs – they would simply bounce.

4Units
refer to the Unit-64 Scheme of UTI.

5These
were a Rs.89.05 crore deal for units of 31st
January, a Rs.44.97 crore transaction for treasury bills for 14th
March, a Rs.90.45 crore transaction for 17% NTPC bonds of 30th
March and a 37.71 crore transactions for units dated 16th
March.

6These
included a Rs.47.95 crore deal for treasury bills, a Rs.151.99 crore
transaction for 2007 central loan and a Rs.101.88 crore 2010
securities transaction.

7Section
6(1) of The NHB Act prescribes that a bank will have three experts
from housing, architecture, engineering, sociology, finance, law,
management and corporate planning, etc. Three persons who have
worked in housing finance institutions, two from RBI, three
officials from the central government and two from the state
government.

8This
included: Rs.290 crore of units, Rs.263 crore of Cantriple, Rs.385
crore of IRFC bonds, Rs.80 crore of 12.5% central loan of 2007,
Rs.50 crore of 6% central loan of 1994, Rs. 20 crore of 11% IDBI
bonds of 2002, Rs. 47 crore of 11% IDBI bonds of 2002, Rs. 23 crore
of 8.75% of IDBI bonds of 2000, Rs. 50 crore of 12% ICICI bonds of
2011 and Rs. 45 crore of missing BRs. The last item was shocking.
Stanchart hadn't kept even the (false) BRs properly.

9The
control over Nedungadi subsequently passed on to some brokers closed
to Ratnakar such as Rajendra Banthia, former vice-president of BSE.
The bank became controversial in 2001 and was under the scrutiny of
RBI for its market exposure and Banthia's large stake.

10This
was a Fairgrowth innovation, similar to Bankers Reciepts issued by
banks.

11“Citibank
entered into a large number of ready forward transactions... where
the second leg of the transaction has not been completed. For eg, in
respect of transactions with Canfina, on behalf of fiduciary clients
in... bonds of an aggregate value of Rs.235 crore when the second
leg of transactions fell due between June and August 1992, the same
have not been accepted by Canfina.”

12Stefan
Wagstyl of The
Financial Times had
hardly spent a few months in India when the scam story broke and
knew precious detail about the way foreign firms operating here.
Yet, he showed admirable confidence in himself and unsettling
disdain for Indian opinion. This opinion of foreign firms being
toward little things lost in the woods and mauled by the natives is
widespread among the small community of foreign correspondents. This
was repeated during the recent Enron scandal.

13The
Rs.550 crore of 11.5% 2010 that SBI bought came from Canfina (Rs.125
crore) , Stanchart (Rs.150 crore), BankAm (Rs.75 crore). Canara Bank
(Rs.150 crore), Grindlays and Karur Vysya (Rs.25 crore each).
Aggarwala supplied Rs.250 crore and Kothari Rs.300 crore. Half of
the profit made by Kothari may have gone to Kayan of C Mackertich,
Calcutta.

14He
apparently picked up Aftek Infosystems at around Rs.40 ; the stock
hit Rs.5000 at its peak.

15The
K-10 were: Silverline, Global Telesystems, Satyam Computers, Zee,
HFCL, SSI, Aftek Infosystems, DSQ Software, Ranbaxy, Pentamedia

16As
part of his promised clean-up early 2000, Dalmia placed shares with
institutional investors led by Bank of America. Pawan Kumar from IBM
joined as president, lending credibility to DSQ's clean-up
operation. DSQ got the money but Rs.220 crore was again taken out
too fund brokers in what is suspected to be Dalmia's own possessions
and later returned.