Sucheta Dalal
01 February 2019 

The chickens are coming home to roost. Instead of better governance and clean administration, we have been hit by a spate of corporate scandals. In each case, collusive deals between top management of banks and corporate houses have inflicted massive losses, caused share prices to crash and created major panic in the capital market. Get Moneylife’s 
Top Stories by EmailSUBSCRIBE All this can be traced to the government’s failure to insist on accountability of regulators and being focused on optics and management of large programmes such as Jan Dhan, Mudra loans, Swachch Bharat, demonetisation or the much-hyped but badly implemented Goods and Services Tax (GST).

 Meanwhile, the Modi government deliberately weakened public sector banks (PSBs), keeping them headless for long periods, forcing them into non-core activities and, when bad loans ballooned, straight-jacketing them through prompt corrective action (PCA). When that too didn’t work, it decided to force-merge several PSBs as though a larger bank will reduce the problem of corruption, behest-lending and absence of accountable management. A quick look at a spate of recent scandals would reveal how this has played out.  Nirav Modi – Gitanjali Gems: Failure of supervision by the Reserve Bank of India (RBI) and the fact that the bank’s top management was busy with Jan Dhan accounts, Aadhaar enrolment, handling demonetisation or participating in Swachh Bharat photo opportunities allowed officials down the line to loot the banks in collusion with Nirav Modi and Mehul Choksi of Gitanjali Gems.  

The investigation that followed is focused on bank officials and the company without going into what enabled such a massive fraud. For a while, the government blamed the 80:20 gold import scheme introduced by its predecessor; but there is no formal inquiry. Not even into the unusual benevolence shown by RBI and the Securities and Exchange Board of India (SEBI), RBI and SEBI, towards the scamsters who have fled the country.  Bankruptcy Code: The Insolvency and Bankruptcy Code (IBC) allowed the government to brag about a 30-point jump (to No. 77) in the global Ease of Doing Business ranking. But the Ruias of Essar Steel, the biggest wilful corporate defaulters, continue to game the system. On 30th January, the NCLT (national company law tribunal) rejected Essar’s sudden offer to settle all dues by producing Rs54,389 crore from unnamed sources. But Arcelor Mittal, whose bid of Rs42,000 crore has already been accepted by the committee of creditors, will still need to fight it out at the appellate tribunal and the Supreme Court to buy this chronic defaulter. If the sale does not go through before the general elections, one doesn’t know what machinations will be at play under the next government, especially if it is a rag-tag coalition. 

Barring a few steel companies, the bankruptcy process seems headed for the same delays and manipulation that afflict out judicial system. Most defaulting companies have no buyers and recovery through liquidation will be less than 10%. In far too many cases, insolvency professionals say that banks are conniving with promoters to sell assets back to them at a fraction of their outstanding dues. But who wants to listen, when the Bankruptcy Bill is touted as one of the big successes of the Modi government?  

Infrastructure Leasing & Financial Services (IL&FS): Isn’t it ironical that a government that was at loggerheads with two RBI governors—Raghuram Rajan and Urjit Patel (who resigned before his term ended)—has failed to question the banking regulator for its failure to supervise a ‘systemically important’ non-banking finance company (NBFC)? RBI failed to act on multiple letters from a whistleblower and even follow up on its own inspection report which had ordered IL&FS to cut its massive borrowings of nearly Rs1 lakh crore. We are still trying to figure out whether this was a case of regulatory capture, defiance or failed supervision. What is significant is that the government doesn’t seem to care.  Dewan Housing Finance Limited (DHFL): On 29th January, a detailed investigation by Cobrapost alleged a massive Rs31,000 crore scam in DHFL through siphoning of loans and diversion of funds through a maze of special purpose vehicles (SPVs). This only confirmed what the market already suspected since September 2018, when the stock had crashed in the aftermath of the IL&FS fiasco. Since then, several reports have detailed suspect dealingsby the promoter’s personal entities.  

DHFL, with borrowings of over Rs100,000 crore has added to the panic and  destabilisation already caused by IL&FS, making markets very jittery. And, yet, an investigation by the ministry of corporate affairs (MCA) is only likely to be launched after the Cobrapost exposé. DHFL’s primary regulators—National Housing Bank (NHB) and the SEBI have done nothing yet. Fortunately, the chances of a quiet bailout by providing re-finance through the NHB seem less likely now.  ICICI Bank: A little after the Tata group scandalously sacked its chairman, Cyrus Mistry, several top executives, gathered for a book launch at the Taj Mahal Hotel, were exclaiming how the action had badly dented the group’s reputation for good governance. One man was calmly confident that public memory is short and it would soon be forgotten. He was MK Sharma, then chairman of ICICI Bank. While Mr Sharma was on the dot about the Tata episode, the same assumption about ICICI Bank was disastrously wrong.  

Developments of the past few days show that it is dangerous to assume that things will always blow over. Chanda Kochhar’s indictment by the Justice Shrikrishna Committee has led to a demand for action against all board members who had defended her in April 2018 at the cost of the Bank. There is also the question of the credibility of the law firm, Cyril Amarchand Mangaldas which gave a clean chit to Ms Kochhar in 2016 and withdrew its report when the winds turned in 2018. The same firm had to be raided by the Central Bureau of Investigation (CBI) to recover Nirav Modi’s documents.   The goings on at ICICI Bank, and, for that matter at Yes Bank, as well as the action of their board raise some serious questions about whether private banks, in general, behave any better when regulatory capture leads to poor supervision and whether privatisation of banks is the panacea it is touted to be.  Zee Group: A sudden crash of anywhere between 26% and 33% in the stock of the Zee group companies saw Subhash Chandra, its chairman, scrambling to reassure large institutional investors. He apologised for bad investment decisions in infrastructure projects and IL&FS and assured investors them that he would clear all liabilities by selling up to 50% in Zee Entertainment Enterprises, the crown jewel of the group. Mr Chandra blamed ‘negative forces’ for trying to sabotage a stake sale and denied a report that a group entity was being investigated for laundering currency during demonetisation. 

Given Zee’s history and the fact that it had previously got away unscathed, despite its deep involvement in the Ketan Parekh scam that has been detailed in the Joint Parliamentary Committee report, it is not clear if investors are fully satisfied with Mr Chandra’s promises. That he is a member of parliament (MP) and very close to the ruling government has further damaged the government’s image, when it is already facing charges of cronyism due to Anil Ambani’s involvement in the big Rafale controversy.  These corporate shenanigans, whether in DHFL, ICICI, IL&FS, Yes Bank or Zee, have serious implications for middle-class Indians, who have entrusted large chunks of their savings to mutual funds and pension funds that have invested in these high-profile companies.  The Modi government has lost an incredible opportunity to bring about a lasting change in governance and supervision, had it single-mindedly focussed on demanding full accountability from regulators and, in turn, management of banks and companies. This would have allowed it to deliver on its promise of minimum government and maximum governance. Instead, we had a government that depended on pliant regulators and mistook articulation for action.