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Clean Up Time?

May 5, 2001

On a flight from Europe to USA, I noted that the Financial Times (Friday, May 04, 2001) carried a news item that “Mr. Yashwant Sinha, India’s Finance Minister yesterday appealed for a clean-up of the financial sector to help salvage a stalled reform programme”. The FT went on to quote Mr. Sinha, “If high ethical standards are not kept, then we might as well write off economic reforms” and also, “Unless and until we are able to tap small investors, we will never be able to attain our growth targets”. Great words indeed and a sort of echo of what Mr. Manmohan Singh, the Finance Minister under Prime Minister Rao and the presenter of the July, 1991 reforms budget said, “Investment is an act of faith”.

You can have the most inexpensive and attractive stock market in the world and the most brilliant product or market position as a company, but if an investor has to count his fingers every time he shakes hands with someone, how can there be any desire to invest in such a market?

If Mr. Sinha is serious, he will take the following steps:

  • Cut the phone lines between New Delhi and the Indian financial institutions like UTI, LIC, ICICI, and State Bank of India – this way there is little temptation for the well connected to use their connections to get their little blessings for small favours and pending applications,

  • Make sure that government nominees occupy less than 33% of all board seats of these financial institutions, the public has 33%, and entrepreneurs with businesses less than Rs 1 bn in revenue have 33% of the seats and loans and approvals sanctioned above, say, Rs 100 m are published every quarter,

  • Nominate people to run these institutions not based on their political backing nor on their number of years in service but, rather, based on their ability to transform many of these misguided gems into fulfilling the charters set for them when they were created,

  • Force more disclosures on these institutions so that their actions are transparent and open to public (and I mean “public”, not some committee) scrutiny,

  • Create a permanent court to handle economic offences greater than, say, Rs 100 crores (if you catch the big crooks, the small crooks will either stay small or disappear totally),

  • Ensure that SEBI pushes through a simple and straightforward (not complex and open to judicial debate) disclosure law that is adopted by every person working as an employee in any financial institution or company in the country (Mr. Sinha, please see what we have adopted internally)

  • Ban all road shows by his team to London and New York (ahh, summer is here in India, time to go abroad again) and instead send his team to the hotter climates of Ludhiana and Nasik instead to apologise to the small investors for slippages of the past. Before India needs to be “sold” to the foreign investors, it needs to be sold to the Indian investors.

Some of the ideas above are pretty easy. How long does it take to call MTNL and cut the phone lines? Five minutes? Or to announce a change in the boards of the financial institutions? One week? The permanent courts for economic offences may take longer but, on the whole, everything above could be implemented within 3 months. They may not solve 100% of India’s present ethical problems but, if implemented, will take care of 90%.

None of the ideas I have expressed above are new and they have been offered before in previous articles as the first step towards a long and drawn battle to let money flow freely where it deserves to rather than flowing along with the connections one has.

My ideas may be old, but then neither are Mr. Sinha’s pronouncements new. Other Finance Ministers have said similar things. But the practices of the past go on.

India has the potential to deliver and the Indian financial markets have come a long way from the closed days prior to July 1991. Hopefully, Mr. Sinha’s frustration with the way the equity markets have tumbled and threatened the 9 on 10 ratings he received for his recent budget and the silence that he and others in the country maintained when the markets were zooming skywards (did anyone care to ask where people got the money to buy those TMT stocks when the market was going up???), will make him a determined reformer.

I hope so. And I wish so.


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