JPC report: Whose fault is it anyway? - Views on News from Equitymaster

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JPC report: Whose fault is it anyway?

Dec 20, 2002

The best way to confuse somebody is to throw such an overwhelming amount of information at them that they are completely lost. Simple common sense! Guess where it has been applied. We give you a clue, the JPC report on the stock markets scam and the subsequent UTI fiasco runs into 450 pages. The first part of the report deals with the debacle of the stock markets post the budget presented in February 2001. On the 28th of February 2001, the day of the presentation of the Budget 2002, the Sensex opened at 4,070 and closed at 4,247,a rise of 177 points. On the next day also the Sensex gained marginally. However, it was on the 2nd of March that it registered a decline of 176 points and an intra-day decline of 246 points. Due to the impact of the crash there was a payment crisis in Calcutta Stock Exchange and the Madhavpura Mercantile Cooperative Bank (MMCB) collapsed. Apart from this many, small investors saw their hard earned money vanish into thin air. Thanks to the greed of a few to get rich quickly.

Here the committee has found that Mr. Ketan Parekeh, a broker, was largely responsible for the events that took place in March 2001. He misused funds from banks to manipulate the stock markets. Here a number of entities were involved banks, brokers, corporates and the exchanges. Even the SEBI and the RBI have been taken to task for turning a blind eye and 'slackness'.

"It is difficult to believe that the Stock Exchanges or SEBI were quite unaware of what was going on in the market when Ketan Parekh entities were manipulating the market using their network. Nor did the High Level Coordination Committee (HLCC) or the SEBI seek a check on where Shri Ketan Parekh was getting his funds from or his methods of manipulating the market. This is all the more disturbing in the context of the previous JPC's findings against Shri Ketan Parekh."
-JPC Report

While it is has been not possible for us to go through the entire report, and initial glance reveals most of the things that were expected.

The UTI Fiasco
The second part that deals with the UTI fiasco reveals much more interesting statistics.

For those who came in late, the UTI has made some investments, which would surpass Mr. Ketan Parekh's risk taking abilities by light years. Consequently, the public money under management vaporized into thin air and redemptions of the flagship scheme US-64 were halted. There was an outrage among small investors, and then a search for a culprit began.

Some of the accusations are rather strange. Mr. Ajit Kumar, the then Finance Secretary has been accused of not acting immediately. He apparently received a letter on the 30th of June 2001, which informed him that the UTI board would meet on the 2nd of July, 2001 to consider two options: either to freeze redemptions or a convert US-64 into a NAV based scheme. Apparently, he did not take action and think of possible ways to avoid the crisis over the weekend and informed the prime minister only on the morning of 2nd of July 2001. But pray tell us what could Mr. Kumar have done. And how come the mighty finance minister was unaware of a big problem. It would be an insult to the intelligence of the citizens of India to imply that those in power were completely caught unawares by an official not informing them in time.

What had happened that after Mr. P. S. Subramanyam took charge of the UTI, he was running riot. It is again very convenient to believe that he came to such position without any patronage from the echelons of power.

"Though the Equity Research Committee (ERC) was set up in 1997, it is only during Shri Subramanyam's tenure from September 1998 onwards that the ERC's comments were overlooked. This is further compounded by the fact that in all these cases UTI's investment portfolio depreciated after the investment. In the specific case of Cyberspace Infosys, the ERC's comments were first accepted and subsequently reversed to clear the investment. Worse, there are cases (one of which, Numero Uno International, has been examined by Tarapore Committee in detail) in which the ERC's recommendations were not taken at all."
JPC Report

Who were the people behind Mr. Subramanyam that made him bold enough to flout these norms such blatantly?

No. of investment proposals approved at different levels - July'98-July'01 by UTI
      Approvals accorded by
Type of
Total Number
of investments
Total amount
(Rs bn)
Board EC Chairman
IPO 30 3.5 0 1 29
Private placement in equity 65 14.6 1 15 49
Private placement in debt 378 121.5 0 103 275*
*Includes 76 investments beyond the authority of the Chairman but subsequently ratified by the EC
1. Mr. Subramanyam's tenure extended from Sep'97 to July'01
2. EC (Executive committee)

While the investigation in the UTI fiasco names some of the people responsible, others have as usual, gone scot free. However, the most disappointing fact is that even those who have been named have till date not been punished and is very unlikely that they ever will be.

Interestingly at one point the JPC notes,

''Lack of urgency on the part of the Government has led to a stage where after more than 9 years, 66 out of 72 cases of 1992 scam have yet to be adjudicated. This clearly sends out a signal that future wrong doers can evade the consequences of their wrongs and can also enjoy their ill-gotten gains. The Committee emphasise that adequate number of courts should be set up to ensure final disposal of cases within two years.''

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