Where exactly does the bloody buck stop?

The state of regulation (or lack thereof) and the fate of hapless investors in India are equally pathetic.

A Mint article ‘NSEL scam: What were RBI’s and NSDL’s roles?’ reveals how hollow the claims of investor protection are. Regulators are often lax in regulating, investigators are often compromised in policing and courts are lethargic in severely punishing, as they should, white collar criminals.

Emboldened, there are an ever-increasing, an ever larger, bunch of crooks out to commit white collar crimes.

FSDC’s pitfalls

After the 2008 crisis the government had set up a Financial Stability and Development Council (FSDC), whose purpose it was to help coordinate the functions of different regulators better, and thus prevent a recurrence of the sort of crisis that led to the 2008 meltdown.

This committee met in 2011 for the NSEL case and, according to recorded minutes, an RBI Deputy Governor told the committee that NSEL was unregulated, not falling under the purview of either SEBI or Forward Markets Commission (FMC).

Did FSDC do what it was supposed to do? Namely, to flag the issue with the government, and have a regulator nominated for NSEL? No! Was the government made aware of this? Yes! Did the Ministry of Finance or of Company Affairs do something about it? No!

Checks & balances

Were these agencies aware that the NSEL, (S stands for Spot) was trading in forward contracts? Yes. Did they prevent it? No!

Did the Warehousing Development & Regulatory Authority check whether the goods traded by NSEL were physically stored in their godowns? No! Yet NSEL issued certificates stating that it had the stocks in its possession, which was untrue.

When the Gujarat High Court asked the RBI why it gave a settlement and clearing license to NSEL, RBI passed the buck on to FMC. Yet, in May 2011, an RBI Governor had, in the minutes which are recorded, stated that neither SEBI nor FMC was appointed a regulator for NSEL.

So, where exactly, Mr Jaitley, does the bloody buck stop?

Investor sans protection

How, Mr Jaitley, do you expect individual investors to keep saving and investing in paper assets, as you encourage them to, if your government show such a nonchalant attitude towards investor protection?

Government and regulators must understand that they are tasked not only with the authority to levy fees on those that regulate, but, more importantly, with the responsibility to do what they are supposed to be doing. The buck stops at their doorstep.

₹2-cr fine for ₹2,000-cr scam

Take another case. In the Saradha scam, SEBI last week imposed a fine of ₹2 crore! The scam is estimated at ₹2,000 crore. Is this not a mockery of the travails of its investors?

The PACL scam was allowed, thanks to regulatory nonchalance, to bloat to over ₹40,000 crore. The scamsters were allowed, through negligence, or maybe collusion, to flee to Australia, where they bought properties with the proceeds of this loot. The properties in India are insufficient to pay off the victims.

Unless the government and the courts crack the whip and severely punish scamsters, the scams will only get bigger. Regulators and investigative agencies must remove the façade of investor protection and start doing their jobs. Unless, of course, the individual investor is dispensable.

(The writer is India Head, EuroMoney Conferences. The views are personal.)

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