Why it is not easy to remove corruption from Indian businesses
Posted by: Uma Shashikant on Nov 06, 2017, 06.30 AM IST
We obsess about our glory as a nation. Anyone even innocently ignorant of our history, culture or traditions is hammered with collective rage. But for a nation that venerates Lakshmi, our financial affairs are case studies in fraud and deceit. The history of financial access in the last 70 years is smeared by one theme—we are unable to stop unscrupulous people from accessing money, using it to create low quality assets with nonchalance, and getting away with unaccounted private profits. The NPAs in our bank books are just a part of this problem of lack of integrity.
The story of Indian business is about a large dark giant who stands taller than the globally efficient and competitive face that we proudly speak about. This dark giant is opportunistic; smells and seeks rents; bends and breaks the law with impunity; and finds clever ways to exploit a situation. Yes, there are business enterprises we are proud of; and there are millions of ordinary people who live with the highest values. But the black giant is bigger, more powerful and influential. It corrupts our moral fabric like nothing else. Without slaying this giant, we cannot cleanse our financial system.
History holds so many episodes of how this dark giant in Indian business has grown and thrived over several decades. Soon after independence, the government set up developmental financial institutions that would provide long-term finance to worthy business enterprises. They would be funded by the government budget and low-cost funding from global lenders, under guarantee from the government.
As it has happened systematically in the 70 years since then, ideas with good intentions are soon hijacked by our dark giant for private gains. The number of financial institutions that were set up at the central and state levels, and for various purposes across the country simply increased. The scent of money is too much to resist. While a few good businesses also got funded, so many unworthy of credit managed to get the money too.
It became a standing joke in financial institutions in those days: the promoters would usually come on a scooter to get their loans sanctioned; and in an imported car to declare bankruptcy and reference to BIFR (the then institution where sick firms went into coma). In the 1970s it was common knowledge that many borrowers would set up a firm, import some machinery over-invoicing it, make payment into a foreign account and let the business die. Read through the reports of various committees that RBI appointed to see how these institutions were saddled with bad debts and eventually closed down.
The story of 1980s is one of NBFCs. There was one loophole in the defined structure: the books of the NBFCs allowed for leverage like a financial institution, but depreciation accounting like a manufacturing business. So many hundreds of NBFCs were set up; every business house had its own NBFC; and every other NBFC raised deposits at attractive rates. Until it all came crashing down in the weight of-yes you guessed it right-questionable assets. Add to it siphoning of funds, unknown end use of funds, and you get the picture of gross misuse of money.
In the early 1990s a clever broker exploited a loophole in the settlement of government bonds, and generated artificial money using bankers' receipts, siphoned the money into the stock markets and sent prices skyrocketing. One day the funding tap ran dry, and the stock markets crashed. Another operator repeated this feat in the early 2000s, using the overnight money from the cooperative banking system to a similar build up and crashing end. Both took millions of gullible people for a ride.
In the 1990s, we embraced the market economy. We decided we are ready for competition and that the government would not directly control how businesses raised money. They would go to the market. There is no helpful institution, but the rigours of the market, we thought. The black giants set up thousands of shell companies, raised funds for dubious ventures, left millions of IPO subscribers in loss, and we are still nursing the wounds from vanishing companies.
Before Sebi could find its feet in the flood of offer documents, merchant banker and mutual fund approvals, it had the CRB scam and a large scale teak farm/orchard/holiday home scams. All had one thing in common— devise a scheme and raise money from the public and deploy it in questionable assets. By the time the 1990s ended, there was another NBFC bust off; a clamp on overseas corporate bodies; and a venerable financial institution was in distress. But our operators had now gone global. They were round tripping money through offshore havens and bringing it back to India as if they were FIIs.
Every modernisation had its opportunistic twist. Getting rid of paper and introducing demat accounts was soon followed by demat account opening scam; electronic trading soon featured price manipulation; financial products were created with an eye on asset building, offering incentives to mis-sell; and an entire exchange crashed trying to sell a spurious commodity derivative product.
The methods of our black giants have only gotten bolder with time. They scraped off Goa to sell iron ore to China; found devious ways to set up coal mines; bent rules to get spectrum; created mafia that mined sand, granite and ore; bid for ambitious projects to set up ports, roads, power plants, and every infra project that enabled quick money; amassed land in the name of health, education, development and urbanisation; and found their way into politics, crime, sports and media to build for themselves an image of power and reach.
In one new avatar after another, we have the black giants treating the scarce capital in a poor country like ours with disdain. They masquerade as businessmen, with no innovation, R&D, expertise or competitiveness to speak about. Much like the small kingdoms of yore that sold off to the British Raj, disempowering the brave kings that stood their ground, we have the dubious businessman who circumvent the law with impunity.
Our bankers know these systematic siphons of pubic funds; our labourers know these exploitative capitalists; our brokers know these operators; our politicians know these funders; our media knows these frauds. However, we collectively put up with these frauds, again and again. But there must be a solution, people ask. Could we not catch, jail, punish, penalise? My submission: We cannot legislate for integrity. That will take a socio-cultural revolution of a different magnitude.
The author is Chairperson, Centre for Investment Education and Learning.
Disclaimer: The facts and opinions written in this column are those of the author and do not reflect the views of economictimes.com. This article appeared in Economic Times dated Nov 06, 2017, 06.30 AM IST