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A blueprint for reform

THE INITIAL REACTIONS to the recent JPC report have been muted in comparison to those that accompanied the publication of the earlier JPC's findings. Both the parliamentary committees were given similar points of reference, with the alleged stock market shenanigans perpetuated by a few brokers, aided and abetted by various acts of omission and commission by mainline institutions and financial sector regulators, being the central point. Therefore, notwithstanding the fact that almost a decade separates the two periods under investigation — the earlier JPC looked into the securities transactions of 1991-92 — the findings of both the committees are similar to a great extent. On the definition of the recent scam, the JPC says that it was a manipulation of the capital market for the benefit of market operators, brokers, corporate entities and their promoters and managements. That, barring a slight change in vocabulary, is almost identical to the earlier JPC's findings of a deep-rooted nexus between bankers, brokers and companies in diverting funds for speculative gain. The other striking similarity is in the identification of a principal culprit — the late Harshad Mehta for the irregularities of 1992 and Ketan Parekh now. Both incidentally belong to the broking fraternity, a class of intermediaries whose less than satisfactory profile had significantly changed for the better over the past decade. The implementation of the recommendations — many key ones were in fact put in place — of the earlier JPC report ought to have helped in sprucing up the image of the capital market and its participants. Sadly, however, that has not happened. Both the reports have blamed nearly all the regulators and the Government, but it is the capital market structure that seems to be creaking still, despite all the progress made recently in settlements, trading systems, technology upgradation, institution building and imparting of professionalism to the participants.

However, neither the similarities in the diagnosis nor the equally predictable prescriptions for correction undermine the value of the recent JPC's findings. The fact that it did not come out with any sensational findings or make sweeping recommendations ought to be viewed positively, a tribute to its awareness of the inherent limitations rather than as a negative point. Much of the financial sector including the capital market has been changing at breakneck speed. The world over regulators, central banks and investigative agencies are hard put to even define financial misdemeanour leave alone punish the perpetrators. Even in the advanced countries such as the U.S. the technology bubble lulled everyone including the usually sharp regulators into complacency. Nor was it possible to even spot, until it was too late, a monumental fudging of accounts of the type committed by Enron, WorldCom and others. Notwithstanding the significant steps, including legal ones that are promptly taken in the wake of a financial scam, the fact remains that no structure however well crafted can effectively forestall a shenanigan. The solution, then, lies in implementing the existing powers more efficaciously and in strengthening existing institutions engaged in regulation and policing. The JPC's recommendations in that genre are practicable and ought to be followed up for a better environment in the financial sector. Its biggest contribution might well be in influencing policy changes so that in future at least there is greater clarity in the approach to issues such as dealing with cooperative banks.

On UTI, however, the JPC's recommendations tread familiar territory and in one specific area — concerning the constitution of UTI-II — seem counter-productive. The crisis at UTI became part of the JPC's agenda long after it took up its core brief involving the inexplicable crash of the market in March 2001, the payment crisis in the Calcutta Stock Exchange and the Madhavpura Cooperative Bank-led failure that has exposed the chinks in regulation. In all these, the common denominator has been the weakness of the capital market which the JPC once again hopes to address. Unlike the last time, the report has not indicted any major public figure nor named any leading banks or institutions, Indian or foreign. Devoid of sensation though its report is, it can be a blueprint for a better financial sector.

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