Market Manipulation Comes to India
D'MONTE, DARRYL
EXPLOITING THE SYSTEM Market Manipulation Comes to India BY DARRYL D'MONTE Bombay To most Americans, turmoilridden India probably does not conjure up an image of a country with a...
...Unfortunately, before long the publie sector lapsed into lethargy because it did not have to compete in the national marketplace, let alone face the fierce winds of competition from abroad...
...Still, political witch-hunting is being given free rein in the current proceedings of the joint parliamentary committee looking into the scam...
...His is a rags-to-riches saga...
...To pull the country out of this rut, the late Rajiv Gandhi ushered in a half-baked liberalization plan shortly after he was chosen Prime Minister in 1984, in the wake of his mother's assassination...
...EXPLOITING THE SYSTEM Market Manipulation Comes to India BY DARRYL D'MONTE Bombay To most Americans, turmoilridden India probably does not conjure up an image of a country with a flourishing, albeit small, middle class engaged in feverish stock market speculation...
...In a society where everyone has tried to evade or escape from controls—on production, consumption, incomes—it may be inevitable that someone who has made it against all the odds is turned into a popular hero...
...Its head, M.H...
...Banking, for example, is critical to the process, and the scam exposed its gross inefficiency in India...
...Despite several setbacks, he became a key figure on Bombay's exchange...
...Narasimha Rao, named a bornagain free-enterpriser, Manmohan Singh, as Finance Minister, and the duo has roused the economy from half a century of slumber...
...Along with a few other bulls, he was responsible for quadrupling the exchange index within the span of one year...
...When the country gained independence almost half a century ago, its first Prime Minister, Jawaharlal Nehru, established what he called a mixed economy: The State retained control of the "commanding heights," while the private sector was allowed entry into a wide range of industries under a strict licensing system...
...In a country where businessmen excel in keeping quiet about their income, Mehta perhaps overreached himself when he ostentatiously paid a single check of nearly $9 million as his year's income tax, the biggest ever from an individual...
...his group's portfolio of holdings went up 10-fold, reaching $670 million in next to no time...
...Politically, the scandal has been helpful to Rao's detractors...
...The State Bank of India, the country's largest, was central to the scam...
...that businessmen needed to prosper...
...One of its securities officials, in fact, carelessly retained false bankers' receipts totaling $150 million in his house...
...More sober reflections might remind his admirers that bucking the system was Mehta's undoing...
...After all, it obtained at subsidized rates whatever raw materials and services it required, and its products were protected by import bans...
...The scam is believed to have involved a staggering $1.7 billion, yet Mehta has emerged a savior rather than a swindler...
...Pherwani, died in his sleep soon after the story broke, allegedly from an overdose of sleeping pills...
...Indians themselves were surprised when the market here surged to dizzying heights in the first quarter of this year—and shocked when the bubble burst at the end of April, setting off a scandal that has yet to be resolved...
...On the human level, in addition to claiming the life of the head of the Housing Board, the scam has inflicted significant casualties...
...This reveals a great deal about India's fettered economy and the number of people straining to break free...
...Although India nevertheless ranked among the top 20 or so nations in the world in terms of the value of its industrial output, the picture darkened dramatically if one looked at per capita product...
...Scam" is a four-letter word that only entered India's lexicon when the Times of India revealed in April that a clutch of unscrupulous brokers, headed by "Big Bull" Harshad Mehta, was taking advantage of the country's lax banking rules to fuel speculation on the exchange...
...The system itself, though, has taken a beating as well...
...The committee is headed by a venerable Congressman, but it has a fair sprinkling of opposition MPs with a one-point agenda—to embarrass the government to the maximum extent possible...
...Manual entries in ledgers may ensure jobs, but they do not help to usher a creaky economy into the 21st century...
...The unions' success in resisting the computerization of banking operations has allowed a dangerous lag between the purchase of securities and their delivery...
...Also implicated were several foreign banks that have been given a new lease on life in India, thanks to recent attempts to liberalize the economy...
...Mehta's personal fortune until his arrest, put at $35 million, did not truly reflect the enormous clout he wielded...
...And the National Housing Board, a Federal agency that is supposed to build houses for the poor, had a finger in the pie...
...The surge of sympathy for Mehta has been partly manipulated—posters lauding him have been plastered all over Bombay's main business district—but there can be no doubt that public opinion is now overwhelmingly on his side...
...Ironically, it was only after Rajiv's own assassination last year that a real reform was launched...
...At the height of his success a few months ago, the merest whisper that his group of companies, appropriately named Growmore, was interested in a stock was enough to send its price zooming...
...Darryl D'Monte, a longtime contributor to The New Leader, is editor of the Bombay edition of the Times of India...
...Bombay, which has always played a dominant role in the nation's economy because of its port and once booming textile industry, is the keenest worshipper at the altar of liberalization...
...His successor, P.V...
...This would help India become a strong industrialized nation, Nehru believed, since the public sector would be providing all the infrastructure—steel, oil, fertilizer, and so on...
...A third casualty was the joint directorof the CBI, K. Madhavan, who was masterminding the scam investigations until he suddenly quit, ostensibly for health reasons...
...Among those named are Madhavrao Scindia, the son of a maharaja who is Minister of Civil Aviation and Tourism, and Sharad Pawar, who holds the defense portfolio...
...George Fernandes of the opposition Janata party—who as Industries Minister during the brief period in the late '70s when the Congress Party was out of power pushed CocaCola and IBM out of India—periodically threatens to reveal names of six to eight tainted ministers...
...Madhavan has remained tight-lipped, but it is widely rumored that Rao told him to slow down when links between Bombay's big fund brokers and some leading politicians were uncovered...
...Suave, Harvard-educated P. Chidambaram resigned as the Commerce Minister when it was revealed that he and his wife had received shares on preferential terms from an investment company heavily implicated in the scandal...
...Now just 37, he quit a low-paying insurance job 12 years ago and began dabbling in the stock market...
...Indeed, it is not uncommon to hear small businessmen saying that he ought to be made finance minister to teach the government how to make money...
...They never seem to materialize, however...
...Other Indian banks were involved too...
...These included ANZ Grindlays of Australia, Standard Chartered of Britain and Citibank N. A. Harshad Mehta was arrested in June following raids on his offices, initially by the tax authorities and then by the Central Bureau of Investigation (CBI...
...The private sector—irrespective of what it may have said in public—was hardly unhappy with the state of affairs...
...The Big Bull attempted to buck the system...
...Harshad Mehta proved to be the most adept exploiter...
...V. Krishnamurthy, a former public sector technocrat on the Planning Commission, also had to resign when his sons were found to be involved with the "scamsters...
...Rao has been steadfastly denying that his liberalization program has been set back by the scam and its aftermath...
...By the time he was released on bail some three months later, the pendulum of public opinion had swung from outrage to unbridled sympathy...
...Pawar, incidentally, is a contender for the prime minister's post, although Arjun Singh, in charge of human resource development, is considered the front-runner if Rao—who was known to be ailing before he assumed office last year—has to step down...
...Chidambaram, because of his law background, was the architect of many of the new import and export regulations that are the cornerstone of the Rao reforms...
...Belatedly, Rao and Singh are realizing that you can't make piecemeal economic changes...
...His lifestyle was equally flamboyant: He moved into a 15,000 square foot apartment and maintained a fleet of 30 cars, including a Japanese Lexus, a genuine rarity in import-restricted India...
...Basically, these brokers were borrowing money on securities they never had...
...But at the minimum the affair has shown that the foundations of the economy are quite weak and there is a long way to go before India can throw its doors open to foreign investment and move to convertibility of the rupee...
Vol. 75 • November 1992 • No. 15
