Harshad Mehta's Conviction: How Not to Handle Financial Crimes

Author(s): Sucheta Dalal

Source: Economic and Political Weekly , Oct. 2-8, 1999, Vol. 34, No. 40 (Oct. 2-8, 1999),
pp. 2833-2834
Published by: Economic and Political Weekly

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our growing dependence on it in economic Those citizens who would like to discuss contrast, scores of middle level officers
matters. This is where the East Timor issue the underlying issues in a frank non- of Indian banks, the small guys with no
too attains a fresh relevance. The natives clandestine manner run the risk of being clout, who have been implicated in the
of that helpless island, 72 per cent of them, dubbed, in this heady season, as rank anti- scam, often for technical offences, have
have opted for freedom in the just- patriotic. But never mind, we will be made simply been destroyed. Abandoned by their
concluded referendum. They were punish- to learn our lessons the hard way. And organisations, most of them have no funds
ed heavily by the Indonesian army for this could it be that, sooner or later, colonial to ensure adequate legal defence or deal
cheekiness. But things are falling in place. decision-makers operating from overseas with the slow and often corrupt investi-
After much humming and hawing, Jakarta posts will decide, on our behalf, what is gation process.
has accepted the idea of an international patriotism and what is not? No country can lay claim to a modem
peace-keeping force. Our government has Between the exit polls and the real thing, and international class financial market
kept mum, congratulating neither the the hiatus is just about to disappear. The unless it knows how to handle financial
Jakarta junta nor the freedom fighters in Kashmir problem will not go away. Now scandals and irregularities. This implies
East Timor. The notion of a freedom- that the campaign days are over, respon- building confidence in the regulatory pro-
granting referendum, followed by an inter-sible political parties need to sort out cess through swift detection of irregular-
national peace-keeping force to guide the which direction their thoughts ought ities and deterrent punishment handed out
transition, is no longer dear to New Delhi.to turn to. But who is to decide the inner within a meaningful time-frame.
Kashmir casts its shadow. The co-ordinatesmeaning of the qualifying clause There are the inevitable comparisons
'responsible'?
are no longer the same as in the days of yore. with Nick Leeson, architect of the collapse
of the blue chip Barings Bank, who is out
on parole, having served his sentence. Or
COMMENTARY the famous eighties imbroglio involving
Drexel, Burnham Lambert Inc - a scandal
probably on par with the Securities Scam
Harshad Mehta's Conviction in India. But investigations were conduc-
ted with precision and the main accused,
How Not to Handle Financial Crimes Mike Milken and Ivan Boesky, swiftly
sent to jail.
Sucheta Dalal
In the Indian situation, the multi-
departmental Janakiraman Committee was
No country can lay claim to a modern and world class financial on the right track and did an excellent job
in piecing together the scandal; its only
system without knowing how to handle financial crimes and scandals.
This calls for building up confidence in the regulatory process flaw of not having spoken to the accused
could have been easily rectified by a judicial
through swift detection of irregularities and deterrent punishment
commission. But the Janakiraman Com-
within a meaningful time-frame. mittee was discredited because the spot-
light had turned on inaction by the Reserve
THE first reaction to Harshad Mehta's such as the Indira Vikas Patra double Bank of India itself. Curiously, while there
conviction in a case related to the Securitiesone's money in a little over five years.isIf a continuing clamour for action against
Scam of 1992 is one of relief that the one includes the opportunity cost in terms the then RBI governor, there is no mention
judicial system, though excruciatinglyof having this money blocked up of in the case for punishment of the people
slow, still works. You then realise that the litigation, the size of the scam could double who were actually in continuous charge
conviction by the Special Court is just onefrom the current estimates of about Rs of the Department of Supervision for over
stage of the judicial process and still needs 5,000 crore. So far, the custodian appointed a decade. The government then insisted,
to be upheld by the Supreme Court. Thisby the government has recovered very probably deliberately, on blundering
could easily take another three years. little of the money lost. further by setting up a multi-party Joint
There are 600-odd civil cases relating The litigation itself has turned in- Parliamentary Committee(JPC) and ignor-
to the scam pending in the Special Courtcreasingly meaningless overtime, because ing the fact that several politicians from
(the number would have been larger but many of the main accused and key witnes- the ruling party were themselves under
for the sensible decision by several foreignses have died or are no longer available. suspicion for diverting several hundred
All senior CBI officials originally
banks to write off their losses and not press crores of rupees from public sector under-
charges). Out of 72 charge-sheets filed byconnected with the investigation have been takings to brokers and banks under the
the Central Bureau of Investigation (CBI)transferred. S P Gadhe, the DIG who guise of portfolio management schemes.
for criminal offences, only 46 cases haveinitially headed the investigation, passed The JPC allowed politicians cutting
been filed and of these only three haveaway four years ago. So have others such across ideologies to either chase their own
been disposed of by the Special Court -as National Housing Bank chairman particular bete noirs, indulge in the niost
including the latest one convicting HarshadManohar Pherwani, State Bank of India reprehensible horse-trading and leak
Mehta. At the pace at which the trial has (SBI) chairman M N Goiporia, SBI's confidential documents. Two reports later,
been proceeding, the scam investigationdeputy managing director C L Khemani the JPC is remembered only for the people
could easily carry on for the next twoand chief of vigilance R L Kamat and it let off the hook rather than for its
decades. In fact the process may actually K Dharmapal, the managing director of contribution towards improving the
slow down if a successor to justice Rane, Fairgrowth Financial Services. system. It also allowed the CBI to pick and
who retires in November, is not found At the same time the country-heads and choose which cases to pursue and those
soon enough. treasury-chiefs of all foreign banks have it should let off. It is no wonder then that
It would also be no surprise if the cost all quit their jobs and most of them are the cases against politicians such as B
of the litigation in several civil cases is no longer in the country. Many of them Shankaranand or the Goldstar case
higher than the disputed amounts. As things have been paid truly hefty severance involving a former prime minister's son
stand, even safe and stodgy investments packages to make the parting bearable. By are not even heard of.

Economic and Political Weekly October 2, 1999 2833

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 All this is all the more disheartening of these proposals, as spelt out in the act,
light on the facts disclosed by the evidence.
because way back in 1956, the brilliant Justice should never be cloistered - it may be summarised as follows: (1) The
enquiry into the Mundhra scandal by justice act is applicable to all irrigation schemes
should be administered in broad daylight."
M C Chagla had already established an He also decided to take evidence on oath
major, medium and minor except those
excellent precedent for clean and fair so that those who gave evidence didunder
so panchayat raj institutions and all
investigation. Justice Chagla, while minor bodies in the scheduled areas of AP.
with a sense of responsibility and know-
deciding on a public hearing in 1956, had ledge of "the consequences of giving false
(2) Every irrigation project would be divide
said, "After very anxious consideration I testimony". into convenient areas of operation of the
have decided that this enquiry should be The Mundhra enquiry was wrapped project and distributary committees, and
held in public. A public enquiry constitutes up in two years, including the appeal to WUA at the primary level. The delineation
a very important safeguard for ensuring the Supreme Court. In contrast, the JPC of the areas would be done on a hydraulic
that the decision will be fair and impartial. insisted on a convenient closed-door
basis, which are administratively and
The public is entitled to know on what investigation with selective briefing of
functionally viable. (3) Depending on the
evidence the decision is based. Members journalists at the end of each day. The
type of irrigation scheme, there may be
single,
investigation into the scam 1-as lost
of the public will also be in a position to its two or three-tier system of
come forward at any stage to throw more relevance ever since. associations/committees. (4) WUAs are
the primary organisational units of

Participatory Irrigation Management

scheme may comprise one or more WUAs.
irrigation water users. Each irrigation

While medium and minor projects could

Experiments in Andhra Pradesh comprise of a single WUA, depending on
Jasveen Jairath the ayacut, the major projects could be
divided into few hundred WUAs,
depending on the spread of the ayacut and
In 1997 the AP Farmers' Management of Irrigation Systems Act was
the spatial distribution of distributaries.
passed to enable the participation of farmers in the maintenance of These primary units of water users shall
irrigation systems. While this has led to many initiatives on the regulate and distribute water within its
irrigation and water-use front, the reforms now need to be carried command area. The total area of operation
of a WUA will be divided into 4-10
forward beyond supply-side initiatives to include the critical realm of
constituencies, depending on the command
end-use regulation of water, which would affect cropping patterns and
area. Each constituency shall elect a
agricultural practices. member of the managing committee of th
WUA and shall directly elect the president
ANDHRA PRADESH has three major on March 27, 1997. The main objectivesof the WUA as well. (5) A group of WUA
rivers, Krishna, Godavari and Pennar, of the legislation were to provide a legal under a distributary or a group of smal
whose dependable flows are 2,746 TMC backing for implementing measures todistributary comprises a distributary
of water, of which 1,846 TMC has been institutionalise the participation of committee (DC). The presidents of all
tapped for irrigation, creating an irrigation irrigation users in the operation andWUAs in a DC are members of a DC.
potential of 4.8 million hectares under maintenance of irrigation systems. That is Together they are to select the members
major and medium projects. Out of this (1) ensuring equitable and reliable supplies; of the managing committee and the DC
only 2.84 million hectares is being irrigated, (2) bridge the gap in ayacut throughpresident, who will be in charge of the
reflecting a gap of about 41 per cent. preparation of suitable operation plans;distributary related matters. (6) Project
According to the note on the state's (3) bring about social audit and water audit committees are apex bodies concerned
Farmers' Management of Irrigation in irrigation; and (4) enable the departmentwith the management and distribution of
Systems Act of 1997 (irrigation depart- to withdraw from M and 0, and concentratewater in the command of major and
ment, government of AP), "existing usage on the reservoir management and develop- medium projects. All the DC presidents
of water is inefficient, wasteful, inequitable ment of new systems. The thrust was onwill be members of the PC. The entire
with tail end deprivation being almost decentralising irrigation management andproject command is to be divided into
universal. Further, widespread deteriora- thereby, according a greater responsibility7-11 constituencies to ensure adequate
tion of infrastructure with little or no as well as greater powers to bodies com-representation. The PC will elect a presi-
participation of farmers has aggravated prising elected representatives of waterdent and 7-11 managing committee
the low utilisation of water of irrigation users. Involvement and control by the usersmembers from each constituency. (7) An
commands." The area irrigated under some at the local level, it was believed, would apex committee chaired by the minister of
of the major and medium projects was constitute an incentive to improve opera-major and medium projects shall be con-
shrinking, in spite of secular increase in tional performance. The entire exercisestituted to formulate broad policy guide-
capital expenditure (corrected for inflation) would lead to improvement in quality andlines for the various committees in its
and increasing M and O expenses. Finally, cost efficiency of irrigation managementcommand and act as the final decision-
the financial returns to the investment in leading to increased profitability ofmaking body forresolving disputes. (8) All
irrigation were very poor due to low rates irrigated agriculture - often in spite oflandholders within localised/authorised
of water cess and low rates of fee collection. increased cost of irrigation to the user. Thearea including title holders, tenants and
That the performance of irrigation projects process was perceived to be a cost savingwhose name is found in Record of Rights
in the state on technological, managerial venture for the government wherein theshall be members of WUA with voting
and financial fronts was very poor, was released resources could be used elsewhere. rights. All other water users either from
well recognised and acknowledged within The proposals for operationalising the non-localised areas or users for non-
the government circles. above ideas envisaged the creation of anagricultural purposes will also be co-opted
The AP Farmers' Management of institutional structure of irrigation wateras members but without voting rights.
Irrigation Systems Act was passed againstuser with water user associations (WUA)(9) These organisations are charged with
this backdrop in the legislative assemblyas its basic elements. The main features the following main functions: preparation

2834 Economic and Political Weekly October 2, 1999

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