Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

February 18, 2000

The saga of coercion, corruption & extortion

Corruption in a large investment institution is so rampant and brazen these days, that seven out the 15 paise brokerage paid to institutional brokers in every deal has to be kicked-back to the fund managers

Six financial institutions (FIs) have apparently been lined up to subscribe to the rights issue of Maruti Udyog Ltd renounced in their favour by the government. These, according to the Business Standard are: Life Insurance Corporation (LIC), State Bank of India, Industrial Development Bank of India (IDBI), Unit Trust of India, ICICI and IFCI. The last mentioned been included although it has needed hefty fund-transfusion in the recent past and continues to be saddled with large non-performing assets (NPAs). News reports have already told us that FIs are ‘happy’ to obey the government diktat, without so even finding out the size of the issue, the price of the shares and the extent of investment expected from each of them. Just in case you feel sorry for the institutions, take a look at the other side too. Just as government compels and coerces FIs to finance favoured industrialists, to buy PSU equity or bail out stock brokers/ speculators, the FIs do the same to corporate houses and brokers who they lord over. Take for instance the example of LIC. The insurance company recently decided to get rid of several hundred dud stocks languishing on its books. These include companies which have vanished, which have been delisted, turned sick or are in the process of being wound up; there are also those which are quoting below par or have not been traded for years.

Most of them do not have buyers at any price. But that does not trouble LIC, because it is not looking for genuine buyers. It has a captive market among the brokers empanelled with it, who would be “persuaded” to acquire up to Rs five lakh of shares, depending on the size of their business with the institution. Further, LIC is not happy selling the stock at any price; it wants to get rid these shares at its purchase price. So scrips which have not been traded for years are being dumped on brokers at anywhere between Rs 18 to Rs 200. One which is quoted at Rs 3 is being forced on a broker at Rs 80.

The modus operandi is as follows: The LIC official hands the broker a list of stocks which he is expected to purchase. It specifies the price and quantity of shares to be sold, and a draft offer letter is also dictated. It says: “as discussed with you today we would like to purchase the following shares at the price given as under. Kindly confirm the same and inform us of the procedure to be followed”. Brokers are furious, but helpless. Many have caved in and purchased the shares while others have been avoiding the LIC office - only one broker is understood to have refused to do the deal. A top broker who refused to answer the LIC summons says that with brokerage rates having dropped to 0.15%, and his retail business having grown significantly, it makes no sense to succumb to such arm-twisting. He would rather give up institutional business. Not everybody is in this happy position. Some hope to cover up the loss through other deals or by getting increased business.

When contacted, P A Balasubramaniam, LIC’s Executive Director in charge of investments is unfazed. He admits that brokers have been asked to buy stock but denies coercion. “Brokers are free to say ‘no’,” says Balasubramaniam, “we are not forcing anyone to buy the stocks”. Brokers say that there are clear hints that a negative reply would lead to a gradual reduction in their business from LIC, but Balasubramaniam insists that the brokers are ‘misinforming’ us.

That is the crux of the matter. Since brokers have a lot to lose by going public with their rancor, LIC can continue to deny coercion. When contacted, top SEBI officials agree that such arm-twisting is wrong and distorts market practice, but who is complaining. Brokers say that the idea of dumping them with dud stock did not originate at LIC; Canbank Mutual Fund and BOI Mutual Fund have done it in the past and got away with it. It is part of the wink-wink, nudge-nudge tolerance which allows a patent malpractice to develop into an ‘accepted market practice’. For instance, it is common knowledge that IDBI coerced corporate houses which are financed by them to buy their equity at Rs 134 per share. The scrip opened below the offer price and has never touched the offer level since then. The smart corporate houses sold the shares on listing and minimised their losses; others have seen their investment dwindle to a third. But nobody complains. The quid has a pro quo in terms of larger loans, interest waivers, rescheduling of repayment obligations and more. Nobody complains.

Interestingly, all the institutions mentioned above are using coercion to clean up the institutions’ books. It is typical of Indian hypocrisy, that even fund managers are expected to be completely infallible. So institutions will fudge facts to avoid losses rather than write off bad investment decisions. Is it because they are afraid that the investment decision was crooked in the first place?

Fudging, on behalf of the institution is still the cleanest of market malpractice. Other institutions are doing even worse. This is a business where temptation is so high that a basic level of corruption is ignored and tolerated by the market community. However, corruption in a large investment institution is so rampant and brazen these days, that seven out the 15 paise brokerage paid to institutional brokers in every deal has to be kicked-back to the fund managers.

Naturally, front running and occasional inside information are the goodies which keep the brokers tied to the institution. The close nexus of this institution with a leading operator is also common knowledge in the market. His clout is derived from his political connections and corrupt officials. There have been times when the broker has bought a certain media scrip from the institutions and after its price has doubled, dumped it back on the same institution. The problem is not even restricted to government-owned financial institutions. Two foreign brokerage houses are most notorious for their day-trading deals. The fancy salary they earn is clearly no bar to corruption. These worthies start the day by giving advance information about their trades to a couple of brokers. The deals are squared up at the end of each session and encashed every day. Since the detection and vigilance machinery in India is slow and inactive, there is almost no deterrent to the mushrooming of corrupt cabals. As Chief Vigilance Commissioner N Vittal says, ‘the down-side risk’ in being corrupt is so low that nobody fears detection or punishment. The coercion and corruption starts at the very top and percolates to the lowest level making for a vicious and impenetrable network.