It seems to be an open season for whistle-blower letters these days—at least, at Moneylife. We keep getting one letter after another exposing the dirt on Indian capital markets and companies. Unfortunately, the deep expertise of insiders, and the excruciating detail they go into, will not have the desired impact if the regulator fails to act. What is worse, anonymous whistle-blowers, lacking in courage and suffering from a trust deficit, seldom provide enough evidence of their charges to warrant an investigation by resource-strapped entities like ours.
On the other hand, large media organisations, which ought to be the first destination for such letters, are either compromised by the massive advertising budgets of the target entities, or their journalists are unwilling to alienate powerful people through investigative work. The latter is a valid career consideration for many young journalists because large corporate houses and their communications armies ruin your career prospects and block access and job opportunities, especially when the target is a multinational company. Many international scholarships and fellowships that are decided by consulates and embassies go only to ‘friendly’ scribes.
This long prelude on the hazards of investigative journalism is important, because anonymous whistle-blowers and their cohorts, often, get on to social media (again, behind anonymous handles) and accuse the media of being compromised. It won’t be a surprise if their access to news is only through pre-programmed Google searches and not paid subscriptions to independent media. But, hey, it is a journalist’s duty to serve society by putting his/her life and career on the line to investigate every bit of the half-baked, self-serving piece of information sent out as ‘whistle-blower’ information, right? Unfortunately, it does not work that way.
That a source will hide his identity, initially, is understandable. Ethical journalists never betray a source who puts herself at risk to provide information. But it has to be a two-way street. The best of reports are built on trust and interaction. This is, probably, required even in ‘supari journalism’, where a powerful interested party pays the huge cost of an elaborate sting operation and its eventual, stage-managed exposé. If this weren’t the case, we would have known the source of funding, at least, in a few botched up stings. The code of omertà, probably, prevails here.
On 23rd April, 25 years ago, The Times of India front-paged my report on the Harshad Mehta scam. My key source, who helped corroborate crucial information all through our scam reportage, remains anonymous. Debashis Basu, who covered the scam for Business Today, and I, used to call him DT, short for ‘deep throat’ that we had unimaginatively borrowed from All the President’s Men. DT had got in touch with me in 1991, when I worked at The Economic Times and shared information on how public sector undertakings and banks were colluding with brokers to pass on large sums of money. Since so little was known to the media, or even the regulators and bankers, about the shadowy world of trading in gilt-edged securities or the secondary market for units of the Unit Trust of India (UTI), his constant help, in explaining the information that we gathered, was crucial. I had shared a lot of this information with the then Securities & Exchange Board of India (SEBI) chairman GV Ramakrishna even before the 1992 scam story, including the collusion between brokers and top politicians and Union ministers to route funds into the market. But until Harshad Mehta’s little trick of helping himself to over Rs700 crore from the State Bank of India (SBI) through a non-existent SGL (securities general ledger) receipt was discovered by the Bank, the rest of the information that one gathered was of little value.
Soon after the first exposé, I wrote another report, which put the size of the scam at Rs5,000 crore (a stupendous figure in those pre-liberalisation days) that included UTI units, fake banking receipts (BRs), deals, portfolio management schemes (with PSUs), bill discounting, etc. On the day the report was published, the then Reserve Bank of India (RBI) governor, S Venkitaramanan, called a press conference to deny the report. Such denials by RBI are unheard of even today; in 1992, it was an extraordinary event. I thought it was the end of my career. On checking with DT (since my information had indirectly come from the central bank itself), we gathered that the RBI governor, indeed, had no concrete basis to deny my report.
He had probably been asked by the government to issue a denial, in order to soothe worried foreign creditors and others. Armed with this knowledge, a few of us (including a couple of friendly journalists in other papers) grilled the governor, until it was fairly clear that the denial was baseless and my report was accurate. Of course, he got the media headlines that he wanted the next day. Ironically, other publications soon began to report that the scam was three or four times the figure I had quoted. The income-tax (I-T) department also made vastly exaggerated claims of tax dues from all the scam accused—their actions have ensured that trials in the special court, and even some sessions court cases, have not ended after 25 years.
Over to Today’s Scam
We are now in the world of HFT (high frequency trading), where powerful global operators, with deep pockets and access to expensive co-located servers and sophisticated algorithms, generate massive trading volumes in nanoseconds. But the gap between what traders were doing, and what the media or regulators knew, remains as vast as it was in 1992 when banks and brokers devised multiple ways to get around RBI’s tediously slow system of recording government securities’ trades in massive physical ledgers, and banks were fighting computerisation. The difference today is the absence of trust. If the whistle-blowers find it hard to trust journalists, we are equally suspicious about their motives. Maybe they are just protecting their eight-figure-salary jobs and want someone else to do the dirty work of helping clean up the system. Or stand to gain personally. This is the environment in which we chose to fight an important case against the powerful National Stock Exchange (NSE). But it can only go thus far, if whistle-blowers are unwilling to work alongside us, as DT did in 1992.
The last two letters I have received about capital markets name a powerful foreign institution that is working around regulation to cream off profits in stocks, currency derivatives and commodities. The latest, from a new whistle-blower, says that a particular foreign institutional investor (FII) is trying to gain back-door entry into Indian commodity trading, by circumventing rules that prohibit foreigners from this market. It has applied for SEBI’s permission through an Indian subsidiary, after having obtained the foreign investment promotions board’s (FIPB’s) approval. The FII has two entities registered in India. One is a securities trading subsidiary (both Indian subsidiaries have common directors), where the 49% shareholder is an Indian employee of the global firm that is evidently just a front. The majority stake is held by a Mauritius-based entity.
Significantly, this FII is mentioned by the NSE whistle-blower as using prohibited Reuters data feeds to get prior information for trading currency derivatives—especially in the rupee-dollar pairs. The FII is notorious globally and has been investigated and sued by regulators in the US, Korea and China. The new letter is addressed to the SEBI chairman and two of its whole-time directors. Will they investigate? One does not know. What we do know is that SEBI sent the first letter from the NSE whistle-blower to the Exchange. Its reply was accepted, filed and the case forgotten until Moneylife wrote about it and opened a huge can of worms, finally leading to NSE’s MD being sacked.
Maybe this, too, will need a rogue algorithm to wreak havoc in commodity prices or currencies which will trigger a public outcry to force a serious investigation. After all, there is only so much that the media can do from outside, if the whistle-blowers want to remain cosily anonymous.