Likes of Modi, Choksi and Mallya serve to divert public gaze from governance and accountability

images (2)By Shantanu Basu*

“When you see that trading is done, not by consent, but by compulsion – when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.” Ayn Rand’s observation could not be truer than for its current Indian context.

Amid the din of the L’Affaire Nirav Modi, certain critical aspects relating to financial management in government and link with politics have been buried for obvious reasons. It is also not as if the private sector is the solo villain de piece; governments have most often vastly bested them, mostly unknown to the public. At the center of such institutionalized malfeasance is the unholy link between politics, government and business in a cash-driven election system.

If banks are guilty of failing to reconciling their accounts, governments are far worse. What is reconciliation? Reconciliation matches figures billed for payment by paying agencies, passed for payment and actual payments made, involving the administrative billing officer, accounts officer and paying agency (mostly banks), each one reporting to separate bosses. This tripartite check is therefore in conformity with the constitutional separation of powers. Although procedures originated in the Government of India Act, 1935 and subsequent legislation and rules thereunder, they are observed almost entirely in their breach. Failure to reconcile the books of accounts maintained by the above triad is a red herring for fraud, defalcation and embezzlement. States have abominably low reconciliation rates and this situation has rapidly escalated with some states reporting full reconciliation by just finger of 30-50 departments per state. SWIFT used by banks is no different from payment authorization to banks by the treasury officer/PAO in governments. Persistent indifference to reconciliation may camouflage criminality.

A NE Indian state received about Rs. 3.50 lakh crore as financial assistance from the Govt. of India over a span of eight years. Of this, about 70% were non-repayable grants-in-aid or say about Rs. 2.50 lakh crore. The lion’s share of the latter was drawn in the last quarter of each fiscal and transferred to about 15-20,000 current bank accounts in FIs, outside the government accounting and auditing system. Once outside the system, banking confidentiality laws safeguarded wholesale criminality. Expenditure was incurred by low-level functionaries; sometimes an individual payment crossed Rs. 300-400 crore. Interestingly, the open-ended parallel and unconstitutional system was had state’s Cabinet approval. Payments were drawn as advances without list of beneficiaries, payments not drawn in favor of suppliers and/or drawn on patently false certificates of work completion/stores received or stocked in fixed deposits, etc. that disappeared without a trace. Arbitrary transfers of over Rs. 1500 crore were made to dubious state sponsored societies. Reconciliation remained a fig leaf. Neither the state nor the Govt. of India ever took any action against such giant malfeasance even after audit and accounts reports reported it to the State Legislature.

In similar vein, Nirav Modi and Mehul Choksi’s banker was only too willing to let them have as many LOUs as they needed without coughing up collateral for them. The reconciliation system was deliberately sabotaged with internal audit and external auditors failing in their duties as well, a large part of which may owe to influence peddling. A related issue is the delegation of financial and administrative powers that too is a global must have. Then there are innumerable internal reports and returns that report progress/regress to senior/top management and Boards. Collated, these reports are a mine of information. Regrettably, most are filed, having been taken as read. How is it even feasible that several hundred LOUs persisted for over a half decade without finding refection in basic accounts and reports and that too issued under the signature of the same junior officer? How this was different in essence from the NE State’s siphoning funds from the public exchequer? Clearly, the finger points to the senior and apex levels of governance of these entities. Obviously, such persistence did not occur as part of customer/public service!

This brings me to the issue of vigilance. Vigilance clearance for prospective candidates to top posts in banks/governments is equally opaque with no qualifying matrix available in the public domain. Besides, CVC’s recommendations are entirely advisory, not binding, upon the appointing authority. The basis on which CVC grants vigilance clearance is a CBI inquiry. Then, how is it that several CMDs of banks were arrested for corruption by the same CBI soon after their appointment was cleared by them in the first instance? CVC’s guidelines on transfer of employees in ‘sensitive’ posts apply to all state banks and Govt. of India equally remains a paper tiger alone while states have similar instructions from their respective VCs. ‘Public interest’ is sacrosanct and routinely adhered in the negative by transferring authorities. Just as the junior bank officer continued in his charge for seven years, so did the Finance Secretary of the foregoing NE state for a period of over a dozen years without a break, earning him a cushy statutory post-retirement sinecure after superannuation. The junior bank officer is plain unlucky having to stand in for his seniors that looked the other way as he supinely carried out their verbal instructions, probably not without ample ‘incentive’. The bulk of government and bank employees have no change of charge in 5-10 years, many times over an entire career as they are promoted in situ, when due. That holds true of many senior and top level civil servants too.

There is also a core group in every government agency that, in tandem with senior/top management, monopolizes all ‘lucrative’ posts while drafting replenishment ‘talent’ periodically. In time, staff associations have often come to shake hands with management on this sensitive issue. In apparently orchestrated moves, party-affiliated unions raise a hue and cry whenever systemic HR transfers are made. The political parties then make a nauseating ‘tamasha’ rushing into the fray and staying transfer efforts. Those that do not comply must face the music and lose their chairs or be shunted out to a sinecure, often by political intervention with the entity’s CEO. Mutual back-scratching is thus the name of the sordid game we witness daily.

Each self-accounting unit (bank branches too), across private and public sectors globally, maintains a cash book that is the fundamental document of financial management. If LOUs were being issued frequently by a bank, such transactions should have been recorded on the expenses side. The basic principle in accounting is that the difference between receipts and expenses ought to be zero. For a commercial LOU-issuing bank this means that the LOU ought to be covered by a corresponding 100% margin money entry as receipt from the company seeking the LOU. In a way a LOU is akin to a banker’s cheque. It is common knowledge that cash books are seldom closed daily and reconciled monthly, across public and private sectors. Audit comments in this regard, if any, are fobbed off by Boards and apex civil servants alike, stating ‘noted for future compliance’, a revealing and recurrent joke. It is the cash book that mirrors the quality of its governance. Both governments and most private sector entities are no exception. With innumerable anomalies in the cash book, there is no better opportunity for private entities to join hands with government agencies/banks and jointly burrow endlessly into the financial system with remote chances of detection.

A closely related issue is that of human resources (HR) both within the entity and vigilance and auditors and the Dept. of Financial Services, RBI & SEBI that are part of the banking ecosystem. Since banks are outside the jurisdiction of the C&AG, their external audit is done by private chartered accountants who often tailor their reports to ensure their continuance in future years. Many also have conflict of interest that they often do not disclose. PM Modi’s warning in 2017 to chartered accountants was therefore wholly in order.

Coming to DFS, RBI and SEBI, in the Global Trust Bank-Ketan Parikh case that resulted in losses of Rs 1000 crore, the damages were finally borne by the majority government-owned Oriental Bank of Commerce in 2004. In May 2013, an investigation by the online media firm, Cobrapost, showed officials of both private and government banks soliciting clients for laundering black money and offering bank lockers to store unaccounted money. In no case, was the senior management of the implicated banks held responsible by SEBI or the DFS despite the online videos revealing that the problem was systemic and not the work of rogue employees alone.

Between Aug. 1, 2014 and Aug. 12, 2015 Rs. 6172 crore was illegally remitted to some companies in Hong Kong by 59 companies through their newly-opened current accounts from a Bank of Baroda (BoB) branch in the Delhi for import of dry fruits, rice and pulses although, allegedly, there were no actual imports. These remittances were sent by splitting them into smaller amounts to avoid automatic detection by software used by banks to alert them about such transactions. Interestingly, BoB said 90% of the remitted funds originated from 30 other banks, while only 10% was received as cash at its branch in New Delhi. So far, there is no word on the identity of the final beneficiaries of such money laundering.

Obtaining loans through fake documents and involvement of bank managements emerged as common modus operandi across cases. Yet top bank managers, particularly of PSBs, DFS top brass, bank auditors, regulators, vigilance and Board Directors, part- and full-time, are seldom punished along with their collaborators. To the contrary, a privileged few worm their way back into the system even recommending top managers of PSBs for appointment, notwithstanding their own abundant conflicts of interest in DFS and probable dubious roles in sanctioning today’s NPAs/CDRs while being nominee govt. Directors on these FIs.

Close to the heart of the sordid saga is the role of the DFS. S. 19 of the Companies Act, 1956, prescribed that Directors would be official and non-official and shareholder representatives, etc. in proportion to the shareholding in PSBs. And who are the official Directors? They are civil servants serving in the Union Ministries. Depending upon the civil servant’s seniority, he/she would be a Director ranging from SBI & LIC to Dena and Corporation Bank. As on Jan. 20, 2017 there were 27 officers from DFS as official Directors in all 27 banks/FIs. The largesse is distributed from the Secretary DFS on the boards of SBI & LIC, Jt. Secretaries in the larger PSBs and right up to Dy. Secretary, even beyond the Union Finance Ministry. Non-official and independent Directors too are appointed by DFS imaginatively for their supposed eminence and have included several with open conflicts of interest and a complete lack of banking knowledge. Stanley Milgram’s quip that “The disappearance of a sense of responsibility is the most far-reaching consequence of submission to authority” could not have rung truer in the Indian context.

A working paper of IIM-B and KPMG discussed issues of fake equity, round-tripping of PSB loans, inflation of project estimates (in many cases double the original) that permitted borrowers to use only PSB loans without deploying promoter funds, conversion of secured funds of the PSBs into unsecured assets, lack of personal and corporate guarantees from the promoter group, right to audit and inspection over other promoter group entities and the role of overseas minority shareholders (most often shell companies). Since Board agenda and minutes are seldom available in the public domain, no one will ever know the level of their compliance with rules and laws. Why is it that official and non-official Directors, both nominated by DFS and ACC are unable to wade through these issues and foresee even 50% of endemic malpractices in a sector that has caused immeasurable harm to India’s PSBs?

Internal audit across public and private sectors is an administrative function that is also it biggest infirmity. There are chronic shortages of personnel since the job is often not ‘lucrative’ enough. Therefore government entities draft in generalists to fill the vacancies. Those that are forcibly drafted, often new recruits, canvass for moving out of internal audit at the drop of a hat. Here too staff unions often make requests for transfers citing extraneous reasons that are mostly accepted. The internal vigilance wings of all banks and entities have been rocked by financial scandals to render any meaningful oversight. The situation is far worse in states where subordinate state finance and accounts service officers head treasuries, accounts officers, etc. but enjoy no autonomy or protection whatsoever. Monthly accounts are often delayed by big-spending departments for months together without any fear of retribution. They are also poorly trained and not transferred regularly. In time, vested interest converges with compliance with the transferring authority, mostly state Finance Secretaries improving the ‘quality of life’ of the compliant. Is that why the CBI found that bank officials had parted with their access passwords to the Modi-Choksi combine to access the bank’s servers, the same way treasury officers passed illegal bills for payment in the above NE state?

C&AG’s audit is mostly scanty, given their severe HR constraints. Recruitments by state public service commissions are scandal-ridden and below par. Having paid their way into a government job, the first priority for new appointees is to look for ways and means to recover their first ‘investment’ many times over. The rot is thus all-encompassing and unaccountable and open to subversion at every level from outside and within the system. M/s. Modi & Choksi and many others only bought into this open system and then brazenly reneged on their repayment obligations, cocking a snook at a seemingly ‘agitated’ State to come after them in salubrious foreign climes, when many are already ‘illegal’ dual citizenship holders.

Supremely, it is the continuing opacity in appointments at Board level and senior management positions in state-owned banks and governments, part of the larger political patronage sub-system that is the largest single contributor to unending government entity-stripping. Finishing of a rough diamond does not add far greater value to an uncut diamond, particularly when wages of artisans and establishment costs are far lower in India. In turn, this offers a golden opportunity for diamantaires to make a huge profit by over invoicing imports and under invoicing exports. With little or no margin money invested with Indian bankers, public bank moneys are diverted offshore and used for various purposes by diamantaires, not necessarily related to the diamond business. Were the Surat-based diamond industry subjected to matching of imports and exports, verification of stock and audit of revenue earned and expenses incurred, explosive findings could become public. Why then are state-owned banks so liberal in sanctioning LOUs and loans to private parties frequently and without securing cashable and non-depreciating collaterals? Bank haven accounts in the Panama Papers and many more disclosures overseas may well have originated in this industry and their state-owned FIs. It is not unusual that there is no appreciable progress in investigation.

At the center of this unending sordid saga is the issue of election funding. India’s democracy is tightly knitted to a wholly cash-driven and empty promise-laden electoral system. Financial assistance to non-governmental agencies and individuals, reimbursement of subsidies, public contracting, utilization of funds released by governments, tampering with taxes, selling public assets and resources, public-private partnerships, creating new layers of diversionary corporate governance structures while undermining existing structures, loan waivers, CDRs, assuming private liabilities as public debt, looking the other way when a ‘quarry escapes’, etc. and myriad more, offer infinite opportunity to fund elections. Individuals like the Modis, Choksis, Mallyas, Ruias, and their like serve a most useful purpose in diverting public gaze and debate from far more fundamental issues of governance with accountability and larger hidden agendas that impact our lives.

The public banking system and the vast majority of public servants that render yeoman service to the nation must be commended. Heated debates on social media presently that nationalization is the root cause for all evils are no more than an alibi to create justification for divesting government shareholding in the state-owned FI sector, something that sections of the media too are thoughtlessly fostering. Notwithstanding their innumerable failings, these FIs have insulated our economic system from several shocks in the international environment in various ways besides providing affordable services to citizens in the remotest areas of India. Foreign FIs, credit/debit card companies, I-T giants, venture capitalists, and speculators (Indian too) lie in wait for more scandals to hit our banking system. Financial scandals that periodically hit our states and PSUs too make a strong case for outsourcing and sale of lucrative assets.

Instead, what is required is to insulate civil servants and state-owned FIs from political intervention in matters of their internal administration and divorce them from Ministries, notably DFS, altogether, including deprival of Govt. of India bail-outs. Selling FIs/outsourcing governance is hardly a solution to the corruption that plagues our financial system, the cure often being worse than the malady. Private prospective buyers too mostly have dubious track records, indeed are no exceptionable paragons of virtue. Preserving our institutions in public hands and insuring their accountability and autonomy on a few key parameters is therefore critical to the preservation of our hard-won independence and democracy. Decimating them would assassinate our Republic for, as Ayn Rand stated, “…….when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.”

*Senior public policy analyst and commentator.

This article first appeared HERE

One thought on “Likes of Modi, Choksi and Mallya serve to divert public gaze from governance and accountability

  1. These frauds are not only diverting public attention towards governance but also the public money is being stashed away with impunity. Number of scams have gone by unresolved and money unrecovered. The corruption remains an election tool to get votes from innocent public


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