NEW DELHI: The government is seriously considering issuing an ordinance to deal effectively with the situation following the stunning disclosure in the Janakiraman committee report that the loss to the banks and financial institutions in the current scam is likely to be Rs 3078.63 crore.

The ordinance is to empower the government to seize the assets of brokers to realize as far as possible dues they owe to the banks. The magnitude of the scam is revealed by the interim report indicates that there is no time for consuming procedural or logical exercise.

For the irregularities in securities transactions involving brokers banks and financial institutions as disclosed in the report amount to a near subversion of the Indian banking system.

The report was submitted here to the finance minister Dr. Manmohan Singh by the RBI governor S.Venkitaramanan. It was later released to the Press.

According to the report four banks and their subsidiaries and institutions have made payments for purchase of investments for which they do not hold either securities SGL forms or BRs to the tune of Rs 1795 crore

The institutions involved are the National Housing Bank (Rs 1199.39 crore) the State Bank of Saurashtra (Rs 175.04 crore) SBI Capital Markets ITd. (Rs 121.23 crore) and the Standard Chartered Bank (Rs 300 crore).

In addition three other institutions are holding BRs and SGLs totaling Rs 128297 crore issued by Bank of Karad Ltd and the Metropolitan Cooperative Bank for which the issuing banks “do not appear to have” sufficient backing.

The three institutions holding such dud BRs and SGLs are the Standard Chartered Bank (Rs 755 crore) Canbank Financial Services Ltd (Rs 425 crore) and Canbank Mutual Fund (Rs 102.97 crore).

The total amount of exposure which banks may find it difficult to realize aggregate to Rs3078.63 crore. “This does not take into account may claims towards interest etc which may arise on settlement” the report says.

An official press note says that the government and the RBI have taken a serious note of gross violation of RBI guidelines by banks and financial institutions the failure of internal control systems as also the floating of banking norms regarding the Account payee checks.

The process for fixing responsibility for lapses and collusion and fraud is under way. Whilg the CBI inquiry is in progress for determining criminal liability the government will take all steps to see that action is taken to recover the dues of the banking system “from all those who have abused the system and to punish the guilty.” .

The Janakiraman Committee expects to produce a second interim report after tracing the flow of funds involving various checks drawn by banks and the broker.

The committee has made 15 sets of recommendations to streamline the working of the public debt office of the RBI and make securities transactions transparent and full proof These range from prohibiting ready forward and double ready forward deals in securities other than government securities formulation of internal exposure limits for transactions to institutional arrangements for inspection of the National Housing Bank The recommendations have been. Accepted by the RBI and necessary follow up action is being: taken.

The committee has found that since July 1991 the increase in the volume of transactions in securities and capital market instruments particularly in the form of ready forward deals led to “indiscriminate issue” of BRs and even SGLs and facilitated “diversion of funds to select brokers.”

Funds have been diverted to Harshad Mehta and his concern in a number of transactions put through particularly by the NHB the State Bank of Saurashtra the SBI and SBI Cap.

In several transactions the counter parties mentioned in the contracts provided by Harshad Mehta are only in name. Also the facility of Meeting of the contracts afforded by SBI and SBI Cap to Harshad Mehta and collection and creditor of bankers checks issued in favor of the SBI in Harshad Mehtas accounts and issue of bankers check of SBl as per his instructions have also resulted in irregular Operations.

The committee has found the & ir regularities in regard to SBIs Wansacuions with Harshad Mehta “extremely disturbing.” The investment account in the SBIS books and SBIs accounts with the Public Debt Office of the RBI according to the comities have been manipulated to accommodate transactions of the latter.

Article extracted from this publication >> June 12, 1992