NEW DELHI: A “top secret” internal note written by the Reserve Bank of India Governor, S. Venkitaramanan, reveals that the RBI Governor knew about the Magnitude of the scam way back in March last year.

In his note to RBI Deputy Governor Amitabh Ghosh on March 20,1991, Venkitaramanan observed that banks were selling government equities without adequate stocks of “such scripts and categorically stated. “The whole transaction is fictitious.”

Yet, the RBI acted in the matter only four months later and that, took, by merely issuing guidelines to bans on July 26 asking them not to conduct certain kinds of securities transactions in future.

Members of the Joint Parliamentary Committee probing the scam, are extremely disturbed over these findings and will take up them up in the major way during their interrogation of the RBI’s top bosses.

Comparing the March 20 note and July 26circular, JPC members point cut that RBI failed to do its duty, the sending of the circular was a delayed and far from adequate response to the kind of irregularities highlighted by the Governor in his note. The guidelines did not reflect the seriousness of the charges contained in the Governor’s internal note.

JPC members raise several pointed questions: why was the RBI content to send a circular to the banks, and that too, after a gap more than four months? Why did the RBI governor not alert the Finance Ministry and the investigating agencies at that stage itself and initiate penal action against the banks guilty of what were clearly criminal offences? What pressures were applied in the interim to stall such a course of action? Venkitaramanan March 20 note expresses serious concern over the “practice of selling government securities by individual banks even when they do not have adequate stocks of such scripts.”

The whole transaction is fictitious. All that the banks exchange is certificates of forward sale and forward purchase, the whole process leading to considerable amount of abuse and corruption. Possibly, the brokerage is being shared,” the Governor observes.

The Governor goes on to ask his deputy to instruct the chairman of banks to ensure that such transactions do not take place “this year.” Any bank chairman found to have indulged in such transaction will have to be “dealt with severely,” he says. He adds that “the message is to be conveyed to particularly chairmen of bans in Bombay and Delhi where such transactions are reportedly taking place on a large scale.

He then goes to suggest that inspection be carried out by inspectors of the DBOD (Department of Banking Operations and Development) of the securities departments of some banks, providing an illustrative list of five banks: Banks of India, Bank of Baroda, and United Bank of India, Canara Bank and Indian Bank.

Significantly, the RBI governor pens in his own hand, the following sentence “While foreign banks are also involved, we have to take care.”

The Deputy Governor receives the note and passes it on to the DBOD for “immediate action.”

The DBOD carries out a “quick scrutiny” of the transactions in securities put through by some public sector banks during the first quarter of 1991. A 12-page report is submitted by the DBOD on June 17,1991, confirming, in greater detail, what the Governor had said in his March note.

Commenting on this report more than a month later, on July 19,1991, the Deputy Governor acknowledges the seriousness of the offences being committed by the banks, calling them, in turns, “improper,” “objectionable,” “imprudent” and “must not be permitted.” He suggests that a reputed firm of chartered accountants like Bansi Mehta and Co should go into the transactions in the investment accounts of a few banks, particularly of the accounts maintained by UCO bank, on behalf of brokers. The Deputy Governor recommends that RBI should only initiate action after receiving their report.

Venkitaramanan responds to his observations with a handwritten noting on July 23 “There is not case for further delay. This is already under investigation, We should issue instructions immediately. We will be inviting adverse notice if we do not issue instructions immediately to stop these malpractices. | am worried that even after I had pointed this out as early as March 20,1991, no deterrent action has been taken so far. The draft instructions may be kept ready for issue on 7-26-91.”

Despite his extremely agitated note and his plea for “deterrent action” the Governor does not speak of any other course of action apart from the circular. Accordingly, the circular is prepared and sent out to bank. It takes nearly one year, after that, for the scam to come to light.

Article extracted from this publication >> October 2, 1992