About a week ago, the government accepted the Supreme Court's (SC’s) suggestion to set up a committee led by a retired judge to study the crash in Adani group shares as well as to recommend improvements in statutory and regulatory regimes governing the securities market. As last reported, the SC had refused to accept names suggested by the government in a ‘sealed cover’ and planned to nominate its own people.
That the SC felt the need for such a committee is in itself a serious indictment of the finance ministry as well as the market regulator. The bigger question is: How sound is the SC’s idea and will it lead to results?
Let’s start with the second half of what the SC has said first. There has been one instance in the past of a committee led by a retired Supreme Court judge, but it did not lead to improved regulation of the markets. The ex-judge was a director of India’s near-monopoly exchange whose governance, during his tenure there, has been highly questionable.
Apart from the co-location (Colo) scam which happened at that time, the board of directors had also rubber-stamped capricious decisions of the managing director (MD) which bypassed established processes on senior appointments, promotions, etc, ostensibly under the guidance of a Himalayan yogi. The role of directors and why they continued to support the MD even after facts were in the public domain, has never been probed and remains a mystery.
If the SC wants this committee to be different and more effective, it needs to check how stock market-related scandals have been handled over the past 50 years. I have been reporting these for over 35 years and researched the first of them, the Haridas Mundhra scandal, for a book. Here is what I found.
Haridas Mundhra Case, 1958
The best-ever investigation was the one appointed under the legendary Justice M C Chagla in 1958 to investigate the Haridas Mundhra scandal. Mundhra followed the same modus operandi as that of every major Indian scamster—ramp up prices of some stocks and use political connections to dump them at high prices on public sector institutions. In this case, Life Insurance Corporation (LIC), again in the spotlight over investments in Adani group companies, was the dumping ground.
Those were more idealistic days; so Justice Chagla formed a one-man investigation commission and completed the inquiry in just 24 days. He conducted transparent public hearings which attracted huge crowds and the testimony of witnesses and Mr Mundhra was broadcast over loudspeakers in the days before television, mobile phones, and the internet. It is said that JRD Tata was among those who attended the hearings, just to listen to the proceedings.
Despite the obvious clout and political connections of Mr Mundhra, bold testimonies against him came from financial legends of that time, such as AD Shroff (https://www.amazon.in/D-Shroff-Titan-Finance-Enterprise/dp/0140296182 ), KRP Shroff (president of the Bombay Stock Exchange—BSE) and HT Parekh (founder of HDFC).
All of them indicated that LIC had no business buying the shares and AD Shroff even said that LIC should not be in the business of propping up the market. He said, the market was not interested in Mundhra’s shares and the claim that LIC had bought the shares to ‘avoid a drag in the Calcutta market’ (then a large trading centre) was a ‘cock and bull story’. Mundhra had “an infinite capacity for not telling the truth…,” he told justice Chagla in his testimony.
Bhagwandas Govardhandas, a leading broker and member of LIC’s investment committee, not only said that shares held by Mundhra were worthless, but that the BSE had publicly warned investors that some of Mundhra’s shares were ‘forged’; he said that he would not even touch them ‘with a pair of tongs’. The quality of testimony reflects the confidence in the investigation itself; something that has not been witnessed ever since. Would it surprise anyone if a string of witnesses called to depose before the committee investigating the collapse of Adani shares, praise the group and blame Hindenberg and George Soros for ‘destabilising’ the Indian market and economy?
The political establishment also learned many lessons from the Mundhra inquiry—unfortunately all the wrong ones, and they impacted how all future scam investigations were conducted. For starters, it was the last time there were public hearings on any financial scandals. Politicians also began to insist on setting up joint parliamentary committees (JPC) to investigate scams, which allowed politicians, who may not be subject matter experts, to act as the judge and jury. All hearings are secretive and even those asked to depose have to swear not to reveal their testimony. The only information in the public domain is through media leaks (plenty) and a daily press briefing.
Securities Scam 1992
This was the time when India was facing a serious balance of payments crisis, had just embarked on economic liberalisation and the World Bank was keeping a close watch on what we did. The government started well by doing two things: The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, was passed to ensure speedy hearings; and the multi-disciplinary Janakiraman committee (comprising regulators, tax investigators, and multiple investigation agencies) was constituted to conduct a detailed investigation.
But faster hearings never happened. Instead, the special court continues to hear the scam cases after 30 years. At the very least, we need the SC to realise that, in a market where transactions worth a few hundred crore rupees each happen within seconds and settlements happen within a day of trade, investigations and court cases that drag on for decades let off wrongdoers. Often, key investigators and witnesses are dead long before the trial concludes.
The Janakiraman committee had the integrity to come up with a series of excellent findings which were to be the basis of charge sheets filed by the central bureau of investigation (CBI). Unfortunately, once the JPC 1992 submitted its report, the dilution of findings and delays began. After all, JPC itself had signalled the way forward by relegating most specific allegations to ‘notes’ attached to the report; they were promptly ignored.
Ketan Parekh 2001
The Ketan Parekh scam, which happened soon after the dotcom bubble burst, was quickly followed by the collapse of the giant Unit Trust of India (UTI). Having pushed the government to set up a JPC, our politicians were demanding another one to investigate UTI in parallel (read more here: https://m.rediff.com/money/2001/aug/08dalal.htm ). Finally, the JPC that was set up did not even include UTI in its terms of reference. The committee itself was packed with politicians close to many of the accused.
Since the Opposition did not press for a Janakiraman-type committee, this was used as an excuse to let off all corporate houses involved with Ketan Parekh, with breezy instructions to the Securities and Exchange Board of India (SEBI) to continue the investigation. SEBI allowed some of the biggest corporates, who had colluded with Ketan Parekh, to walk away with just a warning. Other investigations dragged on for years.
A separate committee under former Reserve Bank of India (RBI) deputy governor, the late Dr SS Tarapore, did a thorough investigation of UTI. The committee report could have led to the immediate filing of charge-sheets, says a committee member, but it was never made public and has vanished with no action against the then chairman, PS Subramanyam.
The fact that Indian corporate houses misused foreign institutional investors and overseas corporate bodies (OCBs) to prop up domestic share prices was established in the Ketan Parekh investigations. SEBI tightened disclosure but didn’t do enough, since foreign portfolio investors are again at the centre of allegations against the Adani group. The Hindenburg Research findings, as well as several earlier reports by the Indian media, have established this.
The question then is: Will an SC-appointed committee come up with different results this time? A committee, like any large SC bench, will have different opinions and perspectives and may not arrive at a consensus. Also, unless it is assisted by a well-empowered, multi-disciplinary committee, it will have to rely on depositions by those who are selectively called to testify. Given the political environment today and the propensity, even among judges, to look for post-retirement sinecures, it is hard to believe that anyone will offer the kind of frank and fearless testimony that justice Chagla was able to obtain. All this leads to just one conclusion. That the SC would do well to leave the job to the regulators and ensure they can operate independently of political pressures by making them accountable to the apex court. Moreover, since the SC wants its proceedings to be live-streamed and transcribed, it should also mandate public hearings of this committee to ensure transparency and fairness.
I disagree with your note that the SC's refusal to accept the government suggested panel was an indictment of the finance ministry and regulator. In another article you yourself had said that the court or its panel would not be equipped to get into such investigation.
As one can agree that we all jump into passing or giving our opinions, because things of the company were bought to the fore by that report's timing.
It was not the rejection of govt suggested panel that was crucial but the SC refused to accept the suggestion as it was in a sealed cover, so the names would remain secret.
If the govt wanted an impartial investigation, then why the secrecy?
This SC has shown remarkable strength in standing up to the bullying by the Executive. Unfortunately the same cannot be said of some of the previous Chief Justices.
That was the practice that was followed for years. Besides, this CJI with remarkable strength as you say did put the comments by the government about Justice Kirpal on the website, could also have gone ahead and revealed the panel names in the sealed cover.
Ever heard of a report from the SC or any other government/regulator, recommending serious repurcussions on the issues on which the commission/committee is formed? By the time this report is out, the situation changes for the worse, making it necessary to form one more committee as the earlier report is redundant. Its a game to form a Committee and the law-abiding citizen is alwaays the loser.
I agree with your suggestion that the SC leaves the investigation to the regulatory bodies, while ensuring that they are able to work without any encumbrance and interference. SC should also give up on their holier than thou attitude which has crept in of late. Appointment of a retired judge to head the committee does not necessarily ensure transparency.
I agree with the suggestion that it is best that SC leaves the investigation to the regulatory body who are well versed and knowledgeable. I also feel that the SC should give up on the holier than thou attitude which is apparent in their suggestion of retired judge heading the committee will make it transparent. They just need to sit tight and ensure that the regulatory body works free of any encumbrance and interference.
This article in itself has hit the mail by writing that "Given the political environment today and the propensity, even among judges, to look for post-retirement sinecures, it is hard to believe that anyone will offer the kind of frank and fearless testimony that justice Chagla was able to obtain" - very difficult in today's times. Mostly it will die its own course in the time to come. Let's wait and see what happens.
A brilliant article and suggestion.
I hope the SC adopts at least one of the suggestions that Ms Dalal has made and that is public hearings of any investigation that they conduct.
With a moribund media and shameless and arrogant politicians and top bureaucrats, only the vigilant public can hold the culprits’ feet to the fire.
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The best-ever investigation was the one appointed under the legendary Justice M C Chagla in 1958 to investigate the Haridas Mundhra scandal. Mundhra followed the same modus operandi as that of every major Indian scamster—ramp up prices of some stocks and use political connections to dump them at high prices on public sector institutions. In this case, Life Insurance Corporation (LIC), again in the spotlight over investments in Adani group companies, was the dumping ground.
This was the time when India was facing a serious balance of payments crisis, had just embarked on economic liberalisation and the World Bank was keeping a close watch on what we did. The government started well by doing two things: The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, was passed to ensure speedy hearings; and the multi-disciplinary Janakiraman committee (comprising regulators, tax investigators, and multiple investigation agencies) was constituted to conduct a detailed investigation. 
The Ketan Parekh scam, which happened soon after the dotcom bubble burst, was quickly followed by the collapse of the giant Unit Trust of India (UTI). Having pushed the government to set up a JPC, our politicians were demanding another one to investigate UTI in parallel (read more here: https://m.rediff.com/money/2001/aug/08dalal.htm ). Finally, the JPC that was set up did not even include UTI in its terms of reference. The committee itself was packed with politicians close to many of the accused.
As one can agree that we all jump into passing or giving our opinions, because things of the company were bought to the fore by that report's timing.
If the govt wanted an impartial investigation, then why the secrecy?
This SC has shown remarkable strength in standing up to the bullying by the Executive. Unfortunately the same cannot be said of some of the previous Chief Justices.
I hope the SC adopts at least one of the suggestions that Ms Dalal has made and that is public hearings of any investigation that they conduct.
With a moribund media and shameless and arrogant politicians and top bureaucrats, only the vigilant public can hold the culprits’ feet to the fire.