Fraud Mitigation Fund

Frauds in Capital Market occur at regular intervals and volumes are written on the modus operandi of the frauds, the losses suffered by many on account of frauds and preventive steps to be followed to ensure against recurrence of frauds. The detection of frauds makes sensational news and people not affected by the frauds enjoy the excitement, criticize the system deficiencies, evaluate the efficacy of our law enforcing  authorities apart from indulging in characterization of all those  connected with the regulatory and supervisory mechanism. With the visual media being very active in exposing the people behind the frauds, the whole thing becomes a time pass for many. The ultimate sufferers on account of these frauds are the Government, the economy, and some innocent share holders. Every time a fraud comes to light the government becomes a defendant and puts all efforts to cover up the case, salvage the image and put up a brave face as if nothing serious has happened although  the loss of confidence and the pecuniary loss on account of these frauds are something serious and cannot be easily quantified.

Some of the major frauds detected during the last two decades and the amount involved roughly are given under.

                                   

 

Scamster	Year	Amount (Rs Crores)
Harshad Mehta	1992	4000
Bhansali	1995	900
Dinesh Dalmia	----	595
Abdul Karim Telgi	2000	171
Ketan Pareikh	2001	1500
Ramalinga Raju	2008	8000

 

 

Apart from these few detected frauds, there are several other irregularities which go unnoticed. Institutions also had to be closed down/forcefully merged with some healthy institutions to save deposits/investments of public   and restore the confidence level in the system. They include Global Trust Bank Ltd, Madhavapura Coop Bank, United western bank Ltd, Lord Krishna Bank Ltd and several small and medium sized cooperative banks and financial companies.   There are several instances of companies which have raised huge funds from capital market and were allowed to be liquidated, vanished. Public have lost heavily and the economy has suffered very badly.  SEBI should be having the list of companies which have raised capital and vanished subsequently without compensating the gullible public who were lured to invest in capital market through IPOS. The overall loss,  on account of scams, frauds, irregularities and fudging of accounts with the knowledge and without  the knowledge of the authorities, to the exchequer  and ultimately to the public runs into thousands of crores directly and indirectly.     

Unless and until some very concrete measures are in force to compensate the innocent shareholders  / investors / depositors who become victims of frauds perpetrated by promoters of companies such as Satyam, they will not have confidence in capital market. Investors are often taken for a ride by promoters, market operators and even by regulators by either not adhering to the regulatory prescriptions or taking advantage of the loopholes in the supervisory system.  Apart from compensating the share holders  for their losses on  account of frauds committed  by promoters, there should be severe penalty for any irregularity observed in capital market related transactions and it is advisable in this regard for SEBI to have a separate FUND mobilized from all listed companies / those connected with companies and market operations. Promoters, Board of Directors, Accountants, Auditors, Bankers and others including Regulators who are party to any irregularity should be made to compulsorily contribute towards this fund.  Penalties should be imposed depending on the magnitude of irregularities / loss to the exchequer. SEBI should maintain this fund and make it transparent for public to see. The size of the fund over a period will turn out to be a good indicator for all to see to what extent the listed companies adhere to the regulations and what type of irregularities are being committed / detected. This will prove to be a mechanism to discipline accountants, auditors, bankers and all connected with the companies' operations. The fund can also be utilized to meet the expenditures connected with detection of fraud or subsequent investigations and finally to compensate the investors... This will go a long way to restore the much needed confidence in capital market.

Public investors need compensation in the form of money and that alone will satisfy them. This requires a fund and it should come from the perpetrators of fraud and not from the Government. The Message should be very clear to promoters of companies, Board of Directors, top executives, accountants, auditors, bankers, regulators and who ever is connected with the affairs of the companies. This is the social responsibility of the Government and part of the corporate governance of the companies.

 

Dr.T.V.G.Krishnan