The outrageous scandals involving the PMC Bank and the alleged role of NCP leader Praful Patel's realty firm in an underworld-protected money laundering racket are the latest examples of systemic failures in the financial system that thrived undetected and could not be caught before assuming dangerous and harmful proportions. The Narendra Modi government may treat these two cases as challenges that can help it set the system right for the larger good of small depositors, banks and economy.
Two recent Mumbai-centric scams revolving around co-operative and shadow banks, realty firms, politicians and the underworld have shaken the nation and thrown up a fresh chilling reminder about the brazenness with which “white collar” criminals and dons manage to dodge the regulatory set up to hive off millions of rupees of unsuspecting and hard working middle class. The most shocking takeaway from these scandals is the ability of wrong-doers to continue the fraud for very long, without being hauled up by regulators.
While financial defaulters continue to be exposed with dangerous regularity, the scams have exposed weak regulatory set ups in the financial world and strong political role in keeping white collar crimes under the carpet for as long as possible. And, most importantly, the trend shows that businessmen dealing in crores of rupees seem to be using funds – both legally and illegally arranged - for anything but genuine, sound commercial activity.
The Punjab and Maharashtra Co-operative Bank (PMC) and its underhand dealings with bankrupt real estate firm Housing Development and Infrastructure Limited (HDIL) has brought thousands of customers of the cooperative bank to the brink of bankruptcy. Apart from the case of siphoning off of over Rs 4,355 crore from PMC by HDIL, there is the shocking case of promoters of non-banking financial company Dewan Housing Finance Corp Ltd being allegedly involved in sanctioning of loans or diverting funds to real estate firms used as fronts by don Dawood Ibrahim's aide Iqbal Memon alias Iqbal Mirchi for terror financing. The wildfire of the DHFL money laundering scandal has also reached the doorsteps of former Union minister and Nationalist Congress Party (NCP) leader Praful Patel over property deals he may have had with the Mirchi family. Patel, however, has denied any wrongdoing during questioning by the ED.
In both the scandals, the dramatis personae belong to the industrious Wadhawan family which, as part of a 2009 restructuring, saw Sarang and his father Rakesh take complete charge of HDIL, while cousins Kapil and Dheeraj Wadhawan took over the management of DHFL, as well as the family's other retail and hotel businesses.
The ED recently attached Rakesh and his son's cars that included Bentley, Audi and Rolls Royce, besides Ferretti yacht and Falcone 2000 private plane that, according to sources, was used for travel by who's who of Mumbai's corporate and political high streets.
The nerve centre of both the scandals has been the financial capital of the country where the underworld plays an equally big role in getting loans sanctioned and getting building project cleared from government agencies. Fugitive dons like Dawood wield as much power as the neta or the babu in the finance ministry to influence corporate deals and loan sanctioning. These cases are testimonies of the underworld controlling the realty business in Mumbai – a fact that was known to many but they had no evidence or courage to prove it in public
In the case of HDIL, the total debt as on March 31 stood at Rs 1,996.43 crore. The third largest realty developer in India, which is largely a slum rehabilitation specialist, seems to have its root in the deep neta-mafia nexus that rules the realty landscape in Mumbai. HDIL got PMC chairman Waryam Singh to create 21,000 dummy accounts to shield HDIL that siphoned off over Rs 4,355 crore from the bank that were later disclosed as non-performing assets (NPAs).
In Patel's matter, Millennium Developers, promoted by him, built a high-rise called Ceejay House in Mumbai in 2006-07 and transferred 14,000 sq feet, spread over the third and fourth floors of the 15-storey building to Mirchi's wife Hajra Iqbal Memon. Sources said the building's plot was allegedly owned by the underworld don using ill-gotten money linked to extortion, money laundering and drug trafficking. Hajra and her son Junaid are suspected to be in UAE and Mirchi's other son, Asif, could be present in London. Patel has faced ED grilling and denied meeting any family member of Mirchi who himself died in the UK in 2013.
Interestingly, co-operative banks' involvement in scams is not new. Quite like the PMC scandal, the big securities scam of 1992 involving Big Bull Harshad Mehta had revolved around Metropolitan Co-operative Bank which funded Mehta's risky bull run in the markets.
Nothing much seems to have been learnt from past scandals perpetrated using funds from cooperative banks, especially in Maharashtra. Also there is a big similarity in the flashy lifestyle and personal assets of alleged fraudsters at the centre of PMC Bank scam and the securities scam of the 1992. Just like Rakesh Wadhawan's fleet of imported cars and yacht, Mehta too took pride in showcasing his fleet of imported cars like Toyota Sera and Corolla and Lexus Starlet which were out of reach then for even the uber rich of the country. Harshad Mehta also owned a sea-facing 15,000 sq feet penthouse in Worli. Mehta died in 2001 at the age of 47 and could be convicted in only four of the 27 criminal cases slapped on him. Many say his death put a lid on the possible secrets about his politician-underworld nexus that gave him access to cooperative bank funds to manipulate the markets.
Amid the depressing news about fresh scams coming to light – at the cost of the honest tax payer and the hardworking small saving investors – the Narendra Modi government has committed itself to cleansing the system. The government is all set to modify laws governing multi-state co-operative banks in the next Parliament session starting November 18. A high-powered three-man panel has been tasked to suggest legislative changes to prevent another PMC-type scam.
If earlier there were financial irregularites committed by Vijay Mallya and Nirav Modi, the addition of the name of Rakesh Wadhawan to the list of white collar criminals has only made it longer. White collar criminals have been brazenly generating illegal personal assets as the law has not been able to create a deterrence. This is especially true for promoters of companies involved in frauds as there are legal provisions that protect personal assets of company directors. The changes now proposed by the Modi government in the legislation could help bring the ill-gotten personal wealth of promoters under the lens of law enforcement agencies.
Modi's Finance Minister Nirmala Sitharaman has blamed the UPA government and former finance minister Manmohan Singh and former RBI governor Raghuram Rajan for the worst phase public sector banks. But, there is no reason why the NDA government should have failed in early spotting of frauds like the PNB scam involving Nirav Modi, the Infrastructure Leasing and Financial Services Ltd (IL&FS) crisis or the recent PMC scandal, says the Congress.
There is no denying the fact that urban co-operative banks (UCBs) have become “family businesses” that are used by greedy businessmen to use UCBs money to repay loans of other commercial banks. The presence of politicians on the board of directors of UCBs only adds to the indiscipline in lending of such banks that end up doling out money due to political considerations of their neta directors rather than sound commercial sense.
The PMC scam and the DHFL money laundering case of 2006-07 allegedly involving Patel and Mirchi have kicked up a big political storm. Besides threatening to have negetive impact on the NCP's performance in Maharashtra polls, these two matters have given a handle to non-BJP parties to flog the Modi government.
CPIM general secretary Sitaram Yechury has accused the NDA of doing little to mitigate the problems of small depositors of the PMC Bank. On the day when Maharashtra voters were casting their ballot for picking a new Assembly, Yechury tweeted, "When the RSS/BJP govt waives off unpaid loans of the rich and gives super-rich tax bonanzas, it destroys banks and this has real consequences on ordinary lives. Another example of misery: PMC Bank depositors, some are dead, others in dire straits. RSS/BJP govt does not care.”
"The BJP govt has been lying shamefacedly. It has destroyed the economy and lives of millions of Indians. Tax revenues have crashed and public money is used for PR, tamashas and self-promotion. Further tax cuts for its rich cronies, after this shortfall? This is a scandal," he said, pointing out that at least four depositors of the PMC have died since the scandal was exposed.
While the Modi government grapples with the issue of a slowing economy, incidents of scams in the co-operative bank sector come as more bad news for it. However, at the bottom of the entire mess is corporate greed to earn more, politicians' mechanisations to create votebanks and generate funds for fighting elections and the failure of auditors or watchdogs to call out scams in time. It is time for the Modi government to bringing better regulation for UCBs by putting a cap on deposits such banks can take so that these banks are not misused for parking black money or underworld’s extortion money masked as deposits. The minimum capital requirement of a co-operative bank is Rs 1 lakh - as compared to Rs 500 crore for any private commercial bank – but they can lend as much as commercial banks. Co-operation is a subject which comes under the purview of registrars of societies in most states and permissions for opening a UCB is not needed from RBI. This leaves RBI, the federal bank and regulator for PSBs and private banks, out of the scene in the case of co-operative banks. However, since UCBs are accepting public money as deposits like other commercial banks there is an urgent need to involve the RBI and bringing co-operative banks under tighter regulation for depositors’ benefit. Most co-operative banks are lax in recovering dues from debtors and this explains the huge losses they incur. But this does not stop greedy middle class investors from getting attracted towards co-operative banks due to the marginally higher interest the UCBs pay on deposits, as compared to other commercial banks, and end up losing their lifetime’s earning when a scam like the one in PMC Bank gets exposed.
Perhaps, there is also need to modify the nation's auditing rules and put in place checks that can even expose colluding auditors who may attempt to suppress scams in co-operative banks, which over the years have become fiefdoms of crafty politicians who have interests in business and realty and use their hold over UCBs for appeasing their voters and extract personal favours from the co-operative bank staff for additional funds during electoral gains.
In the case of Patel's alleged underworld links, if ing his guilt in court then the case would confirm the fears of many citizens who have always suspected the politician-criminal nexus behind big ticket corruption. If guilty, Patel's political career should see a full stop as per the Supreme Court's ban on convicted politicians from contesting elections.