Last week, when the entire board of Tata Finance including such well known names as chairman Freddie Mehta resigned finally owning moral responsibility for the year-long controversy and the huge losses suffered by, what is the largest private sector non-banking finance company in the country.
To such big changes, what are the thoughts of the retail investor or the general public? Luis de Menezes wrote a letter to The Indian Express to show solidarity with the blue chip group. Let me reproduce a paragraph of that letter.
Menezes writes: "Even after the scam (how former Managing Director Dilip Pendse helped run up huge losses) I have not thought of withdrawing my fixed deposit from there. At least for me, Tata Finance is the only trustworthy NBFC left in which I can deposit my money and have sound sleep. The culprits involved in this scam should be brought to book and also sued for tarnishing the Tata name".
Menezes is not alone in exhibiting such touching, unflinching and rather foolish faith in the company or even in the group. After I began to write about the losses of Tata Finance, I received angry emails because I had the temerity to question the Tatas' behaviour. Any newspaper will tell you that negative stories about the Tatas invariably attract a host of nasty letters from the readers - even when such reports are fully backed by facts.
It is indeed true, that that the Tatas still remain India's most reputable business group. Two things, however, need mention. One, it is not above criticism, mistakes, managerial imprudence, fraud lethargy and worse. Two, it would be useful for investors to remember that there were millions of people who exhibited exactly the same touching faith in Unit Trust of India. So much so that they simple ignored all news reports which warned of a serious problem in UTI in 1998 and again in 2001.
Let us look at Tata Finance. The story so far is that this blue chip finance company suddenly hit the headlines when a letter (under a fake name) made the rounds pointing to huge losses in the portfolio of its investment subsidiary Nishkalp. Nishkalp was found to have invested large sums of money in a few scrips which had been massively rigged up by stockbroker Ketan Parekh.
Tata Finance, like UTI, seems to have systematically provided an exit to Parekh and the companies who colluded with him for almost a year, because, even though the scrips prices declined steadily Tata Finance refused to sell.
When Ketan Parekh himself failed to meet his off-market commitments in March this year, the four major holdings of TFL plummeted dramatically. TFL's losses which were earlier estimated at Rs 800 million or so mounted to the Rs 3.95 billion loss that was finally declared last week.
The problem is that TFL is not merely the story of a rogue Managing Director who betrayed the enormous trust reposed in him (Pendse was such a trusted lieutenant of Ratan Tata that he even held Tata's personal power-of-attorney!). Here was an entire board which was seeing no evil, speaking no evil.
The directors were asking no questions, merrily trading on their own account and turning a blind eye to the various shenanigans of its officials.
For instance, when I pointed out to Ishaat Hussain (who has now taken over at chairman of Tata Finance) that all the investments of the subsidiary Nishkalp were specifically ratified by the board -- including such details like whether a scrip should be held as stock-in-trade or investment -- I was told that even board meeting minutes were never scrutinised carefully and that the minutes of several meetings were often all signed together.
Imagine this shocking admission at a time when corporate governance was not only the hottest seminar subject at business conferences, but the Tatas were always seen as the leaders of good corporate practices.
The resignation of the entire board may seem to redeem the group somewhat. But it is far from enough. There are far too many actions of the board which remain questionable.
One was found allegedly indulging in insider trading and another may have played a big role in the hefty purchase of DSQ software shares in TFL and another investment company under his charge.
Then there is the issue of TFL's auditors S B Billimoria and Co. The new chairman Ishaat Hussain has said that the continuation of the auditors may be reviewed. Frankly, it is such a serious issue that it needs to be discussed publicly.
Though P R Ramesh, a senior director of S B Billimoria, conducted TFL's audit, Yezdi H Malegam - with a stellar reputation, heads the firm. S S Tarapore, a former Deputy Governor of the Reserve Bank of India, calls him the 'revered Mr Malegam' and there isn't a single committee on finance or audit standards where Malegam is not the automatic first choice to head it. He is also a director of the Reserve Bank of India.
Let me start by saying that I am as much a believer in Malegam's integrity and knowledge as any of those who revere him. But I want to raise the issue of constructive responsibility for Malegam's response.
Independent directors are supposed to accept collective responsibility for a company's performance or lack of it.
Then how much more true is this of audit firms which are supposed to be the watchdogs of a company's financial and accounting practices. Individual investors, mutual funds, business partners and other stakeholders depend on the audit statement to give them a true and fair picture of a company's financials.
Would the same principle of collective responsibility for the failure to detect fraud and fudging in TFL's accounts not extend to the firm of SB Billimoria?
This is especially true because some of the accounts of TFL's subsidiaries had been recast and would have been scrutinised by an even finer toothcomb.
We are not asking Y H Malegam, but would like to hear from him, as the arbiter of most issues of corporate ethics and governance to spell out what the principle of accountability is in this case?
Because what S B Billimoria and Malegam do becomes the standard for the rest of the audit community.