Sucheta Dalal :Above the Law - (MoneyLIFE Issue 25 Sep 08)
Sucheta Dalal

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Above the Law - (MoneyLIFE, Issue 25 Sep 08)  

September 10, 2008

Exclusive news, the stories behind the headlines and the truth between the lines

 

Edited by SUCHETA DALAL

 

Above the Law

 

Sometime at the end of August, stock broker Ketan Parekh, the central character of the securities scam of 2000, was back in jail. He had surrendered pending a Supreme Court appeal in connection with his conviction in a 1992 case involving Canfina, a subsidiary of Canara Bank. At the time of writing, Ketan and his co-accused had been moved from Mumbai to the Nashik jail while they await a court hearing.

 

Co-incidentally, Parekh's bigger involvement in the scam of 2000 also came up before the apex court at the same time. In a colossal failure of the capital market regulatory system, Ketan Parekh had, once again, been allowed to build a large network of coconspirators and manipulate the market during the dotcom bubble. In the subsequent crash, it turned out that he had colluded with the then chairman of Madhavpura Mercantile Co-operative Bank (MMCB) to illegally siphon off Rs888 crore for his market operations. The bank almost failed when Parekh's stock bubble finally burst and was put under an administrator. Yet, Parekh was allowed to evade a jail term by agreeing to repay the Bank in fixed instalments. Accordingly, he has repaid a massive Rs396 crore and is yet to pay back Rs492 crore. He has now told the court that he is finding it difficult to meet the payment targets. The Supreme Court has now directed MMCB to go back to the trial court to cancel Parekh's bail.

 

Funnily, there is a conspiracy of silence over Ketan Parekh's source of income. How did he earn Rs396 crore over the past five years? Anyone connected with the capital market will tell you that he remained an active player in the market but never traded in his own name. After all, the Securities and Exchange Board of India (SEBI) has barred him from being associated with the capital market "in any manner whatsoever" for 14 long years. Don't his monthly payments to MMCB make a mockery of SEBI's avowed Know Your Customer (KYC) drive? SEBI has not asked any questions so far. What about the Income Tax Department? Wouldn't a huge payment of Rs396 crore suggest an even bigger income? What is the extent of tax that was paid and what was the source of income? The same I-T Department has no problems raiding and defaming legitimate taxpayers for sums that are a fraction of Ketan Parekh's earnings. Senior tax officials in Mumbai were uninterested in asking questions about Parekh's income. One even hinted at directions from the "top". A couple of months ago, we wrote to the Prime Minister's Office. So far, there is no reply. Only someone very powerful could have ensured this special treatment for Parekh.

 

Swiss Mutual Fund

 

Girish Mittal, a regular MoneyLIFE  reader, wrote to say that there was a buzz in Gujarat about something called the 'Swiss Mutual Fund' which offers stupendous returns of 25% per month – yes, indeed, per month – on a dollar-denominated investment. Its Swiss Investment Plan 25 offers a "25% Profit Monthly, 10% Commission, 10% Bonus, 10% Revenue & 0.10 Daily Profit Payout!!! Guaranteed By Swiss Mutual Fund (1948)."

 

Its website http://www.swiss1948.com/index.asp (the original website is not accessible) is full of editing errors and says little about its antecedents or the regulatory regime that it operates under. In fact, the conditions of application alone ought to keep prudent investors away. You can open a trading account by paying $30, but need to be "invited" by a financial planner or consultant (whose names are secret) to make an investment. Like  many chain-marketing or pyramid schemes, it has "special group investment target" for some chosen people who then lure others with the promise of incredible returns.

 

While the name is Swiss, it claims to operate through a Chinese Banking Gateway. If you are still tempted to invest, a google search will give you over 30,000 links – many of them saying it is a scam. Wikipedia says that it is an offshore investment company that originated in New Jersey, US, and was registered in the Commonwealth of Dominica, but struck off the rolls in 2007. The Swiss Embassy in Kuala Lumpur has warned that it has no links with Switzerland and there is nothing to substantiate its claim about being set up by the Chevoit family of France (which has since been removed from the website). There is also nothing to back its claim that it exists since 1948. The Malaysian Securities Commission has also taken action against Swiss Cash operated by the same firm and its monetary authority has published warnings against it. Swiss Mutual Fund is also on the alert list of the Singapore government. The Swiss Fund has reached Indian shores. But instead of hurrying up with the rules and regulations to govern numerous payment systems springing up outside the purview of banking regulations, RBI is busy issuing scam warnings to people.

 

Corporate Inspection

 

Meanwhile, media reports say that the Ministry of Company Affairs (MCA) has ordered an inspection against four companies allegedly linked to Ketan Parekh – Bang Overseas, Orchid Chemicals, Kohinoor Foods and Parekh Aluminium Company. MCA sources told reporters that its action is based on inputs from other government organisations and it will check their end use of funds. The companies have reacted by denying the connection or remaining silent. Bang Overseas raised public money in February 2008 and the stock has been shooting up, although its brands are fairly unknown and no company in its sector (readymade garments for men) is doing well. Orchid Chemicals has lost money in forex trading and suffered a serious crash when the promoters were found trading in their shares on margin money. Kohinoor Foods was recently in the news when it alleged a hostile takeover threat from Temptation Foods, another basmati rice exporter. There is little in the public domain about Parekh Aluminium.

 

Co-op Banks Now Safer

 

Nationalised banks are usually the safest bet for an ordinary saver because there is no risk of collapse even if their net worth has been fully eroded. Foreign banks and leading private banks are relatively safe too, but they are expensive. At the bottom of the pyramid are small co-operative banks, which, barring rare xceptions, have a tendency to go belly up regularly. This is partly because of the joint oversight by Reserve Bank of India (RBI) and the Registrar of Co-operative Societies and their susceptibility to political influence. But they lure investors with low charges and higher returns. Unfortunately, when they go bust, investors are denied even the Rs one lakh deposit guarantee mandated by RBI and the Deposit Insurance and Credit Guarantee Corporation (DICGC) because of the tiresomely slow liquidation and winding up processes. But when the Maratha Co-operative Bank went bankrupt, one Eshwarappa and other depositors from Karnataka successfully dragged DICGC to the consumer court for delayed payment. The DICGC and RBI filed revision petitions with the National Consumer Disputes Redressal Commission (NCDRC). In its August 2008 order, the NCDRC has blasted RBI for delaying payments and said that DICGC must pay depositors when the winding up process begins, rather than wait for liquidation to be completed. Sensibly, it says, if the bank is revived, the money can always be deducted from deposits lying with the bank. Terming the delay in liquidation proceedings a  deficiency of service', NCDRC said that "consumers cannot be left in the lurch" because of RBI's lethargy. This is a significant order that benefits small depositors and hopefully, RBI will have the good sense not to challenge it.

 


-- Sucheta Dalal



 



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