On Thursday evening (May 17, 2001) the Joint Parliamentary Committee chairman Prakash Mani Tripathi defused what was threatening to snowball into a major controversy by clarifying that the committee would indeed examine all transactions of Unit Trust of India and other mutual funds, so long as they pertained to the stock market crisis.
That morning, Tripathi's declaration that UTI, which is the largest and most dominant player in the Indian stock market, would not be examined, had stirred a hornet's nest.
He had said that the JPC's terms of reference did not specifically mention mutual funds and that it was not within the committee's purview to enlarge the scope of their investigation or amend the terms.
In Bombay, everybody connected with the capital market greeted the news that UTI would be excluded with stupefaction.
Excluding UTI, which has been at the centre of the all controversy connected with the stock market crisis, suggested an outrageous cover up and made a monkey of those who had been baying for an investigation into its activities.
Ironically enough, these included:
BJP's economic advisor Jagdish Shettigar, who had written to the JPC chairman for a detailed investigation into the role of corporates, UTI and overseas corporate bodies.
Kirit Somaiya who is a member of the JPC had also made specific allegations about UTI's hurried subscription to debentures of Himachal Futuristic Communications in March, and the funds being transferred to Ketan Parekh.
Somaiya, a BJP-MP has styled himself as an investor activist and would have some egg on his face if the JPC had failed to investigate UTI -- after all, one expects MPs to be alert about the framing of the terms of reference.
Finally, the Securities and Exchange Board of India's preliminary investigation has identified massive purchases of Ketan Parekh's favourite scrips -- Himachal Futuristic, Global Tele-Systems, DSQ Software and Zee Telefilms -- in March, when the broker was already in serious trouble. These transactions smack of an attempt to bail out the broker and clearly beg further investigation.
Financial Express has also identified several questionable investments by UTI including its purchase of stock such as Shonkh Technologies and Cyberspace Infosys (whose promoter is absconding after leaving thousands of investors and employees in the lurch) and several default grade debentures.
In fact, many media reports quoting government sources have openly speculated the removal of the UTI chairman because of its role in the price rigging. The decision was only put off until the JPC completed its hearings and published its conclusions.
The question then is, was the JPC chairman's statement a reflection of how little he understood the capital market, or was this the first signal of how brazen and lop-sided the investigation would be?
Fortunately, the opposition members were as agitated as everybody else was. My sources say that there was almost no discussion on the issue of investigating mutual funds during the day and that the chairman's view was certainly not based on a well-agreed consensus.
Some opposition party members were furious enough to consider "breaking up" the committee, if the statement was an attempt to derail the investigation.
Interestingly, the terms of reference of the committee were drafted by Jaipal Reddy -- a veteran of the previous JPC, which investigated the 1992 securities scam and an opposition party MP to boot. Would Reddy have goofed up in framing the terms?
Yes and no. While the six-point terms of reference indeed do not mention mutual funds, they are otherwise explicit enough to cover all entities connected with the market. But it still led to a flurry of activity to find justifications.
What exactly do the terms of reference say? (see below)
The committee is empowered to "go into the irregularities and manipulations in all their ramification, in all transactions, including insider trading in relation to shares and other financial instruments and the role of banks, brokers and promoter, stock exchanges, financial institutions, corporate entities and regulatory authorities" (emphasis ours).
Its other important function is to "fix the responsibilities of the persons, institutions, or authorities in respect of such transactions" (emphasis ours).
Moreover, stock exchanges record mutual fund transactions under the broad head of 'institutional trades', hence the word is understood include all funds.
But even more specifically, the government of India notifies financial institutions under section 4A of the Companies Act, while the UTI is notified as an institution under this Act.
UTI has also been recognised as a financial institution by the Reserve Bank of India.
Even if we do not go into the definition of "institution", the terms of reference say that the JPC will examine 'all transactions' in 'all their ramifications'; this cannot be done by ignoring trades of mutual funds and the UTI, which have often been the buyers of stocks that were "placed" by Ketan Parekh and other brokers.
In fact, the finance ministry was all set to remove the chairmen of the Securities and Exchange Board of India and the UTI before the JPC was set up.
The decision was deferred on the understanding that any action against them would only follow the JPC investigation.
If, as Tripathi claimed, the JPC refused to investigate UTI and other mutual funds then the issues of accountability and fixing responsibility do not arise.
Clearly, Tripathi had made a serious gaffe and he has made efforts to correct it. On Thursday evening, he clarified that "transactions" of all mutual funds, including UTI and Morgan Stanley would be part of the JPC investigation so long as they pertained to the stock market crisis.
But that is not enough. The JPC has to investigates the role of UTI and other mutual fund, if any, in aiding and abetting price manipulation, otherwise it cannot complete its investigation or draw sensible conclusions.
The next few weeks will demonstrate whether Tripathi, was simply misled, or whether there is a subtle attempt by the ruling BJP led coalition to push uncomfortable issues under the carpet.
If the chairman was misled and misinformed, it is fortunate that his faux pas happened right at the beginning of the JPC hearings, because he will be more careful in choosing his advisors.
However, for the present, it has dented the JPC's already fragile credibility.
The Joint Parliamentary Committee - Terms of References
To go into the irregularities and manipulations in all their ramification, in all transactions, including insider trading in relation to
shares and other financial instruments and the role of banks, brokers and promoter, stock exchanges, financial institutions,
corporate entities and regulatory authorities.
To fix the responsibilities of the persons, institutions, or authorities in respect of such transactions.
To identify the misuse if any of and failures/inadequacies in the control and the supervisory mechanism.
To make recommendations for safeguards and improvements in the system to prevent recurrence of such failures.
To suggest measures to protect small investors
To suggest deterrent measures against those found guilty of violation