Sundeep Khanna, Indian Express, October 27, 2006
With Enron’s Jeff Skilling sentenced this week to 24 years in prison, it’s time to examine why India’s record of dealing with white-collar fraud is so abysmal
Is Jeff Skilling, the former CEO of Enron more guilty than some Indian corporate chieftains? What was Skilling’s crime? More than just leading a financial fraud that destroyed a company, his crime was also to trigger a run on corporate America, in which every public company came under the scanner from shareholders and regulators. US district court judge Sim Lake, while handing out the sentence, said that Skilling’s crimes “have imposed on hundreds if not thousands of people a lifetime of poverty”. In other words, the man is being sent to prison for 24 years for what he did to employees who lost their jobs and retirement benefits.
But fundamentally what Skilling and those of his ilk did was no different from what thousands of executives do routinely in India when they manipulate the rules in the Company’s Act related to reporting figures. “Creative accounting” is hardly seen as a crime in India. Yet thousands of investors read, believe and act on the created numbers, often losing their life’s savings by betting on patently misreported figures. This is no different from what Enron did. And as for depriving employees of their savings, the jute barons of Calcutta made a lifetime of robbing their employees of their PF money. How many prosecutions and convictions did this lead to?
India’s record on white-collar crime is shameful. Less than 5 per cent of white-collar criminals actually face conviction here. From letting Warren Andersen, Union Carbide’s chairman during the methane [sic] gas leak disaster in Bhopal walk free, to the limp conviction of a handful of people in the huge securities scam of 1992, the laws related to financial crime have been shown to be weak, and their enforcement even weaker. Even the extradition notice to Andersen took 10 years coming. Despite a Special Court being set up to try all those who perpetrated the securities scam of 1992, the accused stayed out of jail. Harshad Mehta, after spending some time in prison, came back to stalk the markets in the late 1990’s before his second conviction prior to his death.
The Ketan Parekh stock scam of 2002 was probably a direct outcome of the legislators failing to put in place necessary safeguards after the Harshad Mehta manipulations a decade before. The scam exposed the ineptitude of the SEBI as well as of the RBI, which seemed unaware for nearly three years of what was happening within the confines of a small cooperative bank in Ahmedabad. The Madhavapura Cooperative scam was in no way less than the stocks scam in that it impacted small depositors of the bank.
The cleansing of corporate America can be looked upon as an evolutionary process in the movement of a free market economy. After all, it’s only in the last few years that punishment for corporate crime has become commensurate with the act. Twenty years ago, Mike Milken of “junk bonds” fame, was sent to jail for a mere 22 months. But when, despite the powerful Securities and Exchange Commission and the Internal Revenue Service, auditors like KPMG and Arthur Andersen were found to be in collusion with companies to fudge numbers, the US government moved fast and hard. The Corporate Fraud Task Force was set up to investigate and prosecute executives who break the law. In fact, in August 2002, the US promulgated a revolutionary ordnance forcing managements of large companies to swear by their past numbers. The results are there to see. Last year, WorldCom chief Bernard Ebbers was sentenced to 25 years in prison for fraud leading to the company’s bankruptcy.
In India, special courts have been set up to set up securities frauds but few convictions have been secured. Even the joint parliamentary committee’s report on the UTI case is consigned to the archives. The CBI does have an Economic Offences Division but its teeth are pared. Even the National Crime Records Bureau has limited data related to white-collar crime.
It’s not that the Indian laws are weak. As far back as 1985, the Supreme Court, in its judgment in the Shriran Oleum gas leak case, had said, “It is those who in fact control and determine the management of the company who are held vicariously liable for commission of statutory offences”. Yet, in practice, little is done. Promoters of publicly traded companies routinely siphon off funds from the companies. Cases of excise evasion are routinely filed and equally routinely put on the back burner.
The implications of white-collar crime may not be clearly understood in India, but its impact is far-reaching. The UTI scam alone led to small investors losing anything between Rs 3,000 crore and Rs 5,000 crore. It’s high time the apparatus to tackle white-collar crime is strengthened, before the next big shock hits.
The author is Technology & Special Projects Editor, The Financial Express