Is there any other point you wish to draw to my attention”, Detective Gregory asked Sherlock Holmes. “To the curious incident of the dog in the night-time,” replied Holmes. “The dog did nothing in the night-time,” the detective said. “That was the curious incident,” explained Holmes. This iconic exchange from ‘The Adventure of Silver Blaze’ by Arthur Conan Doyle virtually symbolises the gap between regulators, regulation and the risks to public savings.
On Friday, the Reserve Bank of India slapped a fine of Rs 1 crore on the State Bank of India and Rs 3.5 crore on Corporation Bank and Allahabad Bank for violations of norms and “for not monitoring the end use of funds in respect of one of its borrowers.” So who did SBI lend to, and how much did it lend? Neither SBI nor the RBI found it necessary to explain that.
The issue is not the quantum of the fine, but what it represents—a failure in due diligence, particularly when end use is fuzzy and some end users are absconding. And SBI is the country’s largest bank, with over Rs 27 lakh crore of deposits. The fog over regulatory action is inexplicable. Whether the dereliction of diligence represents material risk or not is not up for debate—not in a systemic landscape with over Rs 10 lakh crore of bad loans.
The need for due disclosure is best illustrated by the IL&FS saga. The RBI, in its annual inspection report 2014-15, observed that the IL&FS balance sheet was overleveraged. IL&FS did not agree the RBI did not pursue or disclose. Mutual fund investors, depositors in NBFCs, bond purchasers and bank depositors were rendered vulnerable. Meanwhile, IL&FS ratings continued to be top notch till it defaulted. In 2019, IL&FS owes entities an estimated Rs 91,000 crore.
Earlier this month, the shares of listed entities of two corporate houses, the Essel-Zee Group and Reliance ADA Group, tanked by around 30 per cent during trading. Subhash Chandra claimed, in a letter to stakeholders, that “negative forces” were sabotaging the prospects of the group. RDAG accused finance companies of “illegal” and “motivated” actions. The sales, sellers claimed, were triggered by enforcing of conditions of lending. Similarly, housing finance companies have alleged coercive corporate action that led to dumping of shares and bonds.
The questions of legality await enquiries, and the Securities and Exchange Board of India is yet to weigh in. The episodes, however, throw up questions on regulations. Redemption dates and details of bonds and commercial papers are largely known. However, factors influencing sell calls of pledged shares are not. The quantum of shares pledged by promoters is known. However, terms and conditions, the value and loan ratio details that trigger offloading of shares is not, and this makes room for gaming and windfall gains. The asymmetry of information triggers volatility and impacts not just promoters but also ordinary shareholders and unit holders in mutual funds.
Last month, the Life Insurance Corporation completed its acquisition of the beleaguered IDBI Bank. The average acquisition price is not clear. What is known is that LIC made an open offer for 26 per cent of the shares at Rs 61.73 and completed the process on January 19. The shares of IDBI Bank closed at around Rs 43 on Friday - a dip of Rs 18 in less than a month. The book value of the Rs 10 share is Rs 27.91. LIC, often the liabilities insurance corporation of India, has been on the speed dial of successive governments bailing out failed disinvestments over a decade—first it bought shares of ailing public enterprises, and now it is bailing out dying enterprises with the knowledge and nod of IRDAI—even the inexplicable acquisition of a bank by an insurance company.
It has been contended that the fund flow of LIC and its investments are long-term and it has profited from previous investments. That is perhaps true, but equally true is that this was true of the Unit Trust of India too. The LIC is audited by 10 auditors who sign on the Annual Report with that mystical preface, “in our opinion and to the best of our information”, and certify that “The Corporation does not act as a trustee of any trust”. What about the trust of 29.62 lakh policy holders and their savings?
The question is, has there been a cost-benefit analysis of LIC’s investments—of which over Rs 80,000, is in public enterprises? If there has been one, would it not merit public disclosure by the IRDAI? And remember, LIC is one of the largest lenders to the government—in 2017- 18 it subscribed to bonds worth Rs 1.09 lakh crore and Rs 1.51 lakh crore issued by the Centre and states. Any delinquency in diligence could trigger economic and political consequences.
The financial and legal landscape of public savings is Indian and complex. There are five regulators for deposits of various kinds—the NHB, RBI, SEBI, MCA and state governments. Given the velocity, volatility and the growing magnitude of public savings, transparent disclosures are critical. You could say there will always be a delta between the observed and the observable factors. The ‘curious incident’ is that regulators frequently limit disclosures of what has been observed from those whose hard-earned capital could be impacted. Opacity is a silent risk factor which India can ill afford.
Author of Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India