That the Reserve Bank of India was derelict in its handling of the Global Trust Bank case is something that most people accept today, especially given that the RBI first detected GTB had a negative net worth as long back as March 2002, in stark contrast to the management's claim at the time that the net worth was around Rs 400 crore (Rs 4 billion).
Yet, instead of taking any serious action, it had the bank's auditors removed, complained about them to the Institute for Chartered Accountants of India, and more than two years later, the ICAI hadn't even moved on the matter!
Earlier, it is true that following the allegations of main promoter Ramesh Gelli's operations with Ketan Parekh, the RBI got Gelli to resign and appointed a new chief for the bank, but he quit within six months, telling the RBI that he was not being allowed to function by Gelli and his supporters.
And yet, the RBI didn't do much to remove Gelli's influence from the bank, or at least nothing that was visible to outsiders.
So are we to conclude, as some apologists for the RBI would have us believe, that the reason for no action on GTB was that the RBI has no powers to really remove a bank's board since it needs to gather all manner of proof of malfeasance before it can act?
After all, the fact that Gelli did manage to get his son elected on to the bank's board and even got himself re-elected (before being asked to step down again by the RBI) does suggest the RBI's powers may be a bit limited.
The larger issue however, and this is why GTBs continue to happen, is that each player in the system is too busy completing just formalities (the Hindi term khanapuri describes this as nothing else can) and no one follows a case to its logical conclusion.
In the GTB case, the RBI was content to write to the ICAI, but never moved heaven and earth to ensure serious action got taken. Another case of a private bank I've been reporting on for years offers the most eloquent examples of this malaise.
In 1998, the Central Economic Intelligence Bureau said it had found prima facie evidence that Rs 300 crore (Rs 3 billion) had been siphoned off from various group companies of Pravin Kumar Tayal and this money had been used to buy shares of the Bank of Rajasthan, of which Tayal later became chairman.
An audit of the firms showed this to be true, and the report was sent, among others, to the RBI since Tayal headed the Bank of Rajasthan -- additional reports from the CEIB traced how Tayal's employees had bought shares of the Bank of Rajasthan well in excess of their incomes, and were therefore benami.
Well, the case went to the department of company affairs and this body fined Tayal Rs 58,000 (that's right, fifty-eight thousand rupees) and ended the matter.
The RBI concluded, shockingly in my opinion, that since the relevant authorities had taken whatever action (inaction, actually) they needed to, it was okay to allow Tayal to continue to run the bank!
In the case of Gelli, similarly, the fact that he was getting investors to invest in his bank by assuring them the share prices would reach a certain level, one would have thought, should have been enough to get the RBI to cancel his banking licence.
But why blame just the RBI for its inaction? An equally curious behaviour in the GTB case has been that of the stock market regulator, the Securities and Exchange Board of India.
In December 2002, after it found prima facie evidence that the promoters of GTB were in cahoots with Ketan Parekh to jack up the prices of the bank's scrip -- this is why GTB's merger with UTI Bank was put off Sebi decided to freeze the GTB shares held by these people/firms for a period of 18 months. The period was fixed to roughly coincide with the period for the investigations to be completed.
Well, on June 12 this year, Sebi Chairman G N Bajpai ruled that "action has already been taken/initiated against many of the entities as above to restore the confidence of investors.
The investigation though completed, the analysis of data and facts against the above entities is still underway. The final orders upon conclusion of proceedings under Section 11 (4) read with 11B of the SEBI Act, 1992 may take some more time."
In the event, Bajpai said he felt "the circumstances under which the interim order was passed have substantially changed" and so decided to lift the freeze on shares.
Immediately, the trading of GTB shares skyrocketed. I haven't heard of any investigation into whether this means the promoters were able to offload their shares just weeks before the bank collapsed.
What makes the case even curiouser is that while the Oriental Bank of Commerce gave the RBI its letter of interest in the second week of July, this was not disclosed to investors till July 26.
Clearly there's a lot more than meets the eye in the GTB case and, since the finance minister has gone on record to say there were regulatory lapses, a fuller public inquiry is called for.
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