The Taming of Judicial Shrew - A Pradhan Seva ??

The Modi led government recently passed the Judicial Appointment Commission Act 2014 in the parliment.  The Act seeks to wrestle back the power of appointment of judges of high court and Supreme Court from the Supreme Court’s collegium system.    In the old collegium system a small band of senior judges of SC would decide the appointment of the judges of constitutional courts (HC and SC) on its own accord.

In 1993, the collegium system came into force after the 3 judges case and supreme court’s response on presidential reference on the question of judicial appointment to president KR Narayanan.  The effect was that the appointment of judges was made totally independent of the government of India and remained so for over 20 years.

Over the years various law commission reports highlighted the problem with the collegium system.  Many of them contented that the decision in the 3 judges case and the response to presidential reference was blatantly erroneous.  The reasoning was that the constitution itself provided that appointment should be made by the president in consultation with others.

The problem with the old system was mutifarious.  For one it was shrouded in the darkness of high secrecy and no one could guess who would be appointed.  It was a non-transparent process.  Two, the members of collegium were far removed from the state and the courts where they sought to appoint their selected judges in and had no awareness of ground realities.  Many judges called the appointments as judicial appointment and lambasted the collegium system.  Even great legal luminaries like AP shah of Delhi high Court were not elevated to the bench of supreme court which went on to prove how fickle the system really worked. 

While it is true that the system of Appointment of judges by the Collegium was always controversial and accused of being non-transparent, reeking od nepotism and favouritism.   It was by all means a thoroughly Independent process.  The Political masters of this country had no say in appointment of any judges of the High Court of Supreme Court for the last 20 years.   While the Individual appointments could always be protested, what could not be protested in the last 20 years was the Independent system of Appointment.  While this led to disappointments for many, the courts by and large worked in a totally Independent manner punishing many politicians and high ranking officers where the need arose. 

 

Under the new system devised by Pradhan Sevak, the judicial appointment commission needs a majority of 5 out of 6 members for any Appointment to be made.  The government of India along with its nominees contitute 3 members and the other are 2 senior judges of the high court along with the chief justice of India himself of the board. 

While primafacie it looks as though the board constitutes an Independent process of appointment as the political executive has no majority say in the appointment (3 out of 6), a deeper analysis reveals that it is not the case. 

The political executive has now arrogated itself with powers to stall the elevation of any judge who it does not prefer.  Simply put, while it is true that the government nominees do not have majority in appointment of Judges in the commission, it is still possible to stall the elevation of any judge to high court or supreme court because a consensus of 5 out of 6 members must be reached for any appointments.

Now if the trial court judge does not grant yedurappa a bail, rest assured the judge will retire as a judge of the trial court and be never elevated to High court by the government despite his illustrious career by using the 3 government nominee on Appointment board.  In future if any High Court judge passes strictures against the government of India or political party.  Rest assured, he will never become judge of the Supreme court in his life time.

Judicial Appointment commission poses strongest challenge to Independence of the Judiciary since the days of Indira Gandhi.  It is now hoped that the supreme Court will now suo motto take up this matter and quash the Judicial Appointment Commission Act as being Ultra Vires the constitutional separation of powers between Executive and the Judiciary. 

In simple words, the political lords of this country should have no business to do with the judiciary much less be able to stall the elevation of judges of high integrity and caliber who may not be to their liking and who may have passed strictures against them in the past.

If the collegium system was accused of Nepotism or favouritism the way forward was to make it transparent system.  The solution was not to let the political lords of this country have a say in who should sit on the benches of constitutional courts. 

The last bastion of  Indian democracy now stands on a shaky pillar, whose foundations are being progressively hollowed by those who claim to bring "Ache din".  Should stroke of pen be allowed to destroy judicial independence of worlds largest democracy and obliterate its last bastion?

That is the thought for consideration. 

The Saradha Fiasco - No Lessons Learnt

 The Multi-Crore Saradha Scam was the largest of scam to have hit the State of West Bengal.  It unequivocally drove many of its victims to destitution and some to suicide and left behind a shattered rural economy.  However, lessons from the scam still remain to be learnt.

On the date this article goes to the press, the Supreme Court of India by its order dated May 2014 has already transferred the investigation of Saradha Scam to the CBI citing Interstate ramifications and political nexus (and leaving behind a fuming and fretting Mamta Banerjee).  Many political observers now hope that the CBI investigation would reveal what the state investigation did not due to political nexus and high connections.  

Nevertheless, there is a need to look back at this scam to understand its ramifications both for the economy of west Bengal and for future of the financial health of the nation at large and ask hard questions on why such scams go on?

The scale of the scam and its aftermath is perhaps described best by one interviewee to times of India reporter.  An interviewee described the aftermath scene as follows “The entire Dakshin Barasat (eastern India) today looks like it was hit by a cyclone.  Every home has a bankrupt depositor or a fugitive agent.  People who were friends have turned enemies.  Happy households have become miserable.  Students have stopped going to school.  Traders have lost interest in opening shutters. There is a sense of treachery that has replaced the warmth of a neighbourhood.  Suddenly everything has become vicious."

The viciousness of Saradha scam was that it seared most the poorest and the most vulnerable section of the society ie the rural poor.  Most of the investors who lost money had invested Rs 10,000 or less over a long period of time from their monthly savings.

West Bengal - The Ponzi Capital of India

While one can empathizes with the human cost of the scam, it must also be mentioned that Saradha scam was not the first scam to hit the state of West Bengal.  The State has a history of Ponzi scams like as Sanchayita Investments, Overland Investment Company, Verona Credit and Commercial Investment Company in the past.  In Bengal, many fly by night companies and Ponzi operators have in the past sold timber bonds, teak bonds, time share bonds, tea bonds and time share bonds etc and successfully duped investors in the 90s.  The Saradha scam stands out only because of its sheer scale and quantum of funds involved and because of the political patronage it received over the years.

It is also estimated that over 60 firms operate various Ponzi schemes in the state of West Bengal giving it the moniker “The Ponzi Capital of India”.  One estimate even pegs the total amount of funds amassed by these firms to upwards of Rs 10 lakh crores or USD 200 billion (It may be noted that Saradha Group alone could amass Rs 17000 crore with its web of companies).   To get a sense of perspective the Rs 10 lakh crore figure exceeds the annual nominal GDP of the State of west Bengal (which stands at 7 lac crores as of 2013).   While numbers can be disputed what cannot be disputed is the pervasiveness of these flyby night operators and Ponzi companies who have literally created a parallel economy in the state.  

One must note that a Ponzi scheme is destined to fail by its very design.  It will sooner or later reach a stage where the pay-ins ie the monies collected from new investors would be less than the payouts or returns to be given to old investors.  In simple words the Ponzi scheme would soon run out of cash.

But how is it possible that such scams have an unmistakable affinity to rural India in general and Bengal in particular? Or why do people invest in these companies in-spite of a checkered history of the past? Is it the greed? or is it something more fundamental like lack of alternative? One can try to answer this riddle which perhaps has more answers than one.

Why Ponzi Scams continue to happen?

1.        The first and foremost reason why Ponzi scams happen is because India has a very large rural population with very low-income and little or no access to formal banking facilities.  It is no sheer co-incidence that most Ponzi scams operate in states and areas with low banking penetration like West Bengal.  Looked another way the Ponzi companies are only filling up the spaces left by the formal banking sector of the country in rural savings and rural banking facilities.

2.        The second reason why Ponzi scams happen is because the formal banking has shown a continuing decline in Interest rate.  Every person wants to invest in a secure investment which gives returns greater than the rate of inflation on a year on year basis.  If not, his savings continue to decline.  The savings account and fixed deposit account has failed to provide a reasonable rate of return although they assure capital protection.

3.        The third reason is lack of alternative investment options.  In the past the Postal savings scheme was a good saving scheme but with dwindling interest rate in 90s and increasing inflation in the last decade, a few people now choose this route for investment.

4.        Other factors like lack of financial literacy, investor awareness and complexity of documentations plays an important role in dissuading the investors from the formal banking investment options.

5.        Lastly the political clout that the Ponzi companies wield is enormous which gives them a cover of invincibility and veneer of respectability.  Consider for example that the Kunal Ghosh, an MP of Trinamool Congress drew a salary of Rs 16 lacs per month from Saradha Group and another MP Srinjoy Bose was directly involved with the media operations of Saradha Group.  While Transport minister madan mitra headed the employees' union of Saradha Group and publicly encouraged people to invest their savings with the company, Mamata Bannerjee is alleged to have sold her paintings to Saradha Group for Rs. 1.8 crores.

So what is the solution?

The problem of Ponzi-scheme as demonstrated in saradha scam is complex and has many socio-economic ramifications.  What is needed is incremental change in the socio-economic sectors starting from the village and rural economy in particular.

1.        The state must endeavor to create alternative investment option for the rural economy which would provide safe investment option for the rural poor.  Such investments would help to act as a social security net and also prevent destitution and many other socio-economic problems.

2.        While RBI has already come out with its private banking guidelines to increase rural connectivity as a priority sector, it is necessary to fill the spaces of unbanked areas in our country and create seamless banking connectivity from urban and rural India.  Endeavour must be made to remove financial barriers of access like minimum amount of deposit for bank accounts and non-financial barriers like availability of all documentation in local language and a local personnel to explain the banking schemes in vernacular languages to the villagers.

3.        To mobilize rural savings and increase penetration of banking, it is recommended that tax concessions can be provided to the first time depositors and higher interest rate for first time depositors in the fixed deposit accounts.

4.        States like West Bengal have now passed West Bengal Protection of Interest of Depositors in Financial Establishments Act 2013 after the fiasco to protect interest of investors, there is a need now that such acts be replicated at a national level and also lead to creation of a national depository of investors who invest in legal NBFC investments.

5.        While SEBI has elaborate powers and mechanisms for controlling such Ponzi schemes which is covered by its regulatory powers on Collective Investment Schemes.  Its Achilles heel is in co-ordination with the local state authorities to enforce its diktats and orders.  Therefore a better centre-state co-ordination will lead to greater enforcement of SEBI orders at Grassroot level and prevent the repeat of Saradha Fiascos.

6.        Finally there is also a need to create a strong deterrence by increasing civil and criminal penalties and also preventing such scams before they reach their fruition rather than always acting in a reactionary speed by the regulators. 

In Conclusion, the Saradha Fiasco is only a reflection of collective negligence and apathy that has been built into the financial and regulatory system over the years.  The socio-economic problems such scams cause is phenomenal because at the end those who suffer the most are the poorest of poor who have neither means nor incentives to access formal channels.  

If socio-economic issues do not stir the conscience of the state, there is also the argument of national security.  Allowing a large parallel economy to prosper on rural deposits with overt and covert support of politicians can also lead to a new round of Naxalism.  Large amount of funds that are generated can also be used for anti-national activities and pose a serious and a direct challenge to the administration.

It is high time that the state must act with resolve.