Risk Hai Toh Ishq Hai: 20 Things You Can Learn About 1990s By Watching Scam 1992

Over the last weekend I saw Scam 1992—The Harshad Mehta Story. The OTT series is based on a book titled The Scam—From Harshad Mehta to Ketan Parekh written by Debashis Basu and Sucheta Dalal.

The 10-episode series is set around the Harshad Mehta scam where Mehta used banking funds illegally to drive up stock prices. Dalal, a journalist with The Times of India broke the story about Mehta’s shenanigans.

Basu who used to work for Business Today magazine at that point of time (not mentioned in the series) is shown to be helping her all along. The story is told from the point of view both Mehta’s and Dalal’s characters.

I enjoyed watching the series immensely and even tweeted saying that the brief Indian OTT era now needs to be divided into before and after Scam 1992.

Watching the series has also inspired me to write this fun piece where I highlight stuff which was very different in the 1990s vis a vis how things are now.

There might be some spoilers here as well (though very few). So, if you haven’t watched the series and plan to watch it, it’s best you stop reading this piece now. You have been warned 

Let’s take a look at this pointwise.

1) The word scam itself wasn’t very popular with the Indian media until Dalal broke the Harshad Mehta scam and weaved the word into the story she wrote for The Times of India (as shown in the series). The phrase used before this was the rather dull financial fraud.

2) A major part of the series is set in 1992, which was a pre-mobile phone era. Hence, all the action happens through landline phones (thankfully pushbutton landline phones had made an appearance by then and so had big cordless phones).

3) It was also the pre-internet era. You had to remember facts or have access to libraries or research departments. This also meant that if you had to verify a company’s address you had to go there physically and do it and couldn’t simply log onto the internet and do so.

4) Cable TV had just started making an appearance in late 1991. Hence, the government owned Doordarshan was the dominant TV channel. It was also the major source of news, which wasn’t a 24/7 business at that point of time. The newspapers came in the morning. All India Radio had news bulletins at fixed points of time during the day. Doordarshan had news in the evenings (and later even in the mornings).

5) You could just walk into the Bombay Stock Exchange, unlike now where you have to go through multiple levels of security and tell the security guys exactly who you are going to meet. So, for journalists to meet sources was easy. Also, unlike today, the sources could be more easily protected simply because there were no electronic /digital footprints being left anywhere.

6) The Bombay Stock Exchange had a trading ring where jobbers representing stockbrokers made the market by actually buying and selling stocks. This matching of the seller and the buyer happens electronically now. The circular trading ring still exists and is used as a hall for hire for events. The events of BSE as the Bombay Stock Exchange is now known as, also happen in what used to be the trading ring.

7) Unlike now, if you wanted to buy or sell a stock you had to call up your broker and ask him to buy or sell on your behalf. You couldn’t just simply login into your demat account and buy or sell whatever you wanted to.

8) India had 23 stock exchanges at that point of time. Bombay and Kolkata were the most important exchanges. Even Patna had one.

9) The drink offered to everyone visiting the Bombay Stock Exchange was masala tea and not machine coffee, as it is now.

10) The Securities and Exchange Board of India (Sebi), the stock market regulator, did exist, but it did not have statutory powers. Hence, even if they knew that financial shenanigans were happening, they weren’t in a position to do anything. That only happened once the Sebi Act came into being in April 1992.

11) The media newsrooms did not have many computers. The stories were still typed on a typewriter, which meant that one had to have the entire story written in one’s mind before one started typing it out on a typewriter. The way a story can be rewritten now on a computer was rather difficult at that point of time.

12) You could smoke inside a media office. (How journalists would love this).

13) You could smoke on an airplane.

14) You could smoke in restaurants and cafes.

15) The RBI Governor leaked news to the media directly.

16) Even short sellers were popular investors at that point of time. The short-seller Manu Manek was called the Black Cobra of the stock market. (In my two decades of following the stock market, I am yet to come across a short seller the market loves). Interestingly, the stock market’s current darling was also a short seller at that point of time. Short selling involves borrowing and selling stocks in the hope that the price will fall and the stock can then be bought later at a lower price, returned to whom it had been borrowed from, and a profit can be made in the process.

17) The BSE was controlled totally by the brokers in the 1990s. It could even open at midnight to change prices at which trades had happened to help certain brokers.

18) The cars on the road were primarily Premier Padmini, Ambassador and the Maruti. India hadn’t seen an explosion in a choice in car models.

19) Levis Jeans hadn’t made an appearance in India until then, though Debashis’s character is shown wearing them in the series. It was launched in India in 1995.

20) There is a scene in the second episode of the Scam 1992, in which a newsreader is seen saying that this year’s budget has a deficit of Rs 3,650 crore for which no arrangements have been made (or as the newsreader in the series said, jiske liye koi vyawastha nahi ki gayi hai). The reference was to the financial year 1986-87.

Given that the makers of the series have stuck to details of that era as closely as possible, I was left wondering if the Rs 3,650 crore number was correct or made up. I went looking for the budget speech of 1986-87 made by the then finance minister Vishwanath Pratap Singh, and found it.

This is what Singh said on page 32 (and point 168) of the speech: “The proposed tax measures, taken together with reliefs, are estimated to yield net additional revenue of Rs 445 crores to the Centre. This will leave an uncovered deficit of Rs 3650 crores. In relation to the size of our economy and the stock of money, [the deficit is reasonable and non-inflationary.”

The number used in the series is absolutely correct. Hence, the makers of the Scam 1992, have gone into this level of detailing.

But the point here being that back then, the government monetised the fiscal deficit. It simply asked the Reserve Bank of India (RBI) to print money and hand it over to the government to spend. This was stopped in 1997.

To conclude, the key dialogue in the series, which keeps getting made over and over again is, risk hai to ishq hai. The inference being only if you take high risk in the stock market do you earn a high return. The trouble, as was the case in 1992 and as is now, just because you take high risk in the stock market (or anywhere else in life) doesn’t mean you will end up with a high return. Investors who hero worshipped Mehta in the 1990s learnt that the hard way.

Investors still continue to learn this basic principle of the stock market, the hard way.

Not everything has changed.

Why the Nirav Modi fraud is much more than just a fraud

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During the course of the last one week, the hottest news-story in India has been that of a jeweller named Nirav Modi, allegedly defrauding one of India’s largest government owned banks, the Punjab National Bank (PNB).

PNB is India’s second largest government owned bank (with assets of around Rs 7,203 billion ($111.7 billion, assuming $1 = Rs 64.5) as on March 31, 2017). The total amount of the fraud has been estimated to be at $1.8 billion (or around Rs 114 billion). News report suggest that Modi (no relation to the current prime minister of India Narendra Modi) fled the country in early January. His immediate family also left India, during the course of the month.

Nirav Modi is believed to be holed up in a luxury hotel in New York and was last seen in Davos, as a part of a business delegation which got a picture clicked with the prime minister Narendra Modi. Before Nirav Modi, Vijay Mallya, another businessman, who hasn’t repaid loans worth Rs 90 billion ($1.4 billion) due to Indian banks, fled the country.

The latest fraud basically involves PNB guaranteeing loans issued to Nirav Modi by issuing a letter of undertaking (LOU). Every time a loan became due, Nirav Modi got PNB to open another LOU equivalent to the loan amount plus the interest that was due on it. The money from the new LOU was used to pay off the loan and the interest due on the previous LOU. In the process, Modi never repaid the loan.

Currently, it is being suggested that he was helped in the process by two employees of PNB. That such a huge Ponzi scheme could be run without the top or the middle management of the bank knowing about it, is a little difficult to believe.

Thus, Modi managed to operate a Ponzi scheme, with money from the new LOU being used to pay off the previous one. Of course, like all Ponzi schemes, Nirav Modi’s scheme collapsed as well. And before the authorities came after him, he left the country, along with his family.

How does Nirav Modi’s fraud look in light of the other frauds that Indian banks face? In July 2017, the ministry of finance had shared some interesting data in this context.

Between the years 2012-2013 and 2016-2017, the banks in the country had seen a total number of 22,949 frauds, with total losses to banks amounting to Rs 698 billion ($10.8 billion). The average loss on a fraud thus amounted to Rs 30.4 million ($0.47 million). The interesting thing here is that of the 78 banks on the list, PNB faced the highest losses when it came to frauds. Over the five-year period, the bank faced 942 frauds with losses of Rs 90 billion ($1.4 billion). The losses amounted to around 12.9% of the total losses faced by the Indian banks due to frauds.

In fact, the average loss for PNB due to frauds stood at Rs 95.5 million ($1.48 million), which was three times the total average of Rs 30.4 million. Also, more than that, PNB faced more frauds than the State Bank of India, the country’s largest bank, with an asset base which is 4.6 times that of PNB.

What this tells us is that PNB’s control systems were in bad shape and hence, the bank got defrauded significantly more than the other banks did. Having said that, the average fraud at PNB between 2012-2013 and 2016-2017 had cost the bank Rs 95.5 million. In Nirav Modi’s case, the size of the fraud is around Rs 114 billion, which is much bigger than the size of the average fraud PNB has faced in the recent years.

What this tells us is that Nirav Modi’s case is more than a petty bank fraud. It is basically more along the lines of a large bank loan default; which many of India’s crony capitalists specialise in.

India’s government owned banks have been facing a huge pressure of corporate loan defaults over the last few years. As of September 2017, the bad loans ratio of these banks stood at 13.5%. This basically means that of every Rs 100 of loans given by these banks, Rs 13.5 had been defaulted on. A bad loan is a loan which hasn’t been repaid for a period of 90 days or more. The corporate default rate has been even higher.

Largely due to corporate loan defaults, the Indian banks have had to write off loans worth around Rs 2,500 billion ($38.8 billion) for the period of five years ending March 31, 2017. Nirav Modi’s bank fraud will only add to this.

To keep these banks going, the government of India has to regularly keep infusing capital in them. In fact, an estimate made by The Times of India suggests that the government has infused Rs 2,600 billion ($40.3 billion) in the banks that it owns, over the last 11 years. Every rupee that goes into these banks is taken away from more important areas like agriculture, education, health, defence etc.

The reason why many Indian businessmen blatantly default on loans is because they know that given India’s slow judicial system and their closeness to politicians, their chances of getting away with a loan default are very high. Nirav Modi is just a small part of this significant whole.

No wonder, former governor of the Reserve Bank of India, Raghuram Rajan, in a November 2014 speech had said that, India was a “country where we have many sick companies but no “sick” promoters”.

A slightly different version of this column appeared on BBC.com on February 20, 2018.

Why you get cheated by friends and relatives



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One of my abiding memories of growing up in a small town is of my father and his friends talking about insurance agents and chit fund agents taking money and disappearing. Usually the agent used to be someone known to them. One story that I remember is of the local dhobi’s (washerman’s) son raising money for a chit fund and then disappearing.

The present day version of this plays out when people invest in wrong kind of insurance policies where the agent commissions are very high or in Ponzi schemes which promise high returns. Ponzi scheme are essentially financial frauds where the money being brought in by the new investors is used to pay off the older investors whose investment needs to be redeemed. They collapse the moment the money leaving the scheme becomes higher than the money entering it.

One version of the Ponzi scheme is a Ponzi scheme masquerading as a multi-level marketing scheme. Those who invest in such schemes end up investing through relatives, friends, neighbours etc. These are essentially people they know and they trust.

One reason why people end up investing money in such avenues is financial illiteracy. While people work hard at earning the money that they do (in most cases), they are very lazy when it comes to investing this hard earned money. They don’t like to carry out any basic research and just hand over their hard earned money to others who they trust.

Hence, trust is another factor at work. In many cases where individuals end up making wrong investments, they invest through an agent who is either a friend or a relative or perhaps someone known to them. This situation is termed as an affinity fraud.

Jason Zweig defines affinity fraud in his book The Devil’s Financial Dictionary as “a financial crime committed by someone with an affinity for doing terrible things to his friends, as when a crook promotes a bogus investment to members of his church, social club, ethnic group, or other close-knot community.” In the Indian context Ponzi schemes masquerading as chit funds or multi-level marketing schemes and being sold to members of a closely knit community are a very good example.

So why do people become victims of the affinity fraud. As Zweig writes about people who victims of the affinity fraud: “They trust him [the agent/the crook] because they know him so well. In return, he trusts them not to notice that he is stealing their money.”

In fact, the human need to trust others and be social is a direct impact of evolution and the fact that human beings are born prematurely in comparison to other animals. As Yuval Noah Harari writes in Sapiens—A Brief History of Mankind: “Humans are born prematurely, when many of their vital systems are still underdeveloped. A colt can trot shortly after birth; a kitten leaves its mother to forage on its own when it’s just a few weeks old. Human babies are helpless, dependent for many years on their elders for sustenance, protection and education.”

And this led to a situation where human beings have had to be social and in the process trust the people around them. As Harari writes: “Raising children required constant help from other family members and neighbours. It takes a tribe to raise a human. Evolution thus favoured those capable of forming strong social ties. In addition, since humans are born underdeveloped, they can be educated and socialised to a far greater extent than any other animal.”

Hence, for human beings to survive and progress in the society, they need to be social and trust the people around them. And this as Harari writes “has contributed greatly both to humankind’s extraordinary social abilities and to its unique social problems”.

One of these social problems is the affinity fraud where we trust others with our money. And sometimes this turns out be a huge blunder. So, the next time you lose money by making a wrong investment through someone know you know, you can blame evolution for it.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column was originally published in the Bangalore Mirror  on December 30, 2015.

Why smart people fall for Ponzi schemes

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Sometime back a friend called and had a rather peculiar question. He wanted to know how he could go about stopping one of his friends from peddling a Ponzi scheme.

This was a rather tricky question. Just explaining to someone selling a Ponzi scheme that he is selling a Ponzi scheme, does not really work. The first question I asked my friend was how was his friend doing in life? “He is doing well for himself,” said my friend with a chuckle. “He works in a senior position with a corporate and has managed to sell the scheme to at least ten people in the housing society that he lives in.”

“If he is working at a senior position, why is he doing this?” I asked my friend, and immediately realised that I had asked a rather stupid question. “I was hoping you would be able to answer that,” my friend replied.

This column is an outcome of that conversation.

Over the last ten years of writing on Ponzi schemes I have come to the realisation that many people who sell and in the process invest in Ponzi schemes are not just victims of greed or a sustained marketing campaign, as is often made out to be.

There is much more to it than that. Many individuals selling and investing Ponzi schemes (like my friend’s friend) come from the upper strata of the society, are well educated and know fully well what they are doing. In case of my friend’s friend he was selling a multilevel marketing scheme for which the membership fee is more than Rs 3 lakh. So, the scheme is clearly aimed at the well to do.

On becoming a member you are allowed to sell products, some of which cost as much as a lakh. Of course, you will also be making new members as well. The bulk of the membership fee paid by the new members you make, will be passed on to you. Hence, the more people you get in as members, the more money you make. Selling products is just incidental to the entire thing, given that a membership costs more than Rs 3 lakh.

This is a classic Ponzi scheme in which money being brought in by the new investors (through membership fee) is being used to pay off old investors (who had already paid their membership fee), with the business model of selling products providing a sort of a façade to the entire thing.

So, the question is why does the smart lot fall for Ponzi schemes? As John Kay writes in Other People’s Money—Masters of the Universe or Servants of the People: “Even if you know, or suspect, a Ponzi scheme, you might hope to get out in time, with a profit. I’ll be gone, you’ll be gone.”

People feel that the money will keep coming in. Or what the financial market likes to call ‘liquidity,’ won’t dry up. And this is the mistake that they make.
Kay defines liquidity as the “capacity of the supply chain to meet a sudden or exceptional demand without disruption…This capability is achieved…in one or both of two ways: by maintaining stocks, and by the temporary diversion of supplies from other uses.”

Kay in his book compares the concept of liquidity to the daily delivery of milk in the city of Edinburgh in Scotland where he grew up. As he writes: “In the Edinburgh of fifty years ago fresh milk was delivered everyday…At ordinary times our demand for milk was stable. But sometimes we would have visitors and need extra milk. My mother would usually tell the milkman the day before, but if she forgot, the milkman would have extra supplies on his float to meet our needs. Of course, if all his customers did this, he wouldn’t have been able to accommodate them.”

What is the important point here? That people trusted the milkman to deliver every morning. And given that they did not stock up on milk, more than what was required on any given day. If the trust was missing then the system wouldn’t have worked.

Take the case of how things were in the erstwhile Soviet Union. As Kay writes: “In the Soviet economy there was no such confidence, and queues were routine, not just because there was an actual insufficiency of supply – though there often was – but because consumers would rush to obtain whatever supplies were available.”

And how does that apply in case of Ponzi schemes? As I mentioned earlier, the individual selling Ponzi schemes feel confident that the money will keep coming in. Those they sell the scheme also become sellers. And for the Ponzi scheme to continue, the new lot also needs to have the same confidence.

In the milk example shared above, if people of Edinburgh had started hoarding milk, the liquidity the system had would have broken down. The confidence that milk would be delivered every day kept the system going. Along similar lines, the confidence that money will keep coming into a Ponzi scheme, gets smart people into it as well.

Of course, this confidence can change at any point of time. And if a sufficient number of people stop feeling confident, then the scenario changes. The money coming into the Ponzi scheme stops and the moment the money coming into the scheme becomes lesser than the money going out, it collapses. So that’s the thing with liquidity, it is there, till it is not there.

In my friend’s friend case, members down the line would stop making more members. Also, members who had bought the membership from my friend’s friend are likely to turn up at his doorstep and demand their money back.

And given that he has told membership to many people in his housing society, he can’t just get up and disappear, given that he is essentially not a scamster. He is a family man with a wife, children and parents, who stay with him.

Hence, he will have to refund them, if he has continue living in the housing society in a peaceful environment. How will he do that? Let’s go back to the definition of liquidity as explained above. Liquidity is maintained by “by maintaining stocks, and by the temporary diversion of supplies from other uses.” So my friend’s friend can pay up from the money he has already accumulated by selling these Ponzi schemes. If that is not enough, he can dip into his savings. And if even that is not enough, he can hopefully take the money being brought in by the new members (if at all there are people like that) and hand them over to the members demanding their money back.

Of course, by doing this he will only be postponing the problem, given that he would have to later deal with the new members.

Long story short—he is screwed!

The column originally appeared on The Daily Reckoning on Oct 13, 2015

The Great Indian banking Ponzi scheme

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One of the themes that I have regularly explored in The Daily Reckoning newsletters is the mess that the Indian banking sector currently is in. This newsletter is another one in the series.

The RBI Financial Stability Report released in June earlier this year pointed out: “Five sub-sectors, namely, mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.8 per cent of the total advances of scheduled commercial banks, had a much larger share of 51.1 per cent in the total stressed advances. Among these five sectors, infrastructure and iron & steel had a significant contribution in total stressed advances accounting for nearly 40 per cent of the total.”

Within the infrastructure sector, the power sector is a big defaulter. Loans to the power sector form around 8.3% of the total loans. But at the same time they form around 16.1% of the stressed advances.

The stressed advances or loans are arrived at by adding the gross non-performing assets (or bad loans) plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate.

So what would typically happen in such a scenario? Banks would go slow on lending to sectors that have been defaulting on their loans. But is that really the case? The sectoral deployment of credit data released by the Reserve Bank of India (RBI) earlier this month suggests otherwise. This despite the fact that banks claim every quarter that they continue to stay away from the sectors that have given them pain in the past.

People may not always tell the right story but numbers do. And here are the numbers. The RBI sectoral deployment data suggests that between July 2014 and July 2015 banks lent a total of Rs 1,20,900 crore to industry as a whole. The lending to industry went up by 4.8%, in comparison to 10.2% growth between July 2013 and July 2014.

The situation gets even more interesting when we take a closer look at the numbers. The bank lending to the infrastructure sector between July 2014 and July 2015 grew by Rs 71,600 crore. Within the infrastructure sector lending to the power sector grew by Rs 59,400 crore.

Lending to the iron and steel sector grew by Rs 27,100 crore during the course of the year. Loans to the iron and steel sector form around 4.5% of the total loans and 10.2% of the total stressed advances.

What does this tell us? In the last one year banks gave Rs 98,700 crore of the Rs 1,20,900 crore that they lent to industry to the two most troubled sectors of infrastructure and iron and steel. This means that 81.6% of all industrial lending carried out by banks in the last one year went to the two most troubled sectors of infrastructure and iron and steel.

These sectors form around 19.5% of the total lending carried out by banks and 40% of their stressed assets. The overenthusiasm of banks to lend to these sectors comes even after the RBI in the Financial Stability Report had raised a red flag.

The report had warned that the “the debt servicing ability of power generation companies[which are a part of the infrastructure sector] in the near-term may continue to remain weak given the high leverage and weak cash flows. Banks, therefore, need to exercise adequate caution while dealing with the sector and need to continue monitoring the developments very closely.”

With regard to the iron and steel sector the report had said that “the sector holds very good long term prospects, though it is currently under stress, necessitating a close watch by lenders.” But the July numbers on the sectoral deployment of credit clearly suggest that banks are not listening to the RBI.
What does this really mean? By lending more and more money to sectors which are in trouble, banks are essentially kicking the can down the road.

The banks are giving new loans to companies operating in these troubled sectors so that they can repay their old loans. They are effectively running a Ponzi scheme. A Ponzi scheme is essentially a fraudulent investment scheme where money being brought in by new investors is used to pay off old investors.
Over and above this conversations I have had with some industry insiders I have come to know that banks(in particular public sector banks) have been using the 5/25 scheme in order to postpone dealing with the bad loans issue, in the hope that these loans will become viable in the years to come.

The 5/25 scheme allows banks to extend the loans given to infrastructure projects to up to 25 years while refinancing them every five to seven years. As a December 2014 newsreport in the Mint newspaper points out: “Banks were typically not lending beyond 10-12 years. As a result, cash flows of infrastructure firms were stretched as they tried to meet shorter repayment schedules.”

In fact when the scheme was first introduced it was available only for new projects. However, in December 2014, it was also extended to existing projects as well. Banks were allowed to increase the repayment tenure for companies which had borrowed money for infrastructure projects and come up with fresh amortisation schedules for repayment of loans.

Such an increase in the tenure of repayment would not be treated as a restructuring of assets. An increase in tenure brought down the amount of money that the companies had to pay during the course of a year, in order to repay the loan. And this increased their chances of continuing to repay the loan.

This 5/25 scheme is also available for projects lending against which has already been classified as a restructured asset (i.e. its repayment schedule has already been extended or the interest rate has been lowered). When such a loan is brought under the 5/25 scheme it continues to be classified as a restructured asset up until the project gets upgraded on the satisfactory servicing of the loan.

RBI’s rationale behind extending the 5/25 scheme to existing projects was that that instead of giving up on an asset under stress, if efforts were made to make it viable, then the loan could be paid back and therefore the pressure of bad loans could be eased.

As RBI governor Raghuram Rajan said on August 4, 2015, while addressing a press conference: “We have said that there is no problem to lend to a project even if it is a non-performing asset, so long as it has done something to bring the project back on track and not for evergreening the loan.” But is that really the way banks also look at it?

Rajan further said in a speech on August 24, 2015: “To deal with genuine problems of poor structuring, it has allowed bankers to stretch repayment profiles…to infrastructure and the core sector (the so-called “5/25” rule), provided the project has reached commercial take-off, has a genuinely long commercial life, and the value of the NPV of loans is maintained. RBI is undertaking periodic examination of randomly selected “5/25” deals to ensure they are facilitating genuine adjustment rather than becoming a back-door means of postponing principal payments indefinitely.”

I sincerely hope that RBI is carefully examining the 5/25 loans. As Rajan said, the RBI making it “easy for banks to “extend and pretend”, is not a solution.” I agree.

The column originally appeared in The Daily Reckoning on Sep 11, 2015