Anyone remember Vardarajalu?

WHEN the CBI announced the arrest of M. Vardarajalu in Paris some days ago, on the basis of a red-corner Interpol alert, the news was greeted by blank stares in most newspaper offices. Who is Vardarajalu, and what was his role in the Indian Bank scam? This column pieces together the Varda story, as well as another huge write-off, both of which show how poor the monitoring of banks is — a point recently underscored by the UTI-Ketan Parekh scandal.
Over a decade ago, the Central Economic Intelligence Bureau (CEIB) received a complaint that cashew imports from Nigeria were being over-invoiced by two Varda firms, MVR Exports and Maxwell Exports. The CEIB found the goods were invoiced from Singapore, and all payments were made by Indian Bank’s branch in Chennai to its Singapore branch, from where the money was transferred again. A CEIB team then went to Singapore, but was rebuffed by Indian Bank — not surprising, since at the Singapore branch, it found Varda sitting there!

The Nigerians then provided records which showed the cashew was exported at $100 a tonne, while it was imported into India at $270 — the excess billing added up to more than Rs 800 crore. Once the goods reached India, Indian Bank’s Chennai branch would credit the money to Singapore. Varda, by the way, never paid Indian Bank for the imports. For over 18 months, he got the bank to extend him a line of credit for some exports, and then got it to adjust the import payments against this line of credit! To cut a long story short, the CEIB sent its report to the CBI detailing Varda’s role as well as that of Indian Bank’s chief Gopalakrishnan as early as 1992 - it took the CBI more than six years to get Interpol to issue a red-corner notice for Varda, and a total of nine years to arrest him. That’s justice for you.

Around March 1998, in a seemingly unrelated case, the CEIB came across a news-item about an Indonesian firm, Polysindo, planning to buy the Thapar’s JCT Industries. The CEIB asked the RBI if it had anything on Polysindo, and was told that between 1977 and 1979, the State Bank of India, Indian Overseas Bank and Indian Bank had lent it around $800 mn. By 1991, Polysindo said it was going bankrupt, and rescheduled its loans, got all interest waived off, and finally paid the Indian banks a total of around $120 mn! All told, given the exchange fluctuation, the banks wrote off a whopping Rs 4,000 crore, making it the biggest write-off in Indian banking history — the same Gopalakrishnan was heading Indian Bank at the time of the write-off. The CEIB then suggested the RBI instruct all banks not to lend more money to Polysindo. Guess what? At least one top financial institution was just about to disburse a loan to Polysindo! In its final letter to the CEIB in 1998, the RBI said it had asked the CBI and the Department of Banking to probe the matter as early
as 1993-94. The CBI is yet to begin its investigation.

Apart from the CBI’s lack of progress, what’s more worrying is the absence of a mechanism to ensure that firms/groups of dubious background don’t get loaned fresh money. A good example of this is the recent allegations about HFCL and Zee Telefilms advancing money to Ketan Parekh to buy their shares. Now, even if you assume the Department of Company Affairs does find the firms guilty of the charges, and fines them the ridiculous five or ten thousand rupees it can, do you think banks will be sent instructions not to lend money to them? In case you haven’t figured it out, the answer is no, both HFCL and Zee will be free to carry on business, as if nothing ever happened.

The UTI collapse reflects the same lack of control systems — this, of course, is the worst. The stock market regulator doesn’t have the powers to regulate US-64, and the finance ministry didn’t want to regulate it, supposedly on the grounds that this would have been perceived as its attempt to control UTI, and the very antithesis of the spirit of liberalisation! That’s right, according to what Finance Minister Yashwant Sinha said publicly, his ministry was alarmed about media reports (only the media was awake, it appears) that UTI was buying dud stocks to bail out Ketan Parekh, and how its net asset value had plunged, and wrote to UTI on several occasions — to ask if UTI was in trouble, and to ask UTI to move towards linking its sale/repurchase prices to its net asset value, and to allow SEBI to inspect its books regularly. UTI, it appears, was able to bluff the ministry for well over a year, and do precisely what it wished.

Essentially, what is needed right now, is a specialised Office of Fraud, to deal with economic offences. The CBI, whatever else its talents may be, is clearly unequal to the task, as few of its staffers have specialised training in this area. The CEIB, in fact, was set up precisely to investigate such crimes, but over the years, its powers have been whittled down. Today, ironically, the CEIB’s main utility appears to be more as a dumping ground, to post officers who are to be eased out from the race to the top customs and excise jobs — in the last decade or so, at least four CEIB chiefs fell in this category. Meanwhile, the frauds continue unabated.

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