This document summarizes issues related to financial mismanagement and the link between politics and business in India. It discusses how reconciliation of accounts is rarely done properly in both governments and banks, allowing for fraud and embezzlement. It also describes specific examples of large amounts of public funds being siphoned off by politicians and funneled into private accounts with no oversight. Overall, it argues that the root cause is the cash-driven election system and lack of transparency in political party financing and appointments to senior positions in banks and government.

1. Hijacking Government & Governance - I
Shantanu Basu
Amid the din of the L’Affaire Nirav Modi, certain critical aspects relating to financial
management and link with politics have been buried for obvious reasons. This is the umpteenth
fraud in this country since 1947. It is also not as if the private sector is the solo villain de piece,
governments have most often vastly bested them, mostly unknown to the public. At the center of
such institutionalized malfeasance is the unholy link between politics and business in a cash-
driven election system.
If banks are guilty of failing to reconciling their accounts, governments are far worse. What is
reconciliation? Reconciliation matches figures billed for payment by paying agencies, passed for
payment and actual payments made, involving the administrative billing officer, accounts officer
and paying agency (mostly banks), each one reporting to separate bosses. This tripartite check is
therefore in conformity with the constitutional separation of powers. Although procedures
originated in the Government of India Act, 1935 and subsequent legislation and rules thereunder,
they are observed almost entirely in their breach. Failure to reconcile the books of accounts
maintained by the above triad is a red herring for fraud, defalcation and embezzlement. States
have abominably low reconciliation rates and this situation has rapidly escalated with some
states reporting full reconciliation by just finger of 30-50 departments per state. SWIFT used by
banks is no different from payment authorization to banks by the treasury officer/PAO in
governments. Persistent indifference to reconciliation may betray criminal intent.
A NE Indian state received about Rs. 3.50 lakh crore as financial assistance from the Govt. of
India over a span of eight years. Of this, about 70% were non-repayable grants-in-aid or say
about Rs. 2.50 lakh crore. The lion’s share of the latter was drawn in the last quarter of each
fiscal and transferred to about 15-20,000 current bank accounts in FIs, outside the government
accounting and auditing system. Once outside the system, banking confidentiality laws
safeguarded wholesale criminality. Expenditure was incurred by low-level functionaries;
sometimes an individual payment crossed Rs. 300-400 crore. Interestingly, the open-ended
parallel was devised by state Cabinet approval. Payments were drawn as advances without list of
beneficiaries, payments not drawn in favor of suppliers, payments drawn on patently false
certificates of work completion/stores received or stocked in fixed deposits, etc. that disappeared
without a trace. Arbitrary transfers of over Rs. 1500 crore were made to dubious infrastructure
development authorities constituted as registered societies. Neither the state nor the Govt. of
India ever took any action against such giant malfeasance even after audit and accounts reports
reported it to the State Legislature.
Nirav Modi and Mehul Choksi merely exploited a similar deliberative systematic sabotage. Their
banker was only too willing to let them have as many LOUs as they needed without coughing up
collateral for them. The reconciliation system was deliberately sabotaged with internal audit and
external auditors failing in their duties as well, a large part of which may owe to influence
peddling. A related issue is the delegation of financial and administrative powers that too is a
global must have. Banks are no exception. Then there are innumerable internal reports and
returns that report progress/regress to senior/top management and Boards. Collated, these reports
are a mine of information. Regrettably, most are filed, having been taken as read. How is it even
feasible that several hundred LOUs persisted for over a half decade without finding refection in

2. basic accounts and reports and that too issued under the signature of the same junior officer?
How was this different in essence from the NE state siphoning funds out of the public
exchequer? Clearly, the finger points to the senior and apex levels of governance of these
entities. Obviously, such persistence did not happen as part of customer/public service!
This brings me to the issue of vigilance. Vigilance clearance for prospective candidates is
equally opaque with no qualifying matrix available in the public domain. Besides, CVC’s
recommendations are entirely advisory, not binding, upon the appointing authority. The basis on
which CVC grants vigilance clearance is a CBI inquiry. If the latter were entirely above board,
how is it that several CMDs of banks were arrested for corruption by the same CBI soon after
their appointment was cleared by them in the first instance? CVC’s guidelines on transfer of
employees in ‘sensitive’ posts apply to all state banks and Govt. of India equally remains a paper
tiger alone while states have similar instructions from their respective VCs. ‘Public interest’ is
sacrosanct and routinely adhered in the negative by transferring authorities. Just as the junior
bank officer continued in his charge for seven years, so did the Finance Secretary of the
foregoing NE state for a period of over a dozen years without a break, earning him a cushy
statutory post-retirement sinecure after superannuation. The junior bank officer is plain unlucky
having to stand in for his seniors that looked the other way as he supinely carried out their verbal
instructions, probably not without ample ‘incentive’. The bulk of government and bank
employees have no change of charge in 5-10 years, many times over an entire career as they are
promoted in situ, when due. That holds true of most top level civil servants too.
There is also a core group in every government agency that, in tandem with senior/top
management, monopolizes all ‘lucrative’ posts drafting replenishment ‘talent’ periodically. In
time, staff associations have often come to shake hands with management on this sensitive issue.
In apparently orchestrated moves, party-affiliated unions raise a hue and cry whenever systemic
HR transfers are made. The political parties then make a nauseating ‘tamasha’ rushing into the
fray and staying transfer efforts. Those that do not comply must face the music and lose their
chairs or be shunted out to a sinecure, often by political intervention with the entity’s CEO.
Mutual back-scratching is thus the name of the sordid game we witness daily.
Each self-accounting unit (bank branches too), across private and public sectors globally,
maintains a cash book that is the fundamental document of financial management. If LOUs were
being issued frequently by a bank, such transactions should be recorded on the expenses side.
The basic principle in accounting is that the difference between receipts and expenses ought to
be zero. For a commercial LOU-issuing bank this means that the LOU ought to be covered by a
corresponding 100% margin money entry as receipt from the company seeking the LOU. In a
way a LOU is akin to a banker’s cheque. It is common knowledge that cash books are seldom
closed daily and reconciled monthly, across public and private sectors. Audit comments in this
regard, if any, are fobbed off by Boards and apex civil servants alike, stating ‘noted for future
compliance’, a revealing and recurrent joke. It is the cash book that mirrors the quality of its
governance. Both governments and most private sector entities are no exception. With
innumerable anomalies in the cash book, there is no better opportunity for malfeasance artists to
join hands with government agencies/banks and jointly burrow endlessly into the system with
remote chances of detection.
A closely related issue is that of human resources (HR) both within the entity and vigilance and
auditors and the Dept. of Financial Services, RBI & SEBI that are part of the banking ecosystem.

3. Since banks are outside the jurisdiction of the C&AG, their external audit is done by private
chartered accountants who often tailor their reports to ensure their continuance in future years.
Many also have conflict of interest that they often do not disclose. PM Modi’s warning in 2017
to chartered accountants was therefore wholly in order.
Coming to DFS, RBI and SEBI, Global Trust Bank, established in 1994, was involved in the
2001 Ketan Parikh-managed stock scam that resulted in losses of Rs 1000 crore. These were
finally borne by the majority government-owned Oriental Bank of Commerce in 2004. In 2013,
in the Deccan Chronicle Holdings’ celebrity fraud case Canara Bank lost Rs. 347 crore, IDBI
Bank Rs 263 crore, ICICI Bank Rs. 490 crore, Axis Bank Rs. 400 crore, Yes Bank Rs. 194 crore
and Indusind and Kotak Banks Rs. 100 crore each. In May 2013, an investigation by the online
media firm, Cobrapost, showed officials of both private and government banks soliciting clients
for laundering black money and offering bank lockers to store unaccounted money. RBI only
fined 25 banks on the lesser charge of not complying with Know Your Client (KYC) norms:
Axis Bank and HDFC Bank were fined the most, at Rs 5 crore and Rs 4.5 crore respectively,
while government banks like State Bank of India, Canara Bank, Bank of Baroda, Indian
Overseas Bank and Bank of India were fined Rs. 3 crore each. The senior management of the
implicated banks was not held responsible by SEBI or the DFS despite the online videos
revealing that the problem was systemic and not the work of rogue employees alone.
In Oct. 2014, SEBI found the real estate giant DLF to have engaged in “sham transactions” to
“camouflage the association of DLF with its three subsidiaries.” What was interesting was that
DLF said that Kotak Bank gave personal unsecured loans to the key management personnel
(KMP) of DLF, who in turn gave loans to their spouses; they in turn bought out the
shareholdings of DLF in its subsidiaries - the ownership changed hands, to the wives of the KMP
of DLF. The SEBI order revealed a similar pattern for 355 DLF subsidiaries, although it did not
say who financed the transactions. While Kotak Bank provided the personal loans, its subsidiary,
Kotak Mahindra Capital Co., was a part of a consortium of eight lead investment bankers for the
DLF initial public offering. The offer certified that these 355 entities owned by wives of KMP of
DLF were not DLF subsidiaries. No action was taken by SEBI or RBI against any of these FIs.
(1651 words) To be continued
The author is a senior public policy analyst and commentator

4. Hijacking Government & Governance - II
Shantanu Basu
Between Aug. 1, 2014 and Aug. 12, 2015 Rs. 6,172 crore was illegally remitted to some
companies in Hong Kong from a Bank of Baroda (BoB) in the National Capital for import of dry
fruits, rice and pulses but allegedly there were no actual imports. The money was remitted by 59
companies through their newly-opened current accounts at the bank's branch. The branch opened
59 current accounts from May 2014 to June 2015 through which large foreign exchange
remittances were made. These remittances were sent by splitting them into smaller amounts to
avoid automatic detection by software used by banks to alert them about such transactions.
Interestingly, BoB said 90% of the remitted funds originated from 30 other banks, while only
10% was received as cash at its branch in New Delhi. So far, there is no word on the identity of
the final beneficiaries of such money laundering.
Obtaining loans through fake documents and involvement of bank managements emerged as
common modus operandi across cases. Yet top bank managers, particularly of PSBs, DFS top
brass, bank auditors, regulators and Board Directors, part- and full-time are seldom punished
along with their borrowers and collaborators. To the contrary, a privileged few worm their way
back into the system recommending top managers of PSBs for appointment, notwithstanding
their own abundant conflicts of interest in DFS and probable dubious roles in sanctioning today’s
NPAs/CDRs while being nominee govt. Directors.
At the heart of the sordid saga are the roles of the DFS and BoDs of PSBs. S. 19 of the
Companies Act, 1956, prescribed that Directors would be official and non-official and
shareholder representatives, etc. in proportion to the shareholding in PSBs. And who are the
official Directors? They are civil servants serving in the Union Ministries. Here too there is a
strict caste system that operates. Depending upon the civil servant’s seniority, he/she would be a
Director ranging from SBI & LIC to Dena and Corporation Bank. A list of such Directors that is
available on the DFS’s web site shows that there are 27 officers from DFS that are official
Directors in all 27 banks/FIs. The largesse is distributed from the Secretary DFS on the boards of
SBI & LIC, Jt. Secretaries in the larger PSBs and right up to Dy. Secretary. Largesse stretches
beyond DFS to other branches of the Finance Ministry. And these data are as of Jan. 20, 2017.
Stanley Milgram’s quip that “The disappearance of a sense of responsibility is the most far-
reaching consequence of submission to authority” could not have rung truer in the Indian
context.
A working paper of IIM-B and KPMG summarized rampant malpractices in Public-Private
Partnerships (PPPs). It discussed issues of fake equity, round-tripping of PSB loans, inflation of
project estimates (in many cases double the original) that permitted borrowers to use only PSB
loans without deploying promoter funds, conversion of secured funds of the PSBs into unsecured
assets, lack of personal and corporate guarantees from the promoter group, right to audit and
inspection over other promoter group entities and the role of overseas minority shareholders
(most often shell companies). Since Board agenda and minutes are seldom available in the public
domain, no one will ever know the level of their compliance with rules and laws. Why is it that
official and non-official Directors, both nominated by DFS and ACC are unable to wade through
these issues and foresee even 50% of endemic malpractices in a sector that has caused
immeasurable harm to India’s PSBs?

5. Internal audit across public and private sectors is an administrative function that is also it biggest
infirmity. There are chronic shortages of personnel since the job is often not ‘lucrative’ enough.
Therefore government entities draft in generalists to fill the vacancies. Those that are forcibly
drafted, often new recruits, canvass for moving out of internal audit at the drop of a hat. Here too
staff unions often make requests for transfers citing extraneous reasons that are mostly accepted.
The internal vigilance wings of all banks and entities have been rocked by financial scandals to
render any meaningful oversight. The situation is far worse in states where subordinate state
finance and accounts service officers head treasuries, accounts officers, etc. but enjoy no
autonomy or protection whatsoever. Monthly accounts are often delayed by big-spending
departments for months together without any fear of retribution. They are also poorly trained and
not transferred regularly; vested interest thus emerges. In time, congruence of vested interest
compliance with the transferring authority, mostly state Finance Secretaries, emerges while
‘quality of life’ steadily improves for many.
C&AG’s audit is mostly illusory given their severe HR constraints. Recruitments by state public
services are scandal-ridden and below par. Having paid their way into a government job, the first
priority for new appointees is to look for ways and means to recover their first ‘investment’
many times over. The rot is thus all-encompassing and unaccountable and open to subversion at
every level from outside and within the system. M/s. Modi & Choksi only bought into this open
system as has every major private operator and then brazenly reneged on their repayment
obligations, cocking a snook at a seemingly ‘agitated’ State to come after them in salubrious
foreign climes, when many are already ‘illegal’ dual citizenship holders.
Supremely, it is the continuing opacity in Board level and senior management positions in state-
owned banks and governments, part of the larger political patronage sub-system that is a major
contributor to unending government entity stripping. I understand that finishing of a rough
diamond does not add far greater value to a finished diamond, particularly when wages of
artisans and establishment costs are far lower in India. In turn, this offers a golden opportunity
for diamantaires to make a huge profit by over invoicing imports and under invoicing exports.
With little or no margin money invested with Indian bankers, public bank moneys are diverted
offshore and used for various purposes by diamantaires, not necessarily related to the diamond
business. Were the Surat-based diamond industry subject to matching of imports and exports,
verification of stock and audit of revenue earned and expenses incurred, interesting findings
could become public. Why then are state-owned banks so liberal in sanctioning LOUs and loans
to private parties frequently and without securing cashable and non-depreciating collaterals?
Bank haven accounts in the Panama Papers and many more disclosures overseas may well have
originated in this industry and their state-owned FIs. It is not unusual therefore that there is no
appreciable progress in investigation.
At the center of such unending sordid sagas is the issue of election funding. India’s democracy
loosely hinges on a wholly cash-driven electoral system. Financial assistance to non-
governmental agencies and individuals, reimbursement of subsidies, public contracting,
utilization of funds released by governments, tampering with taxes, selling public assets and
resources, public-private partnerships, creating new layers of diversionary corporate governance
structures while undermining existing structures, loan waivers, CDRs, assuming private
liabilities as public debt, looking the other way when a ‘quarry escapes’, etc. and myriad more,
offer infinite opportunity to fund elections. Issues like Modis, Choksis, Mallyas, Ruias, and their

6. like serve a most useful purpose in diverting public gaze and debate from far more fundamental
issues of governance with accountability and larger hidden agendas that impact our lives.
The public banking system and the vast majority of public servants that render yeoman service to
the nation must be commended. The argument on social media presently that nationalization is
the root cause for all evils is no more than an alibi to create justification for divesting
government shareholding in the state-owned FI sector, something that sections of the media are
thoughtlessly fostering. Notwithstanding their innumerable failings, these FIs have insulated our
economic system from several shocks in the international environment in various ways besides
providing affordable services to citizens in the remotest areas of India. Foreign FIs, credit/debit
card companies, I-T giants, venture capitalists, and speculators (Indian too) lie in wait for more
scandals to hit our banking system. Financial scandals that periodically hit our states and PSUs
too make a strong case for outsourcing and sale of lucrative assets. Instead, what is required is to
insulate civil servants and state-owned FIs from political intervention in matters of their internal
administration. Selling them off is hardly a solution for their prospective buyers that are
predictable and mostly have dubious track records, indeed are no exceptionable paragons of
virtue.
Preserving our institutions in public hands and insuring their accountability and autonomy on a
few key parameters is critical to the preservation of our hard-won independence and democracy.
Decimating them would assassinate our Republic. (1433 words) Concluded
The author is a senior public policy analyst and commentator