Mumbai: They all came to the fore as heroes with much hype and hoopla and grabbed instant media attention Harshad Mehta in the early nineties, Ketan Parekh in the late nineties, Sanjay Agarwal and his Home Trade in 2000.

Mehta, the Big Bull, sold the dreams of a resurgent Indian Inc to Indian bourses, Parekh was the Big Bull II of the IT boom and Home Trade created ripples with its grandiose plans through glitzy ads and celebrity endorsements. In all these cases, the real nature of these heroes was unravelled much later and we all learned that there was nothing heroic about them. They left a trail of fraud, deceit and scam, invariably shoving the Indian financial system into disarray and shattering investors confidence.

The latest of the scams to tear the Indian financial fabric is not much different from the earlier ones. If Mehta used State Bank of India and some foreign banks to finance his fancies (the total amount lost is still not clear, but it is estimated that it should run into several thousand crores of rupees), Parekh got stock prices of his favourite 10s soar by burning the entire corpus of over Rs 900 crore of Madhavpura Mercantile Cooperative Bank.

The government securities (gilt) scam of the summer of 2001 came into surface when the Reserve Bank of India (RBI) conducted random checks on the books of some cooperative banks following unusual activities in the gilt market. It was discovered that some of these banks were conducting deals worth crores of rupees with some brokers in violation of RBI prudential guidelines.

The latest bakras were a couple of small cooperative banks in Maharashtra and Gujarat. They lost around Rs 400 crore of small investors funds to Home Trade and Gilt Edge. It is also feared that some of the provident funds, too, have lost their funds. The first instance of such a sting operation has emerged with the reported loss of Rs 92 crore from the Seamens Provident Fund.

The real picture came out when Nationalist Congress Party legislator and chairman of Nagpur District Central Cooperative Bank (NDCCB) Sunil Kedar filed a police complaint against five broking firms, including the Navi Mumbai-based financial services company and portal Home Trade for not returning government securities worth Rs 125.6 crore.

Kedar, a former Maharashtra minister for energy, was later arrested by the police and is still in police custody. During interrogation he said he had invested Rs 149.82 crore in government securities but failed to produce receipts from these broking firms, including Home Trade. In a complaint filed with the Nagpur police, Kedar said the broker firms have not given the bankers receipt for the amount despite requesting them time and again.

The other four firms named by Kedar are Indramani Merchants and Shendre Dealers of Kolkata, Syndicate Management Service of Ahmedabad and the Mumbai-based Giltage Management Services. Sources say the amount these brokers owe are as follows: Home Trade: Rs 93.9 crore; Indramani: Rs 16.2 crore; Shendre Dealers: Rs 11.5 crore; Syndicate Management: Rs 16.6 crore; Giltage Management Services: Rs 11.2 crore.

Two days later, a series of cooperative banks based in Maharashtra and Gujarat reported that they also burned their fingers due to their deals with Home Trade as they failed to receive government securities, which they have paid for.

Vardha Central Cooperative Bank spilt the beans when it registered a criminal complaint against Home Trade and its CEO Sanjay Agarwal for failing to deliver securities worth Rs 25 crore. The bank, on 16 March 2001, through a cheque drawn on Maharashtra State Cooperative Bank, credited Rs 25 crore to Agarwals account. But the bank suspected foul play when Home Trade failed to deliver the securities it had pledged.

When the bank threatened to register a complaint, Home Trade, on 4 September 2001, paid an interest of Rs 1.28 crore. Soon, the Pune-based Sadguru Janglee Maharaj Bank said it has lost Rs 32 crore in its deals with Home Trade because the broker failed to deliver gilt securities worth the amount. Osmanabad Central District Bank also lost funds to Home Trade.

After sending a shock wave across India, it was revealed that the scam is not confined to gilt and cooperative banks alone it was discovered that some provident funds too were affected. Gilt Edge and Home Trade had also taken funds from some PFs. Gilt-Edge, headed by Ketan Sheth, who is also a director of Home Trade, failed to deliver gilts worth Rs 92 crore to the Seamens Provident Fund. The provident managers have flouted rules prohibiting them from engaging services of a broker for investing in PF funds. The fund has 26,500 members and a corpus of around Rs 400 crore.

All the main players in the scam are now in police custody. These include Kedar, Agarwal and Sheth. Agarwal surrendered before a local Nagpur court on 11 May and was remanded to police custody and was brought to Mumbai. Sheth, who surrendered to a court, has admitted to the Central Bureau of Investigation, which is investigating the PF scam, that he has taken funds from Seamans PF. The Investigation agencies, including the police, the RBI and the Securities and Exchange Board of India, are trying to ascertain where the funds have gone.

The sad thing about the whole saga is that Indians fail to learn from the past mistakes. Vulnerability of cooperative banks had come to the fore after the Madhavpura and the Hyderabad-based Chimar Bank scams. But the RBI and the government failed to put in place an effective system to counter these kinds of incidents, which risks the savings of millions of small investors.

The other reasons cited for the continuing failure in monitoring such cases are the physical trades and slow transfer procedures in the gilt market. The RBI lags behind in introducing electronic and screen-based trade on the government securities market. The central bank is so preoccupied by trivial issues like the separation of regulatory jurisdiction that it has spurned the use of the National Share Depository systems to dematerialise securities transactions by smaller banks (SGL-II transactions).

The multiple regulatory framework and the highly-politicised nature of cooperative sectors turn RBI mandarins into sitting ducks so that Mehtas, Parekhs and Agarwals can continue to take due advantage. Since the victims the small investors are often voiceless, the authorities have nothing to fear.