Date: 06/02/2023

Relevance: GS-2: Parliament and State Legislatures—Structure, Functioning, Conduct of Business, Powers & Privileges and Issues Arising out of these.

Key Phrases: Deeper Systemic Issues, Irregularities in Securities and Banking Transactions, Share Market Irregularities of Ketan Parekh, Regulatory Laxity of RBI

Why in News?

• The report released by Hindenburg Research alleging stock manipulation and accounting fraud against one of India’s largest conglomerates calls for an immediate and broader debate on market regulation.
• The report by the New York-based short seller has led to a steep downfall in the Adani Group’s domestic shares and its bonds overseas are being sold off rapidly.

Cases of Market Regulation by JPC:

• Irregularities in Securities and Banking Transactions:
  • In 1992, a JPC was set up to investigate irregularities in securities and banking transactions when allegations of financial irregularities resulted in SEBI being accorded statutory status in 1992.
  • The Committee inquired into all aspects of irregularities and fraudulent manipulation and the role of banks and other financial institutions in the transactions.
  • It was tasked with fixing responsibility — individual, institutional or regulatory — for the irregularities that took place in the market.
  • The Committee identified loopholes and recommended safeguards.
    • A large part of the progress made in market regulation conducted by the 1992 JPC is down to the forensic analysis of the failures of market regulation.
• Share Market Irregularities of Ketan Parekh:
  • In 2001, another JPC was ordered to look into the share market irregularities when the Madhavpura Mercantile Cooperative Bank had allegedly colluded with Ketan Parekh to issue pay orders without being backed by requisite funds.
  • The JPC Report held the role of banks, stock exchanges, brokers, the Unit Trust of India (UTI), corporate bodies and chartered accountants into the scam.
    • It knocked on authorities like SEBI, RBI and Department of Company Affairs (DCA) who “should have been able to lay down and implement guidelines and procedures that could prevent such a scam or at least activate red alerts that could lead to early detection, investigation and action against fraud”.
  • It laid bare the lax regulatory framework governing markets and the failure of institutions tasked with regulatory oversight.

Deeper Systemic Issues That Need To Be Addressed:

• Efficient Regulatory Practices:
  • The present saga has exposed the quality of governance and practices followed in the market where regulatory practices have changed much on paper since 1992 and 2001 but in practice the system has not functioned properly.
  • A reduction in value by $108 billion raises a simple question: When these stocks were rising, why was there a general lack of concern from regulators to see whether the rise was in consonance with market fundamentals and not the result of adventurist speculation?
  • Had such diligence been done by regulators, a relatively unknown short seller’s report could not have resulted in the crash of the stock market.
• Regulatory Laxity of RBI:
  • The RBI must be censured for any regulatory laxity as far as banks are concerned.
  • The RBI is responsible for overseeing lenders and ensuring that the banking system is sound and thus questioning banks regularly as to their dealings.
  • It is quite dubious if such inspections and observations were carried out.
  • Indeed, if past regulatory failures are anything to go by, the RBI must answer as to why it did not advise banks to exercise prudence while providing large loans.

What is a Joint Parliamentary Committee?

• Joint Parliamentary Committee (JPC) is an ad-hoc body set up by the Parliament to investigate cases of financial irregularities in any government activity or to examine a particular Bill presented before the Parliament.
• It has members from both the Houses and from both the ruling parties and the opposition. However, there are twice as many Lok Sabha members as the Rajya Sabha.
• It is dissolved after its term ends or its task has been completed.

How is a JPC set up?

• A JPC is set up after one House of Parliament has passed a motion and the other has agreed to it. Members of the JPC are decided by the Parliament. The number of members can vary – there is no fixed number.

What can a JPC do?

• The mandate of a JPC depends on the motion constituting it. For example, “The terms of reference for the JPC on the stock market scam asked the committee to look into financial irregularities, to fix responsibility on persons and institutions for the scam, to identify regulatory loopholes and also to make suitable recommendations.
• To fulfill its mandate, a JPC can scrutinize documents and summon people for questioning. It then submits a report and makes recommendations to the government.

Powers Of A JPC:

• While the recommendations of a JPC have persuasive value, they are not binding on the government.
• The government can choose to launch further investigations based on what the JPC has said, but it can’t be forced to do so.
• The government is required to report on the follow-up action taken on the basis of the recommendations of the JPC and other committees. The committees then submit ‘Action Taken Reports’ in Parliament on the basis of the government’s reply.

JPCs Set Up So Far:

• JPC to examine matters relating to Allocation and Pricing of Telecom Licenses and Spectrum
• JPC on Pesticide Residues in and Safety Standard for Soft Drinks, Fruit Juice and other Beverages
• JPC on Stock Market Scam and Matters Relating thereto
• JPC to enquire into irregularities in Securities and Banking Transactions
• JPC to enquire into Bofors Contract
• Joint Committee to Examine the Constitutional and Legal Position Relating to the Office of Profit.

Conclusion:

• The larger discussion on financial and market oversight, is not an inquisition against any promotor or corporate group.
• The larger question is how could a report by a virtually unknown entity impact the market valuations of one of India’s largest conglomerates so deleteriously.
• Above all, it is an opportunity for the country to strengthen its regulatory mechanisms to prevent future market failures.
• As Indian companies go global and global investors invest in India,the regulatory system must be sufficiently robust to meet attendant challenges.
• For this, a JPC that debates the various aspects of market and financial regulation is a necessary first step to improve its regulatory and oversight mechanisms.
• It is therefore not a political demand but an oversight and regulatory imperative that Parliament must respond to.

Source: Indian Express

Mains Question:

Q. Critically evaluate the effectiveness of the Joint Parliamentary Committees in dealing with the regulatory inefficacies as well as scrutinizing the functioning of the government. (150 words).