Consider for example the core of the current “scam” constituted by transactions involving a set of cooperative banks and Home Trade, which has once again seen a few hundred crores of rupees disappear into thin air. What is surprising was that this was a “scam” that was in the making before the very eyes of the regulators. Home Trade was an unusual venture inasmuch as, at the time of its launch around two years back, it combined activity in two areas which were both at a low, if not in a state of collapse. The first was an internet venture, in the form of a portal that provided information and entertainment to satisfy visitors interested in its principal activity. And second, its principal activity, which was to encourage internet trading of stocks and shares.
 
This dotcom brokerage, ostensibly aiming to attract small investors who had fled markets after burning their fingers, was launched with a high profile advertising campaign that roped in celebrities like Hrithik Roshan, Sachin Tendulkar and Shah Rukh Khan. The campaign, estimated by one source to have cost as much as Rs. 65 crore, was mysterious, since it long remained silent on the product being sold, and was geared at establishing the “Home Trade” brand and win customer confidence in the name. What it did not fail to do was to attract public attention, leading to much media discussion on the campaign itself.
 
The experience with dotcom failures, abroad and in India, that spent huge sums of money even before earning a single unit of currency, should itself have alerted the authorities into scrutinising the venture. More so because, unlike conventional dotcom firms, this one had a revenue model that made it even more risky and suspect: to earn money through brokerage fees from small investors at a time when the market was by no means booming. The case for suspicion and a modicum of scrutiny would have been strengthened if the regulatory authorities had examined the antecedents of the promoters and its Chief Executive, Sanjay Agarwal.
 
Agarwal came to Home Trade with a reputation, built during his days with Lloyd’s Brokerage set up by Lloyd’s Finance, one more Mumbai-based finance company that had picked up the name of an internationally known finance company. Established in 1994, with a paid-up capital of Rs. 2.2 crore, Lloyd’s Brokerage soon acquired the reputation in market circles of being a “dynamic”, market-mover. However, when the BSE Sensex fell by 367 points on a single day in mid-January 1997, the Securities and Exchange Board of India (SEBI) launched an investigation that came to the conclusion that there was prima-facie evidence that Lloyds Brokerage, was responsible for the unusual volatility. By then the firm had changed its name to Euro Asian Securities (EAS), consequent to a sale of 75 per cent of its stake to Mauritius-based S N Investments. Speculative transactions, it appeared, were key to the strategy of EAS, as it has been known to be of most financial entities. However, whether for lack of adequate evidence or other reasons, in October 1999, EAS was let of with an admonition by SEBI, which even permitted the promoters to offload 25 per cent of their stake through a public issue valued at Rs. 32.94 crore.
 
Armed with those funds EAS transformed itself into the internet-based brokerage Home Trade, that was soon favoured with venture funding from two new sources, Euro Discover Technology Ventures and Euro Discover, which also established a second company called Ways India, Ltd. that functioned as part of the Home Trade group.
 
Given this rather labyrinthine evolution of Home Trade from sources that had been investigated for possible market manipulation and given its seemingly irrational choice of area of operation and timing, the company was seen by many, barring the regulators, as being an operation that was suspect from the point of view of market prudence. Yet investigations into Home Trade’s activities had to wait for the NABARD report on the Nagpur District Central Cooperative Bank in April this year.
 
The route to discovering that Home Trade was a fragile venture that was bound to collapse from losses suffered by investors who had handed over large sums of money to the company, is indeed circuitous. After all by March the financial press was reporting that both Home Trade and its sister company Ways India were downsizing operations and retrenching staff, many of whom had not been paid for some time. But neither the regulators nor the media found reason to investigate a company that had burnt up crores in a few months.
 
Sanjay Agarwal, who has since been arrested, is reportedly himself unapologetic. While admitting to some “mismanagement” in his debt servicing division, Agarwal is reported to have claimed that Home Trade has a “great financial model”. At one level he is perhaps right. His was a model of changing form to pursue every option of speculative return that existed. When the project of earning huge commissions through internet broking was found to be not working, he hoped to make large sums by garnering funds for temporary speculative transactions, by convincing clients to invest in g-secs in the expectation that their prices would rise since the government was keen on driving down interest rates. To find investors who would make their purchases through him Agarwal offered an extra two per cent return on investments, and targeted cash rich but poorly regulated sectors like the cooperative banks and small provident funds. His gamble did not work, leading to his being unable to deliver on his trades, but in keeping with what is the true business of finance he at least gambled.
 
The difficulty about making Agarwal the whipping boy when he is already well on the way down is that the exercise only serves to divert attention from larger issues. These are that financial markets, where information available to some is not available to others, are prone to speculation and failure. They therefore need to be tightly controlled or regulated. But India’s economic reform programme has not only liberalised these markets substantially and devalued regulation, it has made the garnering of large profits by financial entities a sign of “efficiency”. This legitimises speculation, so long as you are not caught out because of failure.
 
One result is that when failures do occur it is not the system put in place by reform that is blamed, but the individuals who have been caught out because of failure. Liberalisation is persisted with and financial failure recurs. The problem is that failures affect not just the speculators or those involved in the bank-broker speculative nexus. It also threatens to wipe out a part or the whole of the savings of individuals, who have invested sums exceeding Rs. 1 lakh in entities they do not control, but which they believe the government regulates. It is this trust in government rather than the confidence bought by huge publicity campaigns that finally explain the willingness of small investors to hand money over to entities that are similar to those who have known to have misused them in the past. Given that, it is not enough if the government wakes up each time it is faced with what it dismisses as a scam. It must undo the regime and the structures that render the system fragile.