Insolvency

The Global Financial Crisis of 2008 left behind a couple of lingering images – one the staff of Lehman Brothers Holdings walking out of office during the weekend with precious belongings, and the other was police walking Bernie Madoff to prison. In a way both of them were victims of the collapse of Wall Street. But Lehman CEO Dick Fuld is back in business, while Madoff is serving a prison term in New York. The contrast between the two celebrated titans of Wall Street is: one is bankrupt, and the other is a fraudster. A good legal system is the one that distinguishes between the two. 

• Indian banking practices have been bizarre in many ways. It is how they treated defaulters, especially the big ones. Banks feared that admitting to default is wrong, and in many cases they believed that tide would ultimately turn and the client would be lifted out of misery — not by actions, but by gods. Between the period of default induced by causes beyond the management’s control and the time of recovery, banks were throwing good money after bad.
• In most cases, promoters enriched themselves by inflating project costs, siphoning off funds was just fraud. Even before the project went on stream, promoters equity was back in their pockets and their stake is either zero or negative. The banking system was designed and operated in a way that was difficult to differentiate between the two. Many fraudsters were exploiting the economic conditions over their crimes. Banks were hesitant to go after the criminals for ending up being pulled up for poor credit appraisals and the cursed judicial system that took decades to deliver justice. 
• There were corporate frauds in the West, which included Enron, Worldcom, and Tyco. The perpetrators of these frauds are behind bars after prosecution. The Indian criminal justice system is leaky, and hundreds of cases have been pending for decades. The conviction ration is under 6% which lead to a popular belief that if you are reasonably influential to hire good lawyers, you can escape conviction for fraud. 
• These ‘wilful defaulters’ are white-collar criminals. It is time to treat them so. The country has the IPC and CrPC to try criminals and frauds. Those who commit financial fraud must be tried under these criminal acts, and not through the bankruptcy act. 
• Those who are genuinely bankrupt but are not fraudsters may be bailed out under insolvency act and exonerated from any liabilities under CrPC, but must be blacklisted for further assistance from institutions or public.

The lawmakers and banks must stop living by the concept of limited liability company and treat fraudsters as guests of honor. Unfortunately these fraudsters armed with vast amounts of robbed money are well connected and lead a privileged life in India and abroad. There is hardly any rich man in India, who had not violated laws, practices & traditions in their journey towards amassing wealth. The easiest way to getting rich is to lower the values, and rob public money with the active help of politicians and bureaucrats for a cut in the booty. And there are plenty of accountants, advocates, bureaucrats and politicians who will help these fraudsters in perpetuating this type of robberies and conceal them. 

Those fraudsters must be prosecuted and jailed for prolonged periods (10-20 years) and in any case they must be prevented to get to be back into any kind of business, debar all those people associated with ‘willful defaulters’ and should not be allowed to enjoy societal privileges. They must be blacklisted and debarred from all types of public activities and discourage from private activities. Bank privatization, without strengthening regulatory controls and improving governance, won’t prevent fraud, or curtail undue exposure to risk. The present day concept of  'privatizing profits and socializing losses' is unacceptable nonsense, as profit and loss bot must be owned by equity share holders only. In the absence of stringent actions, punishments and consequences, reckless actions and senseless risks by private people with the money which is not theirs, will continue to surface incessantly.