Corporate fraud target the system not just individuals

Corporate fraud target the system not just individuals

It is welcome that the government is investigating possible diversion by promoters to their shell companies of a part of the loans they had received from banks, contributing to their eventual inability to service the loans, which, in turn, become non-performing assets on the books of the banks that lent them money. It is necessary to bring to book individual culprits. But it is even more important to bring in systemic reforms that would make such diversion difficult, their investigation more productive and encourage industry to focus on improving their efficiency.
Start with the nature of corporate debt. Why should large projects with long gestation periods be financed by banks? Rather, such projects should be financed by bonds issued by the project developer. When the viability of a project and its financial requirements are determined by a handful of bankers, who themselves are obliged to be sensitive to nudges, if not outright orders, coming from the owner of these banks, namely the government, such determination can be faulty and biased in favour of those whom the powers that be favour. If the project is assessed and financed by the corporate debt market, the number of actors who assess the viability of the project at inception and during implementation and running suddenly goes up: asset managers of debt funds, credit-rating agencies, pension funds, private equity and so on. Over-invoicing of projects and diversion of funds during implementation are more likely to be caught. And if such diversion does take place, it is more likely to be detected if the investigating agencies have the specialised expertise to vet project costs benchmarked against the rest of the world, to follow open audit trails and telltale trails left by corporate jiggery-pokery. That is another systemic reform.
But the biggest reform called for is in political funding. Today, companies need to divert funds from their projects to create covert war chests out of which to fund politicians and parties. If parties fund themselves openly and transparently, corporate corruption would be optional, not systemic as it is now.