Friday November 26, 2010

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By Sam Devraj  ( Assistant Editor )

Tainted banks: A worker paints the headquarters of Central Bank of India in Mumbai

INDIA’S federal investigator said today it was probing 21 companies for possible links to a bribes-for-loans scandal that has hit bank shares and hurt the country’s image as an investment destination.

The scandal, in which eight financial executives have so far been arrested, is one of several to dog the government of Prime Minister Dr Manmohan Singh, putting to the test the ability of one of the world’s fastest growing emerging economies to crack down on corruption.

Shares in banks and real estate companies - the two sectors with companies that have so far been implicated in the graft probe - fell sharply today as the scandal unfolded, underperforming a negative Mumbai market.

Analysts said the scandal, which comes a few days after Dr Singh had to defend his government in another graft scandal involving telecoms licences sold too cheaply, could harm investor sentiment.

“This is just unfolding at this point in time. These are very serious issues which impact investor sentiments,” said Nitin Jain, Singapore-based principal of fund manager Kotak Mahindra.

“If we can clearly say that we have done something right at this point in time and do proper things at this point in time then it’s salvageable but otherwise it does have a potential to impact investor sentiments towards India from a medium term perspective,” Jain said.

Investors, so far, remain keen to tap into a country with a young and fast-urbanising population of 1.2 billion. Economic growth is forecast at 8.5 per cent in 2010-11, and then between 9 and 10 per cent every year after that, levels rivalled only by China.

A senior official with the federal Central Bureau of Investigation (CBI) said notices had been sent out to 21 medium to large companies, including real estate firms to provide information about their possible link to the scandal.

Two days earlier, the CBI arrested five officials from state-run listed lenders, including the chief executive of LIC Housing Finance, accused of taking bribes to facilitate large corporate loans.

Three senior executives from a listed private company were also arrested on charges of handing out the bribes.

“Preliminary evidence points to the fact that the case is limited to individuals. So fallout is unlikely to be big,” the senior CBI official, who did not want to be named, told reporters.

The official declined to provide further information, but since Wednesday (November 24), companies from the real estate, financial, banking and other sectors - including Suzlon Energy, Jaiprakash Power and Unitech - have said they have been contacted by the CBI. All have denied wrongdoing.

Media reports said yesterday the CBI and the Securities and Exchange Board of India (Sebi) were probing the possibility some loans were invested in the stock market rather than the projects they were intended for.

The Economic Times newspaper said at least nine companies were being probed for insider trading.

Shares in companies affected by the probe continued to fall today, underperforming a slightly negative blue-chip Mumbai stock index.

The real estate index slid as the spotlight fell on the sector, which is borrowing from companies, including LIC Housing Finance, to raise funds for development projects.

Shares in real estate firms have also fallen on fears that a cash crunch could delay or derail major development projects.

Finance minister Pranab Mukherjee has asked all banks, financial institutions and insurance firms to look into their exposures to firms named by federal investigators in the case.

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