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CRB group of companies. The case examines how the CRB group was able to defraud the investors and the regulatory authorities with ease. The role of RBI and SBI is also explored. The case is so structured as to enable students to understand the way the CRB group of companies defrauded the investors. The case is designed to expose students to the nature and extent of scams in the financial sector and the modus operandi to study the role and responsibilities of the regulatory authorities in the Indian financial sector and a critical evaluation of their performance to study the consequences of the scam. The Man and The Mess
Born in a jute trader's house in Calcutta, Bhansali was a studious person. After obtaining a degree in commerce, Bhansali completed Chartered Accountancy in 1980. In the same year, he started a financial consultancy firm, CRB Consultancy. Through Bhansali's personal contacts, CRB Consultancy soon managed to secure the business of providing issue management services to a few well-known companies in Calcutta. Over the years, Bhansali acquired other degrees as well including ACS, Ph.D., MIIA (US) and a diploma in Journalism.
Though he made a lot of money, Bhansali found it difficult to find recognition in Calcutta. He then moved to New Delhi to join one of the country's leading registrars of companies. However when Bhansali was caught short-charging the registrar's clients, he had to leave.
Bhansali then established 'CRB Consultants,' a private limited company in New Delhi in 1985. In 1992, the name of the company was changed to CRB Capital Markets (CRB Caps) and it was converted into a public limited company.
The company offered various services including merchant banking, leasing and hire purchase, bill discounting and corporate funds management, fixed deposit and resources mobilization, mutual funds and asset management, international finance and forex operations. CRB Caps was also very active in stock-broking having a card both on the BSE and the NSE. The company raised over Rs 176 crore from the public by January 1995. The A+ rating given
2 crore in 1991 to Rs 103 crore in 1995. In the mid 1990s. The drama took a new turn whelm the CBI made arrangements to bring Bhansali back to India after informal negotiations with him and Hong Kong government. managing partner. one of the group's thrust areas. Bhansali's connections with religious leaders and political parties also helped in attracting investors. Leasing and hire purchase. Sid Khanna. reports regarding the frauds being committed by the CRB group began appearing in the media. CRB Share Custodial Services raised another Rs 100 crore in January 1995. In mid 1996. Media analysts pointed out that the group's global outlook and timely foreign collaborations were responsible for its success. media reports claimed that CRB had used many not-so-savvy methods to achieve its ends. CRB Corporation Ltd.. Another CRB company. Given the company's small scale of operations. its activities veered into finance later). Bhansali had even published a booklet on himself. extolling his virtues and achievements titled 'Dr C. In August 1994. who had been advising CRB on group strategy opined that Bhansali had an educated and pragmatic view of globalization.Making The Difference. Bhansali's empire soon flourished with the total income increasing from Rs 1. Questions were raised when CRB Caps' net worth went up from Rs 2 crore in 1992 to Rs 430 crore in 1996. Another Rs 180 crore was raised from investors through fixed deposits. shot up from a paltry Rs 2 lakh in 1991 to Rs 16 crore in September 1994.' Even at this juncture. this phenomenal growth was eyed with suspicion. CRBs joint ventures with Daewoo Securities and Keystone Group met with reasonable success. The mass gathering in front of RBI in May 1997 was the first major manifestation of the 'hate-wave' against CRB. An FIR was filed against CRB as per Section 120 B. Bhansali launched CRB Mutual Funds (CRBMF) which raised Rs 230 crore from the market through its Arihant Mangal Growth Scheme.R.by CARE and upfront cash incentives of 7-10% attracted investors in hordes to Bhansali's schemes. (originally set up as a granite manufacturing company. Andersen Consulting. Bhansali . raised another Rs 84 crore through three public issues between May 1993 and December 1995. read with Section 420 of the Indian Penal Code (IPC) and .
Bhansali's advocate however maintained that his client had surrendered himself to CBI officials 'as soon as he came to know that he was embroiled in an alleged case of fraud by the company. Bhansali however maintained that he was falsely implicated and said that investigations should be properly done so that he did not become the scapegoat. both CRB Capital Markets and CRB Share Custodian Services featured in the list of top 10 companies in which CRB Mutual Funds invested in 1994-95. He capitalized on the 1985 boom in leasing companies to become cash rich. . He used to sell these dummy companies to buyers. which again had a Rs16 crore investment in CRB Capital Markets. For instance. Bhansali used his own money to rig share prices in order to raise more money from the markets in two ways. Bhansali then sold it for a profit to businessmen who needed dummy public limited companies in a hurry. cheating and siphoning off of funds from SBI. He had established good contacts in the Registrar of Companies and the Controller of Capital Issues offices. largely from Calcutta's close knit Marwari Jain community. He also claimed that Bhansali 'did not flee the country' but was on a business trip to Hong Kong and had informed his whereabouts to a friend in Delhi. The Modus Operandi Bhansali was reported to have specialized in setting up dummy investment companies. who later informed the CBI. The latter held 24 lakh shares of CRB Corporation. He registered companies with practically no equity and then stage-managed the dummy company's maiden public issue with a few hundred investors. Having had a company listed on the stock exchange.Section 13(2) read with Section 13(1)D of the Prevention of Corruption Act (PCA). he bought his own stock through private finance companies owned by him. Bhansali was charged with fraud. Bhansali was arrested as soon as he landed in Delhi. he used his other public companies to buy into each other as crossholdings. which was being investigated by the CBI. Firstly. Secondly. which in turn invested Rs 17 crore in CRB Mutual Funds. CRB Share Custodian invested Rs 15 crore into CRB Capital Markets. This way. Bhansali managed to keep the share prices of CRB companies artificially inflated.
Analysts however said that the actual worth of Bhansali's companies was much below what was stated. keeping the books of the companies artificially inflated.000 SBI branches for payment. Defrauding the SBI In May 1996. As per this deal. Bhaiya & Co and. The company also could manage to get higher credit ratings. Bhansali was granted only . Sources within the company revealed that Bhansali invested in three classes of companies: his own privately owned companies. but which could not get full subscription. and many small companies whose issues were managed by CRB Capital. This financial wizardry in the books was made possible with the help of Bhansali's trusted firms of auditors. CRB Corporation's income more than doubled between 1994 and 1996. CRB Caps opened a current account in SBI's main Mumbai branch. he was able to post handsome profits for group companies. which in turn meant that raising money from the public in the future was easier. for payment of interest.P. considering that most of them were bad stocks. The payment warrants could be presented at any of the 4.both old friends from Calcutta. This procedure was repeated over and over again. The higher profits reflected in the share price continuing to remain high.Also. However. CRB Caps reported that the market value of its investments rose from Rs 76 crore to Rs 109 crore in 1995-96. Also. though he never marked its investments to the market. The money generated thus was shown as profits in the books of CRB Caps or CRB Corporation as profits from sale of investment. Many of these companies were the ones Bhansali invested in to generate paper profits for the group. promising to buy it back after a year's time at higher price. private companies owned by his friends and those on the boards of his companies. It was Bhansali's practice to buy IPOs of companies at a much lower price than the issue price and then entering into a ready forward deal with a finance company. For the other companies involved. Jain & Swaika . Bhansali sold the holdings at a higher price. dividend and redemption cheques. the benefit was in form of the IPO price going up on the bourses. ensuring a steady fixed deposit and bank credit inflow. D. Both these firms were rather notorious and Jain & Swaika was in fact reported to be 'available against a fee to fix almost any set of accounts.
However. which he promptly did. . Ltd.a current account facility and did not enjoy any overdraft facility. the setup worked very well. the branches gradually began treating these instruments just like a demand draft. In addition. which were drawn in favor of friends and relatives and presented at various SBI branches. Although it was speculated that Bhansali intended to pocket the cash and flee. Bhansali used benami (false) accounts in Chennai. However. SBI officials met Bhansali in April 1997 and asked him to immediately deposit Rs 10 crore and submit post-dated cheques to cover CRB's outstanding liability of Rs 47 crore. His lawyer insisted that the SBI account was an ordinary one and not of the escrow or 'pre-deposit' type.. He was expected to deposit cash upfront into the current account. it was to be treated as a normal account with overdraft facility. SBI then attempted to obtain Bhansali's co-operation in a bid to recover the entire amount owed to the bank by April end. Clamming that the logistics of payment were very complex and that it was not possible for every branch to check with the head office before honoring a dividend warrant. Calcutta and towns in Rajasthan to encash the interest warrants and fixed deposit repayments.. in March 1997. SBI asked Bhansali to register all property owned by him and . SBI also alleged that Bhansali had printed 1. Bhansali was called to the SBI office and asked to remit the difference immediately. For about nine months. Bhansali did admit to overdrawing from his SBI account following liquidity problems at CRB Caps.all in Chennai .from where they were withdrawn. along with a list of payments that had to be honored. he claimed that he had no fraudulent intentions. Bhansali's lawyer claimed that the overdrawn sum went back into CRB Caps to pay interest and repay principal to fixed deposit holders. There was no mandatory requirement to deposit money with SBI before issuing out the interest warrants and in the event of any overdraft. SBI then issued a circular to all its branches asking them to stop honoring any warrants of CRB Capital Markets. These amounts were then transferred to other accounts like Red Stone Properties Pvt. Chamatkar Investments Pvt. SBI realized that the account had been overdrawn to the extent of a few crores. The same situation arose again within the next fortnight.800 fake dividend warrants. Bahubali Commercial Company Ltd. Ltd. where the overdrawn amount could be repaid with interest.
Further. which resulted in a panic among depositors. However. Bhansali valued his property at over Rs 60 crore. Frequent clashes occurred between RBI and SEBI in the media. The lack of clear communication channels between the banks. Rajasthan was transferred in SBI's name. The bank further claimed that the powers were granted only in March 1997. The RBI claimed that it had no powers to examine the asset quality of the CRB group and thereby was not in a position to pass any judgment on the character of asset generation or deployment of the funds raised by the group. Bhansali however. Bhansali's lawyers also claimed that the SBI and the RBI aggravated the situation by prohibiting CRB Caps from accepting fresh deposits and then announcing it to the public. with both of them trying to prove how the other was responsible for not acting early enough. when the RBI Act of 1934 was amended to include specific provisions for the purpose. did have the powers vested in the Act to call for the books of any NBFC and examine its asset side as per Section 45 L and N. RBI and the government seemed to have worked to Bhansali's advantage to a great extent. A Business India report claimed that the bank. Bhansali's property in Jaipur. The Systemic Rot The collapse of the CRB group seemed to be a fraud allowed by supervisors despite the regulations in place. SBI justified this saying that justice in its normal course would have invariably taken an extremely long period. contrary to the views of its management. The bank also stated that it had begun to examine the liabilities and not the assets.his companies as collateral in favor of the bank. It was only when Bhansali could not pay the first installment of Rs 10 crore that SBI informed the RBI. while SBI claimed that the bank's own valuation turned out to be far less. did not pay the money SBI had asked for. While SEBI gave a status report to RBI on CRB's mutual fund and broking businesses . media reports were quick to refute RBI's claims. It seemed that SBI had knowingly overlooked CRB Caps' impending bankruptcy in order to recover as much cash as possible before the matter reached the judiciary. In the same month.
1993. During this period. wherein severe irregularities were found. SEBI chief Mehta said. it could not be blamed. CRBMF was eventually punished with only a nine-month retrospective ban to approach the markets for more funds. Though an enquiry was conducted by SEBI. The inspection took two months to complete. a firm of chartered accountants. which produced the Chitale Report in January 1995. which took two more months to go through the legal process. SEBI also claimed that since it had not passed any judgment on the group as a whole. Chitale & Co.mentioning the irregularities found. Reacting to this. Bhansali was reported to have destroyed all the evidence in his possession and withdrawn whatever money was still left in the banks before fleeing to Hong Kong. "The RBI never asked for it. RBI first issued CRB an interim show-cause notice on why it should not be banned from accepting fixed deposits in November 1996. the Tourism Finance Corporation of India (TFCI) lodged a complaint against with the RBI CRB Caps claiming defaults on loan repayments. Finally. after the SBI complaints. In December 1994. It took RBI six weeks to issue the winding-up notice and appoint a liquidator. The task was entrusted to M. This raised questions as to why SEBI did not send the full details on the extent of the violations committed by CRB to RBI. a final show cause notice was issued." Despite SEBI's intimation in December 1995 regarding the CRBMF problems. the RBI did not investigate into the company's activities. . The way the CRBMF issue was handled was quoted in the media as an example of a 'good collaborative effort' between the RBI and the SEBI. RBI issued a ban on collection of fixed deposits by CRB in April 1997. In February 1997. SEBI initiated a routine investigation to examine the extent to which the company complied with the SEBI (Mutual Fund) Regulations.P. Within a few days after the CRBMF suspension period ended. RBI went ahead with its approval of CRB's banking venture as the irregularities pertained to the mutual fund business only. Bhansali secured the banking license from RBI. during which time CRB collected a further Rs 20 crore in fixed deposits. In October 1996.
the investors were prematurely paid Rs 4. and the increasing stress on accountability. there were a large number of listed (but thinly traded) and unlisted shares amounting to Rs 17. plus some dividends from investments. the SEBI appointed an administrator for CRB's Arihant scheme finalized a scheme for payment to the unit holders.The Aftermath The CRB scam took the whole nation by storm.07 crore was paid to all 19. The scam had far reaching impacts on the economy and on the banking sector in particular. Under the scheme. these were paid out of the sale proceeds from the listed securities. promoter.5 crore.95 per unit. the finance minister criticized the regulator severely." .000 units were also paid for 300 units. In October 1998. Thus.245 who held up to 300 units and comprised 68% of the unit holders were paid off. other unit holders were paid off. Prudential Capital Markets seemed to have summed up the situation aptly. Vinod Baid. already suffering from low credit off take and borrowers' suspicion were afraid on two counts . It has stopped investors from seeing ads and feeding money into the fixed deposit whirlpool. In the second stage. Banks. unit holders were able to get almost 50% of the initial sum invested. which was its NAV as of 31 March 1998. Non-individual unit holders who had over 10. When the administrator had taken over.396 unit holders to the extent of 300 units each . after disposing of the entire unlisted and non-traded shares. The government asked the RBI to prepare a panel of auditors asking to explore the possibility of making auditing of NBFCs a prerequisite to registration. the Union finance ministry held a meeting everyday to get to the brasstacks of the CRB fiasco. a sum of Rs 1. "Few people realize it but the CRB collapse has done a great deal of good to the country. Besides.possibility of formation of fresh non-performing assets. the assets of the scheme comprised the fund's frozen bank accounts worth Rs 81 lakh. The scam played an important part in the declining investor confidence. poor performance of NBFCs and a host of other problems ailing the financial markets. At one point. In a meeting with SEBI. Finally. According to the scheme suggested.13.
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