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Another scam rocked India last year, which showed the loopholes in the
regulatory framework in India. This scam was committed by Mr. Sanjay Agarwal CEO
of Home Trade (Life Means More) and a broker Ketan Seth. Mr. Sunil Kedar, chairman
of Nagpur District Central Co-operative Bank (NDCCB) is also assumed to be a party to
the scam.
The scam came to light when Sunil Kedar filed an FIR with Nagpur police station
against five brokerages, Home Trade, Gilt Edge securities, Century Dealers, Indramani
Merchants and Syndicate services for non-delivery of government securities worth
Rs.125 crores. With interest this amount came to Rs.150 crores. Soon many other Co-
operative Banks informed that they had similar problems too. Even Seaman's Provident
Fund, with about Rs 430-crore savings, admits to having indulged in transactions of G-
secs worth Rs 100 crore without taking physical delivery.
The scam operated through a simple mechanism, taking money from victims for
the purchase of government securities and never delivering them. First of all, it must be
understood that all urban cooperative banks have to invest in government securities to
meet Statutory Liquidity Requirement (SLR) of 25%. RBI allowed small entities like
cooperative banks to transact physically in G-secs and all others take the demat route.
When these cooperative banks pay money to their brokers for purchase of these
securities, the brokers buy the securities and send them to RBI for transfer. RBI issues a
receipt listing details of securities, the buyer and the seller. The broker hands over these
receipts to the bank and walks away with his commission. The physical delivery by RBI
to the bank takes 3-4 weeks.
However, here banks paid money for the securities, but the broker would never
buy them. Even if he buys them, he would pledge them as collateral with other banks and
use the money. If the bank asked about the securities, they would be informed that their
securities had been sent to RBI for delivery. Some banks did insist on some proof that the
transaction had been completed. This proof often ended up being a receipt issued by one
brokerage, which was part of the ring to another, which was merely a paper transaction. It
is believed that the money was used for stock market transactions to earn higher returns
that would enable payment to these banks. Whenever securities of some bank came to
maturity, they could utilize this money or money borrowed from some other bank for
repaying the amount. However, it seems that they were not able to make enough money
so their checks started bouncing and the cooperative banks realized that they had been
cheated and their money siphoned.
In this case, Mr. Kedar, chairman of NDCCB not only invested money of Co-
operative bank through Home Trade; he even put it in touch with many other Co-
operative Banks that wanted to invest in G-secs. As for the Rs.125 crores that NDCCB
spent on buying these securities, he did not even insist on a receipt from Agarwal or
Sheth (broker).
It is also interesting to note that regulations regarding Co-operative Banks are
much lax when compared to commercial banks. All it once took to start a co-operative
bank was eight willing people (promoters), Rs 500,000 in start-up capital, a letter from
the State Registrar of Co-operatives, and a banking license from RBI. The central bank
last year hiked minimum capital requirement to Rs 25 lakh, and minimum membership to
500. Whereas private bank applicants are required to meet following requirements:- put
through: a minimum capital of Rs 100 crore, a scrutiny of the promoters' background and
track record, and an inventory-audit of infrastructure and tech-support. A cooperative
bank cannot be liquidated. Nor can its management be changed in the normal course. All
RBI can do is fine them for irregularities.
Urban cooperative banks (UCBs) are regulated not just by the Reserve Bank of
India but also by the Registrar of Cooperative Societies of the state where they are
located. District and state-level co-op banks also report to NABARD (National Bank for
Agriculture and Development). However what seems to be everyone’s responsibility
turns out to be no one’s responsibility. Apart from RBI and NABARD even SEBI, with
whom Home Trade s registered as a broker, was unable to prevent the fraud.
The co-op banking system is inherently flawed; lax systems, lack of
accountability, and constant political interference make these banks a hothouse of
corruption. Even in this case, many facts raise an accusing finger towards the chairman of
NDCCB, Sunil Kedar. He dealt with Home Trade without the permission of NDCCB's
board of directors. He advanced Rs 30 crore to Osmanabad District Central Co-operative
Bank to invest in government securities through Home Trade. He loaned an additional Rs
20 crore to Euro Discovery Technology Ventures, Home Trade's holding company; the
collateral was Home Trade stock. It is quite possible that after all this, either something
soured between him and the Agarwal-Sheth duo, or he simply got cold feet.
Another point that needs a mention is that all Co-operative Banks that lost money
in this scam had contravened some of the RBI guidelines. They bought securities directly
from brokers in contravention of RBI regulations. There is also a stipulation about banks
not buying more than 5 per cent of their G-sec holdings through one broker. NDCCB
broke this rule.
We now come to Home Trade, whose initial listing application at the BSE was
rejected in 1999. This application was made after Agarwal bought Lloyd’s Brokerage Ltd
in December 1998 at a paltry Rs 1.5 per share. After changing its name to Euro Asian
Securities, it tried to make an offer for sale at Rs 50. When the BSE rejected its
application it got listed on the Pune Stock Exchange and promptly began to ramp up its
stock price. Between January and June 2000 Home Trade shares traded between Rs 600
and Rs 890 at Pune without any financials to back the price. Ever since Home Trade has
relentlessly worked at listing its shares on the BSE and the NSE. Insiders say that data
submitted to the two bourses at various times was so blatantly wrong and misleading, that
the bourse repeatedly tossed the document back to the promoters for further information.
The promoters and directors are themselves a confused mystery. Ketan Sheth, for
instance, is a broker who runs KSC Securities and is the main promoter of at least a
dozen others with the Gilt edge name (see this column last Sunday); one of these was
involved in the Nagpur Coop Bank case. Nandkishore Trivedi, another director at both
Ways India (Home Trade's associate company) and Home Trade, is also connected with
all other companies of the Gilt edge, Home Trade, EDTV clusters and then a few more.
Apart from these, the promoters of Home Trade seemed to have a bunch of
dotcoms all registered and ready to take advantage of and the worldwide mania for such
companies. These include (India) Ltd, which was formerly
Ltd, India Ltd which was formerly and was to be a
shopping mall on the Net. The dozen or so Gilt-edge companies were listed as part of the
Home Trade group. Buying Experience Ltd was incorporated in London to market
computer software and Euro Allied Ltd was registered in Hong Kong as an Investment
advisory company. Most of these companies had one thing in common — they had
almost no turnover and negligible operating costs. Home Trade itself was a stock broking
company but hardly had any trades. Its main business seemed to be selling shares of
group companies to other group companies and showing inflated profits. Of its Rs 67
crore revenues in 2000-01, over 99 per cent is through such trades at inflated prices.
RBI has barred co-operative banks from entering into deals with brokers. Now,
they can only trade with primary dealers or banks. And it has instituted an online trading
system that leaves no rooms for delivery-shenanigans of the kind Home Trade pulled. In
the new system the buyer, the seller, and the regulator (RBI) will be linked. The
immediacy (and transparency) of an online system will help. As will efforts by RBI to
educate smaller banks and provident funds about the finer aspects of trading in G-secs, it
is a rather technical area and does require some expertise.

Vikas Sharma