Caveat Emptor Case Study

CRB – Chartered Accountant – started CRB Consultants Pvt. Ltd. In 1985 in Delhi
1991 – Converted it to a Public Company – Renamed it to CRB Capital Markets Ltd. (CRBCM)
1992 – First Public issue and OTC dealership
1993 – First rights issue and got mutual fund operations license – Opened CRB Asset
Management Company
1994 – CARE Ratings gave an A+ rating (Highest rating) – formed a mutual fund (Arihant
Mangal)
1995 – Came out with another Rights issue – SEBI noticed irregularities in Arihant Mangal
1995 – Business India ranked CRBCM as the best finance company
1996 – RBI gave ‘in-principle’ license to operate as a bank based on favorable reports from
SEBI – appointed former SBI chairman of the banking operations – agreement with SBI
Mumbai branch to encash interest warrants – CARE downgraded rating to A
1997 – RBI kept the Banking License on hold die to irregularities – Later revoked the license
– CARE downgraded the rating to D – CRBCM liquidated.

Violations

1) FD – Did not register with RBI even after crossing the threshold 5 million net worth
limit since inception in 1991. Only registered with RBI in 1996 to take advantage of
interest rates deregulation – RBI discovered inadequate provisions for NPA – invited
deposits projecting itself as a leasing company.
2) Encashing interest warrants
3) Mutual Funds – Portfolio of Arihant Mangal never disclosed – investments were
made in associated companies.

Regulators (RBI, SEBI and Govt.) reaction was reactive instead of being proactive. BI took
charge of the case.

Parties in question

RBI, SEBI, MoF, Press, Auditors, Business Magazines, Rating Agency, Govt., Banks

RBI – gave banking license in-principle

SEBI – gave favorable report for banking license upon political pressure
Govt. – CM and other political leaders involved
Banks – Current and Ex bank chariman involved
Press – Always provided positive outlook
Auditors – did not present true and fair opinion
Rating – rated without in-depth analysis

New provisions

1) Higher SLR requirement for NBFC

2) CLB empowered to return defaulted money to investors
3) New NBFCs have no access to public for 1st 2 years of operation
4) Credit rating compulsory for raising loans for NBFC
5) NBFCs need to segregate their Merchant Banking division from Hire Purchase and
Leasing division.
6) Dual credit rating made mandatory and detailed validation of a rating.
7)