The CRB Scam

Details

Themes: Corporate scams / Controversies
Period : 1993 - 1997
Organization : CRB Group / SEBI
Pub Date : 2002
Countries : India
Industry : Financial Services

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Case Code : FINC008
Case Length : 09 Pages
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The Modus Operandi

Bhansali was reported to have specialized in setting up dummy investment companies. He used to sell these dummy companies to buyers. He capitalized on the 1985 boom in leasing companies to become cash rich. He had established good contacts in the Registrar of Companies and the Controller of Capital Issues offices. He registered companies with practically no equity and then stage-managed the dummy company's maiden public issue with a few hundred investors, largely from Calcutta's close knit Marwari Jain community. Having had a company listed on the stock exchange, Bhansali then sold it for a profit to businessmen who needed dummy public limited companies in a hurry.

Bhansali used his own money to rig share prices in order to raise more money from the markets in two ways. Firstly, he bought his own stock through private finance companies owned by him. Secondly, he used his other public companies to buy into each other as cross-holdings. For instance, 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.

CRB Share Custodian invested Rs 15 crore into CRB Capital Markets, which in turn invested Rs 17 crore in CRB Mutual Funds. The latter held 24 lakh shares of CRB Corporation, which again had a Rs16 crore investment in CRB Capital Markets.

This way, Bhansali managed to keep the share prices of CRB companies artificially inflated. Also, he was able to post handsome profits for group companies, though he never marked its investments to the market. CRB Caps reported that the market value of its investments rose from Rs 76 crore to Rs 109 crore in 1995-96. Also, CRB Corporation's income more than doubled between 1994 and 1996. Analysts however said that the actual worth of Bhansali's companies was much below what was stated, considering that most of them were bad stocks.

Sources within the company revealed that Bhansali invested in three classes of companies: his own privately owned companies, private companies owned by his friends and those on the boards of his companies, and many small companies whose issues were managed by CRB Capital, but which could not get full subscription. Many of these companies were the ones Bhansali invested in to generate paper profits for the group.

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. As per this deal, Bhansali sold the holdings at a higher price, promising to buy it back after a year's time at higher price. The money generated thus was shown as profits in the books of CRB Caps or CRB Corporation as profits from sale of investment. This procedure was repeated over and over again, keeping the books of the companies artificially inflated. The higher profits reflected in the share price continuing to remain high, which in turn meant that raising money from the public in the future was easier. The company also could manage to get higher credit ratings, ensuring a steady fixed deposit and bank credit inflow. For the other companies involved, the benefit was in form of the IPO price going up on the bourses.

This financial wizardry in the books was made possible with the help of Bhansali's trusted firms of auditors, D.P. Bhaiya & Co and, Jain & Swaika - both old friends from Calcutta. 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.'

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