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 Systemic ROT

The collapse of the CRB group seemed to be a fraud allowed by supervisors despite the regulations in place. The lack of clear communication channels between the banks, RBI and the government seemed to have worked to Bhansali's advantage to a great extent. Frequent clashes occurred between RBI and SEBI in the media, with both of them trying to prove how the other was responsible for not acting early enough.

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. The bank further claimed that the powers were granted only in March 1997, when the RBI Act of 1934 was amended to include specific provisions for the purpose. The bank also stated that it had begun to examine the liabilities and not the assets.

However, media reports were quick to refute RBI's claims. A Business India report claimed that the bank, contrary to the views of its management, 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.

While SEBI gave a status report to RBI on CRB's mutual fund and broking businesses mentioning the irregularities found, RBI went ahead with its approval of CRB's banking venture as the irregularities pertained to the mutual fund business only. SEBI also claimed that since it had not passed any judgment on the group as a whole, it could not be blamed.

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. In December 1994, SEBI initiated a routine investigation to examine the extent to which the company complied with the SEBI (Mutual Fund) Regulations, 1993. The task was entrusted to M.P. Chitale & Co, a firm of chartered accountants, which produced the Chitale Report in January 1995, wherein severe irregularities were found. Though an enquiry was conducted by SEBI, CRBMF was eventually punished with only a nine-month retrospective ban to approach the markets for more funds. Within a few days after the CRBMF suspension period ended, Bhansali secured the banking license from RBI. This raised questions as to why SEBI did not send the full details on the extent of the violations committed by CRB to RBI. Reacting to this, SEBI chief Mehta said, "The RBI never asked for it."

Despite SEBI's intimation in December 1995 regarding the CRBMF problems, the RBI did not investigate into the company's activities. In October 1996, the Tourism Finance Corporation of India (TFCI) lodged a complaint against with the RBI CRB Caps claiming defaults on loan repayments. RBI first issued CRB an interim show-cause notice on why it should not be banned from accepting fixed deposits in November 1996. The inspection took two months to complete. In February 1997, a final show cause notice was issued, which took two more months to go through the legal process, during which time CRB collected a further Rs 20 crore in fixed deposits. Finally, after the SBI complaints, RBI issued a ban on collection of fixed deposits by CRB in April 1997. It took RBI six weeks to issue the winding-up notice and appoint a liquidator. During this period, 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.

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