Ethical Issues in

Management- Individual
Assignment

Topic: Mis-selling by Financial

Institutions
Name: Rajarshi Roy Choudhury
Roll No.- D010
SAP ID: 80511020172

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HSBC duped Suchitra Krishnamoorthi

Ms Suchitra Krishnamoorthi, an eminent singer and actor, was deceived by

HSBC Bank for over five years by promising an extravagant assured return of
24% from mutual funds and insurance. The modus operandi for HSBC in this
case had been an amalgamation of toxic churning of the portfolio management
system (2% entry load on every purchase made by it on behalf of client),
insurance products promising 24% returns, insisting on her taking a loan instead
of withdrawing funds without even disclosing that the client was entitled for a
smart loan.
Upon analyzing her mutual fund transactions, it was found that HSBC Bank had
indulged in large scale malpractices:

 Her mutual fund portfolio was subjected to continuous flux resulting in

high transaction costs in the form of entry loads and exit loads. While
several transactions led to huge losses for her, HSBC gained through
commissions.

 Out of the 75 transactions made, nearly 60% of the transactions were in

short duration equity schemes of less than one year. Her investments were
made in schemes like HSBC India Opportunity Fund and HSBC Mid-cap
Equity Fund, both of which have been underperformers. Apart from
these, majority of the investments were made in balanced schemes of
HDFC Mutual Fund, ICICI Mutual Fund and Sundaram Mutual Fund.

 The worst part of the transactions came around the market peak in
November 2007 where nearly Rs3 crore was invested across five schemes
on a single day which included over Rs1.67 crore invested in three sector
schemes—ICICI Prudential Infrastructure Fund, Sundaram CAPEX
Opportunities and Reliance Diversified Power Sector. Nearly Rs50 lakh
was invested in Sundaram CAPEX Opportunities which has a current
corpus Rs200 crore.

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  The investments from all sector schemes were withdrawn between June
and August 2010 at a loss of nearly Rs40 lakh, almost half her initial
investment. The schemes from ICICI Mutual Fund and Sundaram Mutual
Fund went down by nearly 50%. The other schemes were also withdrawn
at a value 15%-30% lower resulting in a total loss of Rs86 lakh. These
schemes included JP Morgan India Equity Fund (a poorly-performing
scheme) and IDFC Premier Equity Fund.

 Surprisingly, in the whole portfolio there was not a single debt scheme
and just one liquid scheme— HSBC Cash Fund. Ironically, commissions
paid on debt schemes and liquid schemes are much lower.

 Ms Krishnamoorthi claimed an entry load amounting to over Rs29 lakh

was deducted from her investments. If the bank had opted to only invest
her amount of Rs3.60 crore in performing equity schemes for the long
term, without any further buying or selling, the entry load of 2% at that
time would have worked out to just Rs7.20 lakh.

The end result after five years was Rs83 lakh—direct loss from investment,
about Rs28 lakhin commission to HSBC, Rs8 lakh (50% of investment) lost
from an insurance policy, Rs10lakh (again, 50% of investment) valuation
decline in insurance policy still in force, Rs4.5lakh tax paid on redemption of
short-term mutual funds (including Rs1.85 lakh penalty to the Income Tax
department due to non-disclosure of gain by HSBC to the client) and Rs58 lakh
interest on home loan earned by the bank. When Ms Krishnamoorthi wished to
surrender her insurance policies, HSBC refused to act for her by contending that
they no longer had any tie-up with Tata AIG and that it was not their business to
get client’s money back that they had recommended in the first place.

StakeHolders:
 HSBC Bank- As an eminent financial institution their
responsibility was to provide excellent service to the customer.
Instead they duped the customer eventually leading to the loss of
their reputation.
 Suchitra Krishnamoorthi- She was lured by the extravagant
returns assured by her banker as a result of which she suffered
huge financial losses.

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Core Ethical Issues in the case:
It is a typical example of mis-selling and cheating customers, by assuring them
of excessive returns. I would like to examine it from the viewpoint of code of
ethics, and would really like to apply positive moral frameworks for the
evaluation of the same:

 Individualism- The indispensable intention of the individualistic ethical

viewpoint is that it is the responsibility of the business to maximize its
profits, and all actions must be taken to reach that end goal, provided it is
within the legal and ethical frameworks. Applying the Individualism
approach it can be stated that the actions of the HSBC Bank was a
clearcut violation of the individualism approach as it maximized it’s
profits by resorting to unethical means. The Bank earned handsome
revenue through commissions by constantly switching the money of the
customer, Suchitra Krisnamoorthi from one short duration mutual fund
scheme to another while the customer suffered immeasurable financial
losses due to the entry and exit loads of the various mutual fund schemes.
Whenever she complained of losses in her portfolio she was informed by
the Bank authorities that the concerned relationship manager had been
sacked and the Bank promised to make up her losses which never
happened.

 Utilitarianism- It states that an action is right if and only if it produces

the greatest balance of pleasure over pain for everyone. The four distinct
components of the Utilitarianism theory are: Consequentialism,
Hedonism, Maximalism and Universalism.
According to the above mentioned definition, the actions of the HSBC
Bank was unethical and it violated the Utilitarianism approach. The Bank
earned profits through commissions by constantly shifting the money of
the customer, Suchitra Krisnamoorthi from one short duration mutual
fund scheme to another while the customer suffered immeasurable
financial losses due to the entry and exit loads of the various mutual fund
schemes.The actions of the HSBC Bank did not prduce the maximum
benefit for all the concerned stakeholders.

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 Virtue Theory- Virtue theory encompasses four main virtues: Courage,
Honesty, Temperance and Justice. Courage is the ability to defend what
one thinks is ethical and stand in support of that irrespective of the
circumstances. HSBC Bank committed an ethical blunder by deciding to
deceive their customer Suchitra Krishnamoorthi. However no one
concerned with the above mentioned case did have the courage to raise
his or her voice against the malpractices done by the Bank.
Honesty means not to withhold any information and reflecting the truth.
The Bank earned handsome revenue through commissions by constantly
switching the money of the customer, Suchitra Krisnamoorthi from one
short duration mutual fund scheme to another while the customer suffered
immeasurable financial losses due to the entry and exit loads of the
various mutual fund schemes.Whenever she complained of losses in her
portfolio she was informed by the Bank authorities that the concerned
relationship manager had been sacked and the Bank promised to make up
her losses which never happened. The Bank hid the truth from the
customer and earned money through dishonesty.
Temperance refers to the "rational presuppositions and desires" a
business firm possesses. HSBC did not expect the customer to enquire
into the financial losses suffered by her and had thought of hiding the
facts from the customer perpetually.
Justice includes "hard work, good ideas, fair practices" and more. HSBC
resorted to all kinds of malpractices and misused the customer’s money.
HSBC earned profits at the cost of the customer’s money. Referring to
the data given in the above mentioned case it can be concluded that the
HSBC Bank lacked all of the above mentioned virtues and hence their
actions were unethical according to the Virtue Theory.

My Personal Take on it

The undesirable situation of Suchitra Krishnamoorthi suffering huge

financial losses and loss of reputation of HSBC Bank could have been
avoided if the Bank had not compromised Business Ethics for the sake of
earning profits. The concerned Relationship Manager should have
advised the customer as to what would be the best investment decision for
her instead of cheating the customer by assuring her extravagant returns.

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 When the customer started suffering Financial losses, she wanted to know
the reason and she had the full right to know as to why her portfolio was
suffering losses. The Bank should have informed the customer the true
reason of the losses instead of trying to hide the truth and should have
taken the necessary steps to rectify the mistake. But HSBC Bank always
gave the customer false assurance by stating that the concerned
Relationship Manager had been terminated and the Bank would make up
for the losses. Eventually the customer Suchitra Krishnamoorthi was
forced to drag the Bank to the court which led to the financial and
reputational loss of the Bank.

References:

 https://www.moneylife.in/article/hsbc-loots-suchitra-krishnamoorthi-after-
big-promises-of-24-percentage-returns/24975.html

 https://www.moneylife.in/article/hsbc-agrees-to-compensate-suchitra-
krishnamoorthy/36707.html

 Ethics and the Conduct of Business by John R.Boatright, Jeffrey D.Smith and
Bibhu Prasan Patra

Plagiarism Report

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