International Journal of Value-Based Management 15: 83–96, 2002.

83
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.

Caveat Emptor!
A Case of a Non-Banking Finance Company

S. ELANKUMARAN
Management Centre for Human Values, Indian Institute of Management Calcutta, Joka,
Diamond Harbour Road, P.O. Box 16757, P.O. Alipore, Calcutta 700 027, India

Abstract. It is a case of an Indian non-banking finance company started in 1991. The company
had a meteoric rise in a short span of six-seven years and a great fall leading to closing its
shutters down on 15 May 1997. The promoter CRB used money, connections with powers-
that-be and political clout to circumvent banking and commercial guidelines of the country
and took his company to a dizzy height only to head for a doom. In the process, thousands
of small investors and depositors were cheated and their savings vanished in thin air. Even
financial institutions lost several millions. This case gives a detailed account of the whole
drama wherein the roles played by different actors are depicted. The entire case is based on
press reports that appeared in Indian newspapers and magazines and offered to have value
judgments.

Keywords: credit rating, dishonest behaviour, net worth, regulator, small investors, unethical
practices

The backdrop

‘Shoot me! I’d rather die here than lose face in my town and be killed’ –
This was the voice of an anguished fixed deposit broker from Varanasi 1 to
the security guard sitting outside the closed headquarters of a company in
Mumbai. The broker Kumar – one of the hundreds in the country – had
mobilized 20 million Rs2 from more than 400 investors. According to Kumar,
his trust in the company, which offered high incentives for its fixed deposit
schemes, hinged on the fact that the Central Bank of the country, Reserve
Bank of India (RBI), had given the group a banking license as well as press
reports that the company was the best finance company in India. He was not
alone, many like him were fooled. In fact, the savings of thousands of small
investors and depositors had vanished into thin air. The more sophisticated
ones like State Bank of India (SBI), Bank of Baroda, Hinduja Finance, Reli-
ance Capital, IndusInd Bank and several Cooperative Banks in Gujarat 3 also
had lost several millions.
CRB Capital Markets Ltd. – one of the largest non banking finance com-
panies, the best finance company in terms of overall performance, CARE 4 A+
rated company for its fixed deposits, a high growth company having a record
84 S. ELANKUMARAN

thirty-seven fold increase in networth in just three years, Category I merchant

banker – suddenly collapsed and headed for a doom. The company had put its
shutters down on 15 May 1997. The promoter eloped with the booty boarding
a United Airlines flight for Hong Kong with his family members and close
associates a couple of days before. Yet another scam since liberalization.

The man – CRB

CRB was born on 15 June 1957 at Sujangarh in Rajasthan. After finishing

school (where he was a ‘naturally brilliant student,’ according to a company
brochure) he shifted to St. Xavier’s College, Calcutta for his graduation. He
then qualified as a Chartered Accountant, having done his articleship with
the reputed audit firm S. R. Batliboi & Co. Later in the early nineties, his
thesis on ‘The Role of Capital Markets in Economy – Global Perspective with
reference to India’ got him a doctorate from the Netherlands Open University.
CRB had carefully cultivated his image as a man of religion and char-
ity. Besides his business interests, he was patron of various religious and
charitable organizations of the Jain community as well as trustee of many
educational institutions. He also had been instrumental in setting up schools,
hospitals and computer centers in his native Sujangarh. It is now a bustling
industrial town and has, after Jaipur, the largest investor base in Rajasthan.

Meteoric rise

A soft-spoken, teetotaller, religious CRB first started his consultancy firm in

1985, CRB Consultants Pvt. Ltd. in Delhi. In 1991, he converted his company
into a public limited company and then renamed it CRB Capital Markets Lim-
ited (CRBCM), a non-banking financial company (NBFC). Prior to this CRB
Consultants Pvt. Ltd. had been approved as Category I Merchant Banker.
In 1992, CRBCM had its first public issue of 45 million Rs and also
obtained Over the Counter Exchange of India (OTCEI) dealership. In 1993
the company went for a rights-cum-public issue of 525 million Rs and got
licensed for mutual fund operations from the regulator of capital markets,
Securities Exchange Board of India (SEBI). CRB started a new company
‘CRB Asset Management Company’ (CRBAMC) in the same year highlight-
ing a proposed partnership with Boston based Keystone group. In 1994, the
CRB group obtained Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE) membership. Major things happened to the group in 1994.
CARE gave A+ rating for the fixed deposits in February; the group entered
a 50 : 50 stockbroking joint venture with Daewoo Securities and formed
 CAVEAT EMPTOR! 85

CRB Daewoo Securities; the maiden mutual fund ‘Arihant Mangal’ was
launched and 2.29 billion Rs was mobilized against the target of 1.01 billion.
Having expanded the group, CRB engaged multinational Arthur Anderson
Consulting Firm to evolve group strategy.
In 1995 CRBCM came out with another rights-cum-public issue wherein
Indian Overseas Bank, Bank of Rajasthan and Bank of India Mutual Fund
picked up firm allotment. SEBI noticed irregularities in ‘Arihant Mangal’
during May and barred CRB group from floating new schemes. SEBI also
informed the matter to RBI. In their 23 October 1995 issue ‘Business India’
ranked CRBCM as the best finance company in the country. The company
became one of the largest finance companies with a 37-fold increase in net
worth from 116.5 million Rs in March ’93 to 4.366 billion in 1996.
In July 1996, RBI granted ‘in-principle’ licence for the group to set up a
commercial bank based on favourable reports from SEBI and bankers of the
group. The group appointed MKS (formerly Chairman, SBI) as the Chairman
of the new bank ‘CRB Global Bank’ with a whopping pay packet of over
20 million Rs per annum. CRBCM entered an agreement with Mumbai main
branch of SBI to encash interest warrants and refund orders in August. By
September CARE marginally downgraded the rating to ‘A.’
CRBCM applied for registration with RBI as per RBI Amendment Act.
RBI inspected the books and learned irregularities in investments and put its
approval for bank ‘on hold.’ Ministry of Finance gave ‘tax-free’ benefit to
‘CRB Power Bond’ issue in March ’97. By April RBI revoked bank licence
and banned CRBCM from accepting fresh deposits. CARE downgraded its
rating to ‘C’ indicating that there is a likelihood of default in payment of
interest and principal and finally downgraded to ‘D’ its lowest category in
May. By then enough damage had taken place and on 15 May 1997 the group
closed its shutters.

Modus operandi

CRB’s modus operandi was: (i) window-dress the accounts and show con-
sistent growth in net worth and net profits; (ii) establish connections with
powers-that-be and use money and political clout to circumvent banking
and commercial guidelines. He was quite successful on both the counts and
reached the market with two successive rights-cum-public issues in less than
three years, got a licence from SEBI for a mutual fund, CARE A+ rating for
fixed deposits, and above all obtained ‘in-principle’ licence from RBI.
Armed with CARE A+ rating, ‘in-principle’ license from RBI and also
favorable press reports, CRB juiced the market, borrowed – in business par-
lance raised deposits – at between 24–32% a year. Brokers in Gujarat and
86 S. ELANKUMARAN

Mumbai were offered Mercedez & Maruti Esteem cars if they could manage
to cross the 100 million Rs mobilization mark. Thus by 1995–1996, CRBCM
had around hundred thousand depositors and investors and the company was
regarded as one of the largest NBFCs in the country. After the scam broke
out, the ambitious CRB told a newspaper that ‘the bubble had burst.’ 5

Violations and exposure

Business Today 6 (7–21 June 1997) analyzed the violations of CRB group
under three heads: Fixed Deposits, Interest Warrants and Mutual Funds.

Scam: Fixed Deposits

From the very beginning, CRBCM collected deposits without registering it-
self as an NBFC with the RBI, flouting the regulation that requires NBFCs
with a net worth of 5 million Rs and above to register themselves with the
apex bank. In fact, CRBCM met the criterion way back in 1991 when it
registered a net worth of 14.5 million Rs. Then, on 24 July 1996, the RBI
deregulated interest rates. Only those companies registered with the RBI, and
with a licence to deregulate their interest rates, could offer more than 15% on
their deposits. Thus, CRB had no option but to apply for registration, which it
eventually did on 24 October 1996. It was only then that the RBI discovered
that CRBCM had made inadequate provisions for its Non-Performing Assets
(NPAs). Against NPAs of 211 million Rs, CRBCM had provided for only
2.5 million Rs – instead of the stipulated amount of 30 million Rs.
Violating another law, according to an inspection report by RBI, the
company had invited deposits from the public while projecting itself as an
equipment leasing and hire purchase company. But the company’s major
business was investment and loans.

Scam: Interest Warrants

CRB, as well as other managers of the group, have also been accused of si-
phoning off 570 million Rs from the SBI under the garb of encashing interest
warrants and refund warrants of principal amounts. In August 1996, CRBCM
approached the main branch of the SBI in Mumbai to allow encashing interest
warrants issued by it through various branches of the bank. However, after
February 1997, CRB stopped providing the list of refund orders and interest
warrants to the bank, but continued issuing warrants, which were encashed.
Most of this money – about 570 million Rs – is said to have been withdrawn
by the CRBCM itself.
 CAVEAT EMPTOR! 87

Scam: Mutual Funds

In August 1994, Arihant Mangal CRBAMC’s maiden five-year close-ended

scheme mopped up 2.29 billion Rs against a target of 1.01 billion Rs. The
scheme has never disclosed its portfolio. It did come out with two annual
reports in March 1995 and September 1995, but contained just a series of
Net Asset Values (NAVs). Damningly, 80% of the fund’s investments were
made in just 65 companies; many of them associated with the group. Business
Today (ibid.) further reports that the substantial sums were routed through
various companies run by friends and relatives of CRB, before being parked
in CRBCM.
The total exposure in the scam was around 12 billion Rs. The major
losers are Fixed Deposit holders – 1.89 billion Rs (no guarantee of recov-
ery); Debenture holders – 2 billion Rs (no guarantee of recovery); Mutual
Fund Corpus – 2.29 billion Rs (remote chance of recovery); Inter Corporate
Deposits – 1 billion Rs (chance of recovery if they have assets); Banks –
900 million Rs (recovery if they have assets); Other group firms – 430 million
Rs and Cooperative Banks – 500 million Rs (part recovery).

Actions by regulators

RBI swiftly acted and sent a notice to CRB on 16 May 1997 giving three days
to appear before its officials for an enquiry. CRB failed to respond and RBI
promptly filed a winding up petition in Delhi High Court against CRBCM.
SBI filed a complaint with Central Bureau of Investigation (CBI) stating
that CRBCM defrauded the bank of 570 million Rs. CBI registered a case
against all parties involved in the scam. CRB’s passport was impounded and
alerts were made in all airports. SEBI cancelled the licenses of CRB group’s
merchant banking, stock broking and other outfits. Trading on CRB group’s
shares were also suspended and bank accounts were frozen. Investors formed
a forum in Mumbai and filed a petition in Mumbai High Court seeking equal
treatment of all creditors and depositors.
The Government appointed a liquidator and initiated the liquidation pro-
cess. The Ministry of Finance and the Prime Minister convened meetings of
concerned officials. CBI brought back CRB from Hong Kong, he was arrested
and remanded. After the arrest CRB said, ‘My only passport in any place was
money – nothing works in this country without money’ (Outlook,7 25 June
’97). Investigations are going on at various levels and CRB is in a dank CBI
cell with all his prayer books.
88 S. ELANKUMARAN

The sensitive press

The scam appeared on front-page headlines of almost all newspapers and

cover stories of magazines at least for a fortnight. The basic question was
raised; who is to be blamed for the fiasco: the regulators, the credit rating
agency or the company auditors? Various comments, observations and judge-
ments were passed. Almost all the press made critical remarks. Some of them
are:
• The maturity of the Indian Financial System is in a serious question.
Why didn’t anybody – the regulators, credit rating agencies or the
auditors – warn investors in time (Business World,8 7 June 1997)?
• The 12 billion Rs scam exposes the ineffectiveness of regulators and the
great risk small investors’ face (India Today,9 9 June 1997);
• It has almost become a rule for the guardians to wake up only after
the crime has been committed rather than take adequate safeguards to
deter such promoters from taking the small investors for a ride (The
Statesman,10 Calcutta Edition, 22 May 1997);
• Had CARE taken enough care to give prospective investors the cor-
rect status of the company much of the damage could be avoided (The
Statesman, ibid.).
Eminent personalities, political leaders and columnists also have raised vari-
ous questions on the fiasco. Mr Gurudas Dasgupta, M.P., in his article
‘Bhansali Fraud: History Repeats Itself’ (The Statesman, Calcutta Edition,
10 July 1997) vociferously lambastes:
The collapse of the entire regulatory mechanism of our liberalized fin-
ancial system enabling CRB to perpetrate another gigantic fraud looting
several millions of investors’ money, confirms yet again that Govern-
ment stubbornly refuse to learn. . . . Why the Reserve Bank of India,
SEBI, SBI and above all Ministry of Finance were again caught napping
while CRB went on with his looting spree is a question that must be
answered. . . . This is not just another story of brazen violations and
criminal activity cynically and systematically overlooked by SEBI and
RBI in collusion with auditors, manipulators and credit rating agencies
to help a dishonest business house defraud investors. It is also a case
of loot by people in high positions on terms which no longer occasion
surprise.

Some press reports did not spare the depositors and investors. They ques-
tioned the wisdom of the depositors and investors for getting carried away by
fancy returns and incentives. Business reporting was also criticized for too
 CAVEAT EMPTOR! 89

favorable reporting. In the Second Opinion column on ‘Skepticism as Virtue’

(The Economic Times, Calcutta Edition, 28 May 1997), Debashis Basu says:
. . . And what should your position be when you know that people rely
on you for information and action? What ought to be your attitude as
the regulator (SEBI, RBI, Exchanges), enforcer (IncomeTax, Enforce-
ment Directorate, Police), mediaperson, consumer, activist, credit rating
official, etc.?

Sadly, I have never come across anybody saying that in all these po-
sitions, skepticism is a virtue. Indeed, regulators always get praise for
being positive (in effect for accommodation and compromise). Media-
persons and activists who ask too many questions are singled out for
being ‘negative.’ In fact, in the remarkably free press that we have, the
most subtle and powerful kind of censorship is self-censorship and it
takes an interesting form: don’t be too negative.

The result: none of the business magazines and newspapers was able to
anticipate and write about the disaster that CRB Capital Markets was
headed for. They were not skeptical enough. The same thing happens
for the hundreds of falsely cheerful and positive pieces that appear on
various companies.

The lack of skepticism leads to bizarre results. Even in something as

neutral as a ranking exercise, business magazines end up with obviously
flawed lists. Two years ago, ‘Business India’ 11 magazine had figured
that CRB Capital Markets was among the top finance companies. This
magazine always wants to appear positive and has rarely exposed a
scam.

Ironically, the same magazine reported having exposed CRBCM scam in its
cover story of 2–15 June 1997 issue and on the link between the Chairman,
SEBI and CRB in its 28 July–10 August issue, conveniently forgetting its
top-notch ranking of the company some two years ago.

Serious lapses

The fiasco throws some serious questions:

• Why did RBI give the bank license to the group, when leading reputed
business houses were denied?
90 S. ELANKUMARAN

• If RBI knew something was wrong a good six months ago, why did it
not prevent the group from collecting fixed deposits till much later?
• Why didn’t CARE take all violations into account while assigning its
top-of-the line CARE A+ rating to CRBCM’s fixed deposit schemes
between February ’94 and September ’96? In September ’96 it down-
graded marginally to an ‘A’ rating. But it was only in April ’97, when
RBI banned CRB from accepting further deposits that CARE down-
graded the rating to ‘C’ and finally dropped its rating to ‘D’ in May.
Why did it happen so?
• Why did SEBI give a favourable report to RBI for the issue of banking
license, when it found out some irregularities in the group?
• How did the SBI Management allow the CRB group to encash the in-
terest warrants without any security or guarantee? It seems that the staff
at Mumbai main branch did detect the overdrawn amount to the extent
of 25 million Rs in February and Rs 200 million in March and promptly
alarmed the top management. Why did the SBI Management doze off
and not give instructions to stop honouring the interest warrants on time?
• Why did the official Chartered Accountants firm, the Calcutta based
Bhaya and Co., not detect the lapses while inspecting the books of
accounts of the group? How come the audit firm allowed to the most
criminal oversight relating to the matching of assets and liabilities?
• And finally, why did no one blow the whistle?

Defense

RBI’s Deputy Governor, Department of Supervision, Mr SPT, said that ‘in-

principle’ license was issued after obtaining favourable reports from SEBI
and bankers of CRB group.
RBI officials say till 27 March 1997 when the RBI Act was finally
amended after 3 years, it had no powers to inspect any NBFC unless it came
for registration. Even when it comes for registration the RBI could not scru-
tinize everything. Deputy Governor SPT says: ‘They could only look at the
liabilities, i.e., the deposits, and not the asset side.’ It could not check if there
were any assets at all against the money raised. By the time it did get the
powers it was too late (India Today, ibid.).
In response to the question why CARE did not take all violations into
account while assigning its rating Mr PMT, Managing Director of CARE
says:
Rating agencies have to perform within the constraints of the system
in which accounting disclosure standards are poor, audit quality is poor
 CAVEAT EMPTOR! 91

and information system is poor. The world over, rating firms rely on
audited statements, company management and other such sources for
their information.
CARE is promoted by Industrial Development Bank of India (IDBI) and the
rating team consisted of virtual who’s who of Indian business – SMD, former
Chairman, Hindustan Lever, MRM, former Executive Director of the Bombay
Stock Exchange, BR, Chairman of Institute of Certified Financial Analysts of
India and former Revenue Secretary NS. Though CARE defended its action,
there is a suspicion because the ‘A+’ rating was given despite the fact that the
company’s cash flow statement more than conclusively proved the liquidity
crisis.
SEBI could not give convincing defense for its action of giving a good-
character certificate to RBI about the group despite its earlier strictures on
the CRB mutual fund. SEBI’s letter of clearance did not reflect the gravity of
CRBAMC’s wrongdoing. A division chief of SEBI signed the letter to RBI
and it states:
The enquiry proceedings which were in process have been completed
with the direction that CRBAMC would not launch any new scheme till
20 June 1996, for which CRBAMC itself had earlier given an under-
taking to us. This was done because of violations of Regulations and
deficiencies found in the workings of the CRB Mutual Fund. It may
however be mentioned that the enquiry was conducted in a few months
after the launch of first scheme during which, according to the Fund,
the systems were not stabilized. It may further be added that the CRB
Mutual Fund is free to launch schemes from 1 July 1996, under the
provisions of the Regulations.
Why didn’t SEBI send RBI the full details on the extent of the violations
committed by CRBAMC rather than a bland letter that sounds more like
an apology for CRB? This question was raised and there is a feeling that
a detailed letter would have given RBI a better idea of what CRB was up to.
When asked why SEBI did not provide a more detailed reply, SEBI Chairman
said, ‘The RBI never asked for it. If they had asked for it, we would have
provided them with all the information that they needed.’ The Chairman’s
response does not sound credible and it seems he is too accommodating as
far as CRB is concerned. (Business India, ibid.).
SBI, in response to the scam, immediately suspended three officers for
the loss incurred. It seems the Chief General Manager, Mumbai asked all
SBI branches to honour CRB’s cheques. The SBI’s 130 branches in Mumbai
observed a total strike in protest against the suspension of the officers. Since
the case is with CBI the SBI Management is tight lipped.
92 S. ELANKUMARAN

Investigation

CBI registered a case against CRB and others who were associated with the
scam and investigating. It is examining the role of RBI, SEBI, SBI, CARE
and the auditors of the CRB group.
CBI is unwilling to accept the old excuse of ‘systems failure.’ It is virtually
convinced that without the covert support and connivance of responsible RBI
and SBI officers, and also of the finance ministry’s banking division, the CRB
group would not have been able to commit the crime. A senior CBI official
probing the case said:
The kind of illegal things that were allowed to happen with the full
knowledge of the regulatory authorities is simply incredible. All of them
knew that CRB was siphoning off public funds elsewhere. Yet they did
not stop it. It is a big conspiracy to cheat the public and financial insti-
tutions of their money. That none agreed to blow the whistle and apply
the rules have come as a big surprise. The net to cheat the public and
the institutions of their money was cast all over the country. Even now,
desperate attempts are being made to stall our efforts to know where all
the money has gone. And the tragedy is that senior bank officials are
involved in this desperate cover-up operation (The Statesman, Calcutta
Edition, 29 May 1997).

Investigations revealed that MKS, former Chairman, SBI is believed to have

masterminded the cheating of SBI. MKS had been appointed by CRB as
Chairman of the proposed banking venture.
It seems that RBI’s Department of Banking Operations and Development
had objected when CRBCM sought clearance to start banking operations and
also recorded the objections in a file. CBI is now trying to fix the respons-
ibility on the persons responsible for reversing the decision and the reasons
that prompted the reversal. Further CBI says another link that is sought to be
probed is with Bank of Baroda. It is alleged that CRBCM enjoyed a credit
limit of 300 million Rs from this Bank. The former Chairman and Managing
Director of Bank of Baroda, SPT, is now Deputy Governor of the RBI heading
the supervisory board.
CBI suspects that the bulk of money involved in the scam might have been
taken out illegally and is probing all the possibilities.

Confession

During interrogation CRB revealed that he had developed connections with

former Commerce Minister, Subramania Swamy, Rajasthan Chief Minister,
 CAVEAT EMPTOR! 93

Bhairon Singh Shekhawat, the then Uttar Pradesh Chief Minister Mayavati,
Orissa Chief Minister J. B. Patnaik and godman Chandraswami.
He admitted that he ‘threw money’ around to get his work done since he
was ‘neither born with the right connections nor did he have an impressive
personality.’ He told CBI that he wangled a banking license from the RBI
after the SEBI issued a clearance, largely due to the influence wielded by
Bhairon Singh Shekhawat, Rajasthan Chief Minister, Ghuman Mal Lodha,
Bharatiya Janata Party Member of Parliament from Pali, and Rajasthan. In
his statement, CRB claimed that once he sensed he might not be given a
license easily, he requested both Shekhawat and Lodha to put pressure on
DRM, Chairman SEBI, to issue a certificate clearing CRB group; and it was
free to launch new schemes from July 1996. Apparently, DRM complied and
an updated report was passed on to the RBI. CRB was given an ‘in principle’
license by SPT, Deputy Governor, RBI, in July 1996. Without specifically
naming politicians, CRB alleged that he used both money and political clout
in Mumbai to pressure SPT to grant him the licence.
Further, CRB told the CBI that he knows DRM pretty well and regularly
visited him at his home in Mumbai since they belonged to the same com-
munity. While CRB did not claim to have paid off DRM for any favors
granted, he admitted to having donated 0.7 million Rs to the Jaipur Foot
Foundation in Jaipur of which DRM is the Chairman. CRB named a host of
friendly bureaucrats, he claimed that he enjoyed a personal rapport with most
senior SEBI officials and that they ‘helped him’ regularly. He also alleged
that he regularly spent ‘a couple of hundred thousands on organizing foreign
travel tickets and providing chauffeur-driven cars to most senior bureaucrats
and politicians’ (Outlook, ibid.).

The scenario

It is learned that out of 40000 NBFCs operating in the country at present,

only about 2000 companies can meet the existing RBI norms. Sensing that it
is virtually not possible to control such a large number of NBFCs, RBI has
stipulated various conditions for NBFCs and tightened its noose. Some of the
conditions are:
• RBI has directed NBFCs to deposit higher amount of statutory liquidity
ratio (SLR) with commercial banks from 1 October 1997.
• RBI has empowered the Company Law Board (CLB) to order defaulting
NBFCs to refund money to investors. Now any investor who has depos-
ited money with an NBFC, which has defaulted in payment of principal,
interest, or both can file a petition with CLB for refund of money.
94 S. ELANKUMARAN

• RBI has denied new NBFCs access to public deposit during the first
two years of operations. The central bank will permit these companies
to raise deposits after two years only if it is satisfied about their track
record. For the first two years of operations, new companies will have
to rely completely on bank borrowings and their own capital. The idea
behind such a stipulation is that the central bank wants to be extremely
careful about letting unknown companies have access to public depos-
its. This stipulation will ensure that only the really good companies get
access to public deposits.
• RBI made credit rating compulsory for NBFCs to raise loans from
banks. It asked the banks to decide the limit based on rating accorded.
SEBI, on its part, will seek the approval of its board of directors for a
proposal to ensure that NBFCs segregate their merchant banking and hire
purchase/leasing activities. Going by the new proposal, an NBFC registered
with SEBI as a merchant-banker can only undertake activities in the capital
markets, both in the equity and money markets. It cannot carry out other activ-
ities such as hire purchase and leasing if it is registered as a merchant-banker
with SEBI.
The SEBI (Merchant Bankers) Regulations 1993 will have to be amended
for this. The regulator wants separate stand-alone companies to be set up for
this. These outfits would need a separate balance sheet and accounts, which
implies that merchant banking activities of the NBFCs can be carried out only
through a new company set up for that purpose.

Few recommendations

The CRB episode shows the need to create a better supervisory structure for
NBFCs including deposit insurance says former RBI Governor, S. Venkitara-
manan (The Economic Times, Calcutta Edition, 27 May 1997). He says that
the regulators and government would also do well to evolve better systems
of market intelligence and a quicker response to incipient crisis. He further
states: We have to evolve methods of avoiding the infliction of large losses on
depositors, who are swayed by signals of perceived regulatory approval and
media endorsement; we cannot merely tell depositors ‘Caveat Emptor or Let
the Buyer Beware.’
Another step suggested was dual credit rating. S. P. Narang, Secretary, In-
stitute of Company Secretaries of India, in the Debate Column (The Economic
Times, Calcutta Edition, 29 May 1997) says:
Dual credit rating be made mandatory in case the amount of deposits
raised exceed the prescribed limit. Both ratings should be properly dis-
 CAVEAT EMPTOR! 95

closed not by simply giving the information as A+, B, C, etc. but giving
the import thereof so as to communicate the meaning of the rating to the
lay investor.

Will these steps eliminate scams like CRB? P. K. Choudhury, Managing

Director, ICRA 12 in the same Column says:
The Regulators may frame and enforce rules and guidelines. They may
even penalize the violators of such rules and may also plug the loopholes
in the rules as may be detected over time. But there is no way that the
regulators can completely eliminate possibilities of any entity resorting
to unethical practices.

Samir K. Barua, Professor, Indian Institute of Management Ahemedabad,

also in the same column, says:
The only way scams can be eliminated is by eliminating dishonest
behaviour and that is an Utopia that no regulation can hope to achieve.

Epilogue

The investigation is still going on and it would take at least a couple of years
to conclude. One does not find any news item worth mentioning regarding
the episode in press. Meanwhile many regulations were passed to empower
regulators and weed out unethical operators. End of all, thousands of small
investors and depositors are helplessly waiting with the hope that they would
get back something someday.

Questions for discussion

(a) What emotional state influenced (i) CRB to indulge in unethical prac-
tices? (ii) the depositors to deposit their money with CRB’s firm? (iii) the
bureaucrats and other officials to join hands with CRB in his unethical
practices?
(b) How to eliminate/reduce such dishonest behaviour?

Notes
1. Varanasi, Mumbai, Calcutta and Sujangarh are places in India.
2. ‘Rs’ is an abbreviation of the Indian currency – Rupees.
96 S. ELANKUMARAN

3. Gujarat and Rajasthan are provinces (states) in India.

4. CARE stands for a credit rating agency ‘Credit Analysis & Research.’
5. Cited in Economic Times – an English business daily – dated 19th June 1997, p. 8.
6. ‘Business Today’ is an English fortnightly business magazine.
7. ‘Outlook’ is an English fortnightly magazine.
8. ‘Business World’ is an English business weekly.
9. ‘India Today’ is an English weekly.
10. ‘The Statesman’ is an English daily.
11. ‘Business India’ is an English fortnightly business magazine.
12. ICRA stands for a credit rating agency ‘Investments Credit Rating and Analysis.’

References
Economic Times (Calcutta Edition) – 21, 26–29 May, 13, 19, 23, 27 June and 4 November
1997.
The Statesman (Calcutta Edition) – 21–25, 27–31 May, 3–7, 9–14, 17 and 19 June 1997.
India Today, 9 June 1997.
Outlook, 25 June 1997.
Business Today, 7–21 June 1997.
Business World, 7 June 1997.
Business India, 2–15 June and 28 July–10 August 1997.