CAVEAT EMPTOR!

A Case of Non-Banking Finance Company

Team
SHIVAJI BHONSLE
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 Case Summary 4

CRB Capital Markets Limited

 One of the largest non banking finance companies
 The best finance company in terms of overall performance
 CARE4 A+ certified company for its fixed deposits
 A high growth company having a record thirty-seven fold increase in net worth in just three years
 Category I merchant banker

 Company 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.
 The Rise of CRBCM 5

 CRB started CRB Consultants Pvt Ltd in 1985

 Turned it into a public listed company in 1991 as CRB Capital Markets Limited - a NBFC
 First public issues of 45 MINR in 1992
 In 1993, it went for a rights – cum- public issue of 525 MINR and got licensed for mutual fund operations from SEBI
 In 1994, CRB group obtained BSE and NSE membership
 CARE gave A+ rating for fixed deposits
 Maiden mutual fund “Arihant Mangal” was launched, 2.29 BINR was mobilized against the target of 1.01 BINR
 Engaged Arthur Anderson Consulting Firm to evolve group Strategy.
 In 1995, Business India ranked CRBCM as best finance company in India
 The Fall of CRBCM 6

 SEBI noticed irregularities in ‘Arihant Mangal’ in 1995 and barred CRB group from floating new schemes
 In July 1996, RBI granted ‘in-principle’ license for the group to set up a commercial bank based on favorable 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 MINR/annum
 CRBCM entered an agreement with Mumbai main branch of SBI to encash interest warrants and refund orders in August.
 By Sep’96 CARE marginally downgraded the rating to ‘A.’
 The Fall of CRBCM 7

 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 license
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
 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 8

1. Window-dress the accounts and show consistent growth in net worth and net profits

2. Establish connections with powers-that-be and use money and political clout to circumvent
banking and commercial guidelines.
Violations and Exposure 9

Interest Fixed Deposit Mutual Fund

Debt holders
Warrants Holders Corpus
Fixed 2 BINR
Deposits 1.89 BINR 2.29 BINR

Inter Corporate
Banks Other Group Firms
Mutual Deposits
Funds 0.9 BINR 0.4BINR
1 BINR

Cooperative banks
0.5 BINR

Scams worth 12 BINR

 Emotional State of CRB 10

“My only passport in any place was money – nothing works in this country”

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.’
 SBI bank CA Firm 11
RBI Media

Political
CARE
friends Partners in
Crime

SEBI
CRB Friendly
bureaucrats

Caveat
Investors Emptor
 Emotional State of Investors 12

Carried Away by the public image of CRB driven by:

 CARE A+ rating
 Business India (Media) – best finance company in India
 RBI’s decision to give banking license
 Company’s promise of offering high incentives for fixed deposits
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How to eliminate dishonest behavior?

 Better Supervisory structure

 Better corporate governance mechanism
 Role of external auditors
 Better regulatory bodies independent of political / bureaucratic influence
 Higher penalty for violators
 Transparency of firm evaluation methodology
 Role of biased / paid media (?)