Financial Frauds in India in recent times

In this article, we will discuss in detail about three financial frauds that have happened in India in recent times –

1. The PMC Bank Scam, 2019

2. The Karvy Stock Broking Scandal, 2019

3. The Rotomac Pens Scam, 2018

CASE I – THE PMC BANK SCAM, 2019

HISTORY AND BACKGROUND:

• The Punjab and Maharashtra Co-Operative Bank (PMC Bank) is a multi state co-operative bank started in the year 1983.
• The bank has operations in Maharashtra, Goa, Karnataka, Delhi, Gujarat and Madhya Pradesh,
• It has 137 branches spread across the six states. It has its headquarters at Mumbai, about 100 branches in Maharashtra and its one of the most profitable co-operative banks in India.
• It is registered under the co-operative societies act and regulated by the Reserve Bank of India.

THE CRISES:

• On 24.09.2019, the Reserve Bank Of India placed curbs on the activities of the bank for six months.
• The amount which customer could withdraw were restricted to Rs. 1000/- at first and later to Rs.10,000/- followed by upto Rs.25000/- further followed by upto Rs.40,000/- and  Rs. 50,000/- respectively.
• The Enforcement Directorate has filed a money laundering case in the scam.

THE SCAM:

• Housing Development and Infrastructure Limited (HDIL) had exposure of advances of around Rs. 6500 Crores which comes to about 73% of the total advances given by the Bank. The advances given were not repaid.
• As per the allegations, the bank created fictitious accounts of companies which borrowed small sums of money and created fake reports to hide from the regulatory supervision.
• It is alleged that the HDIL promoters colluded with the bank management to draw loans from the bank and the bank officials did not classify these loans as Non Performing Assets despite non payments.
• The banks had presented false financial reports to hide the bad loans and alleged collusion with HDIL.

THE CONFESSION:

The now suspended Managing Director of the PMC Bank, Joy Thomas, accepted the wrongdoings through a confession letter addressed to RBI. In the five page letter, the Ex-MD revealed many shocking facts.

• Joy Thomas accepted giving loans to reality developer HDIL and its related entity to the tune of Rs. 6,500 Crores without informing the board of directors.
• The bank did not report the financial exposure to RBI for over Six Years.
• In the earlier years and in 2004, when the bank faced certain problems, the Wadhwan group infused funds in the banks and helped it come out of the crises.
• Within a small period, transactions of the bank with HDIL group rose to almost 60%. After changes in TDR policy, the HDIL group started facing liquidity crunch and started defaulting in dues.
• Generally, the banking transactions go through 5 layers of scrutiny check, however, bank management found ways to keep the loans away from being detected.
• The information was concealed from the Board of Directors, Auditors and Regulators due to fear of loss of reputation.
• The stressed legacy account belonging to this group were replaced with dummy accounts to match the outstanding balances in Balancesheet.
• The executives of the banks acted as per the instructions from the Management and they do not had any role in allowing the overdrawals.
• Also, most of the Board of Directors had no idea about the wrongdoings and they had no role in the happenings whatsoever.

THE INVESTIGATION AND ACTIONS:

• A case of forgery, cheating and criminal conspiracy was registered against the former bank management and promoters of HDIL on 30.09.2019.
• The bank’s former chairman Waryam Singh, managing director Joy Thomas along with HDIL’s executive chairman Rakesh Kumar Wadhawan and his son Sarang Wadhawan , have been named in the FIR.  Most of the people name in FIR have been arrested.
• The Mumbai High Court has appointed a three-member committee to oversee the sale of assets of Housing Development Infrastructure (HDIL) to pay the depositors. The court has said that if the proceeds from the sale were insufficient to pay the dues, the committee would identify and dispose of the properties of other companies owned or promoted by the Wadhawans which were mortgaged with the PMC Bank, but with paripassu charge of other financial institution

RECENT DEVELOPMENTS:

• RBI has extended the restrictions on the bank till 22.06.2020.
• Meanwhile the Supreme Court has stayed the Mumbai High Court Order to attach properties after appeal from RBI.
• The bank has been asked to deduct TDS on notional interest paid to depositors.

CONCLUSION:

• A huge amount of depositors amount is at stake.
• Government, Courts and authorities needs to take strict actions in this regard to repay back the amount and help the depositors come out of this crises.
• A strict investigation and action in this regard is required against the wrong doers.
• A strict advances lending and monitoring policy is required to be set up for future to stop banks and business groups from indulging in malpractices.

CASE II – THE KARVY STOCK BROKING SCANDAL,2019 

HISTORY AND BACKGROUND:

• Karvy, established in the year 1983, is a financial services group involved in activities like equities, commodities trading, depository and wealth management services.
• It has its headquarters in India and Branch offices spread across India. It also has branch offices outside India in Bahrain, Dubai, Malaysia, Philippines and USA.
• The group has around 900 offices spread across boundaries and around 30,000 employees.
• After starting in stock broking and advisory services, the group expanded in other financial service areas.

THE SCANDAL:

• Karvy stock broking, the stock broking firm has around 12 lakhs clients having demat and broking account who buy and sale shares through Karvy and the shares are deposited in the demat account.
• When an individual opens a stock broking account, he gives a Power of Attorney to the broker to allow them to debit the demat account to effect the transfer of stocks.
• Karvy created a demat account in its own name and used the power of attorney of individuals to transfer Securities to their own account instead of clients account whenever clients bought them.
• Of the securities so accumulated in Karvy’s demat account worth around Rs. 2,300 Crores were pledged for loans with HDFC Bank, ICICI bank, Bajaj Finance and Indusind Bank. The banks took the securities as collateral and handed over loans to the firm.
• Karvy Stock broking had also given an undertaking to the banks that securities pledged belong to themselves and not clients.
• The Karvy stock broking had transferred amount around Rs. 1,096 Crores to group real estate entity Karvy Reality.

ACTIONS TAKEN:

• The Securities and Exchange Board of India has banned Karvy stock broking from taking clients and executing trades.
• The National Stock Exchange and Bombay Stock Exchange have suspended the broking membership of Karvy.
• Out of the around 95,000 clients affected, securities of majority of depositors have been transferred to their respective accounts.
• Karvy had appealed to Securities Appellate Tribunal against the decisions of SEBI and NSE which were later on dismissed in an interim order.

ADVISORY FOR THE FUTURE:

The National Stock Exchange has issued an 11 points advisory to the clients as follows –

• Ensure that pay-out of funds/securities is received in your account within 1 working day from the date of pay-out.
• Be careful while executing the PoA (Power of Attorney) – specify all the rights that the stock broker can exercise and timeframe for which PoA is valid. It may be noted that PoA is not a mandatory requirement as per SEBI / Exchanges.
•  Register for online applications viz Speed-e and Easiest provided by Depositories for online delivery of securities as an alternative to PoA.
• Ensure that you receive Contract Notes within 24 hours of your trades and Statement of Account at least once in a quarter from your Stock Broker.
• Please note that securities provided by you towards margin are not permitted to be pledged by your Stock Broker for raising funds.
• If you have opted for running account, please ensure that the stock broker settles your account regularly and in any case not later than 90 days (or 30 days if you have opted for 30 days settlement).
•  Do not keep funds and securities idle with the Stock Broker.
• Regularly login into your account to verify balances and verify the demat statement received from depositories for correctness.
• Check messages sent by Exchanges on a monthly basis regarding funds and securities balances reported by the trading member and immediately raise a concern if you notice a discrepancy.
• Always keep your contact details viz Mobile number / Email ID updated with the stock broker. You may take up the matter with Stock Broker / Exchange if you are not receiving the messages from Exchange / Depositories regularly.
•  If you observe any discrepancies in your account or settlements, immediately take up the same with your stock broker and if the Stock Broker does not respond, with the Exchange/Depositories.

CASE III – THE ROTOMAC PENS SCAM, 2018  

BACKGROUND AND HISTORY:

• Rotomac Global Private Limited was incorporated in the year 1992.
• Formerly, the company was known as Rotomac Pens Private Limited, a project of the Vikram Kothari Enterprises.
• The project was set up with the objective to provide good quality and economically priced ball pens.
• It is registered at Registrar of Companies, Kanpur, Uttar Pradesh.
• Having Exports in more than 50 Countries, Rotomac Pens is one of the best pen producing and exports company.

THE SCAM:

• The company had allegedly taken loans from a consortium of 7 banks namely – Bank Of India, Bank Of Maharashtra, Indian Overseas Bank, Union Bank Of India, Allahabad Bank, Oriental Bank Of Commerce and Bank of Baroda aggregating to Rs. 2,919 Crores.
• The total outstanding amount along with interest come to Rs. 3,695 Crores.
• It is alleged that credits sanctioned for certain export orders were diverted to different offshore companies and later the money was remitted back into the company without any export order being executed.
• Money disbursed by bank for exports were not used for exports and no export order was executed leading to misappropriation of funds, criminal breach of trust and violation of FEMA guidelines.
• It is alleged that Rotomac was working for interest rate differential in local and foreign currency and even fake documents were submitted to induce banks to lend money.
• It is also alleged that most of the transactions were done with limited number of buyers, sister companies and sellers and no genuine business was actually done.
• It is alleged that the funds obtained from bank were laundered and proceeds were subsequently used for creating illegal assets and black money.

EARLIER SIGNS:

• The company’s account was declared non performing in October 2015, after defaulting in loan repayments.
• The forensic audit arranged by consortium leader Bank Of India highlighted certain irregularities on part of the company.
• Bank Of Baroda after an internal investigation to check for fraud and detecting fraudulent activities, reported them to the Reserve Bank of India in December 2017 and lodged an FIR with CBI.

ACTIONS, INVESTIGATIONS AND RECOVERY:

• The CBI had registered a criminal case against Rotomac Global Pvt. Ltd., it director Vikram Kothari, wife Sadhana Kothari, Son Rahul Kothari and Bank Officials.
• The Enforcement Directorate had registered a money laundering case against the accused.
• The Income Tax Department had attached bank Accounts in relation to tax evasion probe in the case.
• Considering the Loan Accounts being NPA, banks had made 100% provisioning against the advances.
• Dues are under recovery as per provisions of SARFAESI and filing suits at debt recovery tribunals.
• An insolvency petition against the company is also filed with National Company Law Tribunal.
• The probes and actions are underway.

CONCLUSIONS:

• A detailed scrutiny and prompt reporting to RBI needs to be done while granting and after granting loans to big business houses considering the number of defaults being done in recent times.
• Many small and needy businesses are denied minimum amount of loans by Banks owing to their inability to repay back loans. On the other hand, huge amount of loans are given to Big business houses who later on do not pay them back and cause huge amount of losses to banks.
• A proper policy in this regard needs to be made to maintain proper flow of money from banking system into the economy. The Banks needs to take appropriate measures at individual and system level to reduce defaults by customers especially the customers availing huge amount of advances.

Hope You found the article helpful.

(The author is a Chartered Accountant and can be reached at [email protected])