Business Government and Environment

The CRB (Chain Roop Bhansali ) Scam

CONTENTS
Abstract.....PAGE 3 The Doomed Depositors...PAGE 3 4 The Man & the Mess....PAGE 4 5 The Modus Operandi... PAGE 5 6 Defrauding the SBI...PAGE 6 7 The Systemic Rot......PAGE 8 The Aftermath...........PAGE 9

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Abstract
The case 'The CRB Scam' is intended to give a detailed insight into the frauds committed by the CRB group of companies. The case examines how the CRB group was able to defraud the investors and the regulatory authorities with ease. The role of RBI and SBI is also explored. The case is so structured as to enable students to understand the way the CRB group of companies defrauded the investors. The case is designed to expose students to the nature and extent of scams in the financial sector and the modus operandi to study the role and responsibilities of the regulatory authorities in the Indian financial sector and a critical evaluation of their performance to study the consequences of the scam.

The Doomed Depositors

May 18, 1997 - hundreds of angry, frustrated and scared people stood outside the Reserve Bank of India's (RBI) Mumbai headquarters under the scorching sun. They were waiting for Chain
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Roop Bhansali (Bhansali), the head of the CRB Group of companies to arrive. Three days earlier the RBI had given Bhansali 72 hours to come up with a plan to repay his liabilities following over 400 complaints from depositors in his company's financial schemes. Most top officials of CRB were untraceable from the second week of May itself. The Central Bureau of Investigation (CBI) locked and sealed the offices of the CRB Group and arrested six persons, including four directors (two from Bikaner and two from Mumbai) of the satellite companies of the group, a financial controller in Mumbai and a relative and close associate of Bhansali in Delhi. The CBI also conducted simultaneous searches at 16 places in Mumbai, three in New Delhi, one each in Chennai and Ahmedabad and two places each in Calcutta, Jhunjunu, Sujangarh and Bikaner. The CBI froze the bank accounts of the group companies and seized incriminating files and other documents from the residence of the vice-president of the CRB group in Mumbai. Following rumors that Bhansali had fled India and was hiding in Hong Kong or Canada, the CBI sought Interpol's assistance to trace his whereabouts. RBI filed a winding-up petition claiming that the continuance of the CRB Group was not in the interest of the public and depositors. The order prohibited CRB from selling, transferring, mortgaging or dealing in any manner with its assets and from accepting public deposits. In response, Bhansali sent a letter to the RBI. Though it was not signed by him, the letter said that the RBI order had led to the deterioration of the company's financial position. It added that the company was facing tremendous problems with payments to fixed depositors. The letter further said that 'we have, also expressed that in view of the precarious situation which is fast going out of our control, before it becomes unmanageable, our case should be considered sympathetically.' This letter led the investors to believe that Bhansali would come out of hiding and work out a way to get out of the mess.

However, Bhansali did not show up. With the expiry of the RBI deadline, the CRB Group collapsed, shattering the dreams of thousands of investors across the country.

The Man and The Mess

Born in a jute trader's house in Calcutta, Bhansali was a studious person. After obtaining a degree in commerce, Bhansali completed Chartered Accountancy in 1980. In the same year, he started a financial consultancy firm, CRB Consultancy. Through Bhansali's personal contacts, CRB Consultancy soon managed to secure the business of providing issue management services to a few well-known companies in Calcutta. Over the years, Bhansali acquired other degrees as well including ACS, Ph.D., MIIA (US) and a diploma in Journalism.
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Though he made a lot of money, Bhansali found it difficult to find recognition in Calcutta. He then moved to New Delhi to join one of the country's leading registrars of companies. However when Bhansali was caught short-charging the registrar's clients, he had to leave. Bhansali then established 'CRB Consultants,' a private limited company in New Delhi in 1985. In 1992, the name of the company was changed to CRB Capital Markets (CRB Caps) and it was converted into a public limited company. The company offered various services including merchant banking, leasing and hire purchase, bill discounting and corporate funds management, fixed deposit and resources mobilization, mutual funds and asset management, international finance and forex operations. CRB Caps was also very active in stock-broking having a card both on the BSE and the NSE. The company raised over Rs 176 crore from the public by January 1995. The A+ rating given by CARE and upfront cash incentives of 7-10% attracted investors in hordes to Bhansali's schemes. Bhansali's connections with religious leaders and political parties also helped in attracting investors. Another CRB company, CRB Corporation Ltd., (originally set up as a granite manufacturing company, its activities veered into finance later), raised another Rs 84 crore through three public issues between May 1993 and December 1995. CRB Share Custodial Services raised another Rs 100 crore in January 1995. In August 1994, Bhansali launched CRB Mutual Funds (CRBMF) which raised Rs 230 crore from the market through its Arihant Mangal Growth Scheme. Another Rs 180 crore was raised from investors through fixed deposits. Bhansali's empire soon flourished with the total income increasing from Rs 1.2 crore in 1991 to Rs 103 crore in 1995. Leasing and hire purchase, one of the group's thrust areas, shot up from a paltry Rs 2 lakh in 1991 to Rs 16 crore in September 1994. Media analysts pointed out that the group's global outlook and timely foreign collaborations were responsible for its success. CRBs joint ventures with Daewoo Securities and Keystone Group met with reasonable success. Sid Khanna, managing partner, Andersen Consulting, who had been advising CRB on group strategy opined that Bhansali had an educated and pragmatic view of globalization. In the mid 1990s, Bhansali had even published a booklet on himself, extolling his virtues and achievements titled 'Dr C.R. Bhansali - Making The Difference.' Even at this juncture, media reports claimed that CRB had used many not-so-savvy methods to achieve its ends. Questions were raised when CRB Caps' net worth went up from Rs 2 crore in 1992 to Rs 430 crore in 1996. Given the company's small scale of operations, this phenomenal growth was eyed with suspicion. In mid 1996, reports regarding the frauds being committed by the CRB group began appearing in the media. The mass gathering in front of RBI in May 1997 was the first major manifestation of the 'hate-wave' against CRB. The drama took a new turn whelm the CBI made arrangements to bring Bhansali back to India after informal negotiations with him and Hong Kong government. An FIR was filed against CRB as per Section 120 B, read with Section 420 of the Indian Penal Code (IPC) and Section 13(2)
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read with Section 13(1)D of the Prevention of Corruption Act (PCA). Bhansali was charged with fraud, cheating and siphoning off of funds from SBI. Bhansali was arrested as soon as he landed in Delhi. Bhansali's advocate however maintained that his client had surrendered himself to CBI officials 'as soon as he came to know that he was embroiled in an alleged case of fraud by the company, which was being investigated by the CBI. He also claimed that Bhansali 'did not flee the country' but was on a business trip to Hong Kong and had informed his whereabouts to a friend in Delhi, who later informed the CBI. Bhansali however maintained that he was falsely implicated and said that investigations should be properly done so that he did not become the scapegoat.

The Modus Operandi

Bhansali was reported to have specialized in setting up dummy investment companies. He used to sell these dummy companies to buyers. He capitalized on the 1985 boom in leasing companies to become cash rich. He had established good contacts in the Registrar of Companies and the Controller of Capital Issues offices. He registered companies with practically no equity and then stage-managed the dummy company's maiden public issue with a few hundred investors, largely from Calcutta's close knit Marwari Jain community. Having had a company listed on the stock exchange, Bhansali then sold it for a profit to businessmen who needed dummy public limited companies in a hurry. Bhansali used his own money to rig share prices in order to raise more money from the markets in two ways. Firstly, he bought his own stock through private finance companies owned by him. Secondly, he used his other public companies to buy into each other as cross-holdings. For instance, both CRB Capital Markets and CRB Share Custodian Services featured in the list of top 10 companies in which CRB Mutual Funds invested in 1994-95. CRB Share Custodian invested Rs 15 crore into CRB Capital Markets, which in turn invested Rs 17 crore in CRB Mutual Funds. The latter held 24 lakh shares of CRB Corporation, which again had a Rs16 crore investment in CRB Capital Markets. This way, Bhansali managed to keep the share prices of CRB companies artificially inflated. Also, he was able to post handsome profits for group companies, though he never marked its investments to the market. CRB Caps reported that the market value of its investments rose from Rs 76 crore to Rs 109 crore in 1995-96. Also, CRB Corporation's income more than doubled between 1994 and 1996. Analysts however said that the actual worth of Bhansali's companies was much below what was stated, considering that most of them were bad stocks. Sources within the company revealed that Bhansali invested in three classes of companies: his own privately owned companies, private companies owned by his friends and those on the boards of his companies, and many small companies whose issues were managed by CRB Capital, but which could not get full subscription. Many of these companies were the ones
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Bhansali invested in to generate paper profits for the group. It was Bhansali's practice to buy IPOs of companies at a much lower price than the issue price and then entering into a ready forward deal with a finance company. As per this deal, Bhansali sold the holdings at a higher price, promising to buy it back after a year's time at higher price. The money generated thus was shown as profits in the books of CRB Caps or CRB Corporation as profits from sale of investment. This procedure was repeated over and over again, keeping the books of the companies artificially inflated. The higher profits reflected in the share price continuing to remain high, which in turn meant that raising money from the public in the future was easier. The company also could manage to get higher credit ratings, ensuring a steady fixed deposit and bank credit inflow. For the other companies involved, the benefit was in form of the IPO price going up on the bourses. This financial wizardry in the books was made possible with the help of Bhansali's trusted firms of auditors, D.P. Bhaiya & Co and, Jain & Swaika - both old friends from Calcutta. Both these firms were rather notorious and Jain & Swaika was in fact reported to be 'available against a fee to fix almost any set of accounts.

Defrauding the SBI

In May 1996, CRB Caps opened a current account in SBI's main Mumbai branch, for payment of interest, dividend and redemption cheques. The payment warrants could be presented at any of the 4,000 SBI branches for payment. However, Bhansali was granted only a current account facility and did not enjoy any overdraft facility. He was expected to deposit cash upfront into the current account, along with a list of payments that had to be honored. Clamming that the logistics of payment were very complex and that it was not possible for every branch to check with the head office before honoring a dividend warrant, the branches gradually began treating these instruments just like a demand draft. For about nine months, the setup worked very well. However, in March 1997, SBI realized that the account had been overdrawn to the extent of a few crores. Bhansali was called to the SBI office and asked to remit the difference immediately, which he promptly did. The same situation arose again within the next fortnight. SBI then issued a circular to all its branches asking them to stop honoring any warrants of CRB Capital Markets. SBI also alleged that Bhansali had printed 1,800 fake dividend warrants, which were drawn in favor of friends and relatives and presented at various SBI branches. Bhansali used benami (false) accounts in Chennai, Calcutta and towns in Rajasthan to encash the interest warrants and fixed deposit repayments. These amounts were then transferred to other accounts like Red Stone Properties Pvt. Ltd., Bahubali Commercial Company Ltd., Chamatkar Investments Pvt. Ltd. - all in Chennai - from where they were withdrawn. Although it was speculated that Bhansali intended to pocket the cash and flee, Bhansali's lawyer claimed that the overdrawn sum went back into CRB Caps to pay interest and repay principal to fixed deposit
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holders. Bhansali did admit to overdrawing from his SBI account following liquidity problems at CRB Caps. However, he claimed that he had no fraudulent intentions. His lawyer insisted that the SBI account was an ordinary one and not of the escrow or 'pre-deposit' type. There was no mandatory requirement to deposit money with SBI before issuing out the interest warrants and in the event of any overdraft, it was to be treated as a normal account with overdraft facility, where the overdrawn amount could be repaid with interest. SBI officials met Bhansali in April 1997 and asked him to immediately deposit Rs 10 crore and submit post-dated cheques to cover CRB's outstanding liability of Rs 47 crore. SBI then attempted to obtain Bhansali's co-operation in a bid to recover the entire amount owed to the bank by April end. In addition, SBI asked Bhansali to register all property owned by him and his companies as collateral in favor of the bank. In the same month, Bhansali's property in Jaipur, Rajasthan was transferred in SBI's name. Bhansali however, did not pay the money SBI had asked for. Further, Bhansali valued his property at over Rs 60 crore, while SBI claimed that the bank's own valuation turned out to be far less. It seemed that SBI had knowingly overlooked CRB Caps' impending bankruptcy in order to recover as much cash as possible before the matter reached the judiciary. SBI justified this saying that justice in its normal course would have invariably taken an extremely long period. It was only when Bhansali could not pay the first installment of Rs 10 crore that SBI informed the RBI. Bhansali's lawyers also claimed that the SBI and the RBI aggravated the situation by prohibiting CRB Caps from accepting fresh deposits and then announcing it to the public, which resulted in a panic among depositors.

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.

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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.

The Aftermath
The CRB scam took the whole nation by storm. At one point, the Union finance ministry held a meeting everyday to get to the brasstacks of the CRB fiasco. In a meeting with SEBI, the finance minister criticized the regulator severely. The government asked the RBI to prepare a panel of auditors asking to explore the possibility of making auditing of NBFCs a prerequisite to
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registration. In October 1998, the SEBI appointed an administrator for CRB's Arihant scheme finalized a scheme for payment to the unit holders. Under the scheme, the investors were prematurely paid Rs 4.95 per unit, which was its NAV as of 31 March 1998. When the administrator had taken over, the assets of the scheme comprised the fund's frozen bank accounts worth Rs 81 lakh, plus some dividends from investments. Besides, there were a large number of listed (but thinly traded) and unlisted shares amounting to Rs 17.5 crore. According to the scheme suggested, a sum of Rs 1.07 crore was paid to all 19,396 unit holders to the extent of 300 units each - 13,245 who held up to 300 units and comprised 68% of the unit holders were paid off. Non-individual unit holders who had over 10,000 units were also paid for 300 units. In the second stage, these were paid out of the sale proceeds from the listed securities. Finally, after disposing of the entire unlisted and non-traded shares, other unit holders were paid off. Thus, unit holders were able to get almost 50% of the initial sum invested. The scam had far reaching impacts on the economy and on the banking sector in particular. Banks, already suffering from low credit off take and borrowers' suspicion were afraid on two counts - possibility of formation of fresh non-performing assets, and the increasing stress on accountability. The scam played an important part in the declining investor confidence, poor performance of NBFCs and a host of other problems ailing the financial markets. Vinod Baid, promoter, Prudential Capital Markets seemed to have summed up the situation aptly, "Few people realize it but the CRB collapse has done a great deal of good to the country. It has stopped investors from seeing ads and feeding money into the fixed deposit whirlpool."

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