BITS PILANI, PILANI CAMPUS, DEPARTMENT OF

MANAGEMENT

Financial Management and Accounting (MBA G515)

Presented By: Group 4 - Madhuri U (2016H149207)| Rohtash Singh Rathore (2016H149252)

|Tanmay Debnath (2016H149243 )| Vaibhav Sharma (2016H149266)

CRB Capital markets limited (CRB Consultancy) Analysis of a fraud

Indian financial industry has always been successfully able to trace every prospect
offered by the India's fiscal policy both in terms of alteration and expansion. In spite of all the
endeavors implemented to develop the financial market, it still remains fatally faulted due to lack
of three major key elements namely inadequate management, stringent accountability, and
proper punishment.

As a result, the capital market of India has remained one-dimensional and has staggered from
one investment scandal to another. We are analyzing one such case which had shook Indias
investment market in 90s.

Introduction:

C.R. Bhansali, a chartered accountant, started a financial consultancy firm, CRB

consultancy in Calcutta during 1980. CRB consultancy managed to secure the business of
providing ISSUE MANAGEMENT SERVICES (where CRB consultancy acts as manager,
consultant or advisor for selling, buying or subscribing to securities) to few well known
companies in Calcutta. 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. CRB Capital Markets was
followed by creation of CRB Mutual Fund and CRB Share custodial Services. The conglomerate
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.

The company went public in 1992 but did not apply for registration until 1996, as required by
RBI. In three years - from March '93 to '96 - the net worth of CRB Capital Markets moved from
Rs 11.65 crore to Rs 436.6 crore, a 37-fold increase.
How did CRB companies operate?

CRB consultants promised large returns for your small investments. Upfront cash
incentives of 7-10% attracted investors in investing in Bhansalis schemes. CRB was offering at
least 5-6% more than any reputed corporate deposit and almost 8% more what bank FDs would
offer.

CRB Capital Markets raised a whopping Rs 176 crore in three years. In 1994 CRB Mutual Funds
raised Rs 230 crore and Rs 180 crore came via fixed deposits. Bhansali also succeeded to raise
about Rs 900 crore from the markets. Another CRB company, CRB Corporation Ltd raised
another 84crore through 3 public issues between May 1993 and December 1995. CRB Mutual
funds through its Arihant Mangal Growth Scheme and CRB share custodial services raised
330crores from investors.

This high growth was apparently a signal to read. But no! Every fixed deposit (FD) scheme that
is launched in India has to be rated by one of three credit-rating agencies; the aim is to give the
potential depositor a clear indication of the safety of putting his money into a scheme and a A
rating was given by Credit Analysis & Research Limited (CARE) to CRBs FD program,
indicating adequate safety. 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. 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 it is informally said that RBI had considered CRB for
issuing an in-principle license for a bank to an unregistered finance company like CRB while the
applications of well known firms like TATA and Birla were rejected!

To be issued a license, CRB needed a capital of Rs 100 crore, and the exercise was aimed at
raising that amount, whatever it took - including the SBI fiddle.

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 firm was expected to deposit cash upfront into
current account along with the list of payments that had to be honored. Payment warrants were
allowed to be given at any 4000 SBI branches due to vastness of CRB consultancys operation
region.

Branches gradually began treating these dividends and payment warrants just like demand drafts.
The company paid SBI the money required in advance every three months, and against this, the
SBI would encash the interest warrants and refund orders that CRB depositors sent the bank. In
February 1997, CRB quietly stopped making the advance payments. Amazingly, no one in the
SBI seemed to have noticed. The bank kept encashing the cheques till the figure hit the Rs 60
crore The company had used its SBI accounts to siphon off bank funds, claiming it was
encashing interest warrants and refund warrants of principal amounts.

SBI realized that account had been overdrawn to the extent of few crores. CRB consultancy had
faked 1800 dividend warrants to draw money. Justification was given by Bhansali that
overdrawn money was used to repay principal to fixed deposit holders of his company.

The Investigation:

While CRB consultancy did apply for registration in 1996, the central bank decided to inspect
the financial position of the company, which was carried out between November 13, 1996 and
November 18, 1996. RBI did put on the hold the in-principle approval it had granted CRB for
setting up a bank, the company went about collecting money from the public by making false
statements in its prospectus that it had promoted its own private sector bank CRB Global Bank
Ltd. During the inspection several illegalities came to light.

RBI had also received complaints from the Tourism Finance Corporation of India Limited
regarding non-payment of deposits. The central bank issued a show cause notice to CRB Capital
on 24 February 1997 asking why it should not be prohibited from accepting deposits.
Interestingly, in September 1996, the rating agency CARE had assigned an A rating to CRB's
Fixed Deposits but when RBI stopped CRB from raising fresh Fixed Deposits, CARE
immediately downgraded its rating to C. The Outlook reported that SEBI watched silently as
CRB's merchant banking division handled scores dubious of public issues and went around
claiming that it was "the country's No. 1 merchant banker". CRB's auditors would have been
blind not to have read the signs of imminent collapse when they checked the company's
accounts." The lessons learnt from CRB pushed the RBI to frame new directions in 1998,
making it mandatory for NBFCs to register with it.
Loopholes and Response of the Regulatory authorities to C.R bhansali scam:
Crash of CRB and loss of hard earned cash of common man would have easily been avoided if
regulatory bodies like SEBI and RBI had worked properly.

Though in December 1996, RBI had had written a report on massive irregularities
practiced by CRB, no follow-up was taken to save the average investor who had put his
savings in CRB.

There was a lot of confusion about how to act against the CRB, considering its NBFC
(Non-Banking Financial Company) status.
CRB was directed not to enter the market for nine months. According to media sources,
SEBI failed to warn the public in spite of detecting all these irregularities.
Loopholes in the law ensured the SEBI, the RBI and the Department of Company Affairs
have a limited role to play in NBFCs. It was only in 1995 that the RBI began monitoring
 activities of NBFCs.
After the CRB crash, the RBI was planning to establish norms covering NBFCs better
with the market regulator favoring a system through which mutual funds can be
monitored better.
SEBI was also considering more open disclosure norms for mutual funds and fixed
deposits. A possibility of bringing the fixed deposits in NBFCs under the Deposit
Insurance Act was to be handed over to the RBI.

Impact of C.R bhansali scam

An inspection of CRB books and accounts by the RBIs department of Supervision

(DOS) had revealed that there was inadequate provision against non-performing assets (NPA).
Only Rs. 0.25 crore was provided as against a required amount of Rs.3 crore when actual amount
was Rs.21.10 crore. DOS also found that the company had violated provisions of the directives
for NBFCs issued by the RBI. The DOS report also said that the company invited deposit from
the public, projecting itself as an equipment leasing company when it was actually carrying out
loan business as its principal activity, and consequently was entitled to accept a lesser quantum
of deposits. CRB collected deposits aggregating to Rs.139.83 crore in excess of its entitlement of
Rs.107.19 crore violating the ceiling restriction. Also, according to the deputy governor, RBI,
Mr. S.P. Talwar, CRB Caps had issued Rs.200 crore secured debentures in April 1996, but the
debt paper stood unsecured as CRB did not register the charge against its assets. In June 1 997,
six persons were arrested including four directors of CRB Capital Markets. Later C.R. Bhansali
and five members of his family including his wife and parents were escorted from Hong Kong by
CBI sleuths. He was formally arrested after reaching the Indira Gandhi International Airport in
New Delhi. Under an earlier arrangement with the SBI in June 1996, Bhansali could issue
warrants totalling Rs. 50 lakhs and no warrant was to be of an amount over Rs.25000. Despite a
ceiling of Rs.25, 000, the SBI inserted a special clause that allowed Bhansali to alter the warrant
with his signature. As a result, he would cancel the amount himself and write the warrants in the
name of shell companies of which he was the ultimate beneficiary. When questioned by The
Indian Express, all that SBI officials had to say was that this manual override was permissible
and that a few other companies have also been extended similar facilities.

Consequences of the scandal:

Registration of NBFCs with RBI was mandated. In March 1994, out of 37,880
applications received by RBI, only 9000 were found eligible and the remaining 28,500 NBFCs
did not had the required net owned funds.

Aftermath of Fraud:
 SEBI appointed an administrator for CRBs Arihant scheme and 5inalized a scheme for
payment to unit holders.
Under this scheme the investors were prematurely paid Rs. 4.95 per unit. By doing this a
sum of Rs. 1.07 Crores was paid to 19,396 unit holders to the extent of 300 units each and
68% of unit holders were paid off
Non-individual unit holders were also paid for 300 units. After disposing of the entire
unlisted and non-traded shares, the other unit holders were paid off. Unit holders got
approximately 50% of sum which they had invested
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