Regulations
Garnering money has never been easy as regulators are still in slumber!

Do not ask the investors’ for PAN number, address proof or for any KYC. Just promise huge returns in few months and give 35-40% commission to agents and voila! You can garner any amount of money from people, both educated or uneducated living in urban and rural areas. And don’t worry about the regulators. They would be the last one to know about your fortune

 
These days raising crores from the public is easier than it was in the past. Anybody with a gift of the gab can pull it off to collect crores just by styling as first time budding entrepreneur and flourishing a colourful brochure containing a glamorous business plan-cum-prospectus promising great returns on investment. 
 
The road-smart IPO (initial public offer) promoters wanting to make big impact IPOs just flaunt some Masters qualification with an equally phoney Doctorate in either management or industry from an unknown phoren university. No questions asked for post-qualification hands on experience!  Armed with this they then get on board the right connections at different levels in the financial world, media, some political big-wigs, celebrities including P3 glitterati to sign in as “joint-promoters”. Then tie up with big name merchant bankers with right contacts with auditors, preferably from amongst the Big Four, to attest the due diligence report justifying the inflated offer price/premium, even before their entity even came into existence or turned out a single finished product or earned any revenues! Armed with this, the next port of call was a governmental or private development finance institution or bank for term borrowing for land, building and later equipment because all this forms a part of the offer document. The IPO when out then is said to be “oversubscribed” many times over! 
 
Earlier the Reliance group were pioneers in raising monies with all kinds of unusual names like Fully or Partly Convertible Debentures with coupons and illu-pillu twin issues. This took place in the Controller of Capital Issues era in the pre-SEBI (Securities and Exchange Board of India) days. Taking a cue or a precedent, now Sahara, without having to submit voluminous disclosure documents to SEBI or any other authority goes further than Reliance to collect Rs19,000 core Optionally Fully Convertible Debentures to be converted into shares of other unlisted group firms
 
Saradha went on to collect what they denominated Advances from the gullible public against promises to allot land/apartments from one to ten years, others were promised fantastic returns from potato fields, mango and strawberry orchards, potato, teak plantations and emu farms. Both conveniently avoided. Both of them conveniently avoided the elaborate public issue procedural compliances like Red Herring Prospectus and other filings with numerous disclaimers, road shows, TV promos, media ads promoting the proposed CSR activities. 
 
Aarti Krishnan,  recently writing in the Hindu Business Line on Raising capital made easy has a quite an interesting take—“If you are not overly scrupulous and willing to exploit loopholes in the law, here is a ‘business model’ to raise thousands of crores of rupees from retail investors (through chit funds).. The first step to raising public money, without attracting unwanted attention from the numerous regulators, is to keep your identity delightfully vague. Make sure you are not a listed company, a mutual fund, an insurance company, a finance company or even a chit fund.  Holding yourself out as any of these would require you to register under a relevant authority, bringing with it many rules and regulations governing capital raising. Instead... calling yourself XYZ ‘group’ the onus will immediately shift to the regulators to prove that you do fall under their jurisdiction that is likely to take a long time in the Indian courts… Taking on the Sahara group SEBI had to fight a legal battle all the way to the Supreme Court just to establish that it did have powers to regulate unlisted entities raising public money. The same is now playing out with the Saradha group, which appears to be neither a chit fund nor a finance company... Ensure that the instrument through which you raise money is neither a share, nor a bond, nor a deposit but a hybrid that defies any of these descriptions. The trick is to assert that it is not a ‘security’ at all, so that the onerous security market laws about public offers or public offers or disclosures simply cannot apply to it.” 
 
The Saradha group is alleged to have mobilized over Rs20,000 crore before it went bust. Now the other hitherto low-profile companies in this game are out in the public by  taking heavily to the print and electronic media to stave off negative perceptions and to  salvage their image and allay investors’ fears by even airing TV commercials and large scale advertisements in local dailies asserting that they continue to remain “asset-based economically proficient companies” by showcasing projects in which the investors’ funds are parked and also participating in live TV chat talk shows opening up to media queries. One of the outfits—the Rose Valley group—has to its credit national award winning films. The movie Kagajer Nouka –Paper Boat featuring the story of two freedom fighters—one true to his ideals and another setting up a deposit taking company duping public—was prevented from being released. 
 
Sahara and Saradha will hereafter be referred to as S&S have chosen the softer options of signing up big names from cricket, football, hockey and tennis as brand ambassadors to create confidence in the public. While Sahara showcased reality in Ambey Valley near Mumbai, owned in-house TV channels and an airline, Saradha went overboard by setting up myriads of corporate entities to undertake unrelated activities ranging from print media and multiple TV channels and even a two-wheeler manufacturing unit that never saw the light of the day. Both of them took care to keep on the right side of all the political parties of UP and West Bengal that were expected to enforce the state Chit Funds Act, which were conveniently winked at for their companies’ transgressions.  
 
The most informal business plan for windfall fund raising by S&S was to involve minimal or least paper work; no procedural hassles of requiring from their investors any proof of identity or residence any PAN or KYC, cash collection with no limit. Their target markets were not educated urban but rural hinterland in remote smaller unsuspecting towns and villages with minimal literacy and hardly any banking penetration, most transactions in untraceable hard cash. 
 
The promotion was made by a large field force from local agents verbally marketing on promises of high commissions going as high as 35%-40% by way of cuts from collections. The agents in turn also recycled their commissions into investments, not aware that the monies that they were collecting was not to be returned and in the bargain they not only stood to loose their commission but also all that they had invested as principal!  Sahara now tells the apex court that they have truck loads of evidence of repayments, evidence that would require the hundreds of auditors thousands of manhours just to shift through the refund payment vouchers with the application forms.
 
Collecting monies is at best a con job of ensnaring gullible greedy people with offers of windfall stupendous returns that they are told no one else on earth can match. This justifies the good old Hindi adage “Duniya jukti hai, jhukhanewalla chahiye”. A smart con man can bring this it best.
 
 On 17 May 2013, top officials from RBI, CBDT and SEBI, Secretaries from MCA and MOF officials who appeared before the Parliamentary Standing Committee on Finance frankly admitted to poor coordination and lack of regulation to control the flourishing chit fund business. They told the Committee the major onus to regulate chit funds lay on the states. A member pointed out the government data itself was faulty—in response to a question in the parliament, it was stated that the regulations are functional in 15 states when it was flourishing in 17 states and six Union Territories. Gurudas Dasgupta of the CPI terms it a complete failure of system lamenting that different arms of the MOF like Revenue Intelligence, Enforcement Directorate, and Income Tax failed to zero on that advertised in news paper offering as much as 30% returns that were quite abnormal. The Committee has suggested that MOF by an executive order bring all deposit schemes under RBI as recommended by the FSLRC. 
   
Raising monies from banks or financial institutions is not difficult either. Not long ago the multi-national HSBC Bank at Mumbai was conned into lending Rs330crore, ostensibly “for upgrading a media library for BBC”. HSBC apparently took the promoter- conman at face value till their enquiries with BBC exposed the con.
 
 The 17 public sector banks lent crores to  the KFA on various  illusory securities that included the brand name, as a part of the corporate restructuring of  debt got its borrowings converted into equity on an inflated valuation of shares at a premium when the company was always in the red from day one; unenforceable personal and corporate guarantees. Now it transpires that the lenders can possibly recover at the utmost 25% of the securities and this will result in the banks having to write off 75%!
 
The CMD of Canara Bank, which has a Rs360 crore exposure out of the Rs4,000 crore to Deccan Chronicle Holdings now states—“The balance sheet does not reveal the exact situation and the company had filed wrong registration certificates, the true financial picture was not revealed and all loans taken were not disclosed, the end use of funds not established… On the recovery of loans of the total about 50% was securitised.”   
 
Most of our developmental financial institutions are saddled with crores advanced to various industrialists who were advanced funds based on pressures and without adequate due diligence. In the railway minister Pawan Bansal corruption enquiry it has come to light that his personal tax advisor was nominated for two terms on the board of directors of Canara Bank which advanced Rs9 crore to a company in the Bansal family group where the CA was a director.  Conflict of interest is not for high flyers!
 
Acceptance of deposits by limited companies both private and public is another mode of raising funds. To overcome the caps imposed by the Acceptance of Deposit Rules just one equity share is allotted and later money accepted under “Unsecured Loans from Shareholders”. This is also included as equity for Debt: Equity computations. 
 
There is an urgent need to tighten measures to protect the interest of investors by bringing about stricter monitoring by the regulators.
 
(Nagesh Kini  is a Mumbai-based chartered accountant turned activist.)

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COMMENTS

Naresh Nayak

4 years ago

Nothing works in India. The regulators if they act, do it belatedly. The police is darn corrupt. The Judiciary has 500 years of cases to close. So what is the solution? Invest in Fixed deposits. Deal only with people you trust in person after knowing them well. Dealing with insurance, corporate fixed deposits are a hit and miss operation. Good investors (retail) who have made money in India have only parked money in fixed deposits and purchased gold! If as a retail investor you did only these two things it would be a positive return on capital echoing Warren Buffets singular philosophy - Don't lose money.

R Balakrishnan

4 years ago

Nothing comes in the way of an investor and his money getting parted. And the frauds also afford the best of the lawyers leaving the regulators with their backs to the wall even if they can prosecute. The practice of 'negative retainers' by the legal profession is another big contributor

Cobrapost exposures: What next?

No need for more exposures as of now. What the common man is waiting for is a change that would reduce corrupt practices and infuse a semblance of ethical behaviour, on the part of individuals and organisations handling public funds, on which, in reality, they have only trusteeship rights

 
In its breaking news story (14th March), the online portal Cobrapost.com had talked about alleged violation of norms in acceptance of deposits and “money laundering” by three new-generation private sector banks (HDFC, ICICI and Axis).
 
The portal on 6th May came out with a second instalment of exposure, which gave details about its continuing undercover operation, spanning months. The portal accused as many as 23 public and private sector banks and insurance companies of “running a nation-wide money laundering racket, blatantly violating the law of the land”. Based on ‘action’ captured on video-tapes, Cobrapost explained how employees of banks and life insurers are helping customers launder unaccounted cash, bypassing know your customer (KYC) norms. They had allegedly offered to invest unaccounted cash in products that form part of the regular financial system and help launder the unaccounted money.
 
Cobrapost has come out with yet another ‘instalment’ of exposures involving more banks, in fact one doubts whether any major bank is now left out.
 
Though the exposures fell short of any evidence about “concluded deals”, they gave enough indication that the systems in place to prevent money laundering are not working as efficiently as they should. The officials approached by the representatives of the portal as part of its sting operation were all willing to help their prospective clients through all the three main stages of money laundering process. These three stages are:
(i) Placement, where the money launderer (the person who holds money generated from criminal activities—in this case money from undisclosed sources—introduces illegal funds into the financial system. This can be done by dividing large sums into smaller ones and deposited in different accounts.
(ii) Layering, where the launderer converts or moves funds fast to hide the true origin of such funds and to distance the converted funds from the original source.
(iii) Integration. The money travels back to the financial system with legitimacy gained. 
 
Those named in the exposés include two Kerala-based banks (Federal Bank and Dhanalaxmi Bank), State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Indian Bank, Indian Overseas Bank, Oriental bank of Commerce, Allahabad Bank, Central Bank of India, Dena Bank, Corporation Bank, IDBI Bank, Yes bank, DCB Bank, Life Insurance Corporation of India (LIC), Tata AIA, Reliance Life, Birla Sunlife, and many others. 
 
Some of the banks facing allegation have started fire-fighting operations to restore image.  Some banks including SBI India have initiated internal inquiries. Indian Overseas Bank stated that the bank is inquiring two lower level officials identified in the exposure, but adding that “action can be taken once we identify any wrongdoings”. Federal Bank for instance has come out with a statement which says “As a responsible bank, we conduct our business with strict adherence to extant regulatory guidelines, including specific focus on know your customer, and anti-money laundering norms” and has confirmed that the bank has initiated investigations into the matter. Meanwhile, the government said action had been taken against 31 employees as on 7th May. Fifteen officers/employees of various public sector banks (PSBs) had been suspended, 10 officers had been divested of their work and six had been asked to proceed on leave. Regulators including the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA) also have swung into action. Besides, the finance ministry has asked public sector banks and LIC to take action against employees “appear to be advising” customers on ways of violating know-your-customer (KYC) and other regulatory norms. 
 
Following his own approach of denial on the earlier occasion, RBI deputy governor Dr KC Chakrabarty was quick to refute money laundering charges levelled against various banks and claimed that all exposures by Cobrapost.com were connected to KYC norms. His casually observed: “There are certain differences in reporting of KYC norms. We are seeing how banks are following up. Based on this, we will issue show-cause notices and action will be taken. We need to strengthen KYC guidelines and respective departments have to take action.” It looks as if this was not taken very seriously, even by his own men. On the earlier occasion Dr Chakrabarty had taken shelter under “financial illiteracy” saying that “it is not money laundering… it is your financial illiteracy!” 
 
Last week, in an interview given to a mainstream financial newspaper, the same deputy governor lamented that “If bank boards aren’t capable, nothing much can be done”. 
In the given situation, where some exposure or the other reminds us everyday that we are going through a phase of continuous violations of legal norms and ethical behaviour (in the financial sector these get easily ‘quantified’!) the deputy governor may not have ready answers to all the questions posed. But the positions taken by him on the following issues are not professional and a layman’s view is not what one expects from the regulator:
“If bank boards are not capable, nothing much can be done”: If Dr Chakrabarty means what he says, RBI and GOI should take responsibility and take immediate steps to put in place “boards which are capable”.
“Banks might have indulged in ‘traffic rule violations’ but ‘no accident has taken place’:” Cobrapost’s exposure hovers around allegations that bank officials were liberal in offering to violate traffic rules. The position that “no accident has taken place” is a “legal denial”. ‘Accidents’ are taking place and it is for the regulator, supervisor and other authorities including the finance ministry to find out how many of them are ‘caused’ by ‘traffic rule violations’.
“Reputation will be hampered if one or two banks do it. If everyone indulges in this, where is the issue of reputation? My question is why banks should take so much commission in selling insurance/mutual fund products”: If the regulator starts asking questions like this, where does the customer go when he has a grievance? The position that “If everyone indulges in this, where is the question of reputation?” though goes well with the stand political parties take these days, brings down the image of the institution (RBI) Dr Chakrabarty serves today. 
“Restructuring is a perfect commercial phenomenon, practiced across the world. It is like a medicine but it has to be used judiciously. If you don’t use it properly, it will not give you the result. If banks are taking undue advantage, then banks are going to suffer”: Very true. But when banks ‘suffer’, the real loss is passed on to the depositor and the tax-payer. The government and RBI are duty-bound to protect public interest, in such situations.
 
Interestingly, the RBI governor did not take the risk of defending the banks or the regulators on the issue. Dr D Subbarao made the following observations on the subject:
“RBI is not directly involved... Even banks are not directly responsible. They are not expected to inquire about the source of income. It is for government and tax authorities to check money laundering,” he said while addressing students and academicians as part of the Platinum Jubilee celebrations of Jammu & Kashmir Bank on 8th May, adding that “there was no conclusive evidence of money laundering in the expose of Cobrapost”.
 
Ironically, most part of the exposure talks about how bank officials were “very helpful” in circumventing norms and rules. Here, it would be appropriate to recall some of the provisions of the Prevention of Money Laundering Act, 2002 (PMLA).
 
PMLA which came into force with effect from 1 July 2005 and was last amended effective 15 February 2013, forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from 1 July 2005. Director, Financial Intelligence Unit-India (FIU-I), which is the body responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign financial units, and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act. 
 
The PMLA and rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-I. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.
 
Clause (2) of Section 9 of PMLA relating to verification of the records of the identity of clients reads asunder:
 
“ Where the client is an individual, he shall for the purpose of sub-rule (1), submit to the banking company, financial institution and intermediary, as the case may be, one certified copy of an ‘officially valid document’ containing details of his identity and address, one recent photograph and such other documents including in respect of the nature of business and financial status of the client as may be required by the banking company or the financial institution or the intermediary, as the case may be.”
 
The purpose of quoting the above provisions of PMLA is to emphasize that the allegation hovers around non-compliance with the requirements under the Act. The portal has alleged that many bank officials were more than eager to help the prospective client to do things hush-hush and in some cases had offered to create non-existent documents to enable opening of accounts. Some bank officials allegedly offered to accept huge amounts of cash running into tens of lakhs of rupees (first to be deposited in large lockers which will be later credited to accounts to be opened) as deposits. The bank officials were lured by the promise of further deposits of crores of rupees.
 
Let us leave the story, the legal position and the follow up here. 
 
The question arises, in 2013, do we need a Cobrapost, a Tehelka, Wiki-leaks or a new TV channel struggling to improve its own TRP to tell us that all is not well in the goings on in India, when it comes to handling public funds (“public funds” comprise money collected from public which includes bank/company deposits and other funds with private organisations)? After all, this much has been told to us by the highest court (Supreme Court of India), Comptroller and Auditor General, Election Commission and several other “usually reliable” government and private bodies, from time to time in recent years. Most of the political parties also have endorsed this view during their bickering among them. What the common man is waiting for is a change which will reduce corrupt practices and infuse a semblance of ethical behaviour, on the part of individuals and organisations handling public funds, on which, in reality, they have only trusteeship rights.
 
While delivering the Second Annual Lecture at Transparency International in Delhi on 19 February 2011, Dr Bimal Jalan, ex-governor, Reserve Bank of India made the following observation:
“Thus, taken as a whole, corruption is undoubtedly an important cause for rising disparity, persistence of high incidence of poverty, and enormous delays and low productivity of public investments in India.”
 
On an earlier occasion (Seventh Nurul Matin Memorial Lecture, Bangladesh Institute of Bank Management, Dhaka, 2007) speaking on “Ethics in Banking” Dr Jalan had this to say: “Adherence to the ‘Rule of Law’ in a democratic society is an essential minimum requirement of ethical behaviour” He agreed with Professor Nurul Islam who had observed on the same dais that “…..ethics in banking, economic transactions and in society in general, are all interrelated. The solution needs to cover all related areas, including the systematic political factors.” 
 
Remembered the above, in the context that deterioration in ethical behaviour is not confined to financial sector alone. I genuinely feel, we need all voices which bring to surface unethical practices including corrupt behaviour on the part of “public servants”. More importantly, media should help citizens to follow up such cases until the guilty meet with exemplary punishment.
 
(MG Warrier is former general manager, Reserve Bank of India, Mumbai, and is a regular contributor for Moneylife.)

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COMMENTS

SuchindranathAiyerS

4 years ago

The question, for which there is NO answer, is why should India's rulers change? They never had it better. Loot and rape with impunity and "Z" Class security with lathis and bullets for anybody who objects.

REPLY

M G WARRIER

In Reply to SuchindranathAiyerS 4 years ago

Aiyer
You are in the company of one billion people who share your feelings.When all of them start asking, why India shouldn't get the change the country deserves, change is inevitable. So many things have changed during the last hundred years.

I-T department slaps Rs582 crore tax demand notice on Infosys

The Bangalore-based software services exporter is already contesting additional I-T demands of $214 million (about Rs1,175 crore) for four fiscals years beginning 2005 and said it will take legal recourse against the fresh tax demand notice as well

 
The Income Tax (I-T) department has slapped a fresh $106 million (about Rs582 crore) tax demand notice on software services major Infosys, for the fiscal 2008-09.
 
The Bangalore-based software services exporter is already contesting additional income tax demands of $214 million (about Rs1,175 crore) for four fiscals years beginning 2005 and said it will take legal recourse against the fresh tax demand notice as well.
 
“The company has received the assessment order from the income tax authorities for fiscal 2009 on 2 May 2013 along with a demand order for an amount of $106 million,” Infosys said in a filing to the US Securities and Exchange Commission (SEC) last week.
 
In the filing Infosys added, “As the company is contesting this position like earlier years, the appellate authority would be approached within the time limit prescribed under the relevant law.”
 
Infosys is already facing tax demands worth $214 million for fiscal 2005 to fiscal 2008 “mainly on account of disallowance of a portion of the deduction claimed by the company under Section 10A of the Income Tax Act.”
 
“The company has received demands from the Indian I-T authorities for payments of additional taxes totalling $214 million, including interest of $62 million upon completion of their tax review for fiscal 2005, fiscal 2006, fiscal 2007 and fiscal 2008,” it said in the filing.
 
The deductible amount is determined by the ratio of export turnover to total turnover. The disallowance arose from certain expenses incurred in foreign currency being reduced from export turnover, but not reduced from total turnover, it added.
 
The tax demand for fiscal 2007 and fiscal 2008 also includes disallowance of portion of profit earned outside India from the STP units and disallowance of profits earned from SEZ units, it said.
 
“The matter for fiscal 2005, fiscal 2006, fiscal 2007 and fiscal 2008 are pending before the Commissioner of Income tax (Appeals) Bangalore,” Infosys said in the filing.
 
Infosys added that its position in the cases relating to tax demands is strong and it expects to win the appeal.
 
“The company is contesting the demand and the management, including its tax advisors, believes that its position will likely be upheld in the appellate process.
 
“The management believes that the ultimate outcome of this proceeding will not have a material adverse effect on the company's financial position and results of operations,” it added.
 
On taxes in India, Infosys said in the filing, “The company, as an Indian resident, is required to pay taxes in India on the company's entire global income in accordance with Section 5 of the Indian Income Tax Act, 1961, which taxes are reflected as domestic taxes.”

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