The speed at which things moved thereafter was amazing. CRB's closets, it appeared, stored only skeletons. Within days, the group which claimed a funds base of more than Rs 1000 crore and which liked to refer to itself as the "complete global financial house", had collapsed, winding-up operations had started, and an international manhunt was on for the "CRB" in CRB Capital: Chain Roop Bhansali.
And what is now clear is that the crash of CRB could have been easily avoided. The Reserve Bank of India (RBI) Should have seen it coming months before. Indeed, it did in December 1996, an RBI team wrote a damning report on massive irregularities in the way CRB was using public money, but no follow-up action was taken to save the average investor who had put his savings into CRB. The RBI did put the in-principle approval it had granted CRB for Setting up a bank on hold, but it sat and watched as the company collected money from the public, saying, in its prospectus, that it had "promoted its own private sector bank CRB Global Bank Ltd, and is shortly to begin commercial operation". For his part, RBI governor R. Rangarajan told a BJP delegation that he was not aware of this.
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. In September 1996, the rating agency Credit Analysis & Research Ltd (CARE) assigned an A rating to CRB'S FD programme, indicating adequate safety. This was after noting in its report that the company had liquidity problems, that it defaulted on loans and that its asset quality was deteriorating. After the RBI stopped CRB from raising fresh FDs, CARE-which claims to have been monitoring the company all through—quickly downgraded its rating to C, denoting high risk. Interestingly, CARE has been promoted by the IDBI, which in turn had given financial assistance to the group.
The Securities and Exchange Board of India (SEBI) watched silently as CRB's merchant banking division handled scores of dubious 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. But the Calcutta-based D.P. Bhaiya and Company happily gave their seal of approval on CRB'S balancesheet without so much as a squeak about its rotten core.
Chain Roop Bhansali's story, in fact, is a case study of the classic scamster. An obscure chartered accountant from Jaipur, Bhansali made his first pile by setting up shell finance companies, cooking up some accounts and balancesheets for them and selling them off to crooked businessmen who needed such companies to rotate their black money. In 1985, Bhansali set up CRB Capital Markets, which started merchant banking operations, marketing public issues. Its list of clients is a litany of the insignificant and the fly-by-night, but that list was longer than any other merchant banker's in the country. Naturally, since Bhansali was willing to handle any issue at all, with scant attention to the ethics and responsibilities of his profession. By 1994, Bhansali was ready to get into a bigger business: mutual funds. With SEBI(I) giving him the nod, in 1994, he launched the CRB Arihant Mangal Fund and, amazingly, raised something around Rs 230 crore when funds with far better pedigrees could not raise even half the amount. It is now revealed that of this amount, only Rs 6.25 crore came from small investors. Where did the rest come from? For that, take a look at CRB Arihant's investment pattern. Eighty per cent of its corpus was in just 65 scrips while the remaining 20 per cent was distributed over 289 scrips. And around 30 of the 65 scrips on which Bhansali has been so bullish are in unquoted securities. What almost definitely happened was that Bhansali rounded up his pals in a quid pro quo deal. They routed their money into Bhansali's mutual fund, which routed it back to them by buying shares in their companies from them. That's the oldest trick in town, but no one in authority appears to have moved a finger, though rumours about CRB have been rife in financial circles from day one. By now Bhansali was getting really ambitious. The next step-and the crucial one that would close his money-making circle was to set up a bank. The merchant banking division would manage shady share issues, raising money from the unsuspecting public and rerouting crooked promoters' funds. Many of these companies would anyway be finance companies which would redirect money into Bhansali's NBFC and mutual fund, which would keep the moolah flowing in an ever-widening circle with Bhansali and his clients/partners taking their cut out at every orbit. With the bank in operation, Bhansali would have access to more public savings than ever before, and that circle would reach its apogee, moving funds faster and faster, wider and wider. Of course, CRB got the RBI in principle approval to set up his bank in Bhubaneshwar. Why he got it when applicants like the Tatas and Birlas (Aditya Birla group) were refused a banking license, is naturally a question worth pondering. Could it have had something to do with Bhansali recruiting ex-State Bank of India chief M.K. Sinha as the head of his banking outfit? Could it have had to do with his supposed closeness to Janata Party MP Subramanian Swamy, who, sources claim, could have pushed a few levers here and there? Then, in November 1996, a routine RBI inspection revealed that the CRB group was misusing public funds and misreporting income. The RBI withdrew its banking approval, but Bhansali coolly issued his Esteem Bonds, and raised money to actually feed the promoter's contribution in his bank. Where did Bhansali mess up? He needed more and more money to feed his cycle, and his supplies were not matching his demand, for once the cycle is set in motion, it's hard to get off. He started offering absurd incentives for making FDs in his company and began borrowing at exorbitant rates from the inter-corporate market. Much of that money would go into servicing his depositors, paying back their principal and interest. The cycle was fast turning vicious, and the only way he could have saved his empire was to set up the bank and mobilise a new large source of cheap funds. That did not happen. So he tried the last trick in his book. CRB serviced its depositors through the SBI. 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, CRB quietly stopped making the advance payments. Amazingly, no one in the SBI seemed to have noticed. That the SBI suddenly was inundated with redemption requests points to a colluded conspiracy to defraud the bank. The bank kept encashing the cheques till the figure hit the Rs 60 crore mark, when someone sat up and took notice. Then the cheques started bouncing, and the faecal matter hit the air generator. Chain Roop Bhansali is, however, still absconding. While rumours about him being sighted at places ranging from Canada to Hong Kong and Peru abound, the Central Bureau of Investigation is convinced that Bhansali is still in India. There are even rumours that he could be hiding in a prominent politician's home in Delhi or Chandigarh. For Bhansali has never lacked friends in need. Are You Interested? CRB could be just the tip of the iceberg as other finance companies struggle to raise funds. By SHEKHAR GHOSH YOU can almost smell them by now. The symptoms of diseased non-banking finance companies (NBFCS) are like those of an epidemic: flashy brochures, media hype, ambitious plans and diversifications, fancy recruitments at fancier salaries. "When the ego of an NBFC starts riding piggyback on the promoter's id, it's time to run away as fast and as far as you can," says a BSE broker. CRB is the classic case—from the sudden hype claiming dubiously to be the number one merchant banker in the country to C.R. Bhansali's pathetic attempts at snatching influential positions. He failed to become chairman of the Association of Merchant Bankers of India. Organising seminars on financial markets where he himself would be a prominent speaker was another route to respectability. The CRB Foundation for philanthropic and religious activities also helped. The reality is that the CRB debacle will be felt by 45,000-odd finance companies in India. How risk-free are the fixed deposits that many of these companies are offering? Though several NBFCS had managed to land respectable ratings from credit rating agencies, the high interest rates offered by these companies should have made the investors suspicious. Many of them were offering FD rates of 18 and 19 per cent, with broker incentives of 12 per cent, plus free gifts ranging from thermos flasks to colour televisions. The cost of funds for these NBFCs come to over 30 per cent. To make even a minimal profit, they would have to lend it at 35-40 per cent. Says G.C. Garg, managing director of Lloyds Finance: "investors should have been aware that anyone paying such high interest rates were certain to default in repayment of principal." The very nature of the NBFC business too make the companies vulnerable to asset-liability mismatches. Most NBFCS use fixed deposits as their source of funds. Typically, their borrowings have one-year terms. But, the businesses most of them indulge in are leasing or hire purchase, which mean an average lock-in period of three to five years. In essence, they were borrowing for one year and blocking up funds for between three and five years. Thus every year they needed to raise fresh FDs just to repay the old amounts. This worked as long as interest rates were rising. But with a falling interest regime, the bottom was bound to fall out. Besides, instead of blocking the funds in leasing, many NBFC's started resorting to paper leases, without any assets to exploit depreciation and tax benefits. Lack of growth has forced many NBFCs to defer their tax liabilities from one year to the next. "Future tax liabilities of these companies will be far more than their net worth. ITC Classic's net worth is already in the negative to the tune of Rs 473 crore. The cumulative effect on non-performing assets will be almost exponential," says a dealer at NSE.. "In three years, the deferred tax liabilities alone could wipe off over 50 per cent of the NBFCS. " MANY would also be very highly leveraged. After the prosperous markets of 1994 and 1995, many companies have been left holding worthless paper, the result of bought-out deals or fly-by-night new issue operators. At the BSE 358 NBFCS are languishing below issue prices. Sixteen are quoted at issue prices while only 357 are quoted above their issue prices. According to market observers, the CRB fiasco will only accelerate the shakeout, and several NBFCS could be wiped but as investors get choosy. The RBI has shortlisted 10 major companies for closer monitoring of their activities: ITC Classic, Peerless, IFB Finance, Ceat Financial Services, Prudential Capital Markets, Pressman, Srei International, Magna Leasing and Jenson & Nicholson Financial Services. And yet some 17 NBFCS, all of the above included, have also been registered by the RBI as satellite dealers in the specialised, high-volume, low-margin government securities market. Strange, for companies like Kotak Mahindra and DSP Merrill Lynch were given the satellite dealerships much after little known names with unproven records like RR Financial Consultants, Foresight Financial Consultants, Hoare (India) Securities, Dil Vikas Finance, Prudential Stock & Securities and A.K. Capital Services. "This is what makes the RBI suspect," says a banker alluding to the political connections of the promoters of several of these "dark horses". For instance, sources refer to the political connections of the Calcutta-based Vinod Bald-promoted Prudential Stock & Securities, which has taken over the dubious mantle of. "No I merchant banker" from CRB. Having acquired Sikkim Bank last year, the Hyderabad branch of the bank was inaugurated by none other than TDP MP Renuka Chowdhry and Prabhakar Rao, Narasimha Rao's son. The papers carried huge ads of the inauguration to drive the political connection home. For the time being, the attempt is to avoid a run on the NBFCS. Even the bluest of the blue chips are running scared. Soon after the CRB exposure, Anagram Finance issued an ad saying they are open 24 hours, primarily to evade a psychological run on their FD withdrawals. Some NBFCS are also selling their assets like no other. A lot of assets are being sold in the bourses these days, mainly by finance companies desperate to recover whatever liquidity they can. Market experts are betting that several NBFCS Will soon be offered on the auction block. ITC tried to sell off ITC Classic, but there were no buyers. "Classic may be the first, but some of the blue-chip companies are also being negotiated at ridiculous prices," says a chartered accountant. Call it the wages of sin. WARNING SIGNALS Before putting your money in an NBFC fixed deposit, check out the following points: * Is the company offering a very high interest rate, and hefty incentives? * Has the company shot to prominence in the last few years, growing very fast? * Has it suddenly begun advertising heavily, especially on television? * Does it list plantations and real estate among its principal businesses? * Is your fixed deposit broker pushing the company very strongly to you? If the answer to any two of these questions is yes, think twice. RBI Governor R. Rangarajan claims he was not aware of the irregularities in the way CRB was using public money. HOW THE SYSTEM FAILED CREDIT RATING AGENCIES Rating agency CARE assigned an A rating, signifying investor safety, to CRB's FD programme in September 1996, after noting in its report that CRB had liquidity problems, defaulted on loans, and that its asset quality was deteriorating. After RBI stopped CRB from raising fresh FDs; CARE, which claims to have been monitoring CRB all through, woke up and downgraded its rating quickly to C, denoting high investment risk. THE AUDITORS CRB's Calcutta-based auditors D.P.Bhaiya and Company never pointed out any irregularities in CRB's operations, Though the firm would have had to be blind to miss them. Just as ITC Classic's problems remained unreported by its auditors till the company collapsed. The company-auditor nexus is suspected to be fairly common in the country's financial services industry. THE RBI The July 1996, RBI gave an in-principle banking license to CRB, a rare honour. In November, an RBI inspection showed massive irregularities, but did nothing about it while CRB happily went on collecting FDs. In December, RBI put the banking license on hold, but turned a blind eye to CRB raising money for its bank. Only when reports started appearing in the media in April did RBI cancel the license and stop CRB from collecting FDS. THE SEBI SEBI remained a bystander while CRB managed scores of shady share issue to become the number 1 merchant banker in the country. SEBI gave CRB permission to start a mutual fund and a share custodial service. In April 1996, when SEBI discovered irregularities in CRB's mutual fund, it barred it from launching any new schemes. For just two months. THE SBI CRB's depositors encashed their interest warrants and refund orders through SBI. CRB was supposed to deposit the amounts in advance with SBI every three months. In February, CRB stopped this pre-funding and continued to issue warrants and orders, which SBI faithfully honoured, perhpas reassured by the fact that a former SBI chief was on the CRB board. Only when the unpre-funded payouts hit a staggering Rs 60 crore did the bank wake up.