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Action likely against SEBI, RBI officials over CRB fiasco

Heads are likely to roll at the Securities and Exchange Board of India and the Reserve Bank of India following the CRB crash.

Finance Minister P Chidambaram is worried about questions that will come up in Parliament about CRB and is moving swiftly to clean up the regulating bodies.

Both SEBI and the RBI have been asked to hand in reports on the CRB disaster. Thousands of investors lost their money when the CRB's non-banking finance company and its mutual fund collapsed.

SEBI allegedly did not inform the finance ministry about irregularities in companies like CRB Capital Markets Ltd and CRB Mutual Fund.

CRB Capital Markets functioned not only as a Category I merchant banker registered with SEBI but also as a non-banking finance company under an in-principle okay from the RBI.

Though reports of irregularities had been detected in CRB Mutual Funds some time ago, it is not clear if the SEBI board discussed it. A ban on the mutual fund launching new funds was retracted last year and reinstated after the collapse. The finance ministry wants to know if SEBI had alerted the public about the state of affairs.

The RBI has been accused for not taking timely action in the case of CRB's non-banking finance operations. The finance minister is reportedly not going to defend either the SEBI or the RBI, and the prime minister is unlikely to intervene if he sacks any senior official. But Chidambaram will still have a hard time explaining the actions of the two bodies, though he had no hand in appointing its officials.

Chidambaram will not defend them, as Dr Manmohan Singh did during the securities scam, but would describe what action was being taken.

The finance ministry has learnt that a Central Bureau of Investigation official who pointed out the odd way the SEBI was functioning was transferred when he suggested action be taken against a senior CRB official, The official kept his job.

It is alleged that the mandatory inspection was not carried out in a professional manner. Companies could manipulate timings of inspection and its outcome to ensure they stood to gain. SEBI had not acted even when irregularities were detected, it is reported.

The RBI deputy governor in charge of NBFCs appears not to have noted the irregularities in time. RBI officials were surprised that CRB had issued fully secured redeemable power bonds, exempted from tax by the Central Board of Direct Taxes, this March.

The Investors Grievances Forum, which collected claims from investors, produced documents proving this to RBI Governor C Rangarajan.

IGF president Kirit Somaiya, who is also a BJP MLA in Maharashtra, said senior RBI officials had told him they were not aware of CRB's power bonds.

Pramod Mahajan, MP, who led the delegation, said this showed the poor co-ordination between the different government agencies, adding that this collapse occurred despite the RBI putting the group under watch in December after the market regulator had pointed out several irregularities in the CRB Mutual Fund. The latter had barred CRB from launching new mutual fund schemes.

Forum members stated that they are still trying to locate investors who had invested in the power bonds. This is the second company in the private sector to have gained significant concessions from CBDT for investment in the infrastructure sector, they said. The first was TECIL, the Kerala-based Somany group company, But TECIL had a background in the power sector. However, no one seems to have been aware of CRB's foray into the infrastructure sector.

In the light of all this, the finance ministry wants stricter monitoring of how fixed deposit funds are used. An earlier RBI attempt to standardise credit rating norms to avoid misleading ratings of commercial papers, scrips and fixed deposit schemes will also be revived.

In the recent past various credit rating companies have given highly divergent ratings for the same bond or fixed deposit issue.

The government is also planning to set up a body to regulate teak and forest wealth deposit companies since there is little control on them though they offer abnormally high interest rates.

Other measures being considered include compulsory insurance cover for fixed deposits, special audit of NBFCs, a computerised database of NBFCs, quick reporting system for bounced cheques issued by finance companies and major corporate firms. It is also planning to set up a body to regulate NBFCs exclusively.

The finance ministry also plans to ask the CBI for a report on its investigations into the CRB Caps case and perhaps seek that the investigation also cover how funds were deployed and if they were siphoned out of the country.

The CBI is currently inquiring into how the SBI granted unsecured loans worth Rs 580 million to CRB and has registered cases against several top SBI officials as well as against Chand Roop Bhansali, chairman of CRB Caps.

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