CRB Group Bhansali

Higher returns invariably carry higher risks. Indian investors, long used to the cozy security of depositing their savings in state-owned banks, have many a times learned the truth of this maxim. Some may end up paying dearly for the tuition. Bhansali siphoned away investors’ money to the tune of 1200 crores through various lucrative investment schemes over a period of 4-5 years. The chief financial regulatory bodies like SEBI and RBI failed to sense the possibility of any fraud involved in the rosy schemes.

The doubts began to roll in 1995-96 following which the scam came in light.CRB Group Bhansali was born in a jute trader's house in Calcutta. After obtaining a degree in commerce, Bhansali became Chartered Accountant in 1980. In the same year, he started a financial consultancy firm, CRB Consultancy.

CRB Consultancy soon managed to secure the business of providing issue management services to a few well-known companies in Calcutta. Though he made a lot of money, Bhansali found it difficult to find recognition 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.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 was able to raise 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 had a reputation of cooking up some accounts and balance sheets for them and selling them off to crooked businessmen. The company offered various schemes like 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 CRB Mutual FundIn early 1990s, Bhansali had floated several deceitful companies in the market which comprised of CRB Capital Markets, CRB Mutual Fund ; CRB Share Custodial Services and 133 subsidiaries and unlisted companies (basically the dummy companies).

Through his three major companies, he pulled in massive chunks of public money by way of fixed deposits, bonds and debentures which were then transferred to his dummy companies. The money came in easy to him for years (from 1992-96) owing to the rosy picture he showed to the investors, the irresistible bait of high interest rate (24% - 32%) and proposed entry into the banking sector.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 scripts while the remaining 20 per cent was distributed over 289 scripts. And around 30 of the 65 scripts on which Bhansali has been so bullish are in unquoted securities.

Bhansali and his partners in the fraud routed their money into Bhansali's mutual fund; The Mutual fund re- routed it back to them by buying shares in their companies from them. The oldest trick in town, but no one in authority appears to have moved a finger.CRB Global BankBhansali and the NBFC CRB Capital Markets applied to RBI for banking license. The main motive of applying for banking license was to increase his fraudulent network of funds.

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 money flowing in an ever-widening circle with Bhansali and his clients/partners taking their cut out at every juncture.With the bank in operation, Bhansali would have access to more public savings than ever before, and that circle would reach its apex, moving funds faster and faster, wider and wider.Defrauding the SBIIn 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. Claiming 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 was promptly done by him.

Exposure of ScamIn November 1996, a routine RBI inspection revealed that the CRB group was misusing public funds and misreporting income. The RBI withdrew its banking approval that it had given earlier on which the entire system of Bhansali banked.The operations of CRB needed more and more money to feed the cycle, and supplies were not matching the demand. As a last resort, Bhansali 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 mobilize a new large source of cheap funds.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 en-cash the interest warrants and refund orders that CRB depositors sent the bank. In February 1997, CRB quietly stopped making the advance payments. SBI suddenly was inundated with redemption requests which points to a colluded conspiracy to defraud the bank. The bank kept en-cashing the cheques till the figure hit the Rs 60 crore mark, it got noticed.

Then the cheques started bouncing and exploded.Hunt for BhansaliOn May 18, 1997 - hundreds of angry, frustrated and scared people stood outside the Reserve Bank of India's (RBI) Mumbai headquarters waiting for Chain Roop 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 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, to search for Bhansali.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 rumours 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.” 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.

Reason for Collapse of CRBThe 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 color televisions. The cost of funds for these NBFCs comes 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 was certain to default in repayment of principal."The very nature of the NBFC business makes 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.