SEBI chief washes hands off CRB fraud

In its report to the finance ministry, SEBI has listed the actions taken by the market regulator on CRB for its illegal activities in the merchant banking and mutual fund businesses. Declining to comment on the report, SEBI chairman D R Mehta said “SEBI is not the regulator of finance companies, deposit mobilisation and frauds in the finance business. We have taken action on its merchant banking division and mutual fund.”

For violation of norms on the merchant banking front, SEBI had taken action against CRB Capital Markets in 1995. CRB lead-managed the issue of Bajoria Chemtex which failed to get full subscription. Under the SEBI laws, the company and merchant banker in such cases will have to return the money back to investors within 90 days. As CRB failed to return the money, SEBI banned CRB from acting as merchant bankers on June 3, 1995. However, the suspension was revoked on August 24, 1995 as the company later returned the money to the investors.

Thereafter CRB Capital had lead-managed only two issues Sandhya Environs and Garware Petrochem in the year 1996-97. Of this, the Garware Petrochem issue failed. “After the Bajoria epsiode, CRB was not active as a category-I merchant banker. Whenever the company violated laws governing the securities market, SEBI has taken action. If you look at the developments concerning the CRB group on the merchant banking side and mutual fund, it is clear SEBI had stepped in whenever the group had violated norms,” said an official.

SEBI has already asked IIT Corporate Services the custodian of CRB Mutual Fund to freeze the securities held by it on behalf of the CRB Mutual Fund. In fact, CRB Mutual Fund has not come out with any scheme after its first (Arihant Mangal Scheme) which was floated t three years ago.

Kalyaniwala & Mistry, the audit firm appointed by the SEBI to look into CRB Mutual’s books, has indicted the mutual fund on several counts in its interim report. The major irregularity was that CRB Mutual Fund routed its business through the in-house stock-broking firm, violating SEBI norms. SEBI had asked CRB M F not to come out with any scheme till it cleans up its balance sheet..

According to Mehta, SEBI is now considering various legal options about the future of CRB M F. Market sources said dual regulation by various agencies had created confusion in the past also. In the CRB case, the Reserve Bank of India (RBI) was the regulator for its activities in mobilising deposits, functioning as a finance company and ensuring that it followed norms governing finance firms.

SEBI was only responsible for its merchant banking activities and mutual fund business.

In effect, SEBI’s report to MoF has argued that it is the RBI that had failed to to take remedial action for violation of laws by CRB in the last two years. On top of this, the central bank gave a banking licence to the CRB group. The RBI even now doesn’t have a clear picture about the asset-liability position of CRB Capital Markets.

The MoF has declined to comment on the content of the report. The finance minister is believed to have held a series of meetings to determine whether any action is to be taken against SEBI.