The fall of a deal-maker

Bhansali’s skill with deal making, of course, goes back to 1985 when he capitalised on the leasing boom of that period and set up dummy companies, and sold them to investors who needed dummy companies. Clearly, a man who spotted opportunities in the making, Bhansali floated a mutual fund when the mutual fund industry was opened to the private sector; floated a stock-broking firm when SEBI framed guidelines for this. The piece de resistance, of course, was his attempt to float a private bank when the RBI made it easier for the private sector to do so.

In retrospect, Bhansali’s modus operandi seems horribly simple. He used the oldest trick in the book to gain investor confidence. To raise money from the market, he would use his own funds to jack up share prices. In January 1995, for example, when CRB Capital Markets entered the market to raise Rs 90 crore (at a premium of Rs 90 per share), the company’s share price was Rs 142 each once gullible investors sank their millions, its value declined dramatically. The price behaviour of another company, CRB Corporation, peaked much the same way during its public issue.

The CRB Caps raised a total of Rs 176 crore between 1992 and 1995. And at a time when the best of mutual funds had difficulties raising funds, Bhansali’s Arihant Mangal Fund managed to raise Rs 230 crore. No, he didn’t get this from individual investors over Rs 220 crore of this came from corporates. Actually, that’s a bit of a misnomer, since the corporates (apart from a few) weren’t really the kind of corporates you’d associate the word with. Most of them were the kind of shysters that Bhansali himself was. It’s quite clear that these corporates invested in Bhansali’s mutual fund so that the fund, in turn, would invest in their stocks and drive their prices up.

With such a successful track record, interest rate offers of 24 per cent (plus a 10-per cent incentive upfront) and impressive dealers schemes Mercedes Benz and Esteems if dealers got more than a certain amount of deposits it’s hardly surprising that Bhansali got Rs 180 crore worth of deposits from small investors.

Bhansali’s biggest “achievement”, of course, was his understanding of the delays and the communication gaps between various agencies. Like Harshad Mehta before him, Bhansali sought to exploit precisely this island of advantage.

Knowing fully well, for example, that the communication between various branches of the State Bank of India was bound to be poor, he exploited this to full advantage. (In fact, the intelligence agencies are investigating whether the communication was poor or whether Bhansali bribed officials to ensure this happened.)

While Bhansali was authorised to issue dividend warrants up to Rs 50 lakh a month these were encashable at each one of the SBI branches across the country he withdrew close to Rs 2 crore a day in March, knowing fully well that no individual branch would be able to check with the head office.

And when the SBI discovered in the first week of March that Bhansali had withdrawn Rs 20 crore more than he was authorised the master con-man assured officials that he would make good the money soon as he had some “payment difficulties”. Having convinced them, he continued to withdraw funds with gay abandon, and finally duped the SBI of Rs 57 crore by March 19 when they froze his account.

It was similar “aplomb” that helped Bhansali ensure that the credit-rating agency CARE gave him a good rating, and that the RBI took his banking license application seriously.

Knowing very well that credit rating agencies in the country were desperate for business and would not perhaps scrutinise his books very closely, Bhansali asked CARE to rate his company. While doing so, he was conscious that CARE would not pay much attention to the fact that another credit rating agency ICRA had given his company a speculative rating.

What he also did was to appoint his old friends from his Calcutta days — D.P. Bhaiya & Co and Jain & Swakia — as his auditors. They window-dressed his balance sheets which CARE, it is now obvious, decided to take at face value.

What of the poor RBI? Bhansali’s public relations and penchant for picking up big names must surely have dazzled the central bank. Bhansali hired ex-SBI chief M.K. Sinha as the head of his proposed banking outfit; tied up with Daewoo Securities of Korea; and dropped names of leading politicians like Subramanian Swamy, J.B. Patnaik and Bhairon Singh Shekhawat. The fact that friends Bhaiya, Jain, and Swakia helped show a healthy balance sheet could only have added to the show.

It was then that the seeds of his destruction were sowed. With a series of complaints coming from investors of non-banking finance companies, the Government decided to bring in an ordinance which made it mandatory for NBFCs like Bhansali’s to register themselves with the RBI and open themselves up to inspection till then, despite the application for a banking license to the RBI, the RBI did not have the powers to inspect his books (or indeed, those of any NBFC).

The rest is history. After inspecting his books in November 1996 and then going through a process of discussions with him, the RBI withdrew the “in-principle” banking license issued to him earlier. After this, the problems compounded, and investors began to lose faith in him. The fact that, like scores of other investment companies, a large part of his funds were stuck in the depressed capital market, only made the crisis more real.

To finance the cycle of high-interest deposits, Bhansali now got desperate. As his former associate Sub Karan Jain told the CBI a couple of days ago, it was after January that Bhansali began cashing interest warrants from various banks with a vengeance.

Known as a man who never gives up, Bhansali is now trying to throw the investigating agencies off-track by blaming SBI officials and by naming his political contacts. Unfortunately for him, however, the investigating agencies appeared to have learnt their lessons from Harshad Mehta.