Bank Scams
1. The Securities Scam:
Banks sometimes execute transactions in government securities through the brokers. The brokers availed themselves of this opportunity by taking the securities from the seller- banks and instead of delivering those securities to the buyer- banks they raised a considerable volume of money by pledging these securities.
This volume of money was pushed to the stock market for purchasing shares. In some cases false bankers’ receipts were also issued to the buyer-banks. In case of Harshad Mehta, it was observed that he found sellers in United Commercial Bank and National Housing Bank, besides others. Acknowledging the transactions, these banks issued bank receipts.
But in fact these banks did not hold any such securities involved in the said buying and selling transactions. The issuing of bank receipts indicates the sale of securities.
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When the securities involved in the said sale are not held by the seller banks, the process is known as short-selling. These bank receipts are normally routed through the brokers.
In case of this practice, the bank receipts were handed over to the brokers instead of handing over to the buyer banks. Thus, the brokers raised as much money as they could by pledging the bank receipts they managed to collect as collateral securities.
Naturally these funds were transfused into the stock market for ‘extraordinary deals’ which had caused artificial shooting up of share prices. This total system used for engineering the scam is known as ‘the Securities Scam’.
2. The Scam of Securities General Ledger:
The Reserve Bank of India’s Public Debt Office is to debit and credit the accounts of the respective banks for buying and selling of government securities and thereby get the Securities General Ledger Notes issued in favour of them.
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Instead of recording these transactions relating to SGL Notes in their books of account, the banks concerned often showed them in the brokers’ accounts with them.
So SGL Notes—a document showing the investment of a bank in its accounts with the R.B.I’s Public Debt Office—was used by the brokers to finance Ready Forward Deals with other banks without the knowledge of the bank concerned.
3. Scam of Ready Forward Deal:
As banks receive public deposits, it is the statutory obligation on their part to hold’ government bonds for maintaining statutory liquidity ratio which is to run at 1/3 of such total deposits.
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But holding government securities will lead to the loss of income on the part of banks for the interest earnings on these securities are much less than income on any non-government securities. So as to increase profitability, banks often buy and sell the government securities according to their operational programme.
Banks conduct this buying and selling through the brokers in securities. Under such circumstances, banks buy securities from the brokers on the understanding that the latter would buy them back after a certain period of time.
Similarly a bank sells these categories of securities to the brokers on the understanding that the former would buy them back when they would require it to do so as a statutory obligation.
This process was in practice as the parties in the fray of these buying and selling activities are well aware that the prices of the bonds issued earlier, which are of lower yields, would fall when the new issues with higher yields would come into the market.
And then it would be a matter of picking up the lower-yielding bonds from the market at cheaper prices against those bonds sold earlier at higher prices, making a clean profit of sizeable proportion. This is how the system would have worked.
The offending banks and brokers like Harshad Mehta had conducted activities in a way that resulted in this scam.
In some cases it was revealed that these Ready Forward transactions between banks and brokers took place merely on paper and the banks practically lent money to the brokers under the guise of a Ready Forward Deal violating the specific instructions and guidelines issued by the R.B.I.
4. Scam of Accommodation Bills:
It is further revealed that some banks, by adopting illegal means lent money to brokers against pledging of papers which are known as Accommodation Bills.
When these bills fell due, the bankers often provided funds to the brokers, to retire these bills by way of buying shares off the brokers in a ready forward deal.
5. Scam of Call Money:
In the course of enquiry to assess the magnitude and the facets of the scam, it has come to the surface that some banks lent money at call to some other banks and the records of such transactions appear in the lending banks but corresponding entries representing such money at call are found to be missing from the records of the receiving banks.
Instead, the bank accounts of the brokers involved in this transaction got credited with the like amount. The brokers thus used the money of the banks for their marketing activities.
In this context it will not be illogical to point out that this was made possible in connivance with the officers who were responsible for cooking up the books.
6. Scam in Bills Re Discounting:
This process of scam was made possible through rediscounting of bills. Usually, in case of rediscounting of a bill, one bank gets its bills rediscounted with other banks for financing the former’s financial needs.
This rediscounting of bills is carried out through the brokers who often acted as intermediaries. In course of rediscounting, bills are to be handed over to the banks that provide finance through rediscounting.
But surprisingly, to perpetrate scam, the said rediscounted bills were used by the brokers instead of handing -over to the financier banks on account of the former and the financing bank credited the account of the broker with the proceeds of the bill so rediscounted on the pretext that the broker would pay back when the bills would become due for payment to the payee bank.
Thus the proceeds of the bill of the bank that got it rediscounted for financing its own activities went into the hands of the brokers who shed the said funds in trading securities.
7. Scam in Portfolio Management:
Cash-rich public sector companies deposited huge sums of money with the merchant banking subsidiaries of banks under so-called ‘Portfolio Management Schemes’.
This money was made available to the brokers by the merchant-banking subsidiaries which entered into Ready Forward Deals in shares with the former.
In addition to the above, the gross irregularities and fraudulent activities in connection with the disposal of public- sector securities have been brought to light in the 14th Report placed before the Parliamentary Session of 1993. The report highlights the following which simply reveals the real nature of the highest scam ever experienced in Public Sector security deals:
1. The floor-value of shares of the public sector units has been fixed at a point which is unusually low.
2. Without obtaining proper permission, the aforesaid floor-value has been further reduced and the shares have been sold to unknown buyers allowing them to make profits ranging from 126.62 per cent to 615.53 per cent.
3. The Public Enterprise Department (PED) has allowed the banks and mutual funds to hand over securities of the public sector units to foreign banks and private sector undertakings without obtaining any kind of permission from the government to this effect.
4. A sub-committee of the PED has disposed of those shares of the public sector units which were decided not to be sold to the private owners.
5. This report has accused the Government for squandering away public funds collected through the disposal of shares of the Public Sector Undertakings, by way of spending under the Head of Revenue Expenditure as it is purely unconventional.