Avoiding fraudsters

I have read reports in the press as well as heard about how investors get cheated by third-party distributors. Can you please throw some light on this issue by explaining how it happens? If I invest via a distributor, what must I do to protect myself? If I get cheated, will the fund house return my money?
- Jogender Yadav

Frankly, I am not sure how rampant this practice is. But there is no ignoring the fact that it does take place.

Let me start by explaining how the regular process works. Let's say you approach a distributor to invest in a mutual fund scheme. You submit the application form with a cheque in favour of the scheme to the distributor. He then submits it to the mutual fund and you get your units allotted. This is how the regular process is carried out.

Now the problem takes place if instead of submitting the application form in your name, the distributor submits a different one with your cheque. So it will be your money that will buy units for the person in whose name the application has gone. It could be his name or a family member. As the form is in the name of another, the Registrar and Transfer Agent (RTA) will record the details and the units will be allotted not to you but to the person whose name is on the form.

The distributor may choose to either sell the units quickly and pocket the money or stay invested. If he does so, then he will carry on the fraud by allotting you a forged or fake statement showing the allotment in your name.

Undoubtedly, this is scary for the investor. However, if you go with a distributor who is recommended by family and friends, or someone you have been doing business with all along, then trust should not be an issue.

Here are a few measures you can employ to avoid this.

• Insist on signing the application form as well as entering your name, email ID and phone number. No doubt, the distributor can cast away this form. So as a double precaution, also ensure that when you hand over the cheque, you have put your name, application number (which will be on the form) and contact number on the reverse of the cheque. Hopefully, the verifying authority will double check these details with that on the form.
• Within a day or two of your investment (do not wait for too long), ask the distributor for the acknowledgement receipt of the application form. When you get the acknowledgement receipt, check for broker ARN Number on the receipt.
• Again, within a few days, call the mutual fund's call centre or toll free number to ascertain your investment status - the number of units allotted to you and the portfolio value.
• Follow up with the distributor to ensure that you receive the account statement within 15 days of submitting the form.
• Investors should make the effort to get registered with both registrars, Computer Age Management Services Ltd (CAMS) and Karvy for an online consolidated account statement. This can be obtained anytime since it is auto generated and online.

If you run into a problem at the start with the distributor not giving you what you asked for, put in a complaint in writing to the respective Asset Management Company (AMC) or the market watchdog and mutual fund regulator, the Securities and Exchange Board of India (SEBI).

Now if you do get cheated, the AMC is not going to return the money to you since it is not the one responsible for this fraud. However, if you do act promptly and report the distributor's behavior immediately to the AMC or SEBI, and he is guilty, a police complaint will be filed by them. While it has not been confirmed officially, SEBI is mulling a regulation whereby the signature on the cheque must match with that on the application form. If they do come out with such a ruling, it would help in curbing this malpractice. It would be good if the regulations work in such a way that the ultimate beneficiary (investor) must be the same party whose bank account the cheque was drawn upon. And if it is an investment on behalf of a minor, a separate written permission should be attached.





This article was originally published on September 09, 2010.