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RBI Must Crack Down

Investors who take the trouble to understand investments seldom get trapped in scams

It’s been over a month since the outrageous scandal in a Citibank branch in Gurgaon came to light. The bare facts of the scam are well known. Shivraj Puri, a relationship manager in the bank, conjured up an imaginary investment scheme that Citibank was supposedly running. He forged documents about the scheme, including a letter from SEBI permitting the bank’s branch to run the scheme. On the strength of these documents, he took over Rs 300 crore from the bank’s wealth management customers. He leveraged this money up to Rs 1,200 crore and traded in Nifty derivatives with this sum. Eventually, he lost most of the money and the scam was discovered.

I’m clear about one thing — even though a relatively junior bank employee actually carried out the scheme, the ultimate culpability lies higher up the food chain. The scam was implicitly facilitated by Puri’s seniors in that branch, by Citibank, by the practices of the wealth management industry, and by the Reserve Bank of India. It is the banking regulator that turns a blind eye to all kinds of decidedly un-banking activities that have become major businesses for banks.

The word ‘bank’ imparts a certain halo to everything that comes under it. When banks misuse this to hustle stocks and investment schemes like brokers, then the situation is ripe for not one but many Shivraj Puris. It is far easier for a scamster who is carrying a bank’s card to dupe customers than it would be for a broker or an independent financial advisor. I’m eagerly looking forward to the RBI taking steps that would crack down on the practices that facilitated this scam. I believe that every Indian who is the customer of a bank has the right to expect such action from the banking regulator.

The ease with which a bank’s customers were duped by a bank employee brings to attention the extent to which procedures have been tightened by SEBI in the mutual fund industry. In mutual funds, it’s not possible to invest except by paying directly from the investor’s own bank account directly into the account of the specific scheme in which the investment is being made. During redemption, the fund will only pay directly into the same investor’s account. Investors directly get account statements from the fund company. They can also opt to get SMS and email notifications and the actual value of their investments. Similar safeguards exist in the case of stock investments. Investors are compulsorily informed of each individual transaction and can themselves visit the depository’s website for verification.

What makes the present case particularly egregious is that Citibank and other wealth managers specifically arrange things in such a way that the above measures can be circumvented. Customers give blank cheques so they don’t know where the money is going. Apparently, they also don’t get statements directly from funds so they have no first hand evidence of where the money has gone or where it’s coming from.

However, regulatory tightening aside, investors can solve this problem themselves. The solution is simplicity, and self-help. Investors who take the trouble of understanding investments and taking their own decisions never get trapped in such scams.