Well not all frauds have the same genesis, but let us look at one type of a fraud today.
The genesis of all frauds is, sadly greed. Sometimes it can be foolishness and lack of care and attention to detail, but it starts with greed and laziness.
One fraud in the BFSI space is when assets pass hands without consideration passing hands. Let me tell you the story in full…
Bank of Damascus wants to buy bonds worth Rs. 1 crore, but it cannot. Why simply because our great debt market has a lot size of Rs. 5 crores. So he does not buy. Then Bank of Athens wants to buy bonds worth Rs. 3 crores. Same problem.
There is one broker who says…’I will buy worth Rs. 5 crores and give you the split bonds’. Sounds good?
It sounds good to both the banks. So they give the broker cheques for the respective amounts. Broker buys bonds, and sends them the securities.
After 4 months the bankers want to sell – and the same procedure is followed in reverse…..
After a few years the broker tells the bankers….why don’t you let the securities lie with me? afterall when you have to sell, you need to send it to me.
At some stage the broker realises that the client could not care whether the assets exist or no, just a receipt saying ‘GoI bonds are lying with me on your account’ was good enough.
So he becomes a leveraged lender – without any banking rules applicable.
He takes money saying ‘xyz bonds are lying with me’ and buys equity shares. On the due date he pays off the bank.
All sound fine till the shares start going down or some bank insists on delivery and the broker is not able to produce it.
Easy to understand?
Act 1 Scene 1: Harshad Mehta
Act 1 Secene: 2 Ketan Parekh
Act 1 Scene 3: Home trade
Now take the government securities and replace it with commodities you will know what Jignesh allowed NSEL to do (Balakrishnan has written about this in his blog frustrations amalgamated)
National savings certificates, Kvp, life insurance policies – all that is refusing to go into a demat mode….
Already happening: Real Estate.
When your builder advertises and says ‘Pay only 20% now and the rest later’ – it means the bank is funding the builder. The builder uses the money to buy more land. One day when the buck stops, YOU will be paying the EMI for a house that you never got. God bless. (Deepak Shenoy has written about this in capitalmind.com)
Why do these simple instruments not go into demat form? hmmm
hopefully Raghuram Rajan will do something about that!!
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