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)

Forthcoming frauds:

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 inĀ  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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  1. Sir,
    I can understand all the product that you mention in this article but why you say NSC and KVP as forth coming fraud they are issued and backed by GOI.

  2. Mohana India’s problems are in the Government, not in the banking system.

    NSC and KVP – there are people who say ‘your pass book is lying with me’ – and keep making fake entries – dematerialising and online could have helped a lot!

  3. in this regard i recall in one of my mutual fund statement , some units were shown as ‘under lien’ though i have not put any under pledge. when i inquired at call centre , he just told me not to bother . it is just for internal . still i did not understand , though the units were redeem by me then.same with the accounts of trade of shares with delivery , sent to me ,by my broker stating something unusual to understand , though final outcome seems correct. lazy to understand , but i think , it can harm sometime.

  4. ‘Under Lien’ obviously means that somebody had given those units to secure a loan of some sort. It also obviously means someone had access to your MF account details enough to use the available units and get a loan (maybe temporary) for himself. And when you did redeem them, they somehow ensured you got the money, maybe flipped the cash from somewhere else. Rest assured, if you saw those words and you didn’t give them as security yourself, somebody else did and got the benefit of that.

    As far as harm is concerned, if it so happened that the person who took the loan could not repay it, it would have been your MF units that would have been gone from your account. At that time, inquiry with call center will get you no response. Basically you would have been robbed by misuse of the financial apparatus, and you would have to blame your karma for it.

  5. Subra Sir,

    One fraud happened with my uncle wherein an agent took money in lieu of a new SBI Horizon policy. He submitted first year premium and put the 2nd and 3rd year payments in his pocket. My uncle came to know about this very recently. Is there any way we can teach a lesson to that agent?

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