Sucheta Dalal :Why Issue Cheques? - (MoneyLIFE Issue 14 Aug 08)
Sucheta Dalal

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Why Issue Cheques? - (MoneyLIFE, Issue 14 Aug 08)  

July 29, 2008

Exclusive news, the stories behind the headlines and the truth between the lines



Why Issue Cheques?


For sometime, we have argued that retail investors are one of the casualties of rapid automation of our capital markets and banking processes, and every few days we have a new example to back this. It is the season for profitable companies to pay dividends to their investors. But 10 years after the Securities and Exchange Board of India (SEBI) introduced mandatory dematerialisation for secondary market transactions and a year after a bank account and Permanent Account Number were made mandatory even for mutual fund transactions, companies are harassing investors by issuing dividend cheques even to those who have sought electronic credit.

A reader, P Venkatachalam, wrote that he has received a cheque of Rs10 from a reputed company like Dabur and was told that it would cost him Rs50 to deposit it. Similarly, he received a cheque of Rs60 from Bank of Rajasthan and paid out Rs65 as postage and commission for crediting it. Most investors would not bother to deposit these cheques and the money would fatten the unclaimed dividend account under the Investor Education and Protection Fund (IEPF), which is in the region of Rs400 crore already. Asks Mr Venkatachalam pertinently: why can’t the Ministry of Corporate Affairs (MCA) mandate that companies must issue ‘at par’ cheques to investors, or better still, credit the dividend directly to investors’ accounts?

Mayur, another investor, writes that companies mention the bank’s name and account number on the cheque, but refuse to credit it directly. This not only imposes a cost on the investor, but also reduces his options and prevents him from crediting the cheque to any other account. He says that JSW Steel even mailed a physical dividend cheque to his friend abroad. In fact, many non-resident Indians have complained about this tactic. Some of them have even received cheques after the validity period. Prem Gupta, the minister who presides over MCA, is fond of putting his photograph on investor protection advertisements, paid out of the IEPF kitty. It’s time he initiated some action to ensure that dividends are properly credited to investors’ accounts instead of swelling the IEPF.


Colluding Bankers


Remember the notorious Rajkumar Basantani of Soundcraft Industries, Adam Comsoft and Kolar Biotech who fled after duping investors and banks of a few hundred crores? The three companies managed to siphon over Rs200 crore from 30 banks that lent him money including Punjab National Bank (Rs11.5 crore), Bharat Overseas Bank

(Rs five crore) and Greater Bombay Co-operative Bank (Rs five crore). In each case, he collected money by inflating the value of physical assets that were offered as collateral security or against the ramped-up shares of the three companies. The media has reported some of this, including an investigation by the Serious Frauds Office, which unearthed 50 other companies floated by him and the fact that he employed drivers and peons as directors in his companies. The twist to this story is that while investors have lost their money, the banks have found a way to dump 90% of their losses on the exchequer -- that is, the general public. Activist Indur Chhugani says that the banks have recovered the money from Export Credit Guarantee Corporation by claiming that the loans were legitimately disbursed. Had the banks been more vigilant, Basantani would have been in no position to tap public funds and cheat ordinary investors through three separate companies. Chhugani has posted on his website the exact details about Basantani’s assets and the extent to which they were inflated. He says that despite his efforts, no action has been initiated against bank officials and the valuer who seems to have colluded in the fraud.


Need a Mortgage Registry


There is a flip side to the Basantani story as well. In the credit card business, issuers were forced to find a solution to the problem of wilful defaulters and fraudsters. With the help of MasterCard, they created a defaulters’ list (popularly known as the Satyam List, since it was hosted by that company) to weed out bad borrowers. The regulator reacted much later by encouraging the growth of Credit Information Bureau of India Limited (CIBIL) and quietly pressuring lenders to share their customer data with CIBIL.


The same thing is happening in property mortgage. Lenders are desperate for data that would help them weed out fraudsters who pledge the same set of documents with different entities. Lenders say that technology allows these scamsters to make authentic copies of documents or forge title deeds so skilfully that it is almost impossible to spot a fake. Often, the steep cost of registering a document makes it unfeasible. Sometime last year, banks such as Syndicate Bank, Canara Bank, State Bank of Mysore, Corporation Bank and Vijaya Bank in Karnataka came together under the State Level Bankers’ Committee and decided to set up a Mortgage Registry Mechanism to prevent fraud by sharing data on mortgages. They proposed a secure web-based solution that would capture key information about the property pledged as well as the collateral security offered. What pertains to Karnataka is true all over India. In fact, property data is in such disarray and so riddled with fraud that even legitimate owners of property are often blind-sided by fraudsters who falsify official documents by bribing tehsil-level officials into changing the original ownership records. The Reserve Bank of India needs to take the initiative to set up an asset registry that will put the entire financial system on a single platform to access and share data. This will make it faster and also safer to lend.


SEBI’s Many Battles


With CB Bhave at the helm of SEBI, the capital market expects a significant departure in the nature of regulatory action, but there is apparently no escape from some of the curious battles initiated in the past. For instance, SEBI has sent a notice to a Delhi-based individual threatening to file defamation charges. This is surprising, given that hundreds of letters, presumably from SEBI insiders, made the most damaging charges against SEBI’s top brass during M Damodaran’s tenure. Recently, SEBI decided to challenge the powers of the Securities Appellate Tribunal (SAT) to penalise the regulator. While the trigger for SEBI’s action is the rejection of its penalty against Goldman Sachs, there are several cases where SAT orders have exposed SEBI’s shocking lack of application and high-handedness in dealing with regulated entities. SAT had also imposed humiliating penalties against the regulator. It is interesting that SEBI is not challenging a particular order, but SAT’s very power to penalise the regulator.


In another intriguing order, the Central Information Commission (CIC) ordered SEBI to pay Rs10,000 as compensation to Mumbai-based Yogesh Mehta, who was forced to travel to Delhi five times to appear for hearings of the Commission because of a delay in providing information. Mehta was apparently seeking information about shares that had gone missing from the custody of the Bombay Stock Exchange’s Defaulter Committee. Although Mehta was denied information on the ground that the matter was sub-judice, it is a charge that SEBI ought to investigate irrespective of the Right to Information (RTI) query. This is especially important since the two national bourses do not accept that they are subject to RTI. In fact, the National Stock Exchange has gone so far as to challenge a CIC order declaring that it is a public authority under the RTI Act in the Delhi High Court. While the matter is sub-judice, there is a consensus among RTI experts that the bourse must, indeed, be subject to RTI as a public authority.



-- Sucheta Dalal