BackThe murky world of suitcase banking
Early this month, when CBI arrested a broker in Delhi for alleged involvement in paying the Syndicate Bank chairman `50 lakh to approve a loan, another broker in Mumbai celebrated the arrest
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Investors rushed to buy public sector bank stocks last week after the finance ministry made it clear that the government would look into corporate governance issues and strengthen risk management in these banks in the aftermath of the bribe-for-loan scandal that hit Syndicate Bank and employees of two other state-run banks who were found to have gobbled up depositors’ money.
Both the banking regulator and the government, the majority owner of such banks, now seem to be determined to clean up the system. It’s not an easy job as the major risk, in some cases, is the senior management itself. But that’s one leg of the problem. Who will look into the other leg—the so-called investment banks, non-banking financial companies (NBFCs) and advisory services firms that entice bankers to indulge in what the industry calls “suitcase banking"? Investment banks are regulated by the Securities and Exchange Board of India (Sebi) while the Reserve Bank of India (RBI) oversees NBFCs. Will they take a close look at the murky world of suitcase banking?
Early this month, when a broker was arrested by the Central Bureau of Investigation (CBI) in Delhi for his alleged involvement in paying the Syndicate Bank chairman ₹ 50 lakh for approving a loan to a steel company, another broker in downtown Mumbai celebrated the arrest. According to some of his friends, he apparently claimed to have played a part in the arrest by tipping off the investigating agency. But back in November 2010, when this Mumbai broker had been arrested by CBI for his alleged involvement in a similar scam, the other broker—who is currently in judicial custody—had uncorked a bottle of champagne. For two years, in 2008 and 2009, they had worked together and then fallen out over differences over profit sharing. Indeed, profits were huge. Presentations and annual reports of the Mumbai’s broker’s company firm show that he was instrumental in syndicating ₹ 50,000 crore across sectors between 2008 and 2011. He had a virtual monopoly over a government-owned insurer and many public sector banks. He also tries to use the media to plant stories against his former colleague-turned-foe.
I am not naming either as I could not reach out to them, but I have spoken to many of their employees, friends and “admirers", former directors of the boards of group companies, regulators, bank officials and peers to get a sense of their world of operations.
Both are chartered accountants. One now runs a publicly traded NBFC with at least ₹ 900 crore capital and is planning to delist it. After being charge-sheeted in the 2010 bribes-for-loan scam, he had transferred a bulk of his holdings in his father’s name but he actively runs the company, which has stopped debt syndication and runs a real estate and small and medium enterprise (SME) lending business. The debt syndication business is now managed by a different company controlled by the broker and run by his Man Friday, a former employee of the NBFC. The core strategy is to do real estate financing by the listed NBFC, and apart from earning interest, enjoy other benefits in the form of sharing developed space in commercial buildings and residential flats being bought at hefty discounts by companies controlled by the broker and his associates. These deals are under the scrutiny of the regulator and rating agencies.
Pseudo partnership
The company has been rechristened thrice in the past few years. Originally, he bought one listed NBFC with whom his debt syndication business was merged. Post the 2010 bribes-for-loans scam, when his NBFC found it difficult to do business, he forged an alliance with a US-based fund house that agreed to lend one of its group shell asset management company’s name to the broker firm. There was no equity infusion, but the company’s name was changed to reflect the relationship with the US outfit. It is a pseudo partnership that in reality is a trademark and licence agreement without any investment or equity infusion sealed by paying close to $1million to the US fund house for the brand licence. He had raised $100 million in October 2010 through a qualified institutional placement (QIP) from leading private equity funds.
The broker was arrested in November 2010 in the bribe-for-loan scam. His NBFC does not take public deposits. The bank lines were dried up after he was arrested by CBI. Currently out on bail, he has been able to revive at least two bank lines of credit (both are Maharashtra-based)—for ₹ 50 crore each—because of his relationship with bank bosses. He boasts in banking circles that many more are in the pipeline. He also knows well an asset reconstruction company and often buys at a special rate flats and other properties sold by the company to recover dues. The first information reports in five cases where he was involved allege that this broker, in conspiracy with a few others of his company, offered “illegal gratification" to public servants of banks and institutions for “arranging suitable investments". While the CBI cases are on, the Enforcement Directorate (ED) has also apparently stepped in to probe allegations of “disproportionate wealth".
The second broker cut his teeth in banking with a Delhi-based financial institution. Later, he worked with new private and foreign banks. A wizard in corporate bond markets, he is soft-spoken and knows well how to cultivate bankers in the right places to get his job done. He is the head of a boutique financial advisory firm and a director on the board of at least five other group companies. Both the gentlemen offer credit solutions, debt capital market and investment banking—a euphemism for bribing bankers to get loans. The second broker apparently has more professional knowledge and capability, and was perceived to be more credible than the first one till he was caught early this month.
“Chai" is the favourite beverage of the first broker, as that gives him reason to catch up with high ranking officials. “Sir, chai peene aata hun chaar baje aapke paas" (Sir, I’ll be coming to you for a cup of tea at 4pm) would be the favourite “pick-up" line. He has a liking for expensive cufflinks, watches and pens. He would have the latest models of iPhone, iPad, Blackberry, and would be seen juggling between these gadgets while having a conversation with bankers. Till sometime back Blackberry Messenger (BBM) was his preferred mode of communication as it could not be tracked by the government, but now WhatsApp is catching up. Apart from these high-end gadgets, he would always have a few low-end Nokia phones in his car, with SIM cards taken in the names of loyal and long-serving “office boys". These phones carry out the “transactions". At times, a wireless landline phone would also be seen in the car. Typically, he drives an Audi A6 in Mumbai and a BMW 7 Series while in Delhi. He changes his cars regularly to be in sync with the trend.
The display of expensive cufflinks, watches, pens and phones helps him lure “poor" bank officials. A middle-level bank official whose monthly salary would be less than the value of his Swarovski crystal cufflinks or Montblanc pen or Blackberry Porsche or an iPhone 5 may compliment him on his prized possession. And lo, before his next visit, he would ensure that it reaches the banker’s table.
Recently, he bought a watch worth ₹ 15 lakh to wear to a meeting with one of India’s wealthiest men at a wedding in the family of a Gujarat-based businessman. He is a non-smoker and a teetotaller, but knows that popular brands of liquor—Glenfiddich, Talisker, Laphroaig—are all acceptable gifts to senior bankers. “Sir, I picked it up from Duty Free... You know I don’t drink and I know you’re a single-malt connoisseur," he would say while handing over the bottle sheepishly. Both his office and home are stocked with bottles of single-malt whisky to cater to the corrupt connoisseur.
For the bank officials who are not that corrupt, god comes to the broker’s rescue. A silver Ganpati idol for Maharashtrians, a silver Balaji wall piece for South Indians, and an expensive Radha-Krishna for North Indians come in handy. He would say, “Sir, Bhagwan khud dwar pe aye hain, vaapas bhejna theek nah hai" (God has himself appeared at your doorstep, it’s inappropriate to send him back), and a typical god-fearing banker would oblige him.
A fortnight ahead of Diwali, his entire office gets involved in the gifting process. Everybody has to submit their requisition, based on the might of the concerned official and his prospect of becoming an executive director or the chairman of a bank and the gent would personally oversee the entire process. Vouchers of a retail chain worth ₹ 5,000 to ₹ 50,000 would accompany gold coins for bank officials who don’t have the courage to ask for cash. Round the year, one of his trusted lieutenants runs a “travel desk" for the corrupt officials. She would book flights, hotels, trips to hill resorts, first-show tickets of movies—whatever the officials want. Standing instructions are issued by him to oblige all requests.
Net cast far and wide
Incidentally, these brokers do not target the banking community alone—insurers, mutual fund managers and even private equity funds also get trapped in their net, cast far and wide. One of the fund managers of an asset management company, owned by a large insurance outfit, used to frequently travel overseas at the expense of the Mumbai-based broker who believes he can buy anybody with wine, women and wealth—not necessarily in this order, though. He has flats in Mumbai to entertain bankers; at times even hotel rooms are booked by his company for this purpose. The fund manager was given two high-end cars—a Ford Endeavour and Porsche—registered in the name of the broker’s NBFC and he used to stay in a flat provided by the broker.
In 2010, when Sebi mandated that so-called liquid funds also needed to be valued at their market price following the mark-to-market accounting procedure, the insurance firm-owned asset management company had to take a hit of more than ₹ 100 crore as this fund manager had bought all sorts of short-term debt papers under the influence of the broker at a price higher than what was prevailing in the market. The entire money market was aware about his dealings, but because of his clout and blessings from senior officials from the parent company, nobody dared to touch him. In fact, he was featured as one of India’s best fund managers by a financial magazine in 2010. After he was exposed following the arrest of the broker by CBI, the fund manager was shunted from Mumbai to Delhi and then to Guwahati. A Japanese company later picked up a stake in the asset management firm and the entire loss was absorbed by the insurance company, owned by the government.
This broker, who originally hails from Rajasthan, would invest in “relationships" with high-ranking officials who may not be in a direct position to take decisions but would pass on information on policy changes and other investment criterion, which he uses deftly. For instance, the investment committee of a state-run insurance company once decided to pick up double-A rated papers, too, besides triple-A rated papers. This piece of information, passed in time, was too precious for the broker. He used it to claim a hefty fee from double-A rated companies (who were not aware of the internal decision) to place their papers with the investment company. In addition to cash benefits, the officials who pass on such information are also promised directorship and advisory roles in his companies post-retirement. Some of them are now on the board of the broker’s NBFC.
This broker prefers to work on “all-inclusive" mandates. Such mandates do not talk about fee explicitly, but if he manages to get the deal done at an interest rate that is lower than what he had committed, he would pocket the difference. This means, if he commits a 14% rate of interest to a client and “manages" to get it at 12.5%, he would charge 1.5% as his fee. Such all-inclusive mandates illustrate his confidence in striking deals at a cheaper cost because of the nexus between him and the senior bank officials. He also claims to be playing a role in the appointment of chairmen of public sector banks and even regulators. For him, everything can be done at a price and everybody can be bought. His favourite line is: Kitne-ka aadmi hai? (What’s the price of this man?). It’s time the regulators took a close look at such intermediaries to make the financial system safe.
Tamal Bandyopadhyay, consulting editor of Mint, is advisor to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to bankerstrust@livemint.com
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