NEW DELHI: The total amount involved in the stock scam has now been placed at Rs 3542.78 crore up by about Rs 500 crore from the estimate made by the RBI committee in June.

Besides revising upwards the financial involvement of the banks and financial institutions, the second interim report of the RBI committee headed by the deputy governor, Janakiraman, also reveals glaring deficiencies in the internal control mechanism in the entire banking system.

The first interim report had estimated the total sum involved in the scam at Rs 3078.96 crore. While raising the estimate by about Rs 500 crore, the second report puts the total net problem exposure, net of the value of securities seized from one of the parties or brokers, at Rs 3192.79 crore.

The report says that according to the latest estimate, the total value of investments made by banks and institutions for which they do not hold cither securities, SGL transfer forms or banker’s receipts, (BR) is of the order of Rs 196.84 crore. Of this, the National Housing Bank’s (NHB) exposure amounts to Rs 1271.20 crore.

The remaining amount, except for a sum of Rs. 400 crore for Standard Chartered Bank for which investigations are going on, had gone mainly for the benefit of the Harshad Mehta Group. The total sum involved in the other set of transactions where the banks and institutions hold BRs and SGL transfer forms issued by Bank of Karad and Metropolitan Cooperative Bank (both taken into liquidation) amounted to Rs,1470.12 crore. Of this, the exposure of Standard Chartered Bank comes to Rs.931.84 crore. The problem exposure of the Standard Chantered is thus the highest, at Rs,1332.20 crore.

The 72-page report has revealed a number of ingenious ways of diversion of bank funds in addition to the ones brought out in the first report. While banks and institutions have shown large payments as call money transactions, the funds had been credited to individual broker’s accounts. On the due date, the call loans had been repaid by debiting the broker’s accounts.

The report says that the banks had rediscounted bills of exchange but the proceeds and repayment had been routed through the broker’s account,

According to the report, the big bull, Harshad Mehta used the SBI investment account to finance his ready forward deals with other banks,

The merchant banking subsidiaries of public sector banks received large amounts of intercorporate deposits and these funds were made available to brokers under ready forward deals.

The RBI is finding out whether such investments could contravene the relevant provisions of the Companies Act, the report says and points out that in a number of transactions, the rates at which the sale of investments had been booked were at considerable variance with the rates at which counter-parties had booked their purchases,

In several instances, the banks and financial institutions had issued SGL forms against SGL forms brought by brokers and this was within the full knowledge of the management.

The scrutiny by the RBI committee has also brought out certain if regularities in Securities transactions relating to public enterprises shares.

During the 14 months between April 1,1991 and end May 1992, the banks had entered into sales/ purchase contracts in excess of 58,000 in number and 9 lakh crore in race value underlying securities. Two-thirds of these transactions were entered into by only four foreign banks. Over 70% of these transactions were in units of UTL.

The report has found that the security transactions entered into by the banks had been predominantly on ready forward basis of which over 60% were through the intervention of brokers. And of the total broker transactions, over 40% were through the intervention of only 4 brokers.

Over 20% in number and 30% in value of the transactions cannot be matched as the transactions have not appeared in the books of the counter party banks named by the reporting bank. The report clarifies that while this does not mean that the amount relating to these transactions is outstanding, it shows serious deficiencies in the systems of internal control exercised by banks and institutions over the treasury operations.

Article extracted from this publication >> July 17, 1992