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Banking on common sense

If you thought bank fraud accused Shivraj Puri swindling Rs 300 crore from gullible investors was an isolated incident think again. Mis-selling, or misconduct by financial executives that could lead to losses for investors, is happening more frequently than before. Sandeep Singh writes.

india Updated: Jan 09, 2011 09:26 IST
Sandeep Singh

If you thought bank fraud accused Shivraj Puri swindling Rs 300 crore from gullible investors was an isolated incident think again. Mis-selling, or misconduct by financial executives that could lead to losses for investors, is happening more frequently than before.

In 2007, a retired Supreme Court lawyer who had never invested in equities till he was in his seventies was misled into putting his lifetime earnings into the share market. The septuagenarian lost close to R45 lakh during the stock market crash of 2008-09.

The same year, a relationship manager (RM) with a Mumbai-based finance company coaxed a business executive into putting Rs 10 lakh a year into an invest-assure gold plan.

The lady was promised the plan would mature in three years and get her high returns. Then came the shocker: The plan had a maturity period of five years. When she stopped making payments, the company sent her a cheque with a notional value of less than 25 per cent of her investment.

The letter said her policy had been surrendered because she didn’t pay the premium in the fourth year. To get the money back, she now has to wait another two years.

The trend isn’t limited to big cities alone. Misled by the representative of a finance company, a retired government employee in Bhopal and his wife invested Rs 2 lakh into a unit-linked plan assuming it was a one-time payment that would fetch them healthy returns. A year later the representative turned elusive. The couple realised they would end up investing Rs 4 lakh over two years. Without a source of income, they didn’t know whom to turn to.

One big reason behind mis-selling of your investments could be the big differences in commission structures for financial products. While regulators are putting checks in place (see box), exercising a dose of common sense as an investor and taking a few precautions can prove handy.

So what should you do? Be watchful when it comes to investing your money and even more of the conduct of your RM. Pose a few basic queries before handing over the cheque for an investment. Evaluate the RM’s experience, educational qualifications and additional professional certifications such as certified financial planner or chartered financial analyst for selling mutual funds and other capital market products.

These will let you assess the depth of the knowledge the individual has and whether he or she would be able to manage your money.

Make sure to quiz him on conflict of interest. How is he compensated or how much commission does he get? Is he getting a flat fee on the money managed or commissions based on individual products sold. This will reveal if the individual is recommending products that offer him the most revenue. These needn’t necessarily be the ones that best suit you.

Industry experts say regulation of advisors is a must. “Entry-level barriers must be in place. At present anyone can claim to be a financial planner. A minimum education parameter or a certification should be made mandatory for anyone offering financial advice,” says FPSB India chief executive Ranjeet S Mudholkar.

“A regulator is needed in any case where high-stake monetary transactions are involved. The financial advisory needs to be regulated either through a separate regulator or a self-regulatory model where several regulators can co-opt,” adds Mudholkar.

Be careful this quarter
Better known as JFM (January, February, March) in the banking industry, it is the period when banks push high-revenue products under the garb of tax-saving instruments. Your relationship manager may approach you to invest in these products. Safeguard your interests and be cautious about what you are signing and to whom you issue a cheque.

Lessons learnt
Rattled by the Citibank scam, a former CEO of a large mutual fund who doesn’t wish to be named changed his
banking habits. For more than a decade, he never checked his statements in detail, but in the last four days, he went through all his family bank accounts with a fine comb.

“I discovered that a fixed deposit that should have been booked in October was not booked till December. When I asked the relationship manager he said it had already been booked. He finally booked it the next day. By then I had suffered a loss.” His RM has stopped taking his calls and the issue is under dispute.

“I’ve decided to manage my money on my own as relationship managers are driven by targets. This is the result of a new banking trend where fee-based income holds the key and banks assign high targets on certain products that may not be the best solution for customers.”

Anatomy of the Citibank Scam
How a soft-spoken relationship manager duped high net-worth individuals of Rs 300 crore

* Shivraj Puri, a relationship manager with Citibank in Gurgaon for seven years, allegedly showed forged Securities and Exchange Board of India (Sebi) documents to the bank’s clients that promised returns of more than 15 per cent per annum for investments made in certain accounts.

Fixed deposits offer around 8 per cent interest these days n He induced investments from close to 25 high net-worth individuals in excess of R 300 crore and allegedly deposited the money in three fictitious accounts that he had opened in the names of his grandparents and mother

* Then Puri reportedly transferred the money into brokerage accounts with Religare Securities and Bonanza Capital and diverted the funds into the stock market. The brokerage houses, have, however, frozen those accounts since then.

* In the meantime, Sanjay Gupta of the Hero group was also linked with the fraud for allegedly getting kickbacks of upto Rs 20 crore from Puri for transferring money from various Hero Group companies into accounts used by Puri

* Recently, two officials from another Hero group company were held for alleged involvement with Puri and diverting investments of the company into his accounts

* Both the Reserve Bank of India and the Securities and Exchange Board of India are investigating the issue

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