On April 9, the Reserve Bank of India issued an order to CRB Capital Markets Ltd. not to accept or renew any further fixed deposits from the public. This was a bombshell to a large number of people who have deposited crores of rupees in the company.

The company in its announcement declared itself as the second largest constituent of the private sector in terms of net worth of Rs 436 crore as on March 31, 1996. No one ever disputed these figures and the rating agency CARE had earlier granted A + (F.D. rating) to the company, which was later revised to CARE A (F.D. rating). To the best of our knowledge and information, rating A indicates adequate safety regarding timely payment of interest and principal amount.

The duly audited accounts of the company as on March 31, 1996, also reflected a healthy bottom line with a net profit (after tax) of Rs 52.32 crore. The company has been consistently showing profits and the net profit figures (after tax) as reflected in the balance sheets for the year ended 31.3.94 and 31.3.95 were Rs 21.70 crore and Rs 45.67 crore respectively. The company's reserves and surplus as on 31.3.96 stood at Rs 379 crore against its equity capital of Rs 56.74 crore. All these figures indicate a very sound financial position and, no wonder, investors did not find any risk in placing their funds for a period of one year at least! The company also stated in its application form that it was ranked at No. 1 amongst all finance companies in overall performance. Even RBI had granted in principle approval to the company to set up a private sector bank, which was an exceptional case and was termed as recognition of the financial soundness and good management of the company. The company had a consistent dividend track record also.

Obviously, with such credentials backing the company and the rating agency or any other authority not giving any red signal or warning to the investing public, the investors considered the company a safe place to park their funds.

After the first damaging report pertaining to RBI order, bad luck has followed the company practically in a fast sequence. The rating agency CARE, in the first instance, downgraded the rating to A and subsequently, when another report about a possible fraud with SBI appeared, reduced it further to ``C''. All this is fine but the rating agency should note that the downgrading came only after the RBI order and reports of a possible fraud with SBI.

The public at large have considerable faith and confidence in RBI, Maybe the situation could have been better managed by granting the company a few months' time to regularise its limits under direct and strict control of RBI. Would it not have been more prudent to effectively control and monitor the company's operations than exposing it to adverse publicity? No one should have any sympathy for the management of the company which has played havoc with investors' funds and the law should take its own course to deal with them. However, pragmatism demands that the utmost care should be taken to protect the interests of thousands of ordinary investors.

Senior bankers and chiefs of well known finance companies are agreed that rather than placing an embargo on the company from accepting or renewing any further deposits, a better solution would have been for RBI to take control of the affairs of the company, place its nominees in key positions of the company for the time being and allow it to continue its operations.

Instead of this, by issuing an order, the company's prestige has been tarnished to a great extent. There is panic alround. Under such circumstances, even sound financial institutions/banks will be under pressure.

Before it is too late, it is suggested that the company's board be immediately recast with the inclusion of eminent professionals and well-known experts in the fields of finance and management and the control of the company be taken over by appointing a full- time CEO who has proven professional credentials and enjoys the confidence of RBI. He may report to a committee of directors and RBI and work for safeguarding the interests of the company as well as the depositors.

Probably, the consequences of such a large finance company failing are not clearly visualised by all concerned. If timely action is not taken by the concerned authorities, more than Rs 500 crore will be lost, harming thousands of individuals, companies and banks. It will also create an atmosphere of loss of faith in the non-banking finance companies as a whole, which will be very harmful and detrimental to the economy at large.

In 1992 the country witnessed the massive securities scam and we are still fighting to overcome its adverse impact. Let us not suffer the fixed deposit scam 1997, for lack of urgent action by all concerned authorities to safeguard and protect the interests of thousands of small investors, who are on the verge of losing their money.

The author is President, The Guj. Investors' & Shareholders' Association.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.