Till four months ago, kulbhushan kumar suri and his wife vinod were leading a retired life everyone dreams of. they alternated between a comfortable villa in leafy rishikesh and their delhi residence. their children were married and well-settled. they had no financial worries because their investments were in safe hands. but the idyllic calm of this golden sunset was shattered in april this year when suri applied for redemption of some mutual funds. the retired civil engineer felt the ground beneath him slip when he was told by three mutual funds that there was no account of the rs 82.8 lakh he had invested over the past three years.
A shocked suri showed the receipts that subodh kumar, the relationship executive of a brokerage firm, had given him. these turned out to be fake - colour prints taken on an inkjet printer. using a mix of subterfuge, forgery and loopholes in mutual fund rules, kumar allegedly managed to defraud the couple of rs 82.8 lakh invested in various schemes of three mutual funds. these were lic mutual fund (rs 44.8 lakh), tata mutual fund (rs 28 lakh) and fortis mutual fund (RS10 lakh). "we have been cheated of our life savings," says Vinod.
Their fault: they were too trusting and didn't notice the telltale signs such as inkjet smudges on fake receipts. They also didn't question why the receipts were being delivered to them by the broker.
The modus operandi was simple. Kumar allegedly took cheques from the Suris to invest in mutual funds, but used them to do so in his own name by filling up new application forms. This was possible because cheques or bank drafts for investments in mutual funds are made out in the name of the scheme and can be used by anyone. Kumar would apparently withdraw the investments a week or so later and pocket the redemption proceeds.
Helping Kumar in his devious plan was a Securities and Exchange Board of India (Sebi) rule that allows third-party cheques for investments in funds. It has been almost a decade since the Suris began investing through a Delhi-based brokerage firm, H.L. Kapoor Investment & Financial Consultants. All went well till May 2008, when Kumar was assigned to them. As a relationship manager, he had access to the Suris' portfolio and knew exactly when they had investible surplus. Whenever their deposits or bonds matured, he would approach them with a proposal to invest in a fund. He also had their bank details, which he carefully mentioned in the fake receipts. Curiously, Sebi disallowed the use of third-party cheques for stock investments two years ago. This move was meant to prevent benami investments and money laundering.
However, there is no such restriction on mutual fund investments. "It is an anomaly that third-party investments are banned in one segment of the capital market and allowed in another," says Gajendra Nagpal, CEO of Unicon Financial Intermediaries. Suri is livid that no checks are conducted by mutual funds while accepting the investments. "This is a mockery of the know-your-customer (KYC) drive launched by Sebi," he says. Indeed, if the watchdog is so particular about checking the identity of every mutual fund investor to prevent pseudo investments and money laundering, it should also ask fund houses to stop accepting third-party cheques.
Sebi is, however, not considering any change in the rule. E-mails sent by MONEY TODAY to Sebi officials were not answered. On their part, the mutual funds seem to have washed their hands off the incident. "The investments and the subsequent redemptions were perfectly legitimate transactions and, hence, we processed the same," stated Fortis Mutual Fund in a letter to Suri in June. All three fund houses claim that they are "looking into the matter".
However, no criminal complaint has been filed against Kumar by any of the three mutual funds for fraudulent use of their stationery. This shows how keen they are to pursue the case. The Association of Mutual Funds in India (Amfi) too did not respond to an e-mail from MONEY TODAY. Clearly, the scam has been aided by the rule that allows thirdparty cheques. "Banning thirdparty cheques would help prevent such frauds, but we also need to ascertain the possible adverse impact on investors," says Virendra Jain, investor rights activist and founder of the Midas Touch Investors' Association. Distributors fear that a ban will further constrict the flow of investments in mutual funds.
The industry has seen a net outflow of Rs 8,000 crore in equity funds and has lost over 6,00,000 folios since the ban on entry loads in August 2009. However, experts feel this is needed in the larger interest of investors. "A ban on third-party cheques may make it difficult for a handful of investors, but it will prevent such frauds and should be enforced," says Dhirendra Kumar, CEO of Value Research. He is right.
Suris may not be the only victims of such fraud or Kumar the only perpetrator. When was the last time you checked whether your SIP cheque has been correctly credited and recorded in your mutual fund statement? Would you notice if the friendly broker took out one of the 24 post-dated cheques you gave him for investing in a mutual fund? Apart from mutual funds, a host of financial transaction allows one to use third-party cheques. One can argue that thirdparty payments should be allowed for urgent transactions, such as bill payments and EMIs, because the borrower may be facing an emergency. But investing in a mutual fund doesn't have to be an urgent affair.
"Banning third-party cheques will also curtail misuse of the facility to transfer wealth or hold pseudo investments," says Rajesh Krishnamoorthy, managing director of iFast Financial Advisers, an online distributor of funds. Meanwhile, the Suris are in a quandary. The police have registered a case against Kumar, who is absconding. Their only hope is that he has not blown away their savings and that they will be able to salvage some of it in their sunset years.
