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Banks' role in IPO scam — Risk control systems under RBI scanner

Our Bureau

Mumbai , Jan. 24

THE Reserve Bank of India said it would assess whether banks were meeting the Know Your Customer norms and other guidelines related to opening of accounts, in the light of the recent IPO scam.

RBI would also examine the risk and control systems in the seven banks fined by it to find out whether their managements had overlooked the irregularities, said the RBI Governor, Dr Y.V. Reddy.

Addressing a press conference after announcing the Third Quarter of Annual Statement of Monetary Policy for 2005-06, Dr Reddy said it was not a systemic problem, but failure within the banks' internal inspection.

"We tell banks to have their systems and control in place and don't breathe down their backs," said Dr Reddy.

RBI will also conduct an inquiry to see if any irregularity was reported and if RBI officials overlooked them. This would also warrant appropriate action, Dr Reddy said.

On January 23, RBI fined seven banks for their role in the recent IPO scam. It also issued a directive stating that an account payee cheque should go only to the account of the person named in the cheque and not any other.

This move was prompted by the modus operandi used by those involved in the scam.

The banks had violated norms on KYC, breached prudent banking practices and facilitated misuse of IPO finance to ineligible borrowers, said RBI in its press release.

Dr Reddy said, "Instead of using account payee cheques under convenience for contingencies, banks misused them."

After being informed of the irregularity by SEBI, RBI sent inspection teams to these banks. The inspection revealed that 14 branches were involved in the scam, Dr Reddy said.

RBI will also conduct an enquiry to see if any of these violations were brought to their notice, Dr Reddy said.

As per the law, RBI is not permitted to impose penalty exceeding Rs 5 lakh per violation, Dr Reddy said.

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