Manage Your Risk – Fire Fighting Can Be Costly
The Securities and Exchange Board of India discovered another Initial Public Offering (IPO) scam in the public issue of shares of Infrastructure Development Finance Company (IDFC) Ltd.
The market regulator found that on August 8, 2005, a Roopalben Panchal received 266 shares each from 12,253 demat accounts totaling 32.59,298 shares and 532 shares each from four dematerialized accounts totaling 2,128 shares.
“Therefore, it had received a total of 32,61,426 shares in off-market transactions of 12,257 dematerialized accounts,” said Sebi. The regulator also said it would investigate the problem registrar, Karvy.
Complementing this, there was the IPO scam on IDFC and YES Bank, which resulted in a loss of Rs 320 crore (£ 4m / $ 7m) in treasury. In response, the Central Bureau of Investigation (CBI) searched 21 official and broker locations in three cities in India, including the National Capital Region (NCR) in New Delhi.
As I was reading this article, I saw images floating in my mind … of closed doors after the horses had runaway … of a glass falling in slow motion to the ground, and people running to retrieve the milk … and finally , I saw a doctor performing an autopsy on a corpse.
It is ironic that the regulatory machinery is being used to fight fires rather than proactively creating an ethical culture. Implementing preventive checks and balances would provide triggers to alert the system before such outbreaks occur.
It’s not that regulators haven’t taken action in this direction. For example, the ‘Know your customer’ guide is an effective preventive tool to validate the existence of customers. Had the same been followed in spirit, would Ms. Panchal have been able to open 12,000 strange demat accounts?
Markets are expanding and organizations depend on more channels to direct their business to them. In such a scenario, it is imperative that they have a third-party targeting mechanism in place. This will act as an impediment to misinformation in the sales process. It will also alert the system to irregularities well in advance of the damage.
This is not only true for filtering clients. The supplier’s vetting process prior to splicing needs to be more robust. It has to encompass the direct selling partner’s sales staff, agents, franchisees, and all those front-line interfaces. Ultimately, the quality of the portfolio will depend directly on the quality of the channel partners.
We have partnered with companies that support this position. They have not only implemented risk prevention policies and processes for the future, but have taken advantage of CRP’s extensive branch network covering more than 70 locations in India to profile their portfolio and existing suppliers. Investing time, effort and money in this exercise, investing time, effort and money in the exercise has helped them eliminate risks and put them in a more solid position. Today they can relax knowing that their brand is less prone to taking hits from scammers.
For example, for an online stock brokerage firm that conducted a KYC [Know Your Customer] exercise, we mark about 23% of its portfolio High Alert in parameters such as’ There is no such person ‘, the Client has never requested a Demat account’, ‘Expired person’, etc.
The results are very similar for the liability products that we filter for the main private sector banks. About 12 to 15 percent of applications fall into the predefined high-risk negative categories. Can you conceive of the risk that would have entered the system if these filters had not been in place?
Risk mitigation has to do with a company’s vision. If you are looking to build an organization that has stability, growth, and consistency as its core principles, then risk management becomes a “no compromise” option. The rest you will see not as an investment but as a cost.