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Did RBI try to accommodate Parekh at midnight?

Tamal Bandyopadhyay

The Rs 1.37 billion pay order scam has been mired with charges and counter-charges by public sector Bank of India (BoI) -- which has lost Rs 1.37 billion in the scam -- and regulator Reserve Bank of India (RBI).

While the RBI insists that it did inform on March 12, 2001, (Monday) that Madhavpura Mercantile Cooperative Bank did not have funds to honour the pay orders and hence BoI should stop payment, BoI's official version (detailed in the first information report with CBI) is: on March 8 it purchased six instruments worth Rs 620 million and set for clearing on March 9. Another set of seven pay orders worth Rs 750 billion on March 9 which were sent for clearing on March 12 (March 10, 11 being holidays).

It further said that the second set of pay orders were returned by the RBI clearing house under Rule 11 (which implies that Madhavpura did not have funds). But the first set (of six instruments worth Rs 620 milloion) came back only on March 20 along with computer generated statement of the RBI dated March 15 citing reason that in view of Madhavpura's failure to meet the clearing liability, banker's cheques were being returned to the presenting bank (BoI).

In effect, BoI has alleged that the RBI did not give it warning about the first set of pay orders which were returned after 11 days -- an inordinate delay since three working days are the normal period of magnetic ink character recognition (MICR) clearing, while high-value cheques are cleared faster.

Did RBI actually warn BoI on March 12? Was it a failure of BoI officials to heed to RBI warning? Who is to be blamed -- the bank or the regulator? Business Standard conducted an investigation on this issue to lift the mystery shrouding the issue: The RBI did summon Bank of India officials to the clearing house on Shahid Bhagat Singh Marg on March 12 and discussed the issue till about midnight (11.30 pm to be precise).

However, if the clearinghouse sources are to be believed, the RBI did not ask BoI not to issue funds against the pay orders worth Rs 620 million.

Instead, it asked BoI to honour Rs 650 million worth of cheques deposited by Ketan Parekh in Madhavpura Bank drawn on Bank of India which had been sent bank by BoI as there was no money in Parekh's account.

In effect, RBI wanted BoI to "accommodate" Parekh by giving him an overdraft, which BoI apparently refused to do. Perhaps RBI's idea was to plug the loophole for the time being and route BoI money (Rs 650 million) to save the first set of pay orders from being bounced. In other words, BoI's own money would have come back to the bank through the pay order route and the bank's loss for the time being could have been Rs 750 million instead of Rs 1.37 billion.

However, BoI reportedly did not accept the idea and refused to call back the cheques earlier sent back as it thought its loss would go up from Rs 1.37 billion to Rs 2.02 billion as there was no certainty about recovering the overdraft.

Parekh used BoI and Madhavpura route to siphon off money to his shell companies. He discounted the pay orders of Standard Chartered, UTI Bank as well as Global Trust Bank at BoI but those pay orders were always backed by fund.

He used to credit cheques drawn on BoI to Madhavpura, take pay orders from Madhavpura and discount them at BoI. On March 6 or 7 he deposited BoI cheques at Madhavpura but BoI dishonoured the instruments as there was no money in Parekh's accounts. RBI reportedly wanted BoI to call back those cheques (worth Rs 650 million) and honour them. Had BoI done so, it would have ensured a flow of Rs 650 million into Madhavpura.

Nobody knew for sure what actually transpired that night at the RBI clearing house at Fort. Sources in the clearing house are not ready to go on record while K C Mehta (deputy general manager and joint general manager and administrator for the Bombay Stock Exchange branch of BoI), B H Somaiya (branch head) and Samtani (head of clearing operation in BoI) are not willing to say a word.

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