Fines and the sham of it

Here are some interesting articles and something that I always thought was unfair. Read them at your leisure time and it has very little relevance to what I am planning to discuss today-

• Merrill Lynch
• Canara Bank
• IPO Scam

For some of us, clicking and reading is even more difficult than reading it here. I just sent the link to show that they exist and it is no fabrication from my side. Hence, I shall give a brief on most of them. Merrill Lynch was asked to justify their trades that they advertise as there was a 'big' mismatch between them and NYSE. Canara Bank was imposed with a 5 lakh fine for not maintaining the statutory requirements and the IPO scam is well known to most of us.

I shall just take the case of Canara Bank as it is easy for me to put my point across. Its fine was not maintaining the fortnightly balances on its CRR and SLR requirements as 'somehow' some balances from its branches was unnoticed by the head office. Not that it is impossible considering the number of branches it has, but then I always amazed at the power of modern technology in tracking everything, including me. Yet, it happened. Was this intentional, don't know. There was no 'show-cause' notice given to the public. If I was to look at it differently, things show a really different picture.

What if I did it intentionally. Look at Canara Bank's balance sheet. This incident happened sometime this year. The closing balance sheet deposits was close to 116000 crores. The company has to maintain CRR and SLR requirements on this-5% and 25%. The bank was fined 5 Lakhs for this. A small math calculation reveals this - Assuming that the company had invested the money in AAA rated 10 year paper instead of holding it in cash and G-Secs. So the bank should have maintained 34800 in CRR and SLR. Had the bank invested in AAA rated paper and the differential was 3%, this will boil to 2.86 crores for a day. Assuming it takes 2 months for the decision to take place and the fine to be given to RBI and as a good company invest the same in call market that is earning 5% returns. The bank shall now get approximately 7 lakhs as further interest. Have not gone scot free in this transaction. What has the company lost in this? A little bit on the brand value. Well, this is a financial transaction and will get reported mostly in business papers in a small section of a relatively irrelevant side or page where there is nothing else to fill. The bank can explain different reasons and accept that it was a mistake beyond its control. But was it?

The point was never to give a bad picture. I have been with Canara Bank and in all probability this could have just been an accidental error from their side and never intentional. However, if I were to create such a scenario in front of you, is it right? RBI should have actually estimated the profit on this transaction and levied charges proportionate to it. Yet it levied a standard fine. Is the regulator right in his decision or just plain lazy to take note of it? Look at the Merrill Lynch and the IPO scam. The profit has already been taken and the goodwill for Merrill Lynch in terms of being the best broker has already been decided. The incremental business has been created. Will the fine that the regulator imposes reverse these transactions? I do not know. If I were to be unethical, I would happily do so albeit not regularly that I kill this cash cow opportunity.

But then, I can do it, can't I.


The point to be noted is that I am using these companies as an example to explain my thoughts. This is purely a thought process.