DBOD.No. BP.BC.24/21.01.023/98

March 30, 1998
Chaitra 9, 1920 (Saka)

All Commercial Banks

(excluding Regional Rural Bank)

Dear Sir,

Frauds in banks/grant of 'at par' facility for dividend/interest warrants and refund orders

Please refer to our Circular DBOD. No. BP. BC. 109/21.01.023/97 dated September 30, 1997, in terms of which, the entire scheme of extending 'at par' facility has been left to the discretion of the banks. Banks have been advised to put in place adequate internal control mechanism to safeguard their interests while determining the policy regarding 'at par' facility with the approval of their respective Boards.

2. Although, banks were required to take necessary care before extending such facility to their corporate clients, including
pre-funding of the account, it has come to our notice that instruments issued by some of the companies were returned due to inadequate funding arrangements eroding the investors' confidence in these companies leading to public furore. In this connection, reference is invited to para 3(c) of Circular DoS. No. BC. 8/23.08.03/96-97 dated May 27, 1997, according to which the banks must ensure pre-funding of account by the party at all times and the position is to be reviewed by the controlling branch. Banks are, therefore, again advised to ensure that the pre-funding arrangements to meet the payments on the instruments are suitably tied up before the grant of 'at par' facility to a client so that the dividend/interest warrants are not dishonoured due to lack of funds, when presented for payment. Chronic cases of defaults on the part of companies in meeting their liabilities on the dividend/interest warrants etc. may be communicated to the Registrar of Companies or the Ministry of Finance (Department of Company Affairs), to enable them to take action against such companies under the Companies Act, 1956.

Yours faithfully,

(C.R. Muralidharan)

General Manager