MUMBAI: In its role as regulator, the Reserve Bank of India (RBI) has opted to adopt a "non-disruptive enforcement path" with regard to Margadarsi Financiers in Andhra Pradesh, according to well-informed official sources.

A complaint on alleged violations by Margadarsi Financiers was forwarded by Andhra Pradesh Chief Minister Y.S. Rajasekhara Reddy to the Finance Ministry, which referred it to the RBI. The RBI examined the complaint and conducted a thorough review of the transactions of the Andhra-based financial institution, founded by media magnate Ramoji Rao.

"No complaints"

According to the sources, who are conversant with the details of the review: "There have been no complaints from the depositors of any default. The company has an impeccable track record, with good assets to back it up."

The sources explained that a similar issue was raised in the 1990s, and Margadarsi was told that it could not accept deposits in the name of a Hindu Undivided Family (HUF). However, no corrective steps were taken.

The authoritative sources noted that the company has mobilised over Rs. 2,000 crore in deposits, and has been honouring all its commitments to depositors. "Under these circumstances, the regulator has thought it fit to act professionally. A special committee has reviewed the operations and, given the good record, the company has been told to implement the law."

The well-informed sources emphasised that regardless of the motive and politicised circumstances in which the Margadarsi issue had been raised, the RBI was acting professionally. In adopting a "non-disruptive enforcement procedure under difficult circumstances," the central bank has kept the interests of the depositors in mind, they added. Satisfied with Margadarsi's sizeable assets, the RBI has asked it to stop accepting new deposits and "retire the deposits" as they matured. That would ensure there was no run on the institution. An escrow account has been opened by Margadarsi Financiers to credit the matured deposits not claimed by depositors to protect their interests.

The sources say that Margadarsi, like several other deposit-raising entities, was not in compliance with an amended section of Chapter IIIC of the RBI Act of 1934. Section 45S, which was introduced in 1997, reads: "No person, being an individual or a firm or an unincorporated association of individuals shall accept any deposit." The sources said that Margadarsi's argument was that an HUF could not be considered to be a "person or individual." The promoters have now been told that this contention is not acceptable.

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