Some mutual fund distributors are swindling customers by investing the latter's money in their own names through front entities. They do so by taking advantage of a rule allowing registrars to accept third-party cheques with application forms.
According to industry officials, who spoke on condition of anonymity, fund houses have received complaints from customers who have been cheated using this method.
This is how it works. A customer approaches the distributor to invest in an MF scheme. He gives him an application form, with a cheque in favour of the scheme. Instead of giving the customer's form, the distributor substitutes it with his own and gives it to the registrar and transfer agent.
As the form is in the name of the distributor, RTA records his details and units are allotted to him. To keep the customer in the dark, the distributor issues a forged statement showing the customer has got the allotment.
Recently, a New Delhi-based MF distributor invested money given by a customer to buy schemes of three fund houses in his employee's name, causing a loss of about Rs 1 crore (Rs 10 million) to the customer.
"It's a criminal case of breach of trust," said Maju Nair, associate vice president, distribution, at Mumbai-based ShareKhan. "However, banning third-party cheques for buying MF products is not the solution," he added.
To prevent this type of fraud, he says, it should be made mandatory for customers to write their name, application number and contact number on the reverse of the cheque. "So that if RTA finds any mismatch between the details given in the form and on the cheque, it can contact the customer directly," he said.
An MF official, who spoke on condition of anonymity, said it should be made compulsory for distributors to take the signature of customers on the form. "Registrars can match the signature of a customer on the form and the cheque. If there is a difference, they can alert the customer," he said.
An e-mail query sent to the Securities and Exchange Board of India's spokesperson on the issue remained unanswered.
