StanChart in damage control mode

The Standard Chartered Bank is set to ask three of its executives to go on leave following complaints made by a few high net worth clients on mis-selling of products. In another damage-control exercise, the UK-headquartered bank has already roped in investors, including non-banking finance companies and investment banks to buy back debentures issued to these clients.

The bank has already asked Ashish Shankar, head of its investment advisory division, to go on leave. It is learnt that StanChart had promised high returns to some of its HNI clients, failing which it agreed to buy back the securities, which, however, was not permissible under law.

“About 90 per cent of the securities issued have already been re-sold to other investors arranged by StanChart,” a source familiar with the development told Business Standard.

“These securities have been sold at the current market price. StanChart is likely to pay the difference between the current market price and the assured return that was promised to some of its client,” said another source familiar with the developments.

The estimated loss of the bank for paying the difference in market price is pegged at Rs 2 crore. The Indian arm of the UK-based lender did not wish to comment on this development. The bank, however, said it had already informed the Reserve Bank of India and the Securities and Exchange Board of India on the issue. “The issue has been blown out of proportion. It involves only four clients. We are in the process of sorting this out,” a spokesperson of the bank said.

Industry players said relationship managers of StanChart had sold rated debentures issued by a real estate firm, and a few other companies, to some of the high net worth clients. These clients were promised an assured rate of return failing which the bank will buy back these securities. However, as per laws, a bank is not authorised to provide a repurchase option.

The repurchase option was provided by some middle management employees on the hope that the debentures could be resold to other investors, a top official of a wealth management division of a foreign bank said.

Since StanChart did not find new buyers within the stipulated time, these clients demanded the foreign bank should buy back the papers from them, he added.

"This has arisen due to a possible mis-match between the customer's cash flow and tenure of the bond," the official said. According to another industry official, the NBFCs and investment banks have agreed to buy these debentures from StanChart's clients as they are getting these securities at a discount to the market price.

"These are typically securities, which are offering 16-17 per cent return and are backed by equities. The new investors must be comfortable with the ability of these companies to honour their obligations at the maturity. Also, they are getting it at a discount and are sensing an opportunity to make money from this mess," the official said.