A widening police investigation into alleged fraud at a Citibank branch in a New Delhi suburb could increase scrutiny of foreign banks in India and complicate their efforts to gain greater access to the country's vast financial-services market.
Police in Gurgaon, a high-technology hub southwest of the capital, are investigating an alleged scheme in which an employee at the branch allegedly colluded with others to siphon off an estimated $67.2 million from wealth management customers by making false promises on returns, forging government documents and sending false bank statements to clients.
Police officials said Wednesday that they won't pursue a case against top Citigroup Inc. executives, including Chief Executive Officer Vikram Pandit. S.S. Deswal, the commissioner of police of Gurgaon, a satellite city of New Delhi, said the police have examined a complaint filed by a client of the bank, Sanjeev Agarwal, and doesn't believe the U.S. bank's chief executive or other top executives named in the complaint have any responsibility.
"It is merely the local branch activities and only their role will be checked," Deswal told Dow Jones Newswires on the telephone. "The remote-sitting international CEOs [chief executive officers] and even Indian CEOs sitting anywhere cannot be held responsible for branch activities," he added.
Police arrested the relationship manager, Shivraj Puri, last month and on Jan. 2 arrested an executive at New Delhi-based Hero Group, a conglomerate that is India's biggest motorcycle maker. The Hero executive allegedly received commissions for helping direct money from his firm into the scheme.
Analysts of India's financial-services sector said the alleged fraud at Citibank could have happened at any bank-foreign or domestic, state-owned or private. Citigroup has firmly defended its internal controls. The bank said in a statement Tuesday that it detected the fraud in its branch and initiated the case against Puri with police.
Still, the timing of the episode, coming just as regulators are reviewing whether to allow foreign banks to increase their presence in India, could be detrimental to that cause. "Regulators could rightfully say, ‘Show us that you're able to manage your existing network of branches in a prudent and effective manner before we let you expand,'" said Arun Duggal, the former chief executive of Bank of America's Corp.'s India operations.
Foreign banks have been pushing for years to increase the number of branches they can open in India, so far with little success. Under a World Trade Organization agreement, the Reserve Bank of India, the nation's central bank, must let foreign banks open a minimum of 12 new branches a year. Central bank officials say they have been giving permission for more than the required dozen.
But the central bank considers each application for a new branch on a case-by-case basis and has been conservative overall in its approach to bank expansion, bankers say. The RBI had 18 pending applications from foreign banks to begin operations in the country, a finance ministry official said last summer. An RBI spokeswoman said late Wednesday it wasn't possible to provide immediately an updated tally.
Indian officials have said they would be more receptive to foreign bank expansion if the U.S. and other markets gave Indian banks more branch licenses.
There are 32 foreign commercial banks in the country, including big names like HSBC Bank PLC, Standard Chartered PLC and Royal Bank of Scotland Group PLC. But they have a total of just 310 branches, or only 0.4% of the national total, according to figures from the RBI.
Citibank, which has had operations in India for more than a century, has 43 branches. It and others have been keen to expand here because the nation, with a population of 1.2 billion, is relatively underserved by banks and is experiencing rapid economic growth. India's newly emerging wealthy also are viewed as a potentially lucrative market for upscale banking services.
A spokeswoman for the RBI said the government is reviewing rules related to foreign banks, including restrictions on the roll-out of branches, and may soon release a discussion paper — a document meant to launch debate and present various views.
She said the central bank has been notified by Citibank about the Gurgaon case. A senior bank official said Wednesday the RBI is looking into it.
Banking analysts say the government is also weighing whether to require foreign banks to register local subsidiaries in India so it can more easily regulate the firms. Currently, foreign banks simply operate in India as branches of parent companies overseas.
Vyapak Desai, an attorney at law firm Nishith Desai Associates, which represents foreign banks and private-equity firms in India, said the incident "may prompt the regulators to make changes in the manner in which the foreign banks are set up in India."
But he said inadequate corporate oversight at banks is an industry-wide issue that regulators need to probe, not a problem specific to foreign banks.
Indeed, another high-profile banking scandal in recent months involved state-run Indian banks. Last November, India's top federal investigative agency arrested eight people, including four senior bankers at state-run banks and an executive from a state-run insurer, in connection with allegations they accepted bribes to facilitate loans to several companies.
Arvind Mahajan, executive director at KPMG, said fresh regulations and banking rules weren't necessarily required to address the problem uncovered at Citibank. He said the industry should voluntarily tighten fraud-prevention and detection safeguards, especially in emerging business services like wealth management.
"When you are a growing market, some of these aspects can tend to get overlooked," Mahajan said.
The Citibank case has received heightened attention after a prominent venture capitalist, Sanjeev Aggarwal, complained that he lost $7 million through the alleged scheme. Aggarwal says Citibank should have notified him when his account balance was diminishing suspiciously.
A complaint he filed with Gurgaon police names Puri as well as top Citigroup executives including Pandit. Police registered a case based on Aggarwal's complaint but a top police official said Wednesday the claims against top Citigroup officers, including Pandit, won't be pursued because the fraud was local to Gurgaon.
Citigroup says Aggarwal's claims against senior executives "are completely without basis."
Aggarwal, managing director of venture firm Helion Venture Partners, is known for building an outsourcing firm, Daksh, which was acquired by IBM in 2004. He has had a wealth-management account at Citibank since 2004, and the relationship manager was Puri for the past three years, according to his complaint and his public comments.