State Bank, Citibank sold $532 m unregistered bonds in ’98: US Fed

Our Banking Bureau

Mumbai, Nov 20: The US federal regulators have once again alleged that the State Bank of India (SBI) along with Citibank, had violated US securities laws in 1998 by selling $532 million of Indian bonds in the country without registering them with the Securities Exchange Commission (SEC). However, unlike in the recent past, no fines were imposed by the regulators.

The action taken by the SEC on Monday came less than a week after the Federal Reserve and other US banking regulators levied a fine of $7.5 million on the state-run bank for allegedly indulging in unsafe banking practices.

The SBI has already made the payment to the concerned authorities and charged the amount as an expenses of the bank. However, in the latest development, SBI and Citibank have agreed not to violate federal securities laws without either admitting to nor denying the SEC’s allegations. “We have consented to the SEC without admitting the allegation made against the bank,’’ said SBI’s deputy managing director PK Sarkar. Sources in the SBI had explained that the SEC had neither permitted nor allowed the bank to sell resurgent Indian bonds (RIBs) in the US and SBI had preferred to mention the SEC’s stand in the application form for RIBs.

However SBI’s stand has failed to satisfy the US authorities who have issued orders against SBI and Citibank, which acted as an agent for collecting such deposits.

Citibank said in a statement that the settlement “resolves a technical matter” of whether the bonds should be considered bank deposits or securities under US law. The SEC found they were securities whose sale must be registered with the agency. Citibank itself sold some $160 million of the five-year RIBs to at least 5,000 Indian citizens living in the US and to companies owned by them, the SEC said. It said employees and agents of Citibank and the Indian bank, in a “widespread and aggressive” campaign, mailed marketing material to about 90,000 Indians and also made unsolicited telephone calls to sell the bonds.

The marketing material touted features of the bonds that are similar to those of government bonds, such as tax benefits and the use of proceeds for public works projects in India, according to the SEC. Interest rates were said to be as high as 8 per cent. Such actions against foreign banks in the US are fairly rare. In 1992, the SEC took similar action against the State Bank of Pakistan, which had sold Pakistani government bonds in the United States. Questions were also raised by lawmakers about whether those bonds were a vehicle for laundering money.

Last Wednesday, the Federal Reserve, the Federal Deposit Insurance Corp and the New York State Banking Department fined SBI of $7.5 million for allegedly engaging in unsafe and unsound banking practices.

The US banking regulators said the fines resulted from alleged violations of US banking laws by the Indian bank’s operations in this country, including “reckless engagement in unsafe and unsound practices”, failure to keep accurate and complete books and records as well as failure to set up and maintain procedures to comply with the Bank Secrecy Act. The Act requires US banks and those with operations in the United States to report all transactions exceeding $10,000 to authorities.