India’s mutual fund industry has evolved into one of the fastest-growing segments of the financial sector, attracting millions of retail investors. With assets under management (AUM) crossing ₹50 trillion in 2024, the industry represents trust, growth, and financial inclusion. At the heart of this trust sits the Securities and Exchange Board of India (SEBI), the regulator tasked with protecting investors, enforcing transparency, and ensuring accountability.
Yet, history reveals moments when SEBI’s vigilance faltered—either due to regulatory capture, lack of timely action, or deliberate negligence. In those windows, mutual fund frauds flourished, wiping out investor wealth, shaking confidence, and leaving scars on India’s financial landscape.
This article takes a deep dive into historic mutual fund frauds where SEBI looked away, analyzing how they unfolded, the loopholes exploited, and the lessons still relevant today.
The Role of SEBI and Mutual Funds in India
SEBI was established in 1988 and granted statutory powers in 1992, shortly after India’s economic liberalization. One of its key mandates was to regulate collective investment schemes, including mutual funds.
Mutual funds, pooling money from small investors, became a preferred investment vehicle for India’s growing middle class. With this trust came responsibility—fund managers were expected to act with fiduciary care, and SEBI was expected to enforce compliance.
However, history shows that oversight often lagged behind financial innovation and greed.
1. The CRB Mutual Fund Scam (1996)
The Background
CRB Capital Markets, led by C.R. Bhansali, was one of the earliest cases where SEBI’s inability to act decisively created a financial storm. CRB Mutual Fund promised high returns and aggressively collected money from investors during the mid-1990s liberalization boom.
The Fraud
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CRB raised over ₹1,000 crore from investors through its mutual funds and finance schemes.
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Instead of prudently investing, it diverted money into promoter-controlled companies and speculative ventures.
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Funds were misused to create an illusion of profitability.
SEBI’s Role
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Despite red flags raised by RBI and investigative journalists, SEBI delayed action.
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CRB Mutual Fund continued collecting money even as repayment capacity crumbled.
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When the fraud exploded, thousands of small investors were left stranded.
Impact
The CRB collapse in 1997 was one of the first major cracks in India’s mutual fund industry, exposing SEBI’s slow reaction to systemic risks.
2. Ketan Parekh and Mutual Fund Collusion (1999–2001)
The Background
Ketan Parekh, dubbed the “Pied Piper of Dalal Street,” manipulated stock prices during the dot-com bubble. His network included not only banks and corporates but also mutual funds.
The Fraud
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Parekh created circular trading networks, inflating prices of his “K-10” stocks (like Global Telesystems, Zee, Pentamedia).
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Several mutual funds allegedly colluded, buying into these scrips at inflated valuations, either due to inducements or pressure.
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Fund NAVs looked attractive temporarily, luring more investors into dangerous exposures.
SEBI’s Role
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SEBI was slow to intervene, even as stock valuations turned irrational.
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When the scam unraveled after the 2001 budget and the crash, SEBI banned Parekh but did little to investigate the mutual fund complicity.
Impact
Retail investors holding units of funds exposed to K-10 stocks suffered heavy erosion. SEBI’s oversight failure signaled that large-scale collusion could hide under the guise of “market exuberance.”
3. Unit Trust of India (UTI) – US-64 Debacle (2001)
The Background
UTI, the country’s oldest and largest mutual fund, had its flagship scheme US-64, launched in 1964. It was considered a “guaranteed” product for the middle class. By the late 1990s, it had amassed over ₹30,000 crore in assets.
The Fraud / Mismanagement
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UTI invested heavily in speculative equities without disclosure.
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Portfolio mismanagement and lack of transparency eroded NAVs, but the scheme continued to promise assured returns.
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By 2001, the shortfall between obligations and actual assets was unsustainable.
SEBI’s Role
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Shockingly, US-64 was exempt from SEBI regulations for years due to political lobbying.
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SEBI had little oversight, allowing UTI to operate in opacity.
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When the scandal broke, investors realized they had been misled for years.
Impact
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Millions of investors lost savings.
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The government had to bail out UTI, splitting it into UTI Mutual Fund (regulated by SEBI) and SUUTI (Special Undertaking of UTI).
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This became a landmark lesson in regulatory capture and the dangers of “looking away.”
4. Mutual Fund–Broker Nexus (2007–2010)
The Background
As mutual funds expanded, their relationships with brokerages deepened. Investigations revealed that certain fund managers were routing trades to specific brokers in exchange for kickbacks or favors.
The Fraud
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Trades were allocated not based on best execution but hidden agreements.
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Fund managers engaged in “churning” portfolios to generate brokerage commissions.
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Investors bore the hidden cost of inflated transaction charges and poor execution.
SEBI’s Role
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While SEBI issued warnings and circulars, action against individuals was limited.
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Whistleblower complaints were often buried or delayed.
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Some cases ended with small penalties, hardly a deterrent.
Impact
The fund-broker nexus highlighted how SEBI’s limited enforcement bandwidth allowed unethical practices to fester.
5. The Franklin Templeton Debt Fund Collapse (2020)
The Background
Franklin Templeton India abruptly shut six debt funds in April 2020, citing liquidity issues. These funds had assets worth over ₹26,000 crore.
The Fraud Allegations
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The funds had taken excessive exposure to illiquid, high-risk corporate bonds, chasing higher yields.
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SEBI had received earlier warnings but did not enforce corrective measures.
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When COVID-19 triggered redemption pressure, Franklin froze withdrawals.
SEBI’s Role
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Critics argue SEBI failed to detect concentration risks earlier.
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SEBI allowed illiquid exposures under the garb of “credit evaluation,” despite clear red flags.
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Post-collapse, SEBI scrambled to manage the fallout, but investors questioned why it “looked away” before the crisis.
Impact
Investors faced years of uncertainty in recovering their money. The case underscored how even global fund houses could exploit regulatory gaps in India.
Patterns of SEBI’s Oversight Failures
Across these cases, some recurring themes emerge:
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Regulatory Capture: Political or corporate lobbying often shielded large institutions like UTI from oversight.
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Delayed Action: SEBI frequently acted only after crises erupted, rather than proactively.
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Loopholes in Disclosure: Lack of timely and transparent reporting allowed mismanagement to remain hidden.
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Weak Penalties: Even when frauds were proven, penalties were too small to deter future misconduct.
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Neglect of Retail Investors: The most affected were always small investors, with little recourse to recover losses.
Lessons Learned
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Real-Time Transparency: Mutual funds must disclose holdings and risks in near real-time to avoid misleading investors.
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Independent Oversight: SEBI should strengthen its surveillance arms with AI-driven anomaly detection.
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Accountability for Regulators: When SEBI “looks away,” there should be institutional mechanisms to audit its failures.
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Investor Education: Retail investors must be made aware that “guaranteed” returns are often red flags.
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Global Best Practices: Aligning Indian regulations with stricter global norms can prevent future frauds.
Ethical Reflection
The deeper question is not just about fraud but about trust. Mutual funds operate on the foundation that millions of Indians entrust their savings to professional managers. When regulators look away, it’s not only wealth that is lost but also faith in the financial system.
SEBI has since strengthened many frameworks—risk management, disclosure norms, credit evaluation for debt schemes—but history shows that complacency breeds disaster.
Conclusion
Historic mutual fund frauds in India—from CRB to UTI to Franklin Templeton—prove one thing: whenever SEBI looked away, investors paid the price. The regulator’s role is not merely to react but to foresee, prevent, and enforce.
For India’s mutual fund industry to maintain credibility, SEBI must avoid repeating these lapses. Vigilance must replace negligence, transparency must replace opacity, and accountability must replace impunity.
Because when regulators look away, history shows, fraud always finds its way in.
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