The Securities and Exchange Board of India unearthed yet another Initial Public Offering (IPO) scam in the public issue of shares of Infrastructure Development Finance Company (IDFC) Ltd.

The market regulator found that on August 8, 2005, one Roopalben Panchal received 266 shares each from 12,253 demat accounts aggregating to 32,59,298 shares and 532 shares each from four dematerialised accounts aggregating to 2,128 shares.

"Thus she had received a total of 32,61,426 shares in off market transactions from 12,257 dematerialised accounts," Sebi said. The regulator further said that it would investigate registrar to the issue, Karvy.

As an encore to this, there was the IPO scam in IDFC and YES bank, which resulted in loss of Rs 320m (4m/$7m) to the exchequer. In response the Central Bureau of Investigation (CBI) conducted searches at 21 places of officials and brokers in three Indian cities, including the national capital region (NCR) in New Delhi.

As I read this piece, I saw images floating in my mind of doors being closed after the horses had bolted of a glass falling in slow motion to the ground, and people scurrying to recover the milk and finally, I saw a doctor performing a post-mortem on a corpse.

Its ironic that the regulatory machinery is being used to fight fires rather than proactively create an ethical culture. Putting preventive checks and balances in place would provide triggers to alert the system before such outbreaks occur.

Its not that regulators havent taken steps in this direction. For instance, the Know your customer guideline is an effective preventive tool to validate the existence of customers. If the same had been followed in spirit, would Ms. Panchal have been able to open 12000 odd demat accounts?

The markets are expanding and organizations are relying on more channels to direct business to them. In such a scenario, it becomes imperative that they have a third party objective mechanism in place. This will act as a deterrent for mis-information in the sales process. It will also alert the system of irregularities much before the damage.

This is not only true for filtering customers. The pre empanelment vendors background screening process has to be more robust. It has to encompass sales personnel at the direct selling partner, agents, franchisees and all such frontline interfaces. Ultimately the quality of portfolio will directly depend on the quality of channel partners

Weve partnered with companies who support this stance. Theyve not only put into place risk prevention policies and processes for the future, but have leveraged CRP extensive branch network that covers over 70 location in India to profile their existing portfolio and vendors. Investing time, effort and money in this exercise invested time, efforts and money in the exercise has helped them weed out risks and put them in a stronger position. Today they can relax in the awareness that their brand is less prone to take beating from scam artists.

As an example, for an online stock broking company that conducted a KYC [Know Your Customer] exercise, we flagged around 23% of their portfolio High Alert on parameters like No such person existing, Client has never applied for any Demat account, Person expired etc.

The results are very similar for the liability products that we filter for leading private sector banks. Around 12-15 percent of the applications are in the pre-defined high-risk negative categories. Can you conceive of the risk that would have entered the system had these filters not been in place?

Risk mitigation is all about a corporates vision. If youre looking to build an organization that has stability, growth and consistency, as its basic tenets, then risk management becomes a no compromise option. The rest will view it not as an investment but as a cost.