(Have you ever heard that a bank rejected an FD application because the ‘signature’ of a 3-year-old toddler was missing?
Can you imagine a bank rejecting an FD application because the investor did not sign on a blank page?
Would you believe that a bank demands more than 10 copies of PAN and Aadhaar Cards from a customer?
Do you know that a bank prints its contact details on a page of an application form which it retains with it?
If your answer to any of the above questions is ‘No’, then please go through this article.)
I am a regular investor in Floating Rate Savings Bonds, 2020 (Taxable) popularly known as RBI Bonds. These bonds are government-backed debt instruments issued by the Reserve Bank of India (RBI) on behalf of the Government of India. RBI sells these bonds through all Public Sector Banks and a select few Private Sector Banks. I buy these bonds through HDFC Bank in the name of my Hindu Undivided Family (HUF).
Online Purchase of RBI Bonds not Allowed for HUF
In addition to the normal paper-based method, major private sector banks (including HDFC Bank) sell these bonds online also through their websites via a paperless process if the bonds are to be purchased by an individual. However, the paperless method is not allowed if the investment is made in the name of an HUF. Therefore, I am forced to use only a paper-based method for investing in these bonds.
It is not clear why RBI in most cases does not allow any investment in the name of an HUF through the paperless method. Once the Income-tax Deptt. has allotted a PAN to an HUF, there remains no difference between an individual and an HUF. Further, when a bank also opens a Savings Bank or a Current Account in the name of an HUF, this difference completely blurs. Therefore, there is no justification in RBI enforcing only a paper-based investment for an HUF. RBI appears to be extremely averse to computerization and prefer paperwork? Left to RBI, we would still be travelling by bullock-carts.
RBI is not even consistent in its approach. One can easily open an FD online in the name of one’s HUF in the bank where the HUF’s account is held. Where do the strict stipulations of RBI forbidding any investment in the name of an HUF through the paperless method vanish in this case?
Electronic Transfer of Funds not Allowed by HDFC Bank in Paper-based Buying
HDFC Bank accepts paper-based applications for buying these bonds in its branches located in select Indian cities and towns. One of their branches in a city accepts such applications. Even in metropolitan cities like Delhi and Mumbai, they have only one branch designated for selling these bonds. Since it is difficult for most investors to visit this particular branch, especially in big cities, the bank has appointed finance brokers and agents who collect the applications from investors and submit them at the designated branch. I also use the services of a broker whose office is near my residence.
I collect the application form for purchasing RBI bonds from my broker, fill it, and hand it over to him along with the cheque and other enclosures. He visits the designated branch of HDFC Bank to submit it. The bank checks the form and if everything is in order, it sends the cheque for clearing. Once the cheque is passed by my bank and the amount is credited to HDFC Bank’s account, the bonds are allotted. This whole process takes about 4-5 days during which the funds remain idle. The delay can be longer if any bank holidays fall in between.
The application form of HDFC Bank has a provision for Electronic Credit of funds (NEFT, RTGS, IMPS) through which this 5-day delay can be avoided. In electronic credit, the fund is immediately transferred into the bank’s account by the investor as soon as it is available. The paper work is done subsequently. This comes in really handy if any discrepancy is found in the application form and/or in the enclosures since in this case the application form will be returned to the investor or his broker for rectification which will take some time. But since the fund has already been paid to the bank, the date of investment gets fixed and will not undergo any change. On the other hand, if the payment is made by cheque, it will cause more delay and funds will remain idle for an extended period because the cheque is not sent for clearing unless all the documents are found to be in perfect order. However, HDFC Bank does not allow Electronic Credit. It accepts payment only through cheque.
I have also invested in Capital Gain Bonds of REC Ltd. (Rural Electrification Corporation Limited) to avail tax exemption u/s 54EC of the I.T. Act. They allow Electronic Credit of funds by the investors into their account. I transferred the investment amount directly to REC’s account via NEFT on March 28 to ensure that I met the March 31 deadline for tax exemption. This direct transfer was recommended by my broker, as submitting the application form and clearing the cheque before the deadline was not possible due to the upcoming weekend bank closure. The required documentation was subsequently completed in April.
Rejection of Application Form by HDFC Bank on Flimsy Grounds
When I applied for buying the bonds for the first time, I made a mistake in writing the last character of PAN. The bank could have corrected the mistake on its own since a photocopy of the PAN Card was enclosed to the application but it rejected the application and returned it to me by post. Due to this, there was a delay of more than two weeks in my investment as I was out of town.
I used to leave the nomination page blank since nomination is not applicable if the bonds are being purchased in the name of an HUF. When I applied for the bonds for the second time, HDFC Bank rejected my application due to this. It said that even if the page is blank, the applicant must sign in the designated space.
My minor grandson is also a co-parcener in my HUF. I write his name as ‘Master _______ (Minor)’ in the application form along with his date of birth. Once HDFC Bank rejected my application due to the absence of his signature! My broker told me that he had tough time pleading with the bank that a 3-year-old toddler cannot sign.
Lengthy and Incomprehensible Application Form
The application form for purchasing RBI bonds which HDFC Bank prescribes has 7 pages. Another single-page form which they call something like ‘AADHAAR/E-KYC’ is also to be filled by the investor. Self-attested photocopies of the Aadhaar Card and PAN Card of the investor are to be enclosed with the form in addition to the cheque for the investment amount. Since I invest in the name of my HUF, I have to enclose a copy of the PAN Card of my HUF also.
RBI Bonds are no different from a simple Non-cumulative Fixed Deposit (FD) of 7-year duration with interest payable half-yearly on 1st July and 1st January every financial year. How can the application form for an FD be seven pages long, plus another 1-page form, totalling eight pages? Normally, a two or three-page form should be sufficient. This is because HDFC Bank's application form is very poorly designed, extremely clumsy, with similar information scattered across several pages in no logical order and asks for a lot of irrelevant data.
Here are the contents of various pages of HDFC Bank’s application form:
Page 1 –
a) Details of the broker through whom the investor is submitting the form
b) Information regarding the bonds
c) Instructions for filling the form
d) Details of the applicant
Page 2 –
a) Details of the investment, i.e., amount of deposit, cheque details etc.
b) Details of investor’s bank account
c) Two declarations by the applicant
d) Declaration by Karta that he has powers to buy these bonds on behalf of the HUF
Page 3 –
a) Nomination Form
b) Acknowledgement of Nomination – The bank has a provision to give acknowledgement of receipt of the application form to the investor on page 7. However, it has provision to give one more separate acknowledgement exclusively for receiving Nomination Form on this page
Page 4 –
a) Terms and conditions under which the bonds are allotted
b) Another Declaration by Karta of HUF – Here Karta has to give the list of co-parceners
Page 5 and 6 –
a) Information, duties and rights of the investor
b) Address and Email Id of the RBI officers to whom the investor can complain in case of any grievance
Page 7 –
a) A few more declarations by the applicant
b) Main acknowledgement of the application form
Page 8 (AADHAAR/E-KYC) –
a) This has “Aadhaar – Informed consent (?)”
Let us discuss these one-by-one.
Information Regarding Bonds, Instructions for Filling the Form, Terms and Conditions and Duties and Rights of the Investor
The above material is given in the application form as per the following descripttion:
1. Terms and conditions under which the bonds are allotted are given on page 4.
2. Instructions for filling the form have been given on page 1. A few instructions are also on page 2.
3. Information regarding the bonds has been given on page 5 and page 1. Page 3 and page 7 also contain some information for the applicant.
4. Duties of the investor are on page 5 and 6.
5. Rights of the investor are on page 6.
Total space occupied by all this material is more than three pages in very fine print. I saw the word count of this material using MS-Word. It is 1974 words.
Needless to say, although I have filled this form more than 10 times, I have not read even a single word of this material. I know that this material has no significance.
Has anyone heard somebody talking about the rights and duties of an investor when he opens a Fixed Deposit? Everybody knows that his only duty is to pay the principal amount of the FD while opening it and his only right is to get timely interest and redemption on maturity.
Because this material is distributed between several pages and is interspersed with other columns where the applicant has to fill his data, it becomes essential to print it. Had the bank given it as contiguous text in one place of the form, printing it would not have been necessary, resulting in significant paper savings. This is just a lot of matter written by the bank where no data is to be provided by the investor. There is no point in printing and returning it to the bank.
As I stated above, I have also bought Capital Gain Bonds of REC Ltd. Their application form is four-pages long. On the first two pages, they have provided columns where the applicant can fill all the necessary details about himself and the deposit in a logical sequence. On last two pages, they have printed the instructions for filling the form and the terms and conditions. The applicant needs to submit only first two pages to REC. It is not necessary to print or submit pages 3 and 4.
Declarations by the Applicant
The applicant must provide two declarations on page 2: One general declaration and one regarding Income Tax exemption. A few more declarations are to be given by the applicant on page 7.
Additionally, something termed as ‘Aadhaar – Informed consent’ is to be given by the investor on page 8 (extra single page form). Full title of this form is “Application for Account Opening Using Aadhaar/E-KYC for Customers not Opting for DBT” whatever that means.
All the declarations combined together constitute about two pages. They are so frightening, especially the ‘Aadhaar – Informed consent’ that I never had courage to read these declarations. I just keep signing them blindly.
Declarations by Karta if Bonds are Being Bought in the Name of HUF
If the applicant is Karta of an HUF, he has to provide two declarations: first on page 2 and the second on page 4.
1. The Full Powers Declaration
Karta has to declare on page 2 that he has full powers to deal with these bonds on behalf of his HUF.
As per the rules under which an HUF is constituted, Karta has the absolute legal authority to invest the HUF's funds and manage such investments on its behalf. Karta can choose where to invest HUF’s funds—including fixed deposits, mutual funds, shares, or real estate—without needing the signature of other co-parceners (family members). Karta is the sole authorized signatory to open, operate, and close bank accounts and demat accounts in the name of the HUF. Karta can liquidate or sell HUF investments without seeking prior consent from the co-parceners. Co-parceners cannot interfere in Karta's day-to-day investment decisions or object to his choice of investment.
However, Karta cannot arbitrarily gift away HUF’s wealth to an individual member of the HUF or a stranger, gamble using HUF’s funds or spend it on personal luxuries. If Karta is found to be fraudulently mismanaging or wasting family funds with mala fide intentions, the co-parceners can challenge his financial actions in a civil court. But moving idle HUF funds into 100% safe, government-backed, interest-bearing bonds is not fraud, waste, gambling or mismanagement.
If a civil court blocks or suspends Karta's powers due to a family dispute, the very first thing it would do will be to issue an injunction to freeze HUF’s bank account. The fact that the bank honours cheques signed by Karta is a live, real-time proof that Karta's powers are unblocked.
Why, then, is such a declaration necessary? Moreover, it is not HDFC Bank's job to check whether Karta is following all the rules and regulations of HUF while it sells these bonds to HUF.
The S.B. A/C of my HUF is in ICICI Bank. I have opened many FD’s in my HUF’s name in ICICI Bank online. Never did ICICI Bank ask me to give any such declaration. Actually, no bank asks for such a declaration while accepting fixed deposits from an HUF.
My investment in Capital Gain Bonds of REC Ltd. is also in the name of my HUF. They didn’t ask for any such declaration from me when I applied for buying their bonds.
2. The Irrelevant Coparcener Roster
On page 4, Karta has to give another declaration. In this declaration, he has to give the names and dates of birth of all major and minor co-parceners of the HUF and their relationship with Karta. All major co-parceners also have to sign.
What will HDFC Bank do with the list of co-parceners? It is totally irrelevant to the bank. If there is any change in the constitution of the HUF—i.e., if a member dies or a child is born—HDFC Bank need take no action. It will keep crediting the half-yearly interest on the bonds in HUF’s bank account registered in its records as usual.
If Karta dies, the next senior most co-parcener will become Karta. He will inform the bank holding the HUF’s account about Karta’s death and the bank will record his signature in its books for future bank transactions. Nothing except this will change. HDFC Bank will still credit the interest on these bonds to the HUF’s same bank account. When the bonds mature, the maturity proceeds will also be credited to the same account. HDFC Bank need not even know about the change of Karta.
But under this second declaration HDFC Bank wants Karta to categorically promise - "I undertake to inform you immediately as and when there are any changes in the constitution of HUF (due to any addition or on account of death of any members of HUF)".
REC Ltd. never asked me for the list of co-parceners. Actually, no bank or NBFC accepting fixed deposits from an HUF asks for such a list. Even the bank where the HUF’s account is opened asks only for the names of major co-parceners, not minor ones unlike HDFC Bank which asks for all, whether major or minor.
3. Signatures of Co-parceners on the Application Form
How will Karta manage to get the signatures of the co-parceners on the application form? They may not be residing with him. Some may be living separately in the same town or even in another city. Investing HUF funds may be a regular job for Karta, unlike opening a bank account which is a one-time affair. Regular travel just for signing on the form is not possible for the co-parceners.
Acknowledgement of Submitting the Application and Acknowledgement of Nomination
On page 7, HDFC Bank has a provision for acknowledging receipt of the investor's application. Bottom about 60% of page 7 has columns where the necessary details can be filled, this portion torn off and handed over to the applicant as an acknowledgement.
Additionally, they also have a provision for one more separate acknowledgement exclusively for receiving the filled Nomination Form. It is on the bottom 25% of page 3.
What is the need to give a separate acknowledgement for nomination? Difficult to guess. Then why not give acknowledgement for receiving investor’s communication address, permanent address, his bank details, his Aadhaar No., PAN etc. etc.
Nomination details will, in any case, be printed on the bond certificate issued to the investor after the bonds have been allotted. If these details are missing or have any discrepancy, the investor can contact the bank and get them fixed. There is no requirement for a separate acknowledgement for nomination. If it is relied upon, the investor will have to preserve it until bond maturity. Forcing an investor to safely store a tiny scrap of paper for 7 years just to prove a nominee was registered is a massive administrative failure.
How practical, feasible or necessary it is to give these acknowledgements? Let us find out.
When the bank receives the application form, it will check the form and the enclosures, especially the cheque, and ensure that everything appears prima facie to be in order. Then they will fill/check the columns of the acknowledgements. This will take time if the forms are submitted by a broker in bulk. Tearing off the page, signing and stamping also causes some delay. The broker will not wait for such a long time. Therefore, the bank will have to send the acknowledgement later by post (to the broker or investor) or hand it over to the broker on his next visit. Both of these are impractical.
What happens after the broker receives the acknowledgements? He will either call the customer to come to his office to collect the acknowledgement, or the customer may himself visit the broker’s office after 3-4 days anticipating that his application might have been submitted to the bank by then.
All of this involves too much hassle. The people these days do not care about the acknowledgement. What can happen if an investor does not get it? The bank cannot encash the cheque and reject the application. The worst thing we can conceive is that the bank throws away everything—the application, the enclosures, and the cheque—to save its work. But it is easier said than done. The bank gets compensation from the RBI for each form. The brokers also keep a record of how many forms they have submitted to the bank since they also get their incentive on each application. Further, they regularly interact with the bank employees for this purpose and develop some acquaintance with them. It is not practical for the bank employees to tell a blatant lie and say that they did not receive the form.
Many investors send the application form to the bank by post. In this case the acknowledgement cannot be given.
If the investor himself visits the bank to submit the form, only then is it practical to give him the acknowledgement. However, this doesn’t happen too often.
How will the bank file the cut-off pages, i.e., papers from which a portion has been torn off? There may not be sufficient space in the left-over portion of the page for the two holes required for filing. Had the bank provided both the acknowledgements on the same page, instead of using page 3 and page 7 for this, this problem could have been avoided since the two acknowledgements, combined together would have occupied one full page.
Due to the provision for acknowledgement, the form has to be printed on single side of the paper. If it is printed on both sides, the matter printed on the back side of acknowledgement will be lost. The other side of the paper has to be wasted, therefore.
Does HDFC Bank really give any of these acknowledgements to the investor? No. I have bought these bonds more than 10 times. They never gave me any acknowledgement. Once I asked my broker whether they give acknowledgements to his other clients and he replied in the negative.
There is no purpose in having a provision which is never used. If, in a rare case, any investor demands it, he can be given acknowledgement by SMS / WhatsApp / E-mail or the bank can develop a simple software to print it on the spot.
Address and Email ID of RBI officers to Whom the Investor can Complain in Case of any Grievance
On page 6, HDFC Bank provides the addresses and Email ID of the RBI Regional Director and Chief General Manager whom the investor can contact if they have a complaint against HDFC Bank. However, the bank retains the form, including page 6. The investor doesn't receive this page. How will the investor access these contacts if needed later? Shouldn’t these have been printed on the acknowledgement page?
REC Ltd. also has provision for acknowledgement on page 1 of their application form. They use about 3-inch space at the bottom for this. However, they have taken care to print their contact details and those of their registrars at the same position on page 2 using equal 3-inch space. Their form can, therefore, be printed on both sides of paper.
Second and Subsequent Investing
A total of 11 to 12 pages, including photocopies of PAN and Aadhaar Cards, are used in buying these bonds. These 12 pages are required every time an investor buys these bonds, not just the first time. All data on these 12 pages remains the same in any subsequent purchase. Nothing changes. Still, the investor must furnish all the pages every time. He gets no relief in this paperwork.
When an investor buys these bonds for the first time, HDFC Bank allots a unique number to him. The bank calls it Bond Ledger Account No. (BLA No.). The investor must quote his BLA No. when making any subsequent purchase. All data about an investor can be found from his BLA No.
Precisely speaking, absolutely no paperwork is necessary for a second or any subsequent purchase of these bonds. Just the cheque with the investor’s BLA No. written on its back side is sufficient.
As I specified above, I have bought these bonds more than 10 times. Therefore, HDFC Bank has at least 10 copies of my same application form (10 single-side printouts of an 8-page long same MS-Word file). It also has 10 photocopies each of my PAN and Aadhaar Cards.
Where might the bank be storing all this paper? We know that commercial space is very expensive in major cities and not cheap in smaller towns either.
I have an inkling that the bank might be scanning my documents when I buy the bonds for the first time, retaining the soft copies and tearing off and throwing away the originals. In any subsequent purchase, they might be straight away sending all my papers, except the cheque, to a paper shredder.
Silver Lining
However, there is a silver lining in all this darkness. At the time of the bonds' maturity, HDFC Bank does not ask the investor to return the Bond Certificate it sends to him via Registered Post after every purchase. The bank has clearly specified on the bottom of the Bond Certificate that the investor is not required to return this certificate on maturity.
This is good and logical step. What could the bank have done with the old lapsed certificate except tearing it off and throwing away? Why to compel the investor to return a wastepaper at the time of redemption?
Can HDFC Bank go a step ahead? It need not spend money in printing and dispatching the Bond Certificate to the investor when the bonds are bought. A soft copy is sufficient. These days almost everybody has an email.
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