financial scams in india

8/13/2019 financial scams in india

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Project Report on:

Financial Scams in India

Submitted By:

NAME: ANOLI .V.ADHIA

SEAT NO: __________

TYB.Com (FINANCIAL MARKETS)

Semester Vth

Submitted To:

University Of Mumbai

Project Guide:

Dr. Richa Jain

Academic Year

2013-2014


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CERTIFICATE

This is to certify that the project entitled

FINANCIAL SCAMS IN INDIA is successfully done

by ANOLI.V.ADHIA During the Third Year, Fifth

Semester of B.com [Financial Markets] under

University Of Mumbai through the Thakur College of

Science & Commerce, Kandivali (East) , Mumbai

400101.

_______________ _______________ ______________

Co-coordinator Project Guide Principal

Date: _________ Place: ____________

____________________________

External Examiner


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DECLARATION

I ANOLI .V. ADHIA from Thakur College of Science &

Commerce, student of T.Y.B.Com (Financial Markets),

semester V, Examination Seat no:-_________, here by

submit my project report on FINANCIAL SCAMS IN

INDIA.

I also declare that this project which is the partial

fulfillment of the requirement for the degree of T.Y.B.Com

(Financial Markets) of University of Mumbai, is the result of

my own efforts with the help of experts.

Date: __________


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ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project report on

Capital Markets.

Firstly, I take the opportunity in thanking almightily and my parents

without whose continuous blessings, I would not have been able to

complete this project.

I would like to thank my project guide Dr. Richa Jain for her great

help, valuable opinions, advice and suggestions in fulfillment of this

project.

I am also grateful to my co-coordinator Mrs. Rashmi.V. Shetty for

always encouraging and given me new hope to do this project.

I am also grateful to my brother for supporting me for providing me

material and knowledge to make this project a success. I convey my

deep appreciation to them for sparing their valuable time and efforts,

so as to make me capable of presenting this project.

I am thankful to our college for all the possible assistance and

support, by making available the required books and the internet

room which have proved useful to me in successfully completing my

project.

I hope that I have succeeded in presenting this project to the best of

my abilities.


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EXECUTIVE SUMMARY:

The findings are based on a comprehensive survey, cutting across several

industrial sectors, both public and private. 'Strikes, Closures and Unrest'

emerged as the number one risk in the survey report. In the year 2012, it

did not surface among the top five risks in the 'Overall Risk Rating'. The

risk of 'Political and Governance Instability' has significantly changed

position from number eight last year to number two this year.

'Information and Cyber Insecurity', 'Fire' and 'Crime' have been rated at

number three, five and six respectively. They have maintained their

position among the top six risks from the India Risk Survey 2012

onwards. The risk of 'Corruption, Bribery and Corporate Frauds' has

been acknowledged as risk number four. In 2012, India was ranked 94

among 176 countries on the Corruption Perception Index and the

Financial Stability Report of the Reserve Bank of India revealed that

losses of INR 4,448 crores (approx. USD 8.2 billion) to Indian banks

from financial frauds in 2012 were the highest ever.


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RESEARCH OBJECTIVE:

An attempt is made to examine and analyze in-depth the creative-

accounting scandals, which brings the limelight to the importance of

ethics and corporate governance. The fraud committed is a testament

to the fact that the science of conduct is swayed in large by human

greed, ambition, and hunger for power, money, fame and glory.

Scandals from India have, time and again proved, that there is an urgent

need for good conduct based on strong corporate governance, ethics and

accounting & auditing standards. Unlike Enron, which sank due to

agency problem, Satyam was brought to its knee due to tunneling

effect. The Satyam scandal highlights the importance of securities laws

and CG in emerging markets. Indeed, Satyam fraud spurred the

government of India to tighten the CG norms to prevent recurrence of

similar frauds in future. Thus, major financial reporting frauds need to

be studied for lessons-learned and strategies-to-follow to reduce the

incidents of such frauds in the future.


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CONTENTS:

SR.NO PARTICULARS PG.NO

1. Brief introduction on financial markets

2. Introduction on financial scams

3. CASE STUDY-I ( Satyam Scam)

4. CASE STUDY-II ( Securities Scam)

5. CASE STUDY-III (CRB Scam )

6. Corporate Governance

7. Conclusion

8. Bibliography

9.


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BRIEF INTRODUCTION ON FINANCIAL MARKETS:

Financial markets describing any marketplace where buyers and sellers

participate in the trade of assets such as equities, bonds, currencies and

derivatives. Financial markets are typically defined by having transparent

pricing, basic regulations on trading, costs and fees and market forces

determining the prices of securities that trade.

Some financial markets only allow participants that meet certain criteria,

which can be based on factors like the amount of money held, the

investors geographical location, knowledge of the markets or the

profession of the participant.

Financial markets provide channels for allocation of savings to

investment. These provide a variety of assets to savers as well as various

forms in which the investors can raise funds and thereby decouple the

acts of saving and investment. The savers and investors are constrained

not by their individual abilities, but by the economys ability, to invest

and save respectively. The financial markets, thus, contribute to economic

development to the extent that the latter depends on the rates of savings

and investment.


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The financial markets have two major components:

Money market

Capital market.

Money marketis a segment of the financial market in which financial

instruments with high liquidity and very short maturities are traded. The

money market is used by participants as a means for borrowing and

lending in the short term, from several days to just under a year. Money

market securities consist of negotiable certificate of deposists (CDs),

bankers acceptances, U.S. Treasury bills, commercial paper, municipal

notes, Eurodollars, federal funds and repurchase agreements

(repos). Money market investments are also called cash investments

because of their short maturities. The money market is used by a wide

array of participants, from a company raising money by selling

commercial paper into the market to an investor purchasing CDs as a safe

place to park money in the short term. The money market is typically

seen as a safe place to put money due the highly liquid nature of the

securities and short maturities. Because they are extremely conservative,

money market securities offer significantly lower returns than most other

securities. However, there are risks in themoney market that anyinvestor


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needs to be aware of, including the risk of default on securities such as

commercial paper.

Capital Market is one in which individuals and institutions trade

financial securities. Organizations and institutions in the public and

private sectors also often sell securities on the capital markets in order to

raise funds. Thus, this type of market is composed of both the primary

and secondary markets. Any government or corporation requires capital

(funds) to finance its operations and to engage in its own long-term

investments. To do this, a company raises money through the sale of

securities - stocks and bonds in the company's name. These are bought

and sold in the capital markets.

The capital markets have two major components:

Primary market

Secondary market

Primary Market issues new securities on an exchange. Companies,

governments and other groups obtain financing through debt or equity

based securities. Primary markets, also known as "new issue markets,"

are facilitated by underwriting groups, which consist of investment banks


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that will set a beginning price range for a given security and then oversee

its sale directly to investors. The primary markets are where investors

have their first chance to participate in a new security issuance. Theissuing company or group receives cash proceeds from the sale, which is

then used to fund operations or expand the business.

The primary market consists of:

Public and rights issue

Euro issues

Private placements

Public and rights issue:

An issue of rights to a company's existing shareholders that entitles them

to buy additional shares directly from the company in proportion to their

existing holdings, within a fixed time period. In a rights offering, the

subscription price at which each share may be purchased in generally at a

discount to the current market price. Rights are often transferable,

allowing the holder to sell them on the open market.


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Euro issues:

Newly public companies that want to raise more money tend to issue this

type of stock. Euro equity is a term used to describe an initial public offer

occurring simultaneously in two different countries. The company'sshares are listed in various countries rather than where the company is

based. This method differs from cross-listing where company shares are

listed in the home market and then listed in a different country. Euro

equities are sometimes European securities sold on several national

markets. Also referred to as Euro equity Issue.

Private placement:

The sale of securities to a relatively small number of select investors as a

way of raising capital. Investors involved in private placements are

usually large banks, mutual funds, insurance companies and pension

funds. Private placement is the opposite of a public issue, in which

securities are made available for sale on the open market.

Secondary Market is where investors purchase securities or assets

from other investors, rather than from issuing companies themselves. The

Securities and Exchange Commission (SEC) registers securities prior to

their primary issuance, then they start trading in the secondary marketon


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the New York Stock Exchange, Nasdaq or other venue where the

securities have been accepted for listing and trading.

The secondary market consists of:

OTC MARKET

Securities exchanges

OTC MARKET:

Theover-the-counter(OTC) market is a type of secondary market also

referred to as a dealer market. The term "over-the-counter" refers to

stocks that are not trading on a stock exchange such as the NASDAQ,

NYSE orAmerican Stock Exchange(AMEX). This generally means that

the stock trades either on theover-the-counter bulletin board(OTCBB) or

thepink sheets. Neither of these networks is an exchange; in fact, they

describe themselves as providers of pricing information for securities.

OTCBB and pink sheet companies have far fewer regulations to comply

with than those that trade shares on a stock exchange. Most securities that

trade this way arepenny stocksor are from verysmall companies.


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SECURITIES EXCHANGES:

Regulated financial market where securities (bonds notes, shares)

are bought and sold at prices governed by theforces of demand and

supply. Stock exchanges basically serve as

(1) Primary markets where corporations, governments, municipalities,

and other incorporated bodies can raise capital by channeling savings of

the investors into productive ventures

(2) Secondary markets where investors can sell their securities to other

investors for cash, thus reducing the risk of investment and

maintaining liquidity in the system. Stock exchanges impose

stringent rules, listing requirements, and statutory requirements that

are binding on all listed and trading parties.
http://www.businessdictionary.com/definition/bond.htmlhttp://www.businessdictionary.com/definition/force.htmlhttp://www.businessdictionary.com/definition/force.htmlhttp://www.businessdictionary.com/definition/bond.html


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INTRODUCTION ON FINANCIAL SCAMS:

What are scams?

A fraudulent scheme performed by a dishonest individual, group,

or company in an attempt obtain money or something else of value.

Scams traditionally resided in confidence tricks, where an individual

would misrepresent themselves as someone with skill or authority, i.e. a

doctor, lawyer, investor. After the internet became widely used,

new forms of scams emerged such as lottery scams; scam

baiting, email spoofing, phishing, or request for helps. These are

considered to be email fraud. Also see phishing, scheme.

A scam is a dishonest attempt to trap you into parting with your money.

A 'scammer' may make a personal approach, with an offer too good to be

true. Someone may email you, phone, text-message or post an offer that

they press you to take up. Scams can reach their target audience in many

ways, ranging from a one-person door-stepping operation, through to

multinational highly sophisticated telemarketing scams. Advertisements,

direct mail, text messaging, phone calls and e-mail are all widely used.


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However SCAM means when a person tries to deceptively cheat you by

first giving you a very good offer about something but later on you would

be shocked to know that the person was simply bluffing and you have lost

your money. An example of this can be the lottery scam. For example a

person calls or emails you and tells you that you have won a lottery prize

but to get the money there is a small processing fee, you have to pay that

fee and then the money would be sent to you.

The top ten financial scams in India:

1) 2G Spectrum Scam

2) Commonwealth Games Scam

3) Satyam Scam

4) Telgi Scam

5) Bofors Scam

6) The Fodder Scam

7) The Hawala Scandal

l8) IPL Scam

9 )Harshad Mehta Stock Market Scam

10 )Ketan Parekh Stock Market Scam.


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CASE STUDY-I: (SATYAM SCAM)

Introduction on satyam computer services .ltd:

Satyam Computer Services Ltd.

Is a consulting and information technology services company based in

Hyderabad, India .It was found in 1987 by B.Ramalinga Raju.

The company offers information technology (IT) services spanning

various sectors, and is listed on the New York Stock Exchange and Euro

next. It is considered as an icon among the IT companies and at one point

had over billion dollar revenue. Sat yams network covers 67 countries

across six continents. The company employs 40,000 IT professionals

across development centers in India, the United States, the United

Kingdom, the UAE, Canada, Hungary, Singapore, Malaysia,

China, Japan, Egypt and Australia. It serves over 654 global companies,

185 of which are Fortune 500 corporations.

Satyam has strategic technology and marketing alliances with over 50

companies .Apart from Hyderabad; it has development centers in India

at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata,

Bhubaneswar, and Visakhapatnam.


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Satyam Maytas Fiasco:

Satyam Computers had on December 16, 2008, announced that it will

acquire two group firms - Maytas properties and Maytas Infra. The BOD

of Satyam had approved the foundersproposal to buy 51 per cent stake

in Maytas Infrastructure and 100 % in Maytas Properties. The total

outflow for both the acquisitions was expected to t be US$ 1.6 bn

comprising of US$1.3 bn for the 100% stake in Maytas Properties and

US$ 0.3 bn for the 51% stake in Maytas Infra.This is the move that

sparked a row over alleged violation of corporate governance laws. This

deal is not profitable for investors .So after this announcement they

started to raise their voices against the deal.

Maytas infrastructure:

The company is run by the sons of Ramalinga Raju .It was started in the

late 1980s by Ramalinga Raju. The main reason for the debacle of

Maytas Infra is due to the debacle of Satyam.

Maytas properties:

One of the reasons for the debacle of Maytas properties is the ongoing

economic slowdown. The company has huge land banks and the prices

have dropped down in the real estate significantly.


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ANALYSIS:

The truth is as old as the hills" opined Mahatma Gandhi, So a company

named "Satyam" (Truth, in Sanskrit) inspired trust,

Satyam Computers is a multinational company established in 1987 by

B.Ramlinga Raju in Hyderabad, India. Company offered information

technology (IT) services spanning various sectors all over the world &

was very well known in Stock Exchange with an increasing price of the

shares of company. Satyam network covered around 67 countries across

six continents with 40,000 IT Professionals working in India, US, UK,

UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and

Australia. It even serves 654 global companies. Within no time, business

was booming. Andhra Pradesh, of which Hyderabad is the capital, has

one of the largest pools of skilled manpower in India. Satyam would

prove a doughty competitor to its rivals, pricing its services so

aggressively that some thought it was prepared to go with minimum

profits in order to gain customers. And it expanded aggressively overseas.

When he opened his Sydney office a few years ago, he occupied premises

vacated by a top global IT firm. In China , provincial leaders vied to

invite Satyam to set up operations in their areas. But once Mr. Raju sold

shares to the Indian public in 1992 and later, went for a New York listing

in 2001, pressure grew on him to improve the companys performance.


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Ever competitive, he was also in rush to catch the market leaders, Tata

Consultancy Services, Infosys Technologies and Wipro. Raju was

obsessed with getting past the billion-dollar sales mark. When he got

there, he wanted to post US$2 billion .Satyam posted US$2.1 billion

(S$3.1 billion) sales in the year to March 31; 2008.With the ever-rising

pressure to perform, Satyam began doctoring the books to show bigger

profits by manipulating the balance sheet, process that began several

years back. For Satyam, the recent developments are a direct leftover of

the past. In fact, the story is about a decade old. In late 1999, India World

a largely unknown internet firm was acquired by Satyam group

company, Satyam Info way, for an eye-popping Rs 500 crore. The

consternation that accompanied this deal was not hard to comprehend.

India World had a top line of just Rs 1 crore and a net profit of an

insignificant Rs 25 lakh. At Rs 500crore, Satyam Info way, later renamed

Sify, was paying this astronomical sum not just for India World but for a

number of sites that came with it among them weresamachar.com,

khel.com and khoj.com. The argument dished out was based on the

potential of the internet business and the logic of eyeballs was driving this

valuation story. One was not sure about the source of funds and how

much money went back to RamalingaRaju.A few months later in 2000,

shareholders of Satyam were an irate lot. At the annual general meeting


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(AGM) of thecompany in Hyderabad in May 2000, shareholders accused

Satyam of withholding facts and claimed they were defrauded. This was

after the merger of three subsidiaries Satyam Enterprise Solutions

(SESL), Satyam Renaissance Consulting and Satyam Spark Solutions

with Satyam Computer Services. Post merger, 8 lakh shares of Satyam

Computers were allotted to C Srinivasa Raju, who was then Satyam

Computers executive director. Shareholders contended that SESL had

made a rights issue of 12 lakh shares at par just before this merger. A

third of this was bought by Satyam Computer while the remaining 8 lakh

shares went Srinivasa Rajus way after they were renounced. Once

shareholders of SESL were given shares in Satyam Computers in a 1:1

proportion, Mr. Raju got 8 lakh shares at just Rs 10 each, when the shares

were trading at a whopping Rs 1,600. The management of Satyam

Computers, however, maintained that things were above board, though

shareholders thought otherwise. The seeds of accounting manipulation in

Satyam were sown several quarters before Ramalinga Rajus

communiqu to the board on Wednesday, 7th Jan-09. In 2002, the

department of company affairs (DCA) was in receipt of a slew of

complaints from Satyams shareholders that there were accounting

irregularities in the company. Here, it was stated that Satyams directors

invested unwisely in subsidiaries that were underperformers. This merely


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facilitated the process of tax evasion and employing methods such as

writing off large amounts on depreciation. At first blush, Rajus statement

to the board (Rajas letter to the board Appended as Annexure I) in which

he confesses to inflating profits appears a act of contrition by a man who

was willing to stand up and face the music for his transgressions. If Raju

was dressing up the bottom-line, it was only to boost the companys

valuation and ensure that it stayed in the big league of IT services. A

higher valuation also enabled Raju to borrow more money against his

shareholding.


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QUERIES:

Why Mr. Raju Ramalinga manipulated the balance sheet?

Mr. Raju started doctoring the sheet simply to show superior performance

and to be in competition with the market leaders.

Why satyam announced that it will acquire maytas infra and maytas

properties?

Company announced Acquisition of 51% stake in Maytas Infra and 100%

stake in Maytas Properties on 16thDec 2008 to hide the irregularities in

the accounts which were lasting from last few years.

What management could do?

A) Restore the Management of the company & appoint some reputed

people as BOD.

B) Try building confidence in clients to get back the lost projects.

C) It could also be merged with any other software company.

How much was the actual fraud recorded?

His sheets recorded the following:


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Sundry Debtors 2651.6 CR Actual Debt was 2161;

Over stated 490 CR .

Cash & Bank Balance 5312.62 CR

Actual cash in bank was 321C.

Interest on fixed deposits 376 CR.

No accured interest exists.

L i a b i l i t y : Mr. Raju arranged Liability himself 1230 CR

A t o t a l o f 7 1 3 6 C R .

.

If satyam was fudging funds, where were the funds for all cash

acquisition coming from?

Sr. No Year Acquired Firm Profession Funding(Amount in $)1) Apr-05

UK based Citisoft PLC Business Consulting Firm 38Mn(Paid in

tranches)2) July-05 Singapore based Knowledge Dynamics Consulting

Solution Provider 3.3 Mn (All cash deal)3) Oct-07 UK based Nikor

Global Solutions Infrastructure based management services and

consultancy group 5.5 Mn (All cash deal)4) Jan-08 Chicago based Bridge

Strategy Group Management consulting firm 35.00 Mn (All cash deal)5)

Apr-08 Caterpillar Inc Market research and customer analytics operations

95.5 Mn for both deals (all cash purchase)S& V Management Consultants

Supply chain management firm.


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Satyam Scam who is to blame?

Who is guilty in this sordid state of events? MR. Raju is by far the father

of this fraud. But there were others who are also culpable.

1. The auditors:

What were the auditing company, Price waterhouse Coopers, doing?

PwC has written a letter to the BOD of Satyam that its audit may be

rendered "inaccurate and unreliable" due to the disclosures made by

Satyam's (ex) Chairman. Since the Auditors do bank reconciliation to

check whether the money has indeed come or not. They check

bank statements and certificates. So was this a total lapse in supervision

or were the bank statements forged? No one knows yet. The company

officials said they relied on data from the reputed auditors.

2. The promoters:

Since the promoters, in this case, held only about 8 percent shares, their

idea to push through the Maytas acquisition deal was defeated by an

angry lot of shareholders.


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3. The Sebi:

The Sebi had in December given a clean chit to Satyam in the probe on

violation of corporate governance law.

4. The bankers:

If the auditors were conned, it means that either the bank statement or

certificates were forged Satyams banks ICICI Bank, HDFC Bank,

Bank of Baroda, etc.

5. The directors and independent directors:

Despite the shareholders not being taken into confidence, the directors

went ahead with the managementsdecision.

6. The government:

The government too is equally guilty in not having managed to save the

shareholders, the employees and some clients of the company from

losing heavily.


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CASE STUDYII (SECURITIES SCAM):

PART 1:

Introduction on securities scam by Harshad Mehta :

History of Harshad Mehta:

Harshad Mehta was born n 29thy July in a Guajarati Jain family. Moved

from small town Raipur to find his future in Mumbai. First job as

dispatch clerk in new India assurance. Worked with stock brokers and

soon managed to get a brokers card. Soon started his own ventures grow

more research and assets management company ltd. He became a dream

seller and celebrity of the financial world. People started to address him

as the Big Bull of Market. On April 23, 1992 journalist Suchita Dalal in

a column in the Times of India exposed the dubious ways of harshad

Mehta. He was later charged with 72 criminal offences and 600 civil

actions were filed against him. He died in 2002 due to a massive heart

attack in a jail in thane, with much litigation still pending against him.


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Overview of the scam:

This scam can be categorized as a Ca p ital market scam in which

it is done by manipulating the facts I n order to attain enormous

profits. There were 4 different aspects of this scam: Diversion of funds

Diversion of funds from the banking system to brokers for financing

their operations in the stock market.

Intra-day trading-the modus operand mainly included investing

heavily in certain shares at the start of the day which led to a sharp

increase in the price of the stock and then cashing in at the end of the

day to reap huge benefits.

Following two aspects shall be explained in detail later .Use of

Ready Forward (RF) to maintain SLR Fake Bank receipts (BR).

Taking advantages of the loopholes in the banking system, Harshad and

his associates triggered a securities scam diverting funds to the tune of Rs

4000 Cr. from the banks to stockbrokers from April1991 to May 1992.

He caused the steep rise in the Stock market index in the year 1992 by

bidding at a premium for many shares.


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Some of the stocks which were highly invested in by Harshad Mehta

were:

ACC Apollo Tyres.

Reliance

Tata Iron and Steel Co. (TISCO)

BPL

Sterlite

Videocon


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TABLE: 1

The graph shows the rise in the Sensex during the period when Harshad

Mehta was operational and putting in loads of money in the stock

exchange increasing the liquidity and thus arbitrary increase in the prices

of some shares.:

R E A D Y F O R W A R D ( R F )


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Disappearance of money:

It is becoming increasingly clear that despite the intensive efforts by

several investigating agencies, it would be impossible to trace all the

money swindled from the banks. At this stage we can only conjecture

about where the money has gone and what part of the misappropriated

amount would be recovered. Based on the result of investigations and

reporting so far, the following appear to be the possibilities.

A large amount of the money was perhaps invested in shares.

However, since the share prices have dropped steeply from the

peak they reached towards end of March 1992, the important

question is what are the shares worth today? Till February 1992,

the Bombay Sensitive Index was below 2000; thereafter, it rose

sharply to peak at 4500 by end of March 1992. In the aftermath of

the scam it fell to about 2500 before recovering to around 3000 by

August 1992.Going by newspaper reports, it appears likely that the

bulk of Harshad Mehta's purchases were made at low prices, so

that the average cost of his portfolio corresponds to an index well

below 2500 or perhaps even below 2000. Therefore, Mehta's claim

that he can clear all his dues if he were allowed to do so cannot be

dismissed without a serious consideration. Whether these shares

are in fact traceable is another question.


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It is well known that while Harshad Mehta was the "big bull" in

the stock market, there was an equally powerful "bear cartel",

represented by Hiten Dalal, A.D. Narottam and others, operating

in the market with money cheated out of the banks. Since the stock

prices rose steeply during the period of the scam, it is likely that a

considerable part of the money swindled by this group would have

been spent on financing the losses in the stock markets.

It is rumored that a part of the money was sent out of India through

the Havala racket, converted into dollars/pounds, and brought back

as India Development Bonds. These bonds are redeemable in

dollars/pounds and the holders cannot be asked to disclose the

source of their holdings. Thus, this money is beyond the reach of

any of the investigating agencies.

A part of the money must have been spent as bribes and kickbacks

to the various accomplices in the banks and possibly in the

bureaucracy and in the political system.


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A part of the money might have been used to finance the losses

taken by the brokers to window-dress various banks' balance

sheets. In other words, part of the money that went out of the

banking system came back to it. In sum, it appears that only a

small fraction of the funds swindled is recoverable.

After the scandal:

Immediate impact :

After the Harshad Mehta scandal was exposed, April, 1992, the situation

in share market was that of utter chaos. The first impact of the scam was a

steep fall in the share prices. The index fell from 4500to 2500

representing a loss of Rs. 100,000 crores in market capitalization.

However, the major damage to the stock market did not stop here. Since

the accused were active brokers in the stock markets, they had traded a

large number of shares during the previous year. All these shares became

tainted and worthless and could not be used in the market. This was a

great loss to the innocent investor who had bought these shares much

before the scandal was exposed.


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Impact on Indian economy :

There was a lot of media coverage on the scam and the political parties

left no opportunity in criticizing the government for it. The government

was under immense pressure and its liberalization policies were severely

criticized. It was also believed that Harshad Mehta and his accomplices

were behind framing of these policies. In the end the government had to

put the liberalization plans on hold. SEBI had to postpone the sanctioning

of private sector mutual funds. Implementation of some aspects of the

Narasimham Committee recommendations on the banking system had to

be delayed. The much talked about entry of foreign pension funds and

mutual funds became more remote than ever. The Euro-issues planned by

several Indian companies were delayed since the ability of Indian

companies to raise equity capital in world markets was severely

compromised.

Impact on the banks:

Fake bank receipts (BR) which were an integral part of the execution of

the whole scam landed the banks involved in a tight spot. These BR were

declared void and public money was at stake. At least ten prominent

banks were involved in this; some of them being SBI, Standard Chartered


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and a subsidiary of RBI. The scam could have been checked in time with

proper policies and verifications. The government, the RBI and the

commercial banks are as much accountable as the brokers for the scam.

The brokers were encouraged by the banks to divert funds from the

banking system to the stock market. The RBI too stood indicted because

despite knowledge about banks over-stepping the boundaries demarcating

their arena of operations, it failed to check them. Some of the prominent

individuals who were penalized were K. M. Margabandhu, CMD of the

UCO Bank (Arrested and sacked) and V. Mahadevan, one of the MD the

State Bank of India (Suspended).


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CASE STUDY-II (SECURITIES SCAM)

PART-2

Introduction on securities scam by Ketan Parekh:

History of Ketan Parikh:

Ketan Parikh is a former stock broker from Mumbai, India. He was

convicted in 2008, for involvement in the Indian stock market

manipulation scam in late 1999-2001. Currently he has been debarred

from trading in the Indian stock exchanges till 2017. He was trainee of

Harshad Mehta. Ketan Parikh can be best described as the pied piper of

Dalal Street. Parekh came from a family of brokers which helped him to

create a trading ring of his own. A Mumbai based stock broker chartered

accountant by profession. Ketan Parikh took advantage in certain stocks

which later came to be known as K-10 STOCKS. He held significant

stakes in the K-10 companies the buoyant stock markets from January

1999 helped the K-10 stocks increase in value substantially, as a result

other brokers and fund managers started investing heavily in these stocks.


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The K-10 Stocks:

Aftek Infosys

DSQ Software

Global Telesystems

Himachal Futuristic communications

Pentamedia Graphics

Satyam computers

Silver line technology

SSI

ZEE Telefilms

Pritish Nandy communications

Development leading to Ketan Parekh scam:

On March 1st, 2001 a fall about 176 points was seen in the sensex. Prior

day union budget tabled prompted 177 sensex points increase. SEBI

launched immediate investigation on the notice of the current situations in

the market. SEBI inspected the books of several brokers suspected of

triggering the crash. RBI ordered some banks to furnish data of capital

market exposure. BSE President Anand Rathis resignation added to

continued downfall of sensex. The situations opened debate over banks


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financial capital markets operations, lending f funds against collateral

security, dual control of co-operative banks. Ketan parekh was arrested

by CBI on 30thmarch 2001. He was charged defrauding Bank of India by

almost 20$ million. Then there was another sensex fall of 147 points.

Factors that helped Ketan Parekh:

Though Ketan Parekh was a successful broker, he did not have money to

buy large stakes as he held the stakes of more than RS.750 million in

july1999, according to a report. Analyst claimed that he had borrowed

from various companies and banks for this purpose. His financing

method was fairly simple. He bought shares when they were trading at

low prices and saw the rise in the bull market while continuously trading.

When the prices were high enough he pledged the shares with banks as

collateral for funds, and also borrowed from the companies like HFCL.

It could not have been possible without the involvement of banks. A

small Ahmadabad based bank, Madhavapura Mercantile Cooperative

Bank (MMCB) Was KPs main ally in the scam. KP and his associates

started tapping the MMCB for funds in early 2000. In December 2000,

when Ketan Parikh faced liquidity problem in settlement he used MMCB

in two different ways:


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First was the pay order route, where Ketan Parikh issued cheques

drawn on bank of India (BOI) TO MMCB, again which MMCB issued

pay orders, the pay order discounted at BOI.

The second route was borrowing from MMCB branch at Mandvi

(Mumbai) where different companies owned by Ketan Parikh and his

associates had accounts. Ketan Parikh used 16 such accounts, either

directly or indirectly through other broker firms and obtains funds.

Impact on Calcutta Stock Exchange:

Lack of regulations and surveillance on the bourse allowed a highly

illegal and volatile Badla business. Calcutta Stock Exchange had the third

largest volumes in the country after NSE & BSE. Calcutta stock exchange

helped Ketan Parikh to cover his operations from his rivals in Mumbai.

Brokers at CSE used to buy shares at Ketan Parikh behest. These brokers

had to keep shares in their name and they were paid 2.5% weekly interest.

By February 2001, CSE were reduced to estimated Rs. 6-7 billion from

their initial worth of Rs.12 billion. Ketan Parikhs Badla payments were

not honored on time for the settlement and about 70 CSE brokers


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defaulted on their payments. By mid-march, the value of stocks went

down further to around rs.2.5 -3 billion.

Impact of the scam on financial institutions:

Ketan Parikh was threatening to sue the bank of India for defamation

because it complained of bouncing of 1.3 billion pay orders issued to the

broker by Madhavpura mercantile cooperative bank. Investigations by

SEBI & CBI reveal that sheer magnitude of money by Parikh was a

staggering 64 billion.

Working of Badla System:

The stock exchange acts as an intermediary between you and the actual

lender. You will be changed on interest rate for borrowing, which will be

determined by the demand for that stock under badla trading. Thus,

higher the demand for Wipro under badla trading higher will be the

interest rate. You can keep your borrowing unpaid for a maximum of 70

days, after which you will have to repay the badla financer through the

exchange.


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SEBIs role after scam:

An additional 10% deposit margin was imposed on outstanding net sales

in the stock markets. The limit of application of the additional volatility

margins was lowered from 80% to 60%. To revive the markets SEBI

imposed restriction on short sales and ordered. It suspended all the broker

member directors of BSEs governing board. SEBI also banned trading

by all stock exchange presidents, vice presidents and treasures. SEBI

allowed banks for collateralized lending only through BSE & NSE.

Conclusion:

RS.2000 billion lost.

Ketan Parikh was released on bail on May 2001.

the retail investors were the worst hit

SBI, BOI & PNB had to suffer huge losses

MMCB also suffered huge losses around 400 crores.


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mobilization, mutual funds and asset management, international finance

and forex operations. CRB Caps was also very active in stock-broking

having a card both on the BSE and the NSE. The company raised over Rs

176 crore from the public by January 1995. The A+ rating given by

CARE and upfront cash incentives of 7-10% attracted investors in hordes

to Bhansali's schemes.

Table: 2

CRB CAPITAL MARKETSKEY FINANCIALS:


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Overview of the scam:

Bhansali was reported to have specialized in setting up dummy

investment companies. He used to sell these dummy companies to buyers.

He capitalized on the 1985 boom in leasing companies to become cash

rich.

He had established good contacts in the Registrar of Companies and the

Controller of Capital Issues offices. He registered companies with

practically no equity and then stage-managed the dummy company's

maiden public issue with a few hundred investors, largely from Calcutta's

close knit Marwari Jain community. Having had a company listed on the

stock exchange, Bhansali then sold it for a profit to businessmen who

needed dummy public limited companies in a hurry. Bhansali used his

own money to rig share prices in order to raise more money from the

markets in two ways. Firstly, he bought his own stock through private

finance companies owned by him. Secondly, he used his other public

companies to buy into each other as cross-holdings.

Defrauding the SBI:

In May 1996, CRB Caps opened a current account in SBI's main Mumbai

branch, for payment of interest, dividend and redemption cheques. The


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payment warrants could be presented at any of the 4,000 SBI branches for

payment.However, Bhansali was granted only a current account facilityand did not enjoy any overdraft facility. He was expected to deposit cash

upfront into the current account, along with a list of payments that had to

be honored. Claiming that the logistics of payment were very complex

and that it was not possible for every branch to check with the head office

before honoring a dividend warrant, the branches gradually began treating

these instruments just like a demand draft. For about nine months, the

setup worked very well. However, in March 1997, SBI realized that the

account had been overdrawn to the extent of a few crores. Bhansali was

called to the SBI office and asked to remit the difference immediately,

which he promptly did.

The systemic rot:

The collapse of the CRB group seemed to be a fraud allowed by

supervisors despite the regulations in place. The lack of clear

communication channels between the banks, RBI and the government

seemed to have worked to Bhansali's advantage to a great extent.

Frequent clashes occurred between RBI and SEBI in the media, with both

of them trying to prove how the other was responsible for not acting early

enough. The RBI claimed that it had no powers to examine the asset


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quality of the CRB group and thereby was not in a position to pass any

judgment on the character of asset generation or deployment of the funds

raised by the group. The bank further claimed that the powers were

granted only in March 1997, when the RBI Act of 1934 was amended to

include specific provisions for the purpose. The bank also stated that it

had begun to examine the liabilities and not the assets. However, media

reports were quick to refute RBI's claims.

The Doomed Depositors:

May 18, 1997 - hundreds of angry, frustrated and scared people stood

outside the Reserve Bank of India's (RBI) Mumbai headquarters under

the scorching sun. They were waiting for Chain Roop Bhansali

(Bhansali), the head of the CRB Group of companies to arrive.

Three days earlier the RBI had given Bhansali 72 hours to come up with a

plan to repay his liabilities following over 400 complaints from

depositors in his company's financial schemes. Most top officials of CRB

were untraceable from the second week of May itself. The CentralBureau of Investigation (CBI) locked and sealed the offices of the CRB

Group and arrested six persons, including four directors (two from

Bikaner and two from Mumbai) of the satellite companies of the group, a

financial controller in Mumbai and a relative and close associate of


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Bhansali in Delhi. The CBI also conducted simultaneous searches at 16

places in Mumbai, three in New Delhi, one each in Chennai and

Ahmadabad and two places each in Calcutta, Jhunjunu, Sujangarh and

Bikaner. The CBI froze the bank accounts of the group companies and

seized incriminating files and other documents from the residence of the

vice-president of the CRB group in Mumbai. Following rumors that

Bhansali had fled India and was hiding in Hong Kong or Canada, the CBI

sought Interpol's assistance to trace his whereabouts. RBI filed a winding-

up petition claiming that the continuance of the CRB Group was not in

the interest of the public and depositors. The order prohibited CRB from

selling, transferring, mortgaging or dealing in any manner with its assets

and from accepting public deposits. In response, Bhansali sent a letter to

the RBI. Though it was not signed by him, the letter said that the RBI

order had led to the deterioration of the company's financial position. It

added that the company was facing tremendous problems with payments

to fixed depositors. The letter further said that 'we have, also expressed

that in view of the precarious situation which is fast going out of our

control, before it becomes unmanageable, our case should be considered

sympathetically.' This letter led the investors to believe that Bhansali

would come out of hiding and work out a way to get out of the mess.


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Impact of the scam:

The CRB scam took the whole nation by storm. At one point, the Union

finance ministry held a meeting everyday to get to the bras stacks of the

CRB fiasco. In a meeting with SEBI, the finance minister criticized the

regulator severely.The government asked the RBI to prepare a panel ofauditors asking to explore the possibility of making auditing of NBFCs a

prerequisite to registration. In October 1998, the SEBI appointed an

administrator for CRB's Arihant scheme finalized a scheme for payment

to the unit holders under the scheme; the investors were prematurely paid

Rs 4.95 per unit, which was its NAV as of 31 March 1998. When the

administrator had taken over, the assets of the scheme comprised the

fund's frozen bank accounts worth Rs 81 lakh, plus some dividends from

investments. Besides, there were a large number of listed (but thinly

traded) and unlisted shares amounting to Rs 17.5 crore.


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CORPORATE GOVERNANCE:

meaning of corporate governance:

The system of rules, practices and processes by which a company is

directed and controlled. Corporate governance essentially involves

balancing the interests of the many stakeholders in a company - these

include its shareholders, management, customers, suppliers, financiers,

government and the community. Since corporate governance also

provides the framework for attaining a company's objectives, it

encompasses practically every sphere of management, from action plans

and internal controls to performance measurement and corporate

disclosure. Most companies strive to have a high level of corporate

governance. These days, it is not enough for a company to merely be

profitable; it also needs to demonstrate good corporate citizenship

through environmental awareness, ethical behavior and sound corporate

governance practices.

Corporate governance has also been defined as "a system of law and

sound approaches by which corporations are directed and controlled

focusing on the internal and external corporate structures with the

intention of monitoring the actions of management and directors and


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thereby mitigating agency risks which may stem from the misdeeds of

corporate officers."

Good corporate governance ensures that the business environment is fair

and transparent and that companies can be held accountable for their

actions. Conversely, weak corporate governance leads to waste,

mismanagement, and corruption. It is also important to remember that

although corporate governance has emerged as a way to manage modern

joint stock corporations it is equally significant in state-owned

enterprises, cooperatives, and family businesses. Regardless of the type of

venture, only good governance can deliver sustainable good business

performance. The presence of strong governance standards provides

better access to capital and aids economic growth. Corporate governance

also has broader social and institutional dimensions. Properly designed

rules of governance should focus on implementing the values of fairness,

transparency, accountability, and responsibility to both shareholders and

stakeholders. In order to be effectively and ethically governed, businesses

need not only good internal governance, but also must operate in a sound

institutional environment. Therefore, elements such as secure private

property rights, functioning judiciary, and free press are necessary to

translate corporate governance laws and regulations into on-the-ground

practice.


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Principals of corporate governance:

Rights and equitable treatment of shareholders:

Organizations should respect the rights of shareholders and help

shareholders to exercise those rights. They can help shareholders

exercise their rights by openly and effectively communicating

information and by encouraging shareholders to participate in general

meetings.

Interests of other stakeholders:

Organizations should recognize that they have legal, contractual,

social, and market driven obligations to non-shareholder stakeholders,

including employees, investors, creditors, suppliers, local

communities, customers, and policy makers.

Role and responsibilities of the board:

The board needs sufficient relevant skills and understanding to review

and challenge management performance. It also needs adequate size

and appropriate levels of independence and commitment.


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Integrity and ethical behavior:

Integrity should be a fundamental requirement in choosing corporate

officers and board members. Organizations should develop a code of

conduct for their directors and executives that promotes ethical and

responsible decision making.

Disclosure and transparency:

Organizations should clarify and make publicly known the roles and

responsibilities of board and management to provide stakeholders with a

level of accountability. They should also implement procedures to

independently verify and safeguard the integrity of the company's

financial reporting. Disclosure of material matters concerning the

organization should be timely and balanced to ensure that all investors

have access to clear, factual information.


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Corporate governance in India:

India's SEBI Committee on Corporate Governance defines corporate

governance as the "acceptance by management of the inalienable rights of

shareholders as the true owners of thecorporation and of their own role

as trustees on behalf of the shareholders. It is about commitment to

values, about ethical business conduct and about making a distinction

between personal & corporate funds in the management of a company. It

has been suggested that the Indian approach is drawn from the Gandhi

and principle of trusteeship and the Directive Principles of the Indian

Constitution, but this conceptualization of corporate objectives is also

prevalent in Anglo-American and most other jurisdictions.

Unlike south east and east Asia , the corporate governance initiative in

India and was not triggered by any serious nationwide financial, banking

and economic collapse. The initiative in india was initially driven by an

industry association, the confederation of Indian industry. In December

1995, CII was set up a task force to design a voluntary code of corporate

governance. The final draft of this code was widely circulated in 1997.


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In April 1998, the code was released. It was called Desirable Corporate

governance. Between 1998 and 2000, over 25 leading companies

voluntarily followed the code:

Bajaj Auto

Hindalco

Infosys

Dr. Reddys Laboratories

Nicholas Piramal

Bharat Forge

HDFC

BSES

ICICI & many more

Following CII & SEBI, the department of company affairs (DCA)

modified to further improve financial disclosures. These were:

Disclosure of related party transactions.

Disclosure of segment income :revenues, profits and capital

employed

Deferred tax liabilities or assets.

Consolidation of accounts.


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Mandated Corporate Governance Guidelines:

Board of directors : Frequency of meetings and

composition:

1. Board must meet at least four times a year, with a maximum time

gap of four months between two successive meetings.

2. If the chairman of the Company is a non-executive then one-third

of the board should consist of independent directors and

50%otherwise.

3. Independent defined as those directors who, apart from receiving

directors remuneration do not have any other monetary relationship

or transactions with the company, its promoters, management or

subsidiaries, which in the view of the board may affect

independence of judgment

4. The frequency of board meetings and board committee meetings,

with their dates, must be fully disclosed to shareholders in the

annual report of the company.


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5. The attendance record of all directors in board meetings and board

committee meetings must be fully disclosed to shareholders in the

annual report of the company.

6. Full and detailed remuneration of each director (salary, sitting fees,

commissions, stock options and perquisites) must be fully

disclosed to shareholders in the annual report of the company.

7. Loans given to executive directors are capped (no loans permitted

to non-executives), and must be fully disclosed to shareholders in

the annual report of the company.

Board of Directors : Information that must be

supplied:

1. Annual, quarter, half year operating plans, budgets and updates.

2. Quarterly results of company and its business segments.

3. Minutes of the audit committee and other board committees.


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4. Recruitment and remuneration of senior officers.

5. Materially important legal notices and claims, as well as any

accidents, hazards, pollution issues and labor problems

6. Any actual or expected default in financial obligations.

7. Details of joint ventures and collaborations.

8. Transactions involving payment towards goodwill, brand equity

and intellectual property.

9. Any materially significant sale of business and investments.

10.Foreign currency and other risks and risk management.

11.Any regulatory non-compliance


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Board of directors: audit committee:

1.Must have minimum of three members, all non-executivedirectors, the majority of whom are independent.

2.Chairman must be an independent director, and must be presentat the annual shareholders meeting to answer audit or finance

related questions.

3.At least one member must be an expert in finance/accounts.

4. .Must have at least three meetings per year, including onebefore finalization of annual accounts

5.Must meet with statutory auditors and internal auditors; havethe powers to seek any financial, legal or operational

information from the management; obtain outside legal or

professional advice.


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Disclosures to shareholders in addition to balance

sheet, P&L a/c & cash flow statement:

1. Board composition (executive, non-exec, independent).

2. Qualifications and experience of directors.

3.Number of outside directorships held by each director (capped at

director not being a member of more than 10 board-level

committees, and Chairman of not more than 5).

4. Attendance record of directors.

5. Remuneration of directors.

6. Relationship (familial or pecuniary) with other directors.

7. Warning against insider trading, with procedures to prevent such

acts.


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8. Details of grievances of shareholders, and how quickly these were

addressed. Date, time and venue of annual general meeting of

shareholders.

9. Dates of book closure and dividend payment.

10.Details of shareholding pattern.

11.Name, address and contact details of registrars and/orshare transfer

agents.

12.Details about the share transfer system. Stock price data over the

reporting year, and how the company stock measured up to the

index.

13.Financial effects of stock options.

14.Financial effects of any share buyback.

15.Financial effects of any warrants that are to be exercised.


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TABLE: 3

Shows the corporate mis-governance of certain companies for the

period (2002-2003 & 2003-2004)


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CONCLUSION:

While the corporate governance framework in the country is seen at par

with other developed markets, the same has to be implemented in 'letter

as well as spirit.

The fact that white collar crime continues to occur, and seemingly at an

increasing rate, suggests that the expected costs do not outweigh the

expected benefits from cheating. Stronger penalties are needed.

So this concludes the list of Indian scams of all times. According to the

compilation, the total amount of money involved in various scams over

the last 12 years alone, since 1992, is estimated to be over Rs 80 lakh

crore (Rs 80 trillion) or $1.80 trillion! To many people abroad, Ind ia is

seen sentimentally as Mahatma Gandhis country of khadi cloth, good

ethics, and care for the poor. To some it is an economic miracle and a

future super power, while to others it is an unkind cruel place of caste,

ethnic and rich-poor divisions and violence. Above all however, and not

far below the surface, India is a maze of unethical, unlawful and illegal

swindles that link most politicians, many bureaucrats, and a large number

of businessmen and others.


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BIBLIOGRAPHY:

1.www.caseplace.org

2.www.icmrindia.org

3. Articles.timesofindia.indiatimes.com

4.Business ethics: concepts and cases- Velasquez.

5. Dagar, S.S. (2009). How Satyam was sold the untold story.
http://www.caseplace.org/http://www.caseplace.org/http://www.caseplace.org/http://www.caseplace.org/http://www.caseplace.org/http://www.icmrindia.org/http://www.icmrindia.org/http://www.icmrindia.org/http://www.icmrindia.org/http://www.caseplace.org/


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