You are on page 1of 13

W EST B ENGAL N ATIONAL U NIVERSITY

OF J URIDICAL

S CIENCES

FROM HAWALA SCAM TO


COALGATE: AN ANALYSIS OF
SCAMS IN INDIA
White Collar Crime

Submitted by:
Akshay Sharma
ID No. 210019

Electronic copy available at: http://ssrn.com/abstract=2395931

TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 2
MAJOR SCAMS IN INDIA ............................................................................................................ 3
A. Hawala scandal .............................................................................................................. 3
B. Fodder scam.................................................................................................................... 3
C. Harshad Mehta scam ...................................................................................................... 4
D. Ketan Parekh scam ......................................................................................................... 5
E. Adarsh housing society scam .......................................................................................... 6
F. Satyam case ..................................................................................................................... 7
G. 2G Spectrum case ........................................................................................................... 7
H. Commonwealth Games Scam .......................................................................................... 8
I.

Coalgate scam .............................................................................................................. 8

CONCLUSION ............................................................................................................................. 9
BIBLIOGRAPHY ........................................................................................................................ 11
Cases .................................................................................................................................... 11
News articles, opinions and interviews ................................................................................ 11
Reports and documents of governmental agencies .............................................................. 12
Journals and papers ............................................................................................................. 12

Electronic copy available at: http://ssrn.com/abstract=2395931

FROM HAWALA SCAM TO COALGATE: AN ANALYSIS OF


FINANCIAL SCAMS IN INDIA
Akshay Sharma*

INTRODUCTION
The last three years were unique to India in the way it awakened the masses and led them to
express concerns in public matters. Now, the rise of popular peoples movements and mass
participation would usually be encouraging and positive for any democracy like ours.
However, the context in which the aforesaid popular movement came up in India leaves
much to be ashamed of since this background, against which the mass protests began, was
that of widespread corruption in public life.
While corruption had traditionally been endemic in India, it reached unfrequented heights in
the preceding decade. Scams after scams came to rock the Indian imagination and exposed
the rampant corruption that existed with abhorrent ease in public life. In the wake of
successive scams such as the Adarsh, 2G, Satyam and Commonwealth scams coupled with
the governments reluctance to take any action in this regard led the general populace to be
fed up with the prevailing conditions and the aam aadmi, thus, decided to take to the streets
in support of Anna Hazare in his fight against corruption.1
Though recent scams such as those mentioned above come to cloud ones memory in any
discussion on corruption, corruption and financial crimes have been here for far longer. If the
starting point of this timeline is moved just a decade back, it would reveal a large number of
events that have come to the fore. The aim of this paper is to highlight such major scams that
have taken place in the last two decades, i.e., from Hawala to Coalgate. This paper shall study
in detail several of such prominent scams and highlight the administrative and the legal lapses
that were exploited by their operators. It will then discuss the contemporary regulatory
framework to combat corruption in the light of these scams and examine how the lessons
learnt from these incidents helped in strengthening such framework. The author will finally
conclude with an analysis of the road that lies ahead for our public institutions to ensure that
* 4th year student of the W.B. National University of Juridical Sciences, Kolkata.
1
See BBC South Asia, India corruption: Protests swell in support of Hazare, August 17, 2011, available at
http://www.bbc.co.uk/news/world-south-asia-14564727 (Last visited on November 20, 2013).

none of such scams resurface again to undermine the general confidence in our public
institutions.

MAJOR SCAMS IN INDIA


A. Hawala scandal
The Hawala scam was a political scandal that landed many of the top leaders of a prominent
political party into charges of corruption running into thousands of crores of rupees. The
prime accused in the case were the Jain brothers who were accused of acting as hawala
brokers for bribing the accused leaders, including Mr. LK Advani, Mr. VC Shukla, Balram
Jakhar, etc.2 A tip-off from a captured militant on the source of funding led the CBI to
investigate the Jain brothers where it found diaries containing initials of these top ranking
politicians and bureaucrats.3 Investigations revealed an underground network whereby
unlawful funds were being illegally transferred from unlawful sources, thus exposing close
nexus between the corrupt politicians, administrative machinery and even the investigative
agencies.4 In the public interest litigation that was instituted by eminent journalist Vineet
Narain, numerous threats and questions in relation to the security of the nation, integrity in
public life, and the rampant corruption were raised.5
Though the case that followed did not result in successful conviction of all the leaders
accused of corruption on account of inadequacy of evidence, it brought about a new wave of
probity in investigations in such cases. The Supreme Court realised the need for free and
political interference-free prosecution and attempted to free the CBI from political
interference by laying down strict guidelines for the same.6 It also mandated that the
government operationalize an independent Central Vigilance Commission (CVC).7 Thus, this
scam stimulated significant judicial involvement in reforming basic procedures to prevent
corruption.
B. Fodder scam

Charu Lata Joshi, I Am Not The Hawala Kingpin, I Was Just Branded One, June 11, 1997, available at
http://www.outlookindia.com/article.aspx?203677 (Last visited on November 20, 2013).
3
Ranjit Bhushan, Wanted: Proof, Not Diary Notes, April 23, 1997, available at
http://www.outlookindia.com/article.aspx?203417 (Last visited on November 20, 2013).
4
Sudha Mahalingam, Diaries as evidence, FRONTLINE, April 3, 1998, 8.
5
Krishan Mahajan, Contempt and the Supreme Court, April 6, 2000, available at
http://expressindia.indianexpress.com/ie/daily/20000406/ied06072.html (Last visited on November 20, 2013).
6
Vineet Narain v. Union of India, (1996) 2 SCC 199.
7
Id.

The fodder scam had been taking place systemically in Bihar for two full decades till the time
it was unearthed in 1996. The case involved manipulation of rolls and official records to
show a higher number of livestock and obtain inflated resources using the same.8 With the
help of fictitious livestock in the government records, the officials used to procure animal
husbandry equipment in numbers that were much larger than the actual numbers. This
facilitated the siphoning off of state funds to the tune of rupees 900 crores.9
The impact of the scheme was so huge that it led to the resignation of Mr. Lalu Prasad Yadav,
the then Chief Minister of Bihar, and his close aide and accomplice in crime, Mr. Jagannath
Mishra.10 A case for misappropriation of public funds, corruption and conspiracy was
instituted against the accused. After being delayed for more than 12 years, the case finally
reached it conclusion and the judgment pronounced by the court held the two aforementioned
accused guilty along with 45 more of their accomplices.11
C. Harshad Mehta scam
This was a massive scam in the Indian securities market caused by a well-known stockbroker
by the name of Mr. Harshad Mehta. Being an experienced and skilled broker, he understood
the working of the stock market too well before using its loopholes to his advantage by
causing manipulations. He employed his stock manipulation scheme for a long time to amass
huge wealth for himself and committed various financial crimes in the process. The modus
operandi that he indulged in involved brokering of ready forward transactions or short-term
loans between various banks and their buying back at a profit.12
Mehtas manipulations led to a fraud whose net worth is estimated to be around 5000 crore
rupees.13 After this fraud was uncovered, he was soon investigated and prosecuted for more

See Hari Kumar, Former Bihar Chief Minister Convicted in Fodder Scam, September 30, 2013, available at
http://india.blogs.nytimes.com/2013/09/30/former-bihar-chief-minister-convicted-in-fodder-scam/?_r=0 (Last
visited on November 20, 2013).
9
Id.
10
Agencies, Rabri Devi sworn in as Bihar CM, NDA furious, March 12, 2000, available at
http://expressindia.indianexpress.com/ie/daily/20000312/ina12039.html (Last visited on November 20, 2013).
11
Anumeha Yadav, Lalu Prasad, Mishra among 45 convicted in fodder scam case, September 30, 2013,
available at http://www.thehindu.com/news/national/lalu-prasad-mishra-among-45-convicted-in-fodder-scamcase/article5184894.ece (Last visited on November 20, 2013).
12
Sucheta Dalal, Harshad Mehta Scam: A Distorted Picture of 1992, May 15, 2012, available at
http://www.moneylife.in/article/harshad-mehta-scam-a-distorted-picture-of-1992/25659.html (Last visited on
November 20, 2013).
13
Daksesh Parikh and Lekha Rattanani, The rise and fall of Harshad Mehta, May 31, 1992, available at
http://indiatoday.intoday.in/story/securities-scam-harshad-mehta-throws-banking-system-stock-markets-intoturmoil/1/306969.html (Last visited on November 20, 2013).

than 40 criminal charges. He came to be convicted for the majority of these charges two years
after his death in 2003 by the Supreme Court.14
Harshad Mehtas scandal was a watershed moment in the Indian jurisprudence of financial
crimes as it led to major overhaul of the securities framework. The authorities realized the
need for more secure and safer environment for market transactions to reinforce investor
confidence and introduced many changes. Many amendments were brought in to the
governing law of the Securities and Exchange Board of India (SEBI Act, 1992) and to a host
of SEBI regulations to overcome these loopholes.15 Harshad Mehta scam, thus, made a
seminal contribution to the development of the law on corporate crimes.
D. Ketan Parekh scam
Ketan Parekhs scam was the second of the shockers that the Bombay Stock Exchange
experienced in the 1990s after the scandal involving Harshad Mehta. Ketan Parekh too was a
stockbroker who devised a scheme of borrowing funds from different financial companies
with the help of collusion with one of the banks. His method that led to the scam was to buy
shares when they were trading low and as soon as they would go up, secure funds from the
banks by pledging these shares.16 This permitted him to rig stock prices and force circular
trading in a manner to suit his financial needs.
After his scam was caught, he was convicted by the Bombay High Court for criminal
conspiracy to siphon off 47 crore rupees and was banned from trading in the securities market
along with imprisonment and a fine.17 Insofar as the post-scam events are concerned,
Parekhs case bears resemblance to the Harshad Mehta discussed above. This scandal turned

14

Financial Express, SC Upholds Harshad Mehtas Conviction In Stock Scam, January 14, 2003, available at
http://www.financialexpress.com/news/sc-upholds-harshad-mehta-s-conviction-in-stock-scam/69984
(Last
visited on November 20, 2013).
15
See Joydeep Ghosh, From Harshad Mehta to NSEL..., September 5, 2013, available at http://www.businessstandard.com/article/markets/from-harshad-mehta-to-nsel-113090500472_1.html (Last visited on November 20,
2013).
16
Malini Bhupta, 2001-Ketan Parekh scam: Stock and bull story, December 18, 2009, available at
http://indiatoday.intoday.in/story/2001-Ketan+Parekh+scam:+Stock+and+bull+story+/1/75489.html
(Last
visited on November 20, 2013).
17
Mohan Kumar, Ketan Parekh, Hiten Dalal among convicted, March 13, 2008, available at
http://www.indianexpress.com/news/ketan-parekh-hiten-dalal-among-convicted/284116/ (Last visited on
November 20, 2013); Press Trust of India, Ketan Parekh held guilty in '92 security scam case, April 1, 2008,
available
at
http://indiatoday.intoday.in/story/Ketan+Parekh+held+guilty+in+'92+security+scam+case/1/6479.html
(Last
visited on November 20, 2013).

the national attention towards a new set of reforms aimed at mandated disclosures and greater
transparency in the Indian financial system and helped in making the stock markets secure.18
E. Adarsh housing society scam
Adarsh scam aptly revealed the shallowness of the authorities in using the names of decorated
officers of the armed forces for their personal monetary benefits. It involved allocation of
high-end flats in an expensive property located in the upmarket area of Colaba in Mumbai.
The society was originally conceived as a residential society for the war heroes who had
served the nation in the Kargil War and their widows. However, the majority of the
allotments made in this prime real estate spot were to prominent politicians, military officials
and bureaucrats and a host of their respective relatives.19 Besides the change in the original
intended allottees, the building plan also underwent a change, often in violation of several
environmental and other municipal regulations.20 For instance, though originally planned to
be only 6-storey high, it was made to go as high as 31-storeys to accommodate more people.
Another instance of blatant disregard of law by the authorities can be seen from the fact that
very critical files relating to the investigations in the case simply got lost from the offices.21
Investigations launched into the scam by the Enforcement Directorate, CBI and the Income
Tax departments brought to light the role of high-profile ministers, including the then
incumbent Chief Minister Mr. Ashok Chavan, in this scam. In the wake of this controversy,
the latter even signed from his office.22 Investigations into the scam are still on and are being
monitored by the Bombay High Court to insulate the proceedings from any political
interference.23

18

Malini Bhupta, supra note 16.


Sanjay Jog, What the Adarsh scam is about..., November 10, 2010, available at http://www.businessstandard.com/article/economy-policy/what-the-adarsh-scam-is-about-110111000100_1.html (Last visited on
November 20, 2013).
20
Urvi Mahajani, Adarsh case not just about violation of green laws: Bombay high court, November 12, 2013,
available
at
http://www.dnaindia.com/mumbai/report-adarsh-case-not-just-about-violation-of-green-lawsbombay-high-court-1917799 (Last visited on November 20, 2013); ITGD Bureau, Environment Ministry wants
Adarsh society to be demolished, January 16, 2011, available at http://indiatoday.intoday.in/story/environmentministry-wants-adarsh-society-to-be-demolished/1/126772.html (Last visited on November 20, 2013).
21
TNN, Files of Adarsh scam, other CBI cases missing, December 13, 2012, available at
http://articles.timesofindia.indiatimes.com/2012-12-13/india/35796031_1_adarsh-scam-cbi-cases-files
(Last
visited on November 20, 2013).
22
Prachi Jawadekar Wagh, Adarsh scam: A bigger land-grab plan, November 13, 2010, available at
http://www.ndtv.com/article/india/adarsh-scam-a-bigger-land-grab-plan-66215 (Last visited on November 20,
2013).
23
Sanjay Jog, supra note 19.
19

F. Satyam case
The scandal that hit Satyam Computers in 2009 is an epitome of the malpractices and weak
governance that is flourishing across corporate India. Satyam was a company that was widely
regarded as one of Indias proud achievements in the field of the IT sector but as it later
turned out, the deeds of the person at its helm, Mr. Ramalingam Raju, also led to the biggest
corporate fraud in India. The investors suffered a huge loss running into approximately
14,000 crores due to illegal activities like inflating the revenue of the company through false
sales invoices and showing corresponding gains by forging the bank statements with the
connivance of the Statutory and Internal Auditors of the company.24
The Satyam saga proved the need for strong corporate governance and auditing and
accounting standards.25 Taking cue from the incident, the government soon sprang into action
and announced the tightening of corporate governance.26 This impetus can also be seen to
have resulted in the 2013 Companies Act, in which corporate governance has been tightened
and detailed and regular auditing made compulsory with the view to prevent another Satyam
from happening.27
G. 2G Spectrum case
One of the biggest scams that have taken place in the recent past, the 2G spectrum allocation
was a scam committed at every step of the process. Close connivance between the corporate
house, ministers and bureaucrats in the process resulted in a loss of 1.76 lakh crore rupees to
the national exchequer.28 Briefly summarized, the scam took place because the government
did not take to the more transparent process of competitive bidding while allocating licenses
for operation of 2G bandwidth.29 Instead, the first-come-first-serve method was employed to
allow under-the-table deals and quid pro quos in return for favourable allocations.30

24

Central
Bureau
of
Investigation,
The
Satyam
Case,
2009,
available
at
http://cbi.nic.in/fromarchives/satyam/satyam.php (Last visited on November 21, 2013).
25
Afra Afsharipour, Corporate Governance Convergence: Lessons from the Indian Experience, 29 NW. J. INT'L
L. & BUS. 335 (2009).
26
Madan Bhasin, Corporate accounting scandal at Satyam: A case study of Indias Enron, 1 EUROPEAN
JOURNAL OF BUSINESS AND SOCIAL SCIENCES 25 (2013).
27
See Aman Malik, New company law finally approved, August 8, 2013, available at
http://www.livemint.com/Politics/9AbwwdbxYBhvyOoI8WEy5H/Companies-Bill-passed-by-Rajya-Sabha.html
(Last visited on November 21, 2013).
28
NDTV Correspondent, What is 2G spectrum scam?, May 5, 2011, available at
http://www.ndtv.com/article/india/what-is-2g-spectrum-scam-66418 (Last visited on November 21, 2013).
29
Report of the Comptroller and Auditor General of India, Performance Audit Report on the Issue of Licences
and Allocation of 2G Spectrum (March, 2010), 4.4.
30
Id.

The scam that came to the fore after the report of the Comptroller and Auditor General
(CAG) which led to mass resignations in the Telecom ministry and A. Raja, the Telecom
minister, and his aides were booked. This case was landmark in the role that the judiciary
assumed against corruption in cases like this. The SC decided to quash all the 122 licenses
that were granted under this process31 and this revealed the new found vigour with which the
Court was approaching financial crimes.
H. Commonwealth Games Scam
The Organising Committee was alleged to have committed mismanagement and corruption in
the course of the preparation of the 2010 Commonwealth Games. Accordingly, the
government launched the investigations in which lots of names, most famous being that of
Mr. Suresh Kalmadi, came up for causing irregularities leading to huge losses to the
exchequer.32 They were charged for buying various sports equipment at highly inflated rates
with the aim of making personal benefits, e.g., the timing-scoring-result machine from a
Swiss firm, Queens Baton Rally transport tender, event knowledge service tender, etc.33
They were also accused of preparation delays and over-invoicing at virtually every step of the
organization of the Games.34
I. Coalgate scam
The corruption that took place in allocation of coal deposits was the latest in a string of
corruption revelations in the last 5 years. The CAG report estimated that the allocation did
not follow an auction method or any other fixed guidelines in allocation of coal blocks and
this arbitrary manner of distribution led to losses worth 1.86 lakh crore rupees. 35 As a result,
many major coal producing companies received huge benefits under this arbitrary process. 36
This created quite a political outcry over the malaise of corruption that was seen to be deepseated in the government. It must be noted that the trio of 2G, coal allocation and
Commonwealth scams played an instrumental role in igniting the anti-corruption protests that
31

Centre for PIL v. Union of India, (2012) 3 SCC 117.


Press Trust of India, Major scam hits Commonwealth Games, July 31, 2010, available at
http://www.thehindu.com/news/national/major-scam-hits-commonwealth-games/article542593.ece (Last visited
on November 21, 2013).
33
Id.; See generally Livemint, Timeline: Commonwealth Games 2010, September 22, 2010, available at
http://www.livemint.com/Home-Page/9xUHCQF3R8nUqXjOtSf8SM/Timeline-Commonwealth-Games2010.html (Last visited on November 21, 2013).
34
Livemint, id.
35
Report of the Comptroller and Auditor General of India, Performance Audit Report on the Allocation of Coal
Blocks and Augmentation of Coal production by Coal India Limited, (March, 2012).
36
Id.
32

rocked India during the whole of 2011. The consequence of this was a strong public debate
on the need to bring about an independent ombudsman called Lokpal and it did successfully
become a political issue. Though a very strong Jan Lokpal at the Centre could not become a
reality, many state governments brought in noteworthy anti-corruption Lokpal legislations.
Thus, as contended earlier, these scams led to an awakening of the Indian masses and the
political class.

CONCLUSION
Having looked at the line of all the important scams, the scams that take place in India may
be divided into two kinds. One would be financial crimes committed by private parties for
their personal interests, such as those of Raju or the two stockbrokers. The other would be
that where the state machinery and politicians and/or bureaucrats, who employ their
discretion and influence in hoarding out crores from the exchequer in the course of their
duties, are involved. Following a discussion on cases described above, it can be safely
concluded that while prosecution has been successfully made in the former case involving
private entities, the same in respect of the latter category is almost non-existent. This is due to
the political interference that inevitably comes to influence investigation in these matters. It is
reflective of the urgency with which India needs to adopt the right discourse that achieves
effective investigation and trial of persons involved in white collar crimes involving public
money.
Moreover, it can also be seen that with every scam involving private individuals, the
government has realized its lapses and taken remedial measures in strengthening the
regulatory framework to curb such crimes. However, the same excitement in curbing this
malaise has not been observed in the state-sponsored corruption cases involving persons from
public life. This shows that it is a matter of national urgency to bring a new model for
reducing such crimes. While the Lokpal is a welcome measure and it is urged in this paper
that it is readily brought in, till the time it can become a reality other measures must be
explored. For instance, freeing the CBI from the clutches of the government, giving more
teeth to the Vigilance departments, bringing about a law for protection of whistleblowers who
expose corruption in public sphere, ensuring adequate protection to RTI activists who play
the role in exposing administrative malpractices, etc. are measures that the government must
attention to. Till now, the 1999 recommendations of the Law Commission have been

conveniently forgotten but it must now be given the due attention that it warrants presently.37
This because the anti-corruption paradigm is not composed of Lokpal alone but in fact
requires many such concurrent models to be adopted.
In the midst of the gloom that has been presented alone, a positive conclusion that may be
drawn comes from the reaction of our public institutions against the abhorrence of corruption.
The role played by the civil society, the judiciary as well as constitutional bodies, such as the
Comptroller and Auditor General, has been remarkable in steering the public debate on this
issue. If the CAG brought such issues into the public domain, the Anna Hazare-led civil
society generated an atmosphere of political discourse on this and, finally, the judiciary also
played its part in dealing very strictly with the issue, as clear from the order of cancellation of
licenses in the 2G case. It is hoped that this momentum indeed continues till India achieves
corruption-free governance and succeeds in making itself a corruption-free society.

37

Law Commission of India, One Hundred Sixty Sixth Report on the Corrupt Public Servants (Forfeiture of
Property) Bill (February, 1999).

10

BIBLIOGRAPHY
Cases:
Vineet Narain v. Union of India, (1996) 2 SCC 199
Centre for PIL v. Union of India, (2012) 3 SCC 117
News articles, opinions and interviews:
Agencies, Rabri Devi sworn in as Bihar CM, NDA furious, March 12, 2000
Aman Malik, New company law finally approved, August 8, 2013
Anumeha Yadav, Lalu Prasad, Mishra among 45 convicted in fodder scam case,
September 30, 2013
BBC South Asia, India corruption: Protests swell in support of Hazare, August 17,
2011
Charu Lata Joshi, I Am Not The Hawala Kingpin, I Was Just Branded One, June 11,
1997
Daksesh Parikh and Lekha Rattanani, The rise and fall of Harshad Mehta, May 31,
1992
Financial Express, SC Upholds Harshad Mehtas Conviction In Stock Scam, January
14, 2003
Hari Kumar, Former Bihar Chief Minister Convicted in Fodder Scam, September
30, 2013
ITGD Bureau, Environment Ministry wants Adarsh society to be demolished, January
16, 2011
Joydeep Ghosh, From Harshad Mehta to NSEL..., September 5, 2013
Krishan Mahajan, Contempt and the Supreme Court, April 6, 2000
Livemint, Timeline: Commonwealth Games 2010, September 22, 2010
Malini Bhupta, 2001-Ketan Parekh scam: Stock and bull story, December 18, 2009
Mohan Kumar, Ketan Parekh, Hiten Dalal among convicted, March 13, 2008
NDTV Correspondent, What is 2G spectrum scam?, May 5, 2011
Prachi Jawadekar Wagh, Adarsh scam: A bigger land-grab plan, November 13, 2010
Press Trust of India, Ketan Parekh held guilty in '92 security scam case, April 1, 2008
Press Trust of India, Major scam hits Commonwealth Games, July 31, 2010
Ranjit Bhushan, Wanted: Proof, Not Diary Notes, April 23, 1997
Sanjay Jog, What the Adarsh scam is about..., November 10, 2010
Sucheta Dalal, Harshad Mehta Scam: A Distorted Picture of 1992, May 15, 2012
11

Sudha Mahalingam, Diaries as evidence, FRONTLINE, April 3, 1998, 8


TNN, Files of Adarsh scam, other CBI cases missing, December 13, 2012
Urvi Mahajani, Adarsh case not just about violation of green laws: Bombay high
court, November 12, 2013
Reports and documents of governmental agencies:
Central Bureau of Investigation, The Satyam Case, 2009
Law Commission of India, One Hundred Sixty Sixth Report on the Corrupt Public
Servants (Forfeiture of Property) Bill (February, 1999)
Report of the Comptroller and Auditor General of India, Performance Audit Report
on the Allocation of Coal Blocks and Augmentation of Coal production by Coal India
Limited, (March, 2012)
Report of the Comptroller and Auditor General of India, Performance Audit Report
on the Issue of Licences and Allocation of 2G Spectrum (March, 2010)
Journals and papers:
Madan Bhasin, Corporate accounting scandal at Satyam: A case study of Indias
Enron, 1 EUROPEAN JOURNAL OF BUSINESS AND SOCIAL SCIENCES 25 (2013)
Afra Afsharipour, Corporate Governance Convergence: Lessons from the Indian
Experience, 29 NW. J. INT'L L. & BUS. 335 (2009)

12

Related Interests