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Contents

Table of Content ..................................................................................................................................... 2 Abstract ................................................................................................................................................... 3 Acknowledgement .................................................................................................................................. 4 Executive Summary ................................................................................................................................ 5 Aim of the Study ..................................................................................................................................... 6 Capital Market ........................................................................................................................................ 7 History of Indian Capital Markets .......................................................................................................... 8 Different Scams in Indian Capital Market ............................................................................................ 11 Scam 1: ............................................................................................................................................. 11 Harsad Metha Scam ...................................................................................................................... 11 Impact on Capital Market ............................................................................................................. 14 Role of SEBI ................................................................................................................................. 15 Recommendation .......................................................................................................................... 16 Scam 2: ............................................................................................................................................. 17 KETAN PAREKH ........................................................................................................................ 17 Impact on Capital Market ............................................................................................................. 20 Role of SEBI ................................................................................................................................. 21 Some Recent IPOs Scam in Capital Market ........................................................................................ 22 TAKSHEEL SOLUTIONS Ltd. ....................................................................................................... 22 FINANCIAL HIGHLIGHTS: ....................................................................................................... 28 Steps Taken by SEBI: ................................................................................................................... 29 Impact: .......................................................................................................................................... 29 RDB RASAYAN Ltd. ...................................................................................................................... 30 IPO Grading: ................................................................................................................................. 30 Analysis of Financials: .................................................................................................................. 31 Steps Taken by SEBI: ................................................................................................................... 33 Impact: .......................................................................................................................................... 33 Recommendation .................................................................................................................................. 34 Conclusion ............................................................................................................................................ 36 Bibliography ......................................................................................................................................... 37

Scams of Capital Market in India

Table of Content
Table 1: Profit and Loss Account of Taksheel Solutions Ltd. Table 2: Balance Sheet of Taksheel Solutions Ltd Table 3: Source of Funds of Taksheel Solutions Ltd. Table 4: Profit & Loss of RDB Rasayans Ltd. Table 5: Balance Sheet of RBD Rasayans Ltd. 25 26 27 31 32

Basic Financial Management, PGP/FW/10-12/IIPM, Pune | Table of Content

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Abstract
The term "capital scam" refers to a diversion of funds to the tune of over Rs. 3500 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992. The scam has for several months become a permanent feature of the front pages of the newspapers. Despite the massive media coverage of the scam, most readers found it hard to understand it particularly when they were confronted with arcane terms and acronyms like ready forward, double ready forward, SGL, PDO, BR, PMS etc. Nevertheless an understanding of the scam is a prerequisite for any meaningful analysis of policy alternatives to improve the functioning of the financial system. This paper presents a plausible reconstruction of how the scam originated, how it was perpetrated, and what would be its aftermath. The paper is expository in nature and the authors make no claims to omniscience. The paper goes on to discuss the response of the government to the scam in terms of 1) discovering and punishing the guilty, 2) recovering the money, and 3) reforming the system. While agreeing with the importance of discovering and punishing the guilty, the paper argues that the attempt of the government to recover the money by such measures as the tainted shares law which cause severe and unjustified hardship to genuine and innocent investors is misguided. Turning to the arena of reforms of the financial system, the paper argues that the origins of the scam lie in overregulation of our markets. It recommends that normal transactions must be allowed to be done openly and transparently, and the role of brokers as market makers must be recognized. The second lesson from the scam is that artificial insulation of closely related markets from each other is counterproductive in the long run. Artificial barriers between the money market and the capital market, between the market for corporate securities and the market for government securities and between the formal money market and the informal one must be eliminated.

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Scams of Capital Market in India

Acknowledgement

We would like to thank our Prof. Vivek Divekar (IIPM Pune) for his kind support for making this research as possible. We are grateful for him contribution towards the execution of our project and feel fortunate enough to undergo a project on SCAMs OF CAPITAL MARKET IN INDIA on a very macro-level. It has brought the best in us to analyze and research on such a project. We offer our regards and blessings to all of those who supported us in any respect during the completion of the Research. We would also like to give special thanks to our friends Mr. Keshav Mundra, Mr. Jay Suyani for their kind support at time of research on our topic SCAMs OF CAPITAL MARKET IN INDIA. We would like to thank all of my class mate and the people who had supported in the research directly or indirectly.

Basic Financial Management, PGP/FW/10-12/IIPM, Pune | Acknowledgement

Scams of Capital Market in India

Executive Summary
We came to the know how the different scams are been done in a proper planned manner to earn from the capital market due to the lack of hard and fast rules and regulation of the SEBI and RBI. We came to know the process of issuing the IPOs of the company and how they make the investor to invest in the IPO. This led us to know what had happened at the time of Taksheel Solutions Pvt. Ltd. And RDB Rasayans Pvt. Ltd. issuing of IPOs and what was the effect of that on Capital market and the investors.

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Scams of Capital Market in India

Aim of the Study

The aim to study is to know in more about the scam that had impacted the capital market at different time. This happened due to lack of rules and regulations to verify the present status of the capital market. This also made to know about Capital Market and its history. This helped to know the impact of scams on capital market at different time and what was the impact of scams on capital market? How these are being handled by SEBI and RBI at different time? What was the impact of different scams on the capital market and the role of SEBI towards that scam was come into knowledge.

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Scams of Capital Market in India

Capital Market
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g. the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Money markets and capital markets are parts of financial markets. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. All New Stocks or Bonds presented by growth-oriented business companies of diverse sectors are sold to the investors in the Primary Capital Market through Underwriting. The further trading of these capital market securities and bonds takes place in the Secondary Capital Market, commonly with the help of Stock Exchanges. The Securities and Exchange Board of India (SEBI) governs and regulates the Indian capital market. The capital market of India is among the top ten biggest capital markets of the world, and provides a variety of capital market instruments. There are 25 well-organized Stock Markets in India among which the Bombay Stock Exchange (BSE) and the National Stock Exchange hold the dominant positions. Indian Economy ranks among the top five largest economies of the world. Its booming financial and capital markets have been impressing and enticing investors and companies from every major and developed countries every year (in addition to thousands of Indian investors) by virtue of extensive investment prospects, rapid growth potential, and bumper profitability. We provide reliable and expert information and support for most lucrative and safest harvesting of these opportunities in India. Regulated by the Reserve Bank of India, the Money Market is one of the major and vital constituents of the financial market in India. The money market is market for diverse Debt Securities and other easily liquefied financial assets, which are valid and potent for short periods of time, up to one year.

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History of Indian Capital Markets


The history of the Indian capital markets and the stock market, in particular can be traced back to 1861 when the American Civil War began. The opening of the Suez Canal during the 1860s led to a tremendous increase in exports to the United Kingdom and United States. Several companies were formed during this period and many banks came to the fore to handle the finances relating to these trades. With many of these registered under the British Companies Act, the Stock Exchange, Mumbai, came into existence in 1875. It was an unincorporated body of stockbrokers, which started doing business in the city under a banyan tree. Business was essentially confined to company owners and brokers, with very little interest evinced by the general public. There had been much fluctuation in the stock market on account of the American war and the battles in Europe. Sir Premchand Roychand remained a kingpin for many years. Sir Phiroze Jeejeebhoy was another who dominated the stock market scene from 1946 to 1980. His word was law and he had a great deal of influence over both brokers and the government. He was a good regulator and many crises were averted due to his wisdom and practicality. The BSE building, icon of the Indian capital markets, is called P.J. Tower in his memory. The planning process started in India in 1951, with importance being given to the formation of institutions and markets The Securities Contract Regulation Act 1956 became the parent regulation after the Indian Contract Act 1872, a basic law to be followed by security markets in India. To regulate the issue of share prices, the Controller of Capital Issues Act (CCI) was passed in 1947. The stock markets have had many turbulent times in the last 140 years of their existence. The imposition of wealth and expenditure tax in 1957 by Mr. T.T. Krishnamachari, the then finance minister, led to a huge fall in the markets. The dividend freeze and tax on bonus issues in 1958-59 also had a negative impact. War with China in 1962 was another memorably bad year, with the resultant shortages increasing prices all round. This led to a ban on forward trading in commodity markets in 1966, which was again a very bad period, together with the introduction of the Gold Control Act in 1963. The markets have witnessed several golden times too. Retail investors began participating in the stock markets in a small way with the dilution of the FERA in 1978. Multinational

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companies, with operations in India, were forced to reduce foreign shareholding to below a certain percentage, which led to a compulsory sale of shares or issuance of fresh stock. Indian investors, who applied for these shares, encountered a real lottery because those were the days when the CCI decided the price at which the shares could be issued. There was no free pricing and their formula was very conservative. The next big boom and mass participation by retail investors happened in 1980, with the entry of Mr. Dhirubhai Ambani. Dhirubhai can be said to be the father of modern capital markets. The Reliance public issue and subsequent issues on various Reliance companies generated huge interest. The general public was so unfamiliar with share certificates that Dhirubhai is rumored to have distributed them to educate people. Mr. V.P. Singhs fiscal budget in 1984 was path breaking for it started the era of liberalization. The removal of estate duty and reduction of taxes led to a swell in the new issue market and there was a deluge of companies in 1985. Mr. Manmohan Singh as Finance Minister came with a reform agenda in 1991 and this led to a resurgence of interest in the capital markets, only to be punctured by the Harshad Mehta scam in 1992. The mid-1990s saw a rise in leasing company shares, and hundreds of companies, mainly listed in Gujarat, and got listed in the BSE. The end-1990s saw the emergence of Ketan Parekh and the information communication and entertainment companies came into the limelight. This period also coincided with the dotcom bubble in the US, with software companies being the most favored stocks. There was a meltdown in software stock in early 2000. Mr. P Chidambaram continued the liberalization and reform process, opening up of the companies, lifting taxes on long-term gains and introducing short-term turnover tax. The markets have recovered since then and we have witnessed a sustained rally that has taken the index over 13000. Several systemic changes have taken place during the short history of modern capital markets. The setting up of the Securities and Exchange Board (SEBI) in 1992 was a landmark development. It got its act together, obtained the requisite powers and became effective in early 2000. The setting up of the National Stock Exchange in 1984, the introduction of online trading in 1995, the establishment of the depository in 1996, trade guarantee funds and derivatives trading in 2000, have made the markets safer. The introduction of the Fraudulent Trade Practices Act, Prevention of Insider Trading Act, Takeover Code and Corporate

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Governance Norms, are major developments in the capital markets over the last few years that has made the markets attractive to foreign institutional investors. This history shows us that retail investors are yet to play a substantial role in the market as long-term investors. Retail participation in India is very limited considering the overall savings of households. Investors who hold shares in limited companies and mutual fund units are about 20-30 million. Those who participated in secondary markets are 2-3 million. Capital markets will change completely if they grow beyond the cities and stock exchange centers reach the Indian villages. Both SEBI and retail participants should be active in spreading market wisdom and empowering investors in planning their finances and understanding the markets.

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Different Scams in Indian Capital Market Scam 1:


Harsad Metha Scam Harshad Mehta (Hindi: ) was an

Indian stockbroker and is alleged to have engineered the rise in the BSE stock exchange in the year 1992. Exploiting several loopholes in the banking system, Harshad and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex. When the scheme was exposed, the banks started demanding the money back, causing the collapse. He was later charged with 72 criminal offenses and more than 600 civil action suits were filed against him. He died in 2002 with many litigations still pending against him. Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and had an expensive lifestyle. He lived in a 15,000 square feet (1,400 m2) apartment, which had a swimming pool as well as a golf patch. By 1990 Harshad Mehta had risen to prominence in the stock market. He had been buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid up to Rs.10,000. For those who asked, Mehta had the replacement cost theory as an explanation. The theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company. Through the second half of 1991 Mehta had earned the sobriquet of the Big Bull, who was said to have started the Bull Run.

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On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India exposed the dubious ways of Harshad Metha. The broker was dipping illegally into the banking system to finance his buying. The authors explain: The crucial mechanism through which the scam was affected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jeweler. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price. It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system. A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasnt the case in the lead-up to the scam. In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker. This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank. Another instrument used in a big way was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR.

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As the authors write, a BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the meantime, the seller holds the securities in trust of the buyer. Having figured this out, Mehta needed banks, which issue fake BRs, or BRs not backed by any government securities? Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee? The authors point out. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, obviously assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned. The game went on as long as the stock prices kept going up, and no one had a clue about Mehta modus operandi. Once the scam was exposed though, a lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping Rs.4,000 crore. When the scam was finally revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof because he knew that if people come to know about his involvement in issuing cheques to Harshad Mehta, people would accuse him. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. This time around, he was in cahoots with owners of a few companies and recommended only those shares. This game, too, did not last long. Interestingly, by the time he died, Mehta had been convicted in only one of the many cases filed against him. Till now, the real story behind the entire scam is unknown.

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Impact on Capital Market


The immediate impact of the scam was a sharp fall in the share prices. The index fell from 4500 to 2500 representing a loss of Rs.100,000 crores in market capitalization. Though one may be tempted to blame the steep decline in prices on the scam, we think that the reason for this fall was not scam directly. Purely technically speaking, scam just resulted in withdrawal of about Rs.3,500 crores from the market, which for a market of the size of Rs.250,000 crores (at an index level of 4500) is a very small amount, and therefore should have little impact on the prices. There was however two major reasons for the fall, both related to the government's knee jerk response to the scam. First was the phenomenon of tainted shares which created panic in the market and second was the perceived slowdown of the reform process which destroyed the very foundation on which the boom was based. The government set up a special court and promulgated an ordinance with several draconian provisions to deal with the scam. Sections (3) and (4) of the ordinance attached the properties of all individuals accused in the scam and also voided all transactions that had at any stage been routed through them after March 31, 1991. Since the accused were active brokers in the stock markets, the number of shares which had passed through their hands in the last one year was colossal. All these shares became "tainted" shares, and overnight they became worthless pieces of paper as they could not be delivered in the market. Genuine investors who had bought these shares well before the scam came to light and even got them registered in their names found themselves being robbed by the government. This resulted in a chaotic situation in the market since no one was certain as to which shares were tainted and which were not. The government's liberalization policies came under severe criticism after the scam, with Harshad Mehta and others being described as the products of these policies. Bowing to the political pressures and the bad press it received during the scam, the liberalization policies were put on hold for a while by the government. The Securities Exchange Board of India (SEBI) postponed sanctioning of private sector mutual funds. Implementations of some aspects of the Narasimham Committee recommendations on the banking system were also delayed. Some question marks arose regarding privatization as the chairman of the committee looking into this ended up in jail on charges of involvement in the scam. The much talked

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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. Role of SEBI It is clear that the government, the RBI and the commercial banks are as much accountable as the brokers for the scam. The brokers were encouraged and abetted by the banks to divert funds from the banking system to the stock market. The RBI too stands indicted because despite knowledge about banks over-stepping the boundaries demarcating their arena of operations, it failed to reign them in. The looting was done with active connivance and sometimes full knowledge of the very individuals who were supposed to guard against such a possibility. What has been the response of the government so far and what needs to be done to ensure that such scams do not recur in the future? The response of any government to a scam of this kind would have three main facets: 1. Discover and punish the guilty. This task has been entrusted to the Central Bureau of Investigation (CBI) and to the Joint Parliamentary Committee (JPC). A special court has also been set up to facilitate speedy trial. 2. Recover the money. The draconian provisions of the Ordinance for attachment of property and voiding of transactions with the consequent creation of "tainted" shares were attempts in this direction. 3. Reform the system. The government's response so far has consisted of measures like banning of RF deals and going slow on liberalization.

In this context, the policy responses of the government in the direction of further regulation and controls, typified by the ban on RF deals appears to be quite misguided. Notwithstanding the repeated statements by the Prime Minister and the Finance Minister to the contrary, there are signs that the pace of liberalization has slowed down. This would be most unfortunate as the surest way of preventing scams of this type in the future would be to quickly bring the liberalization process to its logical conclusion by integrating the various financial markets. In this connection, the recommendations of the Nadkarni Committee set up in the wake of the scam, to examine the functioning of the money market, that RF deals be permitted and that

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the entire settlement and clearing system be streamlined and computerized are to be welcomed.

Recommendation There cannot be two opinions on the need for identifying and punishing the guilty. The principal objective behind punishing the offenders is more to deter future offenders. However, the government must ensure that not only the obviously guilty (the brokers) but also the not so obviously guilty (the bank executives, the bureaucrats and perhaps the politicians) are identified and brought to book. Investigations of this kind are necessarily time consuming and expensive, but they have to be gone through so that the credibility of the system is restored. A rule of thumb which is often quoted throughout the world is that investigation of any fraud will cost as much as the magnitude of the fraud itself. One can, therefore, expect the real costs of the scam investigation to be of the order of a couple of thousand crores at least. While recovery of the money swindled from the banks is important, the method employed by the government to do that is extremely ham handed and unfair. While governments have, at all times, claimed special powers to recover dues like land revenue and taxes, the same principle cannot be extended to recovery of amounts which the government owned organizations (or for that matter, the foreign banks) have lost by their own negligence and complicity. There can be no justification for such measures as the "tainted" shares law which harass genuine innocent investors irrespective of the magnitude of the loss incurred. The most constructive response to the scam would be in the arena of reforms of the financial system. In our view, the origins of the scam lie in over-regulation of our markets. The regulations in the money markets were such that thoroughly legitimate and essential transactions could not be put through openly, but had to be disguised and camouflaged. The role of the brokers and of some of the banks as market makers was not recognized and they could perform these important and useful functions only by subterfuge. The payment and clearance system was so antiquated and cumbersome that totally indefensible methods had to be adopted to achieve speedy funds transfers. The net result of all these was a total lack of transparency in the operations in the money market. Irregularities of all kinds were so

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common that no suspicions were aroused even by highly irregular transactions. The situation was an ideal environment for a scam to germinate and grow to alarming proportions. We would even argue that some of the control systems in the banks broke down because they had been deliberately allowed to weaken by both the commercial banks as well as the RBI in order to facilitate normal transactions in violation of the RBI guidelines.

Scam 2:
KETAN PAREKH Ketan Parekh [KP] was a chartered accountant by profession and used to manage a family business, NH Securities started by his father. Known for maintaining a low profile, KP's only dubious claim to fame was in 1992, when he was accused in the stock exchange scam. He was known as the 'Bombay Bull' and had connections with movie stars, politicians and even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in new economy companies. Over the years, KP built a network of companies, mainly in Mumbai, involved in stock market operations. The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early 1999 led to a rise of the Indian stock markets as well. The dotcom boom contributed to the Bull Run led by an upward trend in the NASDAQ. The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest Communications, and Penta Media Graphics KP selected these companies for investment with help from his research team, which listed high growth companies with a small capital

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base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks. The shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of After Infosys, and 15% each in Zee and HFCL. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially (Refer Exhibit I for BSE Index movements). HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks. Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges (Refer Exhibit II for the price movements of K10 stocks). HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs.51.8 billion. As such huge amount of money were being pumped into the markets, it became tough for KP to control the movements of the scrips. Also, it was reported that the volumes got too big for him to handle. Analysts and regulators wondered how KP had managed to buy such large stakes. This could not have been possible out without the involvement of banks. A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP's main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000. In December 2000, when KP faced liquidity problems in settlements he used MMCB in two different ways. First was the pay order route, wherein KP issued cheques drawn on BoI to MMCB, against which MMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits. As per a RBI inspection report, MMCB's loans to stock markets were around Rs.10 billion of which over Rs.8 billion were lent to KP and his firms. The second route was borrowing from a MMCB branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts. KP used around 16 such accounts, either directly or through other broker firms, to obtain funds. Apart from direct borrowings by KP-owned finance companies, a few brokers were also believed to have taken loans on his
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behalf. It was alleged that Madhur Capital, a company run by Vinit Parikh, the son of MMCB Chairman Ramesh Parikh, had acted on behalf of KP to borrow funds. KP reportedly used his BoI accounts to discount 248 pay orders worth about Rs.24 billion between January and March 2001. BoI's losses eventually amounted to well above Rs.1.2 billion. The MMCB pay order issue hit several public sector banks very hard. These included big names such as the State Bank of India, Bank of India and the Punjab National Bank, all of whom lost huge amounts in the scam. It was also alleged that Global Trust Bank (GTB) issued loans to KP and its exposure to the capital markets was above the prescribed limits. According to media reports, KP and his associates held around 4-10% stake in the bank. There were also allegations that KP, with the support of GTB's former CMD Ramesh Gelli, rigged the prices of the GTB scrip for a favorable swap ratio before its proposed merger with UTI Bank. KP's modus operandi of raising funds by offering shares as collateral security to the banks worked well as long as the share prices were rising, but it reversed when the markets started crashing in March 2000. The crash, which was led by a fall in the NASDAQ, saw the K-10 stocks also declining. KP was asked to either pledge more shares as collateral or return some of the borrowed money. In either case, it put pressure on his financials. By April 2000, mutual funds substantially reduced their exposure in the K-10 stocks. In the next two months, while the Sensex declined by 23% and the NASDAQ by 35.9%, the K-10 stocks declined by an alarming 67%. However, with improvements in the global technology stock markets, the K-10 stocks began picking up again in May 2000. HFCL nearly doubled from Rs.790 to Rs.1,353 by July 2000, while Global shot up to Rs.1,153. After Infosys was also trading at above Rs.1000. In December 2000, the NASDAQ crashed again and technology stocks took the hardest beating ever in the US. Led by doubts regarding the future of technology stocks, prices started falling across the globe and mutual funds and brokers began selling them. KP began to have liquidity problems and lost a lot of money during that period.

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It was alleged that 'bear hammering' of KP's stocks eventually led to payment problems in the markets. The Calcutta Stock Exchange's (CSE) payment crisis was one of the biggest setbacks for KP. The CSE was critical for KP's operation due to three reasons. One, the lack of regulations and surveillance on the bourse allowed a highly illegal and volatile badla business. Two, the exchange had the third-highest volumes in the country after NSE and BSE. Three, CSE helped KP to cover his operations from his rivals in Mumbai. Brokers at CSE used to buy shares at KP's behest. Though officially the scrips were in the brokers' names, unofficially KP held them. KP used to cover any losses that occurred due to price shortfall of the scrips and paid a 2.5% weekly interest to the brokers. By February 2001, the scrips held by KP's brokers at CSE were reduced to estimated Rs.6-7 billion from their initial worth of Rs.12 billion. The situation worsened as KP's badla payments of Rs.5-6 billion were not honored on time for the settlement and about 70 CSE brokers, including the top three brokers of the CSE (Dinesh Singhania, Sanjay Khemani and Ashok Podar) defaulted on their payments. By mid-March, the value of stocks held by CSE brokers went down further to around Rs.2.5-3 billion. The CSE brokers started pressurizing KP for payments. KP again turned to MMCB to get loans. The outflow of funds from MMCB had increased considerably from January 2001. Also, while the earlier loans to KP were against proper collateral and with adequate documentation, it was alleged that this time KP was allowed to borrow without any security.

Impact on Capital Market

The 176-point Sensex crash on March 1, 2001 came as a major shock for the Government of India, the stock markets and the investors alike. More so, as the Union budget tabled a day earlier had been acclaimed for its growth initiatives and had prompted a 177-point increase in the Sensex. This sudden crash in the stock markets prompted the Securities Exchange Board of India (SEBI) to launch immediate investigations into the volatility of stock markets. SEBI

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also decided to inspect the books of several brokers who were suspected of triggering the crash.

Role of SEBI Meanwhile, the Reserve Bank of India (RBI) ordered some banks to furnish data related to their capital market exposure. This was after media reports appeared regarding a private sector bank having exceeded its prudential norms of capital exposure, thereby contributing to the stock market volatility. The panic run on the bourses continued and the Bombay Stock Exchange (BSE) President Anand Rathi's (Rathi) resignation added to the downfall. Rathi had to resign following allegations that he had used some privileged information, which contributed to the crash. The scam shook the investor's confidence in the overall functioning of the stock markets. By the end of March 2001, at least eight people were reported to have committed suicide and hundreds of investors were driven to the brink of bankruptcy The scam opened up the debate over banks funding capital market operations and lending funds against collateral security. It also raised questions about the validity of dual control of co-operative banks. The first arrest in the scam was of the noted bull, Ketan Parekh (KP), on March 30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports abounded as to how KP had single handedly caused one of the biggest scams in the history of Indian financial markets. He was charged with defrauding Bank of India (BoI) of about $30 million among other charges. KP's arrest was followed by yet another panic run on the bourses and the Sensex fell by 147 points. By this time, the scam had become the 'talk of the nation,' with intensive media coverage and unprecedented public outcry.

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Scams of Capital Market in India

Some Recent IPOs Scam in Capital Market


TAKSHEEL SOLUTIONS Ltd.
Taksheel Solutions Ltd. (TSL), its directors, key executives and its merchant banker, PNB Investment Services (PNB) are among those barred from accessing the capital markets, as part of a crackdown by the Securities & Exchange Board of India (SEBI) on manipulation of public offerings. TSLs Initial Public Offer (IPO) of 55 lakh shares at Rs150 per share witnessed huge price volatility at its trading debut on 19 October 2011. The scrip opened at Rs157.40, and touched a high of Rs185 before crashing to Rs38.50 on the Bombay Stock Exchange (BSE). The pattern was repeated on the National Stock Exchange (NSE). Relative to its issue size of 55 lakh shares, the scrip witnessed a combined turnover of around roughly 9.13 crore shares on the two bourses raising a red flag. SEBIs investigation revealed deliberate concealment of material facts from the public issue. TSL deliberately hid the status of a five-acre land acquisition at Warangal from the Andhra Pradesh Industrial Infrastructure Corporation (APIICL), where the company intended to build an SEZ. The Red Herring Prospectus (RHP) said, our Company is required to commence and complete the construction work within the time specified therein, failing which the allotment may be cancelled. In fact, the land deal was already cancelled at time of the issue. TSL misled investors into thinking it had possession of the land. Eventually, TSL restored the status of the land after paying fines and fees due to APIICL, on 28 November 2011, after the IPO. The company also misled investors to thinking that the company had pan-global presence. The prospectus claimed, we have Indian nationals, as our employees, working in the United States, Europe and other countries and may depend on our ability to obtain necessary visas and work permits. The fact was that it had only 64 employees in total, out of which 50 were posted in Hyderabad, AP and remaining were in Warangal, AP. Similarly, it misled the public about the nature of its clients on television. When SEBI found out that TSL was using shady website practices for registering domains of its clients, it had asked the company for information regarding its clients and discovered that it did not have the information. To which it replied, we are not in possession of information regarding details of ultimate clients in respect of the said projects were executed, as we are not privy to

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the contractual relationship between our client and the ultimate clients. Yet, on the day of the IPO, Pawan Kumar Kuchana, the chairman and managing director of TSL had given a television channel specific client names such as LFG and Merill. Thus Mr Kuchana had misled investors on the nature and details of its clients, when in fact that these clients were merely conjured up names. TSL had blatantly misused the IPO proceeds toward paying off Inter-Corporate Deposits (ICDs) to the tune of Rs32 crore. Moreover, it never disclosed this fact to the general public. The company had supposedly earmarked roughly Rs24 crore towards general corporate purposes to be used for strategic initiatives and such, but instead used this as a guide to pay off concealed instruments, namely the ICDs, which was at least 41% of the IPO size. According to the prospectus the company flatly mentioned that ...no part of the issue proceeds will be paid as consideration to promoter, directors, key managerial personnel or persons forming part of the promoters group. Not true. How so? PNB had grossly neglected the fact that one of the key management personnel, Vinod Babu Bollikonda, the vice-president of the technology division of TSL, was also a key signatory of Wiselink Technologies Pvt Ltd (WTPL), one of TSLs vendors for design and development of Mobile Interactive Solutions. Despite this clear case of conflict of interest, TSL transacted with WTPL for a price of Rs5.04 crore for rendering the latters services. One of the investors, Dinesh Singhi, had earlier invested Rs10 crore in TSL and had a Share Purchase Agreement (SPA) with the company. As per SEBI rules, SPAs are illegal at time of listing. However, the company had arbitrarily stated in the prospectus that, on one hand there was a possibility of the SPA being exercised upon (which is, again, illegal as per SEBI norms) and on the other hand stated that the person in question, Mr Singhi, had given a consent letter for a lock-in period of a year. Consent for lock-in for all pre-IPO shares issued is a mandatory requirement provided under SEBI regulations. Why was SEBI or the merchant banker casual about this contradictory nature of the statement? Ironically, this is under the Risk Factors section of the prospectus! Incidentally, Mr Singhi is also one of the recipients of the IPO proceeds, vis-a-vis a circuitous route from WTPL to the extent of Rs3.5 crore. Not only did TSL lie in its prospectus about WTPL, it had used WTPL merely as a conduit to transfer funds from the IPO proceeds to Mr Singhi.

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Scams of Capital Market in India

Four clients namely Overall Financial Consultants Pvt Ltd (OFCL), Rose Valley Merchandise (RVM), Shreya Multitrade Pvt Ltd (SMPL) and Baba Bhoothnath Trade & Commerce Pvt Ltd (BBTC) all received IPO money from TPL vis-a-vis several entities in a circuitous fashion. Incidentally, OFCL and RVM shared the same postal address as did their directors address. OFCL and RVM collectively suffered losses to the extent of Rs6.10 crore. BBTC suffered a whopping loss of Rs64 crore by trading TSL on the day of the listing. To fund this loss, it received Rs41 lakh through Silverpoint Infratech Pvt Ltd (SPI) and Rs1.6 crore from RVM. In a brazen move, TSL had issued Inter-Corporate Deposits (ICDs) to SPI to the tune of Rs23 crore which it repaid from IPO money. SPI was just another conduit for routing money to various entities, and also to make good on BBTC trades. It also channeled an additional Rs16 crore to various entities who thereby diverted money to RVM, who made investments in TSL on the first day of the listing. SEBI has ordered that TSL shall call back the ICD placed with SPI amounting to Rs23 crore as well as the proceeds of IPO invested by the company in India Bulls Mutual Fund - Liquid Fund amounting to Rs.5 crore, along with the remains of the IPO money. The total amount will have to also be transferred to the said escrow account.

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Scams of Capital Market in India

Table 1: Profit and Loss Account of Taksheel Solutions Ltd.

Particular Income Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Adminstrative expenses Expenses capitalised Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnigs before appropriation Equity dividend Preference dividend Dividend tax Retained earnings

Profit & Loss Account Mar ' 11 Mar ' 10 147.26 109.13 1.66 6.85 117.63 29.63 -1.34 28.29 0.81 0.07 27.42 27.42 58.96 58.96 31.54 8.09 31.54 49.5

Mar ' 09 33.2 -

Mar ' 08 31.72 -

Mar ' 07 11.68 -

1.18 35.4 36.59 12.91 0.54 0.06 12.31

1.99 30.19 32.17 1.02

11.82 1.5 2.21 15.53 16.19 0.31 16.5 0.34 0.31 15.85 1.82 14.03

0.82 1.91 0.89 3.62 8.06 0.19 8.25 0.17 0.14 7.94 0.01 7.92 -0.01 -0.03 7.89 9.59 -

0.51 0.32 0.2 0.01 0.19 2.24 -0.02 2.4 23.45 23.45

-4.22

14.03 21.05

21.05

9.59

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Table 2: Balance Sheet of Taksheel Solutions Ltd

Particulars Liabilities Share Capital Reserves & Surplus Net Worth Secured Loans Unsecured Loans TOTAL LIABILITIES Assets Gross Block (-) Acc. Depreciation Net Block Capital Work in Progress. Investments. Inventories Sundry Debtors Cash And Bank Loans And Advances Total Current Assets Current Liabilities Provisions Total Current Liabilities NET CURRENT ASSETS Misc. Expenses TOTAL ASSETS (A+B+C+D+E)

Mar'11 Mar'10 12 Months 12 Months 16.35 16.48 74.25 76.77 90.61 93.25 8.13 3.09 0.46 0.64 99.2 0.51 0.13 0.37 11.8 0 0 36.31 6.05 50.7 93.05 6.03 0 6.03 87.02 0 99.2 96.99 42.14 0.06 42.08 0 0 0 42.52 0.12 17.85 60.49 5.47 0.11 5.58 54.91 0 96.99

Mar'09 12 Months 11.48 63.68 75.16 3.2 0.67 79.03 34.26 1.36 32.9 0 2.67 0 29.76 1.38 15.91 47.05 3.5 0.09 3.59 43.46 0 79.03

Mar'08 Mar'07 12 Months 12 Months 11.35 7.27 51.3 7.01 62.65 14.29 3.02 2.8 0 0 65.67 22.66 1.04 21.62 1.45 2.67 0 11.89 0.98 30.26 43.12 3.19 0 3.19 39.93 0 65.67 17.09 1.84 0.74 1.11 0.65 2.67 0 4.06 0.01 9.21 13.28 0.62 0 0.62 12.66 0 17.09

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Scams of Capital Market in India

Table 3: Source of Funds of Taksheel Solutions Ltd.

Particular Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity shares outstanding (Lacs)

Mar ' 11

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

16.35 74.25 8.13 0.46 99.2

16.35 0.13 76.77 3.09 0.64 96.99

11.35 0.13 63.68 3.2 0.67 79.03

11.35 51.3 3.02 65.67

5.79 1.49 7.01 2.8 17.09

0.51 0.13 0.37 11.8 93.05 6.03 87.02 99.2 163.52

42.14 0.06 42.08 60.49 5.58 54.91 96.99 163.52

34.26 1.36 32.9 2.67 47.05 3.59 43.46 79.03 113.52

22.66 1.04 21.62 1.45 2.67 43.12 3.19 39.93 65.67 2.67 113.52

1.84 0.74 1.11 0.65 2.67 13.28 0.62 12.66 17.09 2.67 57.87

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Scams of Capital Market in India

FINANCIAL HIGHLIGHTS: The company has been growing over the years, but the financials have been fluctuating. After growing sales at the rate of 172% in FY08, the rate fell to a mere 5% in FY09. The growth picked up again in FY10 at 49%. In FY10, The sales for FY11 grew at a robust pace of 197% owing to of new client addition and increased marketing. Segment wise, the revenue can be attributed to Application services (82%), data warehousing and business intelligence (9%) and the remaining from outsourcing. Majority of the revenue (vertical wise) is contributed by wealth management. The share of wealth management has gone up from 51% in FY10 to 71% in FY11. EBIDTA experienced steady growth from INR 82 Mln FY07 to INR 165 Mln in FY08 and dropped substantially to INR 33 Mln in FY10 as total income did not move in line with the operating cost. During FY08, the company had build up capacities in anticipation of higher turnover in the following years. However, unexpected and sudden downturn of US economy had an adverse impact on revenue and EBIDTA. For FY10 and FY11, EBIDTA rose to INR 87 Mln and INR 283 Mln respectively. EBIDTA margins have also been volatile touching a high of 69% in FY07 and a low of 3% in FY09. In line with the rest of the financials, even the PAT margins have been fluctuating. The company has been exempt from tax, considering that most of its operations are in SEZs. It will be subject to MAT at 18% in the forthcoming years. This could cause the PAT margins to dip marginally in the future. The proceeds from issue will finance Rs 9.16 crore for setting up of a new SEZ software development centres in Hyderabad and Rs 8.66 crore for setting up of a new SEZ software development centres at Warangal, Rs 22 crore for acquisitions and other strategic initiatives, Rs 12.8 crore for financing the incremental working capital requirements apart from general corporate purpose and issue expenses. The turnover as on March 31, 2011, was Rs 147.26 crore, the Profit after tax was Rs 27.42 crore. The total income of Taksheel registered a y-o-y growth rate of around 197% during FY 2011 over FY 2010, primarily due to addition of five new clients during the same period in wealth management solutions vertical. The revenue contribution from the wealth management solutions has grown from 51% of total income in FY 2010 to 71% of total income in FY 2011.

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Scams of Capital Market in India

As on March 31, 2011, company derived 82% of its revenue from application services, 9% from data warehousing and business intelligence and the rest from offshore outsourcing. As of August 10, 2011, there are 65 employees with 50 skilled technician and 15 in sales and administration.

Steps Taken by SEBI:


In the case of Hyderabad-based Taksheel Solutions, SEBI observed that the company has hid vital pieces of information in its public disclosures and misstated figures. There was a lack of adequate, independent and professional due diligence by the merchant bankers, it said. Questions have also been raised on the status of clients and vendors of the company and the alleged siphoning of money and fund flows between the companies, vendors and clients. The regulator also raised issues over the pricing and the listing of the shares on the stock market by the company and related entities. SEBI barred six promoters and nine entities in Taksheels case. SEBI has asked the company to recall its inter-corporate deposits and unutilized IPO proceeds and keep the money in an escrow account.

Impact:
Since January, at least 37 companies have listed their shares on stock exchanges through IPOs, of which about three-fourths are trading below their issue prices. While the Sensex, the BSEs benchmark equity index, has shed at least 22% in the year so far, the exchanges IPO index has fallen 27%.

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Scams of Capital Market in India

RDB RASAYAN Ltd.


RDB Rasayans Ltd, a packaging material manufacturer, engaged in manufacture and sale of FIBC (Jumbo Bags), Woven Sacks and various woven polymer based products, has entered the capital markets with Public Issue of 45,00,000 Equity Shares of Rs.10/- each. The IPO would remain open for subscription for 3 days between September 21, 2011 and September 23, 2011 The Pricing of the 100% Book Building Issue has been done rather ambitiously at Rs.72/- on the lower end of the price band and Rs.79/- at the upper end of the price band. Chartered Capital And Investment Limited is the Book Running Lead Manager as well as the Syndicate Member for the IPO, while Link Intime India Pvt. Ltd. is the Registrar to the Issue. Applications can be made in a Price Band of 80 Equity Shares and in multiples thereof. rickwork Ratings India Private Limited has assigned the IPO Grading to the Issue A factor worthy of a note is that the equity shares will be listed only on the Bombay Stock Exchange (BSE) and not on National Stock Exchange (NSE) RDB Rasayans Ltd. is a subsidiary of RDB Industries Ltd. and engaged in manufacture and sale of FIBC (Jumbo Bags) and Woven Sacks and and various woven polymer based products like container liners, protective irrigation system, canal liners, etc. These products use fertilizers, cement, polymers, chemicals, textiles, machinery, automobiles and steel industry etc. Its manufacturing facility is located in West Bengal IPO Grading: Brickwork Ratings (BWR) has assigned BWR IPO Grade 2 to the proposed IPO of RDB Rasayans Limited (RRL). Brickwork Ratings BWR IPO Grade 2 indicates "Below Average Fundamentals" for the issue in relation to its peers. BWR assigns IPO grading on a scale of IPO Grade 5 to IPO Grade 1 with Grade 5 signifying strong fundamentals and Grade 1 poor fundamentals of the issue in relation to its peers According to the Grading Report from Brickwork Ratings, the grading factors RRLs experienced management team and promoter group, strategic cost/logistic advantage enjoyed by RRL due to their location close to clients and ports, healthy growth of domestic packaging industry as well as demand from Western and European countries and good clientele and suppliers. The grading is constrained by

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Scams of Capital Market in India

volatility of raw material prices and RRLs inability to fully pass on the production price hikes, negative cash flows from operations, fragmented nature of industry with high level of regulation, number of litigations against the promoter and group companies, risk of adverse business environment with regard to labor unrests and cyclicality of end-user sectors Analysis of Financials: A significant factor worth consideration when it comes to the financials of the company is the negative cash flow from operations. The Prospectus filed with SEBI details the following cash flow position of the company during the preceding five years: As can be seen from the above, the Net Cash Flow from Operating Activities of the company has been widely volatile and also cuts across into the negative quadrant for FY ending on 313-2008 and FY ending on 31-3-2011 Profit & Loss Statements Particulars Net Sales Total Expenditure Raw Material Cost Manufacturing & Other Cost Gross Profit Other Income EBIDTA Depreciation Interest Profit Before Tax Tax Profit After Tax IT Adjusted for earlier years Net PAT No. of Shares EPS(Rs) Price PE(x) FY 07 23.96 20.88 16.60 4.28 3.08 0.16 3.24 0.67 0.49 2.08 0.52 1.56 0.00 1.56 0.33 4.73 79.00 16.71 FY 08 25.07 22.13 16.97 5.16 2.94 0.20 3.14 0.72 1.10 1.32 0.34 0.98 0.02 0.96 0.33 2.97 79.00 26.60 FY 09 30.61 26.66 20.93 5.73 3.95 0.59 4.54 1.02 1.17 2.35 0.66 1.69 -0.28 1.97 0.33 5.12 79.00 15.43 FY10 28.47 24.95 18.23 6.72 3.52 0.30 3.82 1.27 1.55 1.00 0.22 0.78 0.00 0.78 1.32 0.59 79.00 133.69 (Rs. Cr) FY11 42.42 37.32 26.29 11.03 5.10 0.13 5.23 1.51 1.16 2.56 0.74 1.82 0.02 1.80 1.32 1.38 79.00 57.30

Table 4: Profit & Loss of RDB Rasayans Ltd.

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Balance Sheet Particulars Fixed Assets (including Capital WIP) Less: Accumulated Depreciation (A) NET Block (B) Investments Inventories Sundry debtors Cash and Bank Balances Loans and Advances (C) Total Current Assets & Advances Secured Loans Deferred Tax Liability Current Liabitities & Provisions (D) Total Liabilities and Provisions Net Worth (A+B+C+D) 1. Share Capital 2. Share application money 3. Reserves and Surplus Net Worth (1+2+3)

FY 07 11.15 1.83 9.32 0.00 2.62 2.15 4.09 4.12 12.98 7.00 0.77 2.15 9.91 12.39 3.30 0.00 9.09 12.39

FY 08 13.70 2.52 11.18 0.00 3.39 3.10 0.07 7.88 14.44 8.77 0.82 2.68 12.27 13.34 3.30 0.00 10.04 13.34

FY 09 18.22 3.54 14.68 0.00 3.19 3.03 0.50 8.80 15.52 11.18 1.10 2.63 14.91 15.29 3.30 0.00 11.99 15.29

FY10 19.94 4.79 15.15 0.00 3.53 4.75 0.88 6.77 15.93 10.61 1.14 3.25 15.00 16.07 13.21 0.00 2.86 16.07

(Rs.Cr) FY11 20.70 6.29 14.41 0.00 9.53 4.98 0.81 5.11 20.44 12.52 1.23 3.22 16.97 17.88 13.21 0.00 4.66 17.88

Table 5: Balance Sheet of RBD Rasayans Ltd.

For the FY ending 31-3-2011, on a Sales of around Rs.46.13 Crs, the company has posted a PAT of only about Rs.1.80 Crs, which implies a profit margin of less than 4% of the revenue. The story in earlier four years has also been quite similar with profit to sales margin remaining under 6% in those years as well The Equity base for the company is also comparatively high with Equity Share Capital alone constituting around 74% of the total Net Worth of the company. For the FY11, the EPS of the company comes to around 1.37, which when compared to the Price Band, gives an exorbitant PE multiple of around 53 times even at the lower end of the Price Band.

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Steps Taken by SEBI:


In the IPO scam that was unearthed in 2005, SEBI found that a group of fictitious investors cornered shares reserved for retail investors in 21 IPOs and made illegal profits after their listing. Following investigations, SEBI ordered the wrongdoers to return their profits. Kolkata-based polymer manufacturer RDB Raysans Ltd, which came out with an issue of Rs.35 crore at a price of Rs.79 per share in September, has also been barred from raising any more capital from the securities market for misutilizing IPO proceeds to fund losses incurred by some trading clients, six of whom were banned, on its listing day. SEBI also banned six of the companys directors. The regulator has asked RDB to pull back a Rs.31.60 crore loan it made to a group company with weak financials and deposit it in an interest-bearing escrow account. The merchant banker, Chartered Capital, its managing director and company secretary were also banned from any capital market-related activities.

Impact:
The 2010-11 financial years has not been very good for small investors, as the stock prices of more than 70 per cent of companies that went for IPOs fell below their issue prices in the first few weeks of listing. Among the recent IPOs, RDB Rasayana, Bharatiya Global, Servalakshmi Paper, Brooks Laboratory, Tijaria Poly Pipes and Sanghvi Forging & Engineering, among others, fell 70-80 per cent on either the day of listing or in two-three trading sessions after it. The share price of RDB Rasayana was down 73 per cent on October 7, the listing day, and crashed to a low of Rs.14 on BSE from the issue price of Rs.79. All these IPOs were small, of Rs.30-80-crore size.

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Scams of Capital Market in India

Recommendation
There cannot be two opinions on the need for identifying and punishing the guilty. The principal objective behind punishing the offenders is more to deter future offenders. However, the government must ensure that not only the obviously guilty (the brokers) but also the not so obviously guilty (the bank executives, the bureaucrats and perhaps the politicians) are identified and brought to book. Investigations of this kind are necessarily time consuming and expensive, but they have to be gone through so that the credibility of the system is restored. A rule of thumb which is often quoted throughout the world is that investigation of any fraud will cost as much as the magnitude of the fraud itself. One can, therefore, expect the real costs of the scam investigation to be of the order of a couple of thousand crores at least. While recovery of the money swindled from the banks is important, the method employed by the government to do that is extremely ham handed and unfair. While governments have, at all times, claimed special powers to recover dues like land revenue and taxes, the same principle cannot be extended to recovery of amounts which the government owned organizations (or for that matter, the foreign banks) have lost by their own negligence and complicity. There can be no justification for such measures as the "tainted" shares law which harass genuine innocent investors irrespective of the magnitude of the loss incurred. The most constructive response to the scam would be in the arena of reforms of the financial system. In our view, the origins of the scam lie in over-regulation of our markets. The regulations in the money markets were such that thoroughly legitimate and essential transactions could not be put through openly, but had to be disguised and camouflaged. The role of the brokers and of some of the banks as market makers was not recognized and they could perform these important and useful functions only by subterfuge. The payment and clearance system was so antiquated and cumbersome that totally indefensible methods had to be adopted to achieve speedy funds transfers. The net result of all these was a total lack of transparency in the operations in the money market. Irregularities of all kinds were so common that no suspicions were aroused even by highly irregular transactions. The situation was an ideal environment for a scam to germinate and grow to alarming proportions. We would even argue that some of the control systems in the banks broke down because they had

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been deliberately allowed to weaken by both the commercial banks as well as the RBI in order to facilitate normal transactions in violation of the RBI guidelines.

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Scams of Capital Market in India

Conclusion
As the capital market is the biggest market to make money by investing with less risk to invest in any of the project. Due to proper information system at the time, the scams had taken place by which SEBI had changed the rules and regulation regarding the issues and the role of SEBI and RBI. It also had been updated to promote the investor to invest and SEBI had updated the system of investment so that the transparency for investment to the investor will be better and the FDI, FII, ADR/GDR, etc will come and invest in different project and increase the business at the national level. It is also necessary for SEBI and RBI to make care of these type of investor to create the environment so that the investor will come to invest in the capital market.

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Bibliography

1. The Indian Financial System Markets, Institutions, and Services By Bharati V. Pathak Chapter: Capital Markets Scams 2. Market Wisdom Investor Empowerment Series Asit C. Mehta 3. Securities Scam: Genesis, Mechanics and Impact Samir K. Barua & Jayanth R. Varma 4. Brickwork RATINGS For Investment Decisions 5. www.sebi.gov.in 6. Financial Market Regulation Security Scams In India with Historical Evidence and The Role of Corporate Governance Supreena Narayanan, Madras School of Economics

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