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Project Report on: Financial Scams in India Submitted By: NAME: ANOLI .V.ADHIA SEAT NO: __________ TYB.

Com (FINANCIAL MARKETS) Semester Vth Submitted To: University Of Mumbai Project Guide: Dr. Richa Jain Academic Year 2013-2014

CERTIFICATE This is to certify that the project entitled FINANCIAL SCAMS IN INDIA is successfully done by ANOLI.V.ADHIA During the Third Year, Fifth Semester of B.com [Financial Markets] under

University Of Mumbai through the Thakur College of Science & Commerce, Kandivali (East) , Mumbai 400101.

_______________

_______________

______________

Co-coordinator

Project Guide

Principal

Date: _________

Place: ____________

____________________________ External Examiner

DECLARATION

I ANOLI .V. ADHIA from Thakur College of Science & Commerce, student of T.Y.B.Com (Financial Markets), semester V, Examination Seat no:-_________, here by submit my project report on FINANCIAL SCAMS IN INDIA.

I also declare that this project which is the partial fulfillment of the requirement for the degree of T.Y.B.Com (Financial Markets) of University of Mumbai, is the result of my own efforts with the help of experts.

Date: __________

ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project report on Capital Markets. Firstly, I take the opportunity in thanking almightily and my parents without whose continuous blessings, I would not have been able to complete this project. I would like to thank my project guide Dr. Richa Jain for her great help, valuable opinions, advice and suggestions in fulfillment of this project. I am also grateful to my co-coordinator Mrs. Rashmi.V. Shetty for always encouraging and given me new hope to do this project. I am also grateful to my brother for supporting me for providing me material and knowledge to make this project a success. I convey my deep appreciation to them for sparing their valuable time and efforts, so as to make me capable of presenting this project. I am thankful to our college for all the possible assistance and support, by making available the required books and the internet room which have proved useful to me in successfully completing my project. I hope that I have succeeded in presenting this project to the best of my abilities.

EXECUTIVE SUMMARY:

The findings are based on a comprehensive survey, cutting across several industrial sectors, both public and private. 'Strikes, Closures and Unrest' emerged as the number one risk in the survey report. In the year 2012, it did not surface among the top five risks in the 'Overall Risk Rating'. The risk of 'Political and Governance Instability' has significantly changed position from number eight last year to number two this year. 'Information and Cyber Insecurity', 'Fire' and 'Crime' have been rated at number three, five and six respectively. They have maintained their position among the top six risks from the India Risk Survey 2012 onwards. The risk of 'Corruption, Bribery and Corporate Frauds' has been acknowledged as risk number four. In 2012, India was ranked 94 among 176 countries on the Corruption Perception Index and the Financial Stability Report of the Reserve Bank of India revealed that losses of INR 4,448 crores (approx. USD 8.2 billion) to Indian banks from financial frauds in 2012 were the highest ever.

RESEARCH OBJECTIVE:

An attempt is made to examine and analyze in-depth the creativeaccounting scandals, which brings the limelight to the importance of ethics and corporate governance. The fraud committed is a testament to the fact that the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory. Scandals from India have, time and again proved, that there is an urgent need for good conduct based on strong corporate governance, ethics and accounting & auditing standards. Unlike Enron, which sank due to agency problem, Satyam was brought to its knee due to tunneling effect. The Satyam scandal highlights the importance of securities laws and CG in emerging markets. Indeed, Satyam fraud spurred the government of India to tighten the CG norms to prevent recurrence of similar frauds in future. Thus, major financial reporting frauds need to be studied for lessons-learned and strategies-to-follow to reduce the incidents of such frauds in the future.

CONTENTS:

SR.NO

PARTICULARS

PG.NO

1.

Brief introduction on financial markets

2.

Introduction on financial scams

3.

CASE STUDY-I ( Satyam Scam)

4.

CASE STUDY-II ( Securities Scam)

5.

CASE STUDY-III (CRB Scam )

6.

Corporate Governance

7.

Conclusion

8.

Bibliography

9.

BRIEF INTRODUCTION ON FINANCIAL MARKETS:

Financial markets describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.

Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investors geographical location, knowledge of the markets or the profession of the participant.

Financial markets provide channels for allocation of savings to investment. These provide a variety of assets to savers as well as various forms in which the investors can raise funds and thereby decouple the acts of saving and investment. The savers and investors are constrained not by their individual abilities, but by the economys ability, to invest and save respectively. The financial markets, thus, contribute to economic development to the extent that the latter depends on the rates of savings and investment.

The financial markets have two major components: Money market Capital market.

Money market is a segment of the financial market in which financial


instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificate of deposists (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, Eurodollars, federal funds and repurchase agreements

(repos). Money market investments are also called cash investments because of their short maturities. The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities. However, there are risks in the money market that any investor

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

Capital Market is one in which individuals and institutions trade


financial securities. Organizations and institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Any government or corporation requires capital (funds) to finance its operations and to engage in its own long-term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the company's name. These are bought and sold in the capital markets.

The capital markets have two major components: Primary market Secondary market

Primary Market issues new securities on an exchange. Companies,


governments and other groups obtain financing through debt or equity based securities. Primary markets, also known as "new issue markets," are facilitated by underwriting groups, which consist of investment banks

that will set a beginning price range for a given security and then oversee its sale directly to investors. The primary markets are where investors have their first chance to participate in a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business.

The primary market consists of: Public and rights issue Euro issues Private placements

Public and rights issue: An issue of rights to a company's existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased in generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them on the open market.

Euro issues: Newly public companies that want to raise more money tend to issue this type of stock. Euro equity is a term used to describe an initial public offer occurring simultaneously in two different countries. The company's shares are listed in various countries rather than where the company is based. This method differs from cross-listing where company shares are listed in the home market and then listed in a different country. Euro equities are sometimes European securities sold on several national markets. Also referred to as Euro equity Issue.

Private placement: The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

Secondary Market is where investors purchase securities or assets


from other investors, rather than from issuing companies themselves. The Securities and Exchange Commission (SEC) registers securities prior to their primary issuance, then they start trading in the secondary market on

the New York Stock Exchange, Nasdaq or other venue where the securities have been accepted for listing and trading.

The secondary market consists of: OTC MARKET Securities exchanges

OTC MARKET: The over-the-counter (OTC) market is a type of secondary market also referred to as a dealer market. The term "over-the-counter" refers to stocks that are not trading on a stock exchange such as the NASDAQ, NYSE or American Stock Exchange (AMEX). This generally means that the stock trades either on the over-the-counter bulletin board (OTCBB) or the pink sheets. Neither of these networks is an exchange; in fact, they describe themselves as providers of pricing information for securities. OTCBB and pink sheet companies have far fewer regulations to comply with than those that trade shares on a stock exchange. Most securities that trade this way are penny stocks or are from very small companies.

SECURITIES EXCHANGES: Regulated financial market where securities (bonds notes, shares) are bought and sold at prices governed by the forces of demand and supply. Stock exchanges basically serve as (1) Primary markets where corporations, governments, municipalities,

and other incorporated bodies can raise capital by channeling savings of the investors into productive ventures (2) Secondary markets where investors can sell their securities to other investors for cash, thus reducing the risk Stock of investment and impose

maintaining liquidity in

the system.

exchanges

stringent rules, listing requirements, and statutory requirements that are binding on all listed and trading parties.

INTRODUCTION ON FINANCIAL SCAMS:

What are scams?


A fraudulent scheme performed by a dishonest individual, group, or company in an attempt obtain money or something else of value. Scams traditionally resided in confidence tricks, where an individual would misrepresent themselves as someone with skill or authority, i.e. a doctor, lawyer, investor. After the internet became widely used, new forms of scams emerged such as lottery scams; scam baiting, email spoofing, phishing, or request for helps. These are considered to be email fraud. Also see phishing, scheme.

A scam is a dishonest attempt to trap you into parting with your money. A 'scammer' may make a personal approach, with an offer too good to be true. Someone may email you, phone, text-message or post an offer that they press you to take up. Scams can reach their target audience in many ways, ranging from a one-person door-stepping operation, through to multinational highly sophisticated telemarketing scams. Advertisements, direct mail, text messaging, phone calls and e-mail are all widely used.

However SCAM means when a person tries to deceptively cheat you by first giving you a very good offer about something but later on you would be shocked to know that the person was simply bluffing and you have lost your money. An example of this can be the lottery scam. For example a person calls or emails you and tells you that you have won a lottery prize but to get the money there is a small processing fee, you have to pay that fee and then the money would be sent to you.

The top ten financial scams in India:


1) 2G Spectrum Scam 2) Commonwealth Games Scam 3) Satyam Scam 4) Telgi Scam 5) Bofors Scam 6) The Fodder Scam 7) The Hawala Scandal l8) IPL Scam 9 )Harshad Mehta Stock Market Scam 10 )Ketan Parekh Stock Market Scam.

CASE STUDY-I: (SATYAM SCAM)

Introduction on satyam computer services .ltd:

Satyam Computer Services Ltd.


Is a consulting and information technology services company based in Hyderabad, India .It was found in 1987 by B.Ramalinga Raju. The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euro next. It is considered as an icon among the IT companies and at one point had over billion dollar revenue. Sat yams network covers 67 countries across six continents. The company employs 40,000 IT professionals across development centers in India, the United States, the United Kingdom, the UAE, Canada, Hungary, Singapore, Malaysia,

China, Japan, Egypt and Australia. It serves over 654 global companies, 185 of which are Fortune 500 corporations. Satyam has strategic technology and marketing alliances with over 50 companies .Apart from Hyderabad; it has development centers in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata,

Bhubaneswar, and Visakhapatnam.

Satyam Maytas Fiasco: Satyam Computers had on December 16, 2008, announced that it will acquire two group firms - Maytas properties and Maytas Infra. The BOD of Satyam had approved the founders proposal to buy 51 per cent stake in Maytas Infrastructure and 100 % in Maytas Properties. The total outflow for both the acquisitions was expected to t be US$ 1.6 bn comprising of US$1.3 bn for the 100% stake in Maytas Properties and US$ 0.3 bn for the 51% stake in Maytas Infra.This is the move that sparked a row over alleged violation of corporate governance laws. This deal is not profitable for investors .So after this announcement they started to raise their voices against the deal.

Maytas infrastructure:
The company is run by the sons of Ramalinga Raju .It was started in the late 1980s by Ramalinga Raju. The main reason for the debacle of Maytas Infra is due to the debacle of Satyam.

Maytas properties:
One of the reasons for the debacle of Maytas properties is the ongoing economic slowdown. The company has huge land banks and the prices have dropped down in the real estate significantly.

ANALYSIS:
The truth is as old as the hills" opined Mahatma Gandhi, So a company named "Satyam" (Truth, in Sanskrit) inspired trust,

Satyam Computers is a multinational company established in 1987 by B.Ramlinga Raju in Hyderabad, India. Company offered information technology (IT) services spanning various sectors all over the world & was very well known in Stock Exchange with an increasing price of the shares of company. Satyam network covered around 67 countries across six continents with 40,000 IT Professionals working in India, US, UK, UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia. It even serves 654 global companies. Within no time, business was booming. Andhra Pradesh, of which Hyderabad is the capital, has one of the largest pools of skilled manpower in India. Satyam would prove a doughty competitor to its rivals, pricing its services so aggressively that some thought it was prepared to go with minimum profits in order to gain customers. And it expanded aggressively overseas. When he opened his Sydney office a few years ago, he occupied premises vacated by a top global IT firm. In China , provincial leaders vied to

invite Satyam to set up operations in their areas. But once Mr. Raju sold shares to the Indian public in 1992 and later, went for a New York listing in 2001, pressure grew on him to improve the companys performance.

Ever competitive, he was also in rush to catch the market leaders, Tata Consultancy Services, Infosys Technologies and Wipro. Raju was obsessed with getting past the billion-dollar sales mark. When he got there, he wanted to post US$2 billion .Satyam posted US$2.1 billion (S$3.1 billion) sales in the year to March 31; 2008.With the ever-rising pressure to perform, Satyam began doctoring the books to show bigger profits by manipulating the balance sheet, process that began several years back. For Satyam, the recent developments are a direct leftover of the past. In fact, the story is about a decade old. In late 1999, India World a largely unknown internet firm was acquired by Satyam group company, Satyam Info way, for an eye-popping Rs 500 crore. The consternation that accompanied this deal was not hard to comprehend. India World had a top line of just Rs 1 crore and a net profit of an insignificant Rs 25 lakh. At Rs 500crore, Satyam Info way, later renamed Sify, was paying this astronomical sum not just for India World but for a number of sites that came with it among them weresamachar.com, khel.com and khoj.com. The argument dished out was based on the potential of the internet business and the logic of eyeballs was driving this valuation story. One was not sure about the source of funds and how much money went back to RamalingaRaju.A few months later in 2000, shareholders of Satyam were an irate lot. At the annual general meeting

(AGM) of thecompany in Hyderabad in May 2000, shareholders accused Satyam of withholding facts and claimed they were defrauded. This was after the merger of three subsidiaries Satyam Enterprise Solutions (SESL), Satyam Renaissance Consulting and Satyam Spark Solutions with Satyam Computer Services. Post merger, 8 lakh shares of Satyam Computers were allotted to C Srinivasa Raju, who was then Satyam Computers executive director. Shareholders contended that SESL had made a rights issue of 12 lakh shares at par just before this merger. A third of this was bought by Satyam Computer while the remaining 8 lakh shares went Srinivasa Rajus way after they were renounced. Once shareholders of SESL were given shares in Satyam Computers in a 1:1 proportion, Mr. Raju got 8 lakh shares at just Rs 10 each, when the shares were trading at a whopping Rs 1,600. The management of Satyam Computers, however, maintained that things were above board, though shareholders thought otherwise. The seeds of accounting manipulation in Satyam were sown several quarters before Ramalinga Rajus

communiqu to the board on Wednesday, 7th Jan-09. In 2002, the department of company affairs (DCA) was in receipt of a slew of complaints from Satyams shareholders that there were accounting irregularities in the company. Here, it was stated that Satyams directors invested unwisely in subsidiaries that were underperformers. This merely

facilitated the process of tax evasion and employing methods such as writing off large amounts on depreciation. At first blush, Rajus statement to the board (Rajas letter to the board Appended as Annexure I) in which he confesses to inflating profits appears a act of contrition by a man who was willing to stand up and face the music for his transgressions. If Raju was dressing up the bottom-line, it was only to boost the companys valuation and ensure that it stayed in the big league of IT services. A higher valuation also enabled Raju to borrow more money against his shareholding.

QUERIES:
Why Mr. Raju Ramalinga manipulated the balance sheet? Mr. Raju started doctoring the sheet simply to show superior performance and to be in competition with the market leaders.

Why satyam announced that it will acquire maytas infra and maytas properties? Company announced Acquisition of 51% stake in Maytas Infra and 100% stake in Maytas Properties on 16th Dec 2008 to hide the irregularities in the accounts which were lasting from last few years.

What management could do? A) Restore the Management of the company & appoint some reputed people as BOD. B) Try building confidence in clients to get back the lost projects. C) It could also be merged with any other software company.

How much was the actual fraud recorded? His sheets recorded the following:

Sundry Debtors 2651.6 CR Actual Debt was 2161; Over stated 490 CR . Cash & Bank Balance 5312.62 CR Actual cash in bank was 321C. Interest on fixed deposits 376 CR. No accured interest exists. L i a b i l i t y : Mr. Raju arranged Liability himself 1230 CR A total of 7136 CR. . If satyam was fudging funds, where were the funds for all cash acquisition coming from? Sr. No Year Acquired Firm Profession Funding(Amount in $)1) Apr-05 UK based Citisoft PLC Business Consulting Firm 38Mn(Paid in tranches)2) July-05 Singapore based Knowledge Dynamics Consulting Solution Provider 3.3 Mn (All cash deal)3) Oct-07 UK based Nikor Global Solutions Infrastructure based management services and consultancy group 5.5 Mn (All cash deal)4) Jan-08 Chicago based Bridge Strategy Group Management consulting firm 35.00 Mn (All cash deal)5) Apr-08 Caterpillar Inc Market research and customer analytics operations 95.5 Mn for both deals (all cash purchase)S& V Management Consultants Supply chain management firm.

Satyam Scam who is to blame?


Who is guilty in this sordid state of events? MR. Raju is by far the father of this fraud. But there were others who are also culpable.

1. The auditors: What were the auditing company, Price waterhouse Coopers, doing? PwC has written a letter to the BOD of Satyam that its audit may be rendered "inaccurate and unreliable" due to the disclosures made by Satyam's (ex) Chairman. Since the Auditors do bank reconciliation to check whether the money has indeed come or not. They check bank statements and certificates. So was this a total lapse in supervision or were the bank statements forged? No one knows yet. The company officials said they relied on data from the reputed auditors.

2. The promoters: Since the promoters, in this case, held only about 8 percent shares, their idea to push through the Maytas acquisition deal was defeated by an angry lot of shareholders.

3. The Sebi: The Sebi had in December given a clean chit to Satyam in the probe on violation of corporate governance law.

4. The bankers: If the auditors were conned, it means that either the bank statement or certificates were forged Satyams banks ICICI Bank, HDFC Bank, Bank of Baroda, etc.

5. The directors and independent directors: Despite the shareholders not being taken into confidence, the directors went ahead with the managements decision.

6. The government: The government too is equally guilty in not having managed to save the shareholders, the employees and some clients of the company from losing heavily.

CASE STUDY II (SECURITIES SCAM): PART 1:

Introduction on securities scam by Harshad Mehta :

History of Harshad Mehta:


Harshad Mehta was born n 29thy July in a Guajarati Jain family. Moved from small town Raipur to find his future in Mumbai. First job as

dispatch clerk in new India assurance. Worked with stock brokers and soon managed to get a brokers card. Soon started his own ventures grow more research and assets management company ltd. He became a dream seller and celebrity of the financial world. People started to address him as the Big Bull of Market. On April 23, 1992 journalist Suchita Dalal in a column in the Times of India exposed the dubious ways of harshad Mehta. He was later charged with 72 criminal offences and 600 civil actions were filed against him. He died in 2002 due to a massive heart attack in a jail in thane, with much litigation still pending against him.

Overview of the scam:


This scam can be categorized as a Ca p ital market scam in which it is done by manipulating the facts I n order to attain enormous profits. There were 4 different aspects of this scam: Diversion of funds Diversion of funds from the banking system to brokers for financing their operations in the stock market. Intra-day trading-the modus operand mainly included investing heavily in certain shares at the start of the day which led to a sharp increase in the price of the stock and then cashing in at the end of the day to reap huge benefits. Following two aspects shall be explained in detail later .Use of

Ready Forward (RF) to maintain SLR Fake Bank receipts (BR). Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 Cr. from the banks to stockbrokers from April1991 to May 1992. He caused the steep rise in the Stock market index in the year 1992 by bidding at a premium for many shares.

Some of the stocks which were highly invested in by Harshad Mehta were: ACC Apollo Tyres. Reliance Tata Iron and Steel Co. (TISCO) BPL Sterlite Videocon

TABLE: 1 The graph shows the rise in the Sensex during the period when Harshad Mehta was operational and putting in loads of money in the stock exchange increasing the liquidity and thus arbitrary increase in the prices of some shares.:

READY FORWARD (RF)

Disappearance of money:
It is becoming increasingly clear that despite the intensive efforts by several investigating agencies, it would be impossible to trace all the money swindled from the banks. At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Based on the result of investigations and reporting so far, the following appear to be the possibilities. A large amount of the money was perhaps invested in shares. However, since the share prices have dropped steeply from the peak they reached towards end of March 1992, the important question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. In the aftermath of the scam it fell to about 2500 before recovering to around 3000 by August 1992.Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's purchases were made at low prices, so that the average cost of his portfolio corresponds to an index well below 2500 or perhaps even below 2000. Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so cannot be dismissed without a serious consideration. Whether these shares are in fact traceable is another question.

It is well known that while Harshad Mehta was the "big bull" in the stock market, there was an equally powerful "bear cartel", represented by Hiten Dalal, A.D. Narottam and others, operating in the market with money cheated out of the banks. Since the stock prices rose steeply during the period of the scam, it is likely that a considerable part of the money swindled by this group would have been spent on financing the losses in the stock markets.

It is rumored that a part of the money was sent out of India through the Havala racket, converted into dollars/pounds, and brought back as India Development Bonds. These bonds are redeemable in dollars/pounds and the holders cannot be asked to disclose the source of their holdings. Thus, this money is beyond the reach of any of the investigating agencies.

A part of the money must have been spent as bribes and kickbacks to the various accomplices in the banks and possibly in the bureaucracy and in the political system.

A part of the money might have been used to finance the losses taken by the brokers to window-dress various banks' balance sheets. In other words, part of the money that went out of the banking system came back to it. In sum, it appears that only a small fraction of the funds swindled is recoverable.

After the scandal: Immediate impact :


After the Harshad Mehta scandal was exposed, April, 1992, the situation in share market was that of utter chaos. The first impact of the scam was a steep fall in the share prices. The index fell from 4500to 2500 representing a loss of Rs. 100,000 crores in market capitalization. However, the major damage to the stock market did not stop here. Since the accused were active brokers in the stock markets, they had traded a large number of shares during the previous year. All these shares became tainted and worthless and could not be used in the market. This was a great loss to the innocent investor who had bought these shares much before the scandal was exposed.

Impact on Indian economy :


There was a lot of media coverage on the scam and the political parties left no opportunity in criticizing the government for it. The government was under immense pressure and its liberalization policies were severely criticized. It was also believed that Harshad Mehta and his accomplices were behind framing of these policies. In the end the government had to put the liberalization plans on hold. SEBI had to postpone the sanctioning of private sector mutual funds. Implementation of some aspects of the Narasimham Committee recommendations on the banking system had to be delayed. The much talked about entry of foreign pension funds and mutual funds became more remote than ever. The Euro-issues planned by several Indian companies were delayed since the ability of Indian companies to raise equity capital in world markets was severely compromised.

Impact on the banks:


Fake bank receipts (BR) which were an integral part of the execution of the whole scam landed the banks involved in a tight spot. These BR were declared void and public money was at stake. At least ten prominent banks were involved in this; some of them being SBI, Standard Chartered

and a subsidiary of RBI. The scam could have been checked in time with proper policies and verifications. The government, the RBI and the commercial banks are as much accountable as the brokers for the scam. The brokers were encouraged by the banks to divert funds from the banking system to the stock market. The RBI too stood indicted because despite knowledge about banks over-stepping the boundaries demarcating their arena of operations, it failed to check them. Some of the prominent individuals who were penalized were K. M. Margabandhu, CMD of the UCO Bank (Arrested and sacked) and V. Mahadevan, one of the MD the State Bank of India (Suspended).

CASE STUDY-II (SECURITIES SCAM) PART-2

Introduction on securities scam by Ketan Parekh: History of Ketan Parikh:


Ketan Parikh is a former stock broker from Mumbai, India. He was convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1999-2001. Currently he has been debarred from trading in the Indian stock exchanges till 2017. He was trainee of Harshad Mehta. Ketan Parikh can be best described as the pied piper of Dalal Street. Parekh came from a family of brokers which helped him to create a trading ring of his own. A Mumbai based stock broker chartered accountant by profession. Ketan Parikh took advantage in certain stocks which later came to be known as K-10 STOCKS. He held significant stakes in the K-10 companies the buoyant stock markets from January 1999 helped the K-10 stocks increase in value substantially, as a result other brokers and fund managers started investing heavily in these stocks.

The K-10 Stocks: Aftek Infosys DSQ Software Global Telesystems Himachal Futuristic communications Pentamedia Graphics Satyam computers Silver line technology SSI ZEE Telefilms Pritish Nandy communications

Development leading to Ketan Parekh scam:


On March 1st, 2001 a fall about 176 points was seen in the sensex. Prior day union budget tabled prompted 177 sensex points increase. SEBI launched immediate investigation on the notice of the current situations in the market. SEBI inspected the books of several brokers suspected of triggering the crash. RBI ordered some banks to furnish data of capital market exposure. BSE President Anand Rathis resignation added to continued downfall of sensex. The situations opened debate over banks

financial capital markets operations, lending f funds against collateral security, dual control of co-operative banks. Ketan parekh was arrested by CBI on 30th march 2001. He was charged defrauding Bank of India by almost 20$ million. Then there was another sensex fall of 147 points.

Factors that helped Ketan Parekh:


Though Ketan Parekh was a successful broker, he did not have money to buy large stakes as he held the stakes of more than RS.750 million in july1999, according to a report. Analyst claimed that he had borrowed from various companies and banks for this purpose. His financing

method was fairly simple. He bought shares when they were trading at low prices and saw the rise in the bull market while continuously trading. When the prices were high enough he pledged the shares with banks as collateral for funds, and also borrowed from the companies like HFCL. It could not have been possible without the involvement of banks. A small Ahmadabad based bank, Madhavapura Mercantile Cooperative Bank (MMCB) Was KPs main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000. In December 2000, when Ketan Parikh faced liquidity problem in settlement he used MMCB in two different ways:

First was the pay order route, where Ketan Parikh issued cheques drawn on bank of India (BOI) TO MMCB, again which MMCB issued pay orders, the pay order discounted at BOI.

The second route was borrowing from MMCB branch at Mandvi (Mumbai) where different companies owned by Ketan Parikh and his associates had accounts. Ketan Parikh used 16 such accounts, either directly or indirectly through other broker firms and obtains funds.

Impact on Calcutta Stock Exchange: Lack of regulations and surveillance on the bourse allowed a highly illegal and volatile Badla business. Calcutta Stock Exchange had the third largest volumes in the country after NSE & BSE. Calcutta stock exchange helped Ketan Parikh to cover his operations from his rivals in Mumbai. Brokers at CSE used to buy shares at Ketan Parikh behest. These brokers had to keep shares in their name and they were paid 2.5% weekly interest. By February 2001, CSE were reduced to estimated Rs. 6-7 billion from their initial worth of Rs.12 billion. Ketan Parikhs Badla payments were not honored on time for the settlement and about 70 CSE brokers

defaulted on their payments. By mid-march, the value of stocks went down further to around rs.2.5 -3 billion.

Impact of the scam on financial institutions:


Ketan Parikh was threatening to sue the bank of India for defamation because it complained of bouncing of 1.3 billion pay orders issued to the broker by Madhavpura mercantile cooperative bank. Investigations by SEBI & CBI reveal that sheer magnitude of money by Parikh was a staggering 64 billion.

Working of Badla System:


The stock exchange acts as an intermediary between you and the actual lender. You will be changed on interest rate for borrowing, which will be determined by the demand for that stock under badla trading. Thus, higher the demand for Wipro under badla trading higher will be the interest rate. You can keep your borrowing unpaid for a maximum of 70 days, after which you will have to repay the badla financer through the exchange.

SEBIs role after scam:


An additional 10% deposit margin was imposed on outstanding net sales in the stock markets. The limit of application of the additional volatility margins was lowered from 80% to 60%. To revive the markets SEBI imposed restriction on short sales and ordered. It suspended all the broker member directors of BSEs governing board. SEBI also banned trading by all stock exchange presidents, vice presidents and treasures. SEBI allowed banks for collateralized lending only through BSE & NSE.

Conclusion: RS.2000 billion lost. Ketan Parikh was released on bail on May 2001. the retail investors were the worst hit SBI, BOI & PNB had to suffer huge losses MMCB also suffered huge losses around 400 crores.

CASE STUDY III (CRB SCAM) : Introduction on the scam: History of C.R.Bhansali:
Born in a jute trader's house in Calcutta, Bhansali was a studious person. After obtaining a degree in commerce, Bhansali completed Chartered Accountancy in 1980. In the same year, he started a financial consultancy firm, CRB Consultancy. Through Bhansali's personal contacts, CRB Consultancy soon managed to secure the business of providing issue management services to a few well-known companies in Calcutta. Over the years, Bhansali acquired other degrees as well including ACS, Ph.D., MIIA (US) and a diploma in Journalism. Though he made a lot of money, Bhansali found it difficult to find recognition in Calcutta. He then moved to New Delhi to join one of the country's leading registrars of companies. However when Bhansali was caught short-charging the registrar's clients, he had to leave. Bhansali then established 'CRB Consultants,' a private limited company in New Delhi in 1985. In 1992, the name of the company was changed to CRB Capital Markets (CRB Caps) and it was converted into a public limited company. The company offered various services including merchant banking, leasing and hire purchase, bill discounting and corporate funds management, fixed deposit and resources

mobilization, mutual funds and asset management, international finance and forex operations. CRB Caps was also very active in stock-broking having a card both on the BSE and the NSE. The company raised over Rs 176 crore from the public by January 1995. The A+ rating given by CARE and upfront cash incentives of 7-10% attracted investors in hordes to Bhansali's schemes.

Table: 2
CRB CAPITAL MARKETS KEY FINANCIALS:

Overview of the scam:


Bhansali was reported to have specialized in setting up dummy investment companies. He used to sell these dummy companies to buyers. He capitalized on the 1985 boom in leasing companies to become cash rich. He had established good contacts in the Registrar of Companies and the Controller of Capital Issues offices. He registered companies with practically no equity and then stage-managed the dummy company's maiden public issue with a few hundred investors, largely from Calcutta's close knit Marwari Jain community. Having had a company listed on the stock exchange, Bhansali then sold it for a profit to businessmen who needed dummy public limited companies in a hurry. Bhansali used his own money to rig share prices in order to raise more money from the markets in two ways. Firstly, he bought his own stock through private finance companies owned by him. Secondly, he used his other public companies to buy into each other as cross-holdings.

Defrauding the SBI:


In May 1996, CRB Caps opened a current account in SBI's main Mumbai branch, for payment of interest, dividend and redemption cheques. The

payment warrants could be presented at any of the 4,000 SBI branches for payment. However, Bhansali was granted only a current account facility and did not enjoy any overdraft facility. He was expected to deposit cash upfront into the current account, along with a list of payments that had to be honored. Claiming that the logistics of payment were very complex and that it was not possible for every branch to check with the head office before honoring a dividend warrant, the branches gradually began treating these instruments just like a demand draft. For about nine months, the setup worked very well. However, in March 1997, SBI realized that the account had been overdrawn to the extent of a few crores. Bhansali was called to the SBI office and asked to remit the difference immediately, which he promptly did.

The systemic rot:


The collapse of the CRB group seemed to be a fraud allowed by supervisors despite the regulations in place. The lack of clear communication channels between the banks, RBI and the government seemed to have worked to Bhansali's advantage to a great extent. Frequent clashes occurred between RBI and SEBI in the media, with both of them trying to prove how the other was responsible for not acting early enough. The RBI claimed that it had no powers to examine the asset

quality of the CRB group and thereby was not in a position to pass any judgment on the character of asset generation or deployment of the funds raised by the group. The bank further claimed that the powers were granted only in March 1997, when the RBI Act of 1934 was amended to include specific provisions for the purpose. The bank also stated that it had begun to examine the liabilities and not the assets. However, media reports were quick to refute RBI's claims.

The Doomed Depositors:


May 18, 1997 - hundreds of angry, frustrated and scared people stood outside the Reserve Bank of India's (RBI) Mumbai headquarters under the scorching sun. They were waiting for Chain Roop Bhansali (Bhansali), the head of the CRB Group of companies to arrive. Three days earlier the RBI had given Bhansali 72 hours to come up with a plan to repay his liabilities following over 400 complaints from depositors in his company's financial schemes. Most top officials of CRB were untraceable from the second week of May itself. The Central Bureau of Investigation (CBI) locked and sealed the offices of the CRB Group and arrested six persons, including four directors (two from Bikaner and two from Mumbai) of the satellite companies of the group, a financial controller in Mumbai and a relative and close associate of

Bhansali in Delhi. The CBI also conducted simultaneous searches at 16 places in Mumbai, three in New Delhi, one each in Chennai and Ahmadabad and two places each in Calcutta, Jhunjunu, Sujangarh and Bikaner. The CBI froze the bank accounts of the group companies and seized incriminating files and other documents from the residence of the vice-president of the CRB group in Mumbai. Following rumors that Bhansali had fled India and was hiding in Hong Kong or Canada, the CBI sought Interpol's assistance to trace his whereabouts. RBI filed a windingup petition claiming that the continuance of the CRB Group was not in the interest of the public and depositors. The order prohibited CRB from selling, transferring, mortgaging or dealing in any manner with its assets and from accepting public deposits. In response, Bhansali sent a letter to the RBI. Though it was not signed by him, the letter said that the RBI order had led to the deterioration of the company's financial position. It added that the company was facing tremendous problems with payments to fixed depositors. The letter further said that 'we have, also expressed that in view of the precarious situation which is fast going out of our control, before it becomes unmanageable, our case should be considered sympathetically.' This letter led the investors to believe that Bhansali would come out of hiding and work out a way to get out of the mess.

Impact of the scam:


The CRB scam took the whole nation by storm. At one point, the Union finance ministry held a meeting everyday to get to the bras stacks of the CRB fiasco. In a meeting with SEBI, the finance minister criticized the regulator severely. The government asked the RBI to prepare a panel of auditors asking to explore the possibility of making auditing of NBFCs a prerequisite to registration. In October 1998, the SEBI appointed an administrator for CRB's Arihant scheme finalized a scheme for payment to the unit holders under the scheme; the investors were prematurely paid Rs 4.95 per unit, which was its NAV as of 31 March 1998. When the administrator had taken over, the assets of the scheme comprised the fund's frozen bank accounts worth Rs 81 lakh, plus some dividends from investments. Besides, there were a large number of listed (but thinly traded) and unlisted shares amounting to Rs 17.5 crore.

CORPORATE GOVERNANCE: meaning of corporate governance:

The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. Most companies strive to have a high level of corporate governance. These days, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior and sound corporate governance practices. Corporate governance has also been defined as "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and

thereby mitigating agency risks which may stem from the misdeeds of corporate officers." Good corporate governance ensures that the business environment is fair and transparent and that companies can be held accountable for their actions. Conversely, weak corporate governance leads to waste, mismanagement, and corruption. It is also important to remember that although corporate governance has emerged as a way to manage modern joint stock corporations it is equally significant in state-owned enterprises, cooperatives, and family businesses. Regardless of the type of venture, only good governance can deliver sustainable good business performance. The presence of strong governance standards provides better access to capital and aids economic growth. Corporate governance also has broader social and institutional dimensions. Properly designed rules of governance should focus on implementing the values of fairness, transparency, accountability, and responsibility to both shareholders and stakeholders. In order to be effectively and ethically governed, businesses need not only good internal governance, but also must operate in a sound institutional environment. Therefore, elements such as secure private property rights, functioning judiciary, and free press are necessary to translate corporate governance laws and regulations into on-the-ground practice.

Principals of corporate governance:

Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board:

The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.

Integrity and ethical behavior:

Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:

Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Corporate governance in India:

India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. It has been suggested that the Indian approach is drawn from the Gandhi and principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions. Unlike south east and east Asia , the corporate governance initiative in India and was not triggered by any serious nationwide financial, banking and economic collapse. The initiative in india was initially driven by an industry association, the confederation of Indian industry. In December 1995, CII was set up a task force to design a voluntary code of corporate governance. The final draft of this code was widely circulated in 1997.

In April 1998, the code was released. It was called Desirable Corporate governance. Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto Hindalco Infosys Dr. Reddys Laboratories Nicholas Piramal

Bharat Forge HDFC BSES ICICI & many more

Following CII & SEBI, the department of company affairs (DCA) modified to further improve financial disclosures. These were: Disclosure of related party transactions. Disclosure of segment income :revenues, profits and capital employed Deferred tax liabilities or assets. Consolidation of accounts.

Mandated Corporate Governance Guidelines:

Board of directors : Frequency of meetings and composition:

1. Board must meet at least four times a year, with a maximum time gap of four months between two successive meetings.

2. If the chairman of the Company is a non-executive then one-third of the board should consist of independent directors and 50%otherwise.

3. Independent defined as those directors who, apart from receiving directors remuneration do not have any other monetary relationship or transactions with the company, its promoters, management or subsidiaries, which in the view of the board may affect independence of judgment

4. The frequency of board meetings and board committee meetings, with their dates, must be fully disclosed to shareholders in the annual report of the company.

5. The attendance record of all directors in board meetings and board committee meetings must be fully disclosed to shareholders in the annual report of the company.

6. Full and detailed remuneration of each director (salary, sitting fees, commissions, stock options and perquisites) must be fully disclosed to shareholders in the annual report of the company.

7. Loans given to executive directors are capped (no loans permitted to non-executives), and must be fully disclosed to shareholders in the annual report of the company.

Board of Directors : Information that must be supplied:

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

2. Quarterly results of company and its business segments.

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

4. Recruitment and remuneration of senior officers.

5. Materially important legal notices and claims, as well as any accidents, hazards, pollution issues and labor problems

6. Any actual or expected default in financial obligations.

7. Details of joint ventures and collaborations.

8. Transactions involving payment towards goodwill, brand equity and intellectual property.

9. Any materially significant sale of business and investments.

10.Foreign currency and other risks and risk management.

11.Any regulatory non-compliance

Board of directors: audit committee:

1. Must have minimum of three members, all non-executive


directors, the majority of whom are independent.

2. Chairman must be an independent director, and must be present


at the annual shareholders meeting to answer audit or finance related questions.

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

4. .Must have at least three meetings per year, including one


before finalization of annual accounts

5. Must meet with statutory auditors and internal auditors; have


the powers to seek any financial, legal or operational information from the management; obtain outside legal or professional advice.

Disclosures to shareholders in addition to balance sheet, P&L a/c & cash flow statement:

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

2. Qualifications and experience of directors.

3. Number of outside directorships held by each director (capped at director not being a member of more than 10 board-level committees, and Chairman of not more than 5).

4. Attendance record of directors.

5. Remuneration of directors.

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

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

8. Details of grievances of shareholders, and how quickly these were addressed. Date, time and venue of annual general meeting of shareholders.

9. Dates of book closure and dividend payment.

10.Details of shareholding pattern.

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

12.Details about the share transfer system. Stock price data over the reporting year, and how the company stock measured up to the index.

13.Financial effects of stock options.

14.Financial effects of any share buyback.

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

TABLE: 3 Shows the corporate mis-governance of certain companies for the period (2002-2003 & 2003-2004)

CONCLUSION:

While the corporate governance framework in the country is seen at par with other developed markets, the same has to be implemented in 'letter as well as spirit. The fact that white collar crime continues to occur, and seemingly at an increasing rate, suggests that the expected costs do not outweigh the expected benefits from cheating. Stronger penalties are needed. So this concludes the list of Indian scams of all times. According to the compilation, the total amount of money involved in various scams over the last 12 years alone, since 1992, is estimated to be over Rs 80 lakh crore (Rs 80 trillion) or $1.80 trillion! To many people abroad, Ind ia is seen sentimentally as Mahatma Gandhis country of khadi cloth, good ethics, and care for the poor. To some it is an economic miracle and a future super power, while to others it is an unkind cruel place of caste, ethnic and rich-poor divisions and violence. Above all however, and not far below the surface, India is a maze of unethical, unlawful and illegal swindles that link most politicians, many bureaucrats, and a large number of businessmen and others.

BIBLIOGRAPHY:

1. www.caseplace.org 2. www.icmrindia.org 3. Articles.timesofindia.indiatimes.com

4. Business ethics: concepts and cases- Velasquez.


5. Dagar, S.S. (2009). How Satyam was sold the untold story.