CHANAKYA NATIONAL LAW UNIVERSITY,

PATNA

Project Report
On
Capital Market Frauds And The Role Of Sebi
(Macro - Economics)

Submitted to: Submitted by:

Dr. Shivani Mohan Name: Piyush Sharma
Faculty of Economics Roll No.: 1948
Course : B.A LL.B(Hons.)
(Fourth Semester)
Session : 2018-2023

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 ACKNOWLEDGEMENT

The present project on the” Capital Market Frauds And The Role Of Sebi” has been able to
get its final shape with the support and help of people from various quarters. My sincere thanks
go to all the members without whom the study could not have come to its present state. I am
proud to acknowledge gratitude to the individuals during my study and without whom the study
may not be completed. I have taken this opportunity to thank those who genuinely helped me.

With immense pleasure, I express my deepest sense of gratitude to Dr. Shivani Mohan, Faculty
for Economics , Chanakya National Law University for helping me in my project. I am also
thankful to the whole Chanakya National Law University family that provided me all the
material I required for the project. Not to forget thanking to my parents without the co-operation
of which completion of this project would not had been possible.

I have made every effort to acknowledge credits, but I apologies in advance for any omission
that may have inadvertently taken place.

Last but not least I would like to thank Almighty whose blessing helped me to complete the
project.

THANKING YOU,

NAME : PIYUSH SHARMA

ROLL NO. : 1948

COURSE : BA.LLB (Hons.)

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 DECLARATION

I hereby declare that the work reported in the BA.LLB (Hons.) Project Report entitled “Capital
Market Frauds And The Role Of Sebi” submitted at Chanakya National Law

University is an authentic record of my work carried out under the supervision of Dr. Shivani
Mohan. I have not submitted this work elsewhere for any other degree of diploma.
I am fully responsible for the contents of my project report.

SIGNATURE OF CANDIDATE

NAME OF CANDIDATE : PIYUSH SHARMA

CHANAKYA NATIONAL LAW UNIVERSITY , PATNA

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 TABLE OF CONTENT

S.No Topic Page

No.
Acknowledgement 2
I. Introduction
1. Aims and Objective
2. Hypothesis
3. Research Methodology 5-7
4. Method of research
5. Research Question
6. Method of Writing
7. Limitation

II. About the Saradha scam and 2G scam

8-12

III. About the establishment and mission of Sebi 13-14

IV. Role of Sebi in Capital Market 15-16

V. Conclusion and Suggestion 17-18

Bibliography

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 I. INTRODUCTION
The history of the capital market in India dates back to the 18th century when East India
company securities were traded in the country. It has been a long journey for the Indian capital
market. Now the capital market is organized, fairly integrated, mature, more global and
modernized. The Indian equity market is one of the best in the world in terms of technology as
well as value- cum-volume of business. On 31stAugust, 2010 our Indian equity stocks total
market capitalization value was around Rs.70, 00,000 crores. The history of the capital market in
India dates back to the 18th century when East India company securities were traded in the
country. It has been a long journey for the Indian capital market. Now the capital market is
organized, fairly integrated, mature, more global and modernized. The Indian equity market is
one of the best in the world in terms of technology as well as value- cum-volume of business. On
31stAugust, 2010 our Indian equity stocks total market capitalization value was around Rs.70,
00,000 crores.

After the securities are issued in the primary market, they are traded in the secondary market by
the investors. The stock exchanges along with a host of other intermediaries provide the
necessary platform for trading in secondary market and also for clearing and settlement. The
securities are traded, cleared and settled within the regulatory framework prescribed by the
Exchanges and the SEBI. Till recently, it was mandatory for the companies to list their securities
on the regional stock exchange nearest to their registered office, in order to provide an
opportunity to investors to invest/trade in the securities of local companies. However, following
the withdrawal of this restriction, the companies have an option to choose from any one of the
existing stock exchanges in India to list their securities. Due to the earlier regulation requiring
companies to get listed first at the regional stock exchange, there are in all 23 exchanges
operating today in the country.

The capital market serves a very useful purpose by pooling the capital resources of the country
and making them available to the enterprising investors well developed capital markets augment
resources by attracting and lending funds on the global scale. A developed capital market can
solve this problem of paucity of funds. For an organized capital market can mobilize and pool
together even the small and scattered savings and augment the availability of investible funds.
While the rapid growth of capital markets, the growth of joint stock business has in its turn

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encouraged the development of capital markets. A developed capital market provides a number
of profitable investment opportunities for small savers.

The Central Government has power to issue directions to SEBI Board, supersede the Board, if
necessary and to call for returns and reports as and when necessary. The Central Government has
also power to give any guideline or to make regulations and rules for SEBI and its operations.
The activities of SEBI are financed by grants from Central Government, in addition to fees,
charges etc. collected by SEBI. The fund called SEBI General Fund is set up, to which, all fees,
charges and grants are credited. This fund is used to meet the expenses of the Board and to pay
salary of staff and members of the body.

I.1 Aims and Objectives :

The Researcher aims to fulfill below objectives through this project :

1. The main aim of this project is to study about the saradha scam and 2G scam.
2. To study the role of Sebi in protecting market integrity.

I.2 Research Methodology

The Researcher will be relying on Doctrinal method of research to complete this project.

I.3 Hypothesis

1. The Researcher assumes that will help investors to decide whether the stock market is a
secured place for their investment or not and it will reveal to investors whether the
watchdog organization SEBI is offering them the protection they need or not.
2. The Researcher assumes that the Securities Market of India is not a secured investment
environment for investors
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I.4 Sources of Data

Secondary sources :- Books , Internet.

I.5 Research Question

1. What is the role of Sebi in Capital market?

2. What are the missions of Sebi?

I.6 Method of Writing

The method of writing followed in the course of this research paper is primarily analytical.

I.7 Limitation of the study

The Researcher as a student has completed the project , he has access to a limited area and
having a limited time.

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 II. About the saradha scam and 2G scam
Saradha Scam

The Saradha Group financial scandal was a major financial scam and alleged political
scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over
200 private companies that was believed to be running collective investment schemes popularly
but incorrectly referred to as chit funds1 in Eastern India.

The group collected around 20 to 30 billion from over 1.7 million depositors2 before it collapsed
in April 2013. In the aftermath of the scandal, the State Government of West Bengal where the
Saradha Group and most of its investors were based instituted an inquiry commission to
investigate the collapse. The State government also set up a fund of 5 billion to ensure that low-
income investors were not bankrupted.

The central government through the Income Tax Department and Enforcement
Directorate launched a multi-agency probe to investigate the Saradha scam and similar Ponzi
schemes.3 In May 2014, the Supreme Court of India, inter-state ramifications, possible
international money laundering, serious regulatory failures and alleged political nexus,
transferred all investigations into the Saradha scam and other Ponzi schemes to the Central
Bureau of Investigation (CBI), India's federal investigative agency. Many prominent
personalities were arrested for their involvement in the scam including two Members of
Parliament (MP) - Kunal Ghosh and Srinjoy Bose, former West Bengal Director General of
Police Rajat Majumdar, a top football club official Debabrata Sarkar, Sports and Transport
minister in the Trinamool Congress government Madan Mitra.

The scam has often been compared to the Sanchayita investment scam, a multi crore rupees scam
that occurred in West Bengal in the 1970s, complaints related to which led to the formation of
the Prize Chits and Money Circulation Schemes (Banning) Act of 1978.

1
"Chitti chitti bang bang". The Telegraph. Mumbai. 30 April 2013. Retrieved 2 feb 2020.
2
Dutta, Romita (20 June 2013). "Saradha raised deposits from 1.7 mn people, probe finds". LiveMint.
Retrieved 2feb 2020.
3
Dasgupta, Mithun (26 April 2013). "60 firms like Saradha Group operating in Bengal". The New Indian Express.
Retrieved 2 feb 2020.

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Companies illegally moving deposits diverted an estimated sum of 240 billion from small
savings funds promoted by state government since 2010. Official data show a steady decline in
small-savings deposits and a rise in withdrawals, which left a reduced amount from which the
state government could borrow. This affected the overall macroeconomic situation of the state;
instead of being used by government for public funding, the money went into Ponzi schemes that
were either diverted to foreign locations or were put to use for private gains.4

It was feared that legitimate non-banking financial companies and micro finance institutions
would be stigmatised, leading to a vicious cycle of low depositor trust, higher interest rates,
lower lending and a localised credit crisis. Because most of the Saradha Group depositors came
from the lowest economic strata, the loss of the investment would cause a further decrease in
social mobility. The scandal drew attention to similar illegal deposit mobilising companies,
which are facing increased regulatory pressure. Many of these companies have been variations of
time share travel schemes, of which there are few clear regulations. These companies tried to
register as cooperative societies to continue their financial operations.5

FIR was filed against Sudipto Sen and Kunal Ghosh on 14 April 2013. Around six officials from
Saradha Group were arrested. The investigation was headed by the detective department
of Bidhannagar police. The investigation was widened to include other Ponzi funds. Kunal
Ghosh and other Ponzi fund officials from Saradha were repeatedly questioned by police to
determine the true assets of the company and other facets of the fraud. Ghosh was arrested by
SIT in November 2013 after he posted a list of 12 names on his Facebook page; these included at
least four TMC MPs and West Bengal Chief Minister Mamata Banerjee.

As per the initial SIT reports, Saradha Group had mobilised 2,459.59 crore through issuance of
its policies. By April 2014, around 385 FIRs against Sardha Group, in which SIT filed 288
chargesheets, had been filed. 453 FIRs were filed against other money pooling companies and
Ponzi funds, and 75 charge sheets were filed before the court.

4
Sarkar, Pranesh . "Snore & drown savings bell ." The Telegraph. Kolkata. Retrieved 4 feb 2020..
5
Basu, Manish "Saradha fallout: Bengal firms eye cooperative society status". LiveMint. Kolkata. Retrieved 4
feb 2020..

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Since 2 May 2013, after complaints from depositors, state government ordered SIT to broaden its
investigation and conduct search and seizure at offices of MPS Greenery Developers Ltd and
Prayag Infotech Hi-Rise Ltd, which were running unregistered collective investment schemes
similar to Saradha Group. By 6 May 2013, police had arrested directors of Ponzi companies
ATM Group and Annex Infrastructure Pvt Ltd on charges of defrauding depositors. According to
news-reports, at the time of handing the Saradha Group investigation to CBI, SIT had arrested 11
people, had traced 224 immovable properties, seized 54 vehicles and had filed charge sheet in
almost 300 pending cases.

By mid-August 2013, the Justice Shyamal Sen Commission finished its initial compilation of the
list of claimants. Around 1.74 million depositors filed claims with the Commission, of which
83% invested 10,000 (US$140) or less. The Commission recommended that West Bengal state
government sell the assets of Saradha Group and proportionally distribute the returns among
defrauded investors By April 2014, the Commission had refunded 400,000 depositors who had
invested less than 10,000. The Commission received claims from 500,000 depositors who were
defrauded by Ponzi funds other than Saradha; the Commission did not refund any of these
depositors. In April 2014, Calcutta High Court sought a report from the Commission on the
discriminatory standards being applied to the refunding of depositors. In February 2014, Sudipta
Sen was convicted in a case where he was charged, under various provisions of employment law,
as a director of Saradha Group for his failure to deposit with the provident fund authorities INR
0.03 million that his firm owed to its employees; he was sentenced by the trial court to three
years in jail, it was the first conviction in a series of civil and criminal cases, relating to corporate
fraud and non-payment of deposits, pending against him6.

6
Dutta, Romita. "Saradha chairman Sudipta Sen sentenced to three years in jail". Livemint. Retrieved 4 feb 2020..

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2G Scam

The 2G spectrum case was an alleged scam that the politicians and private officials under
the United Progressive Alliance coalition government in India were accused of committing.7 It
was claimed that the magnitude of the scam was 2,867,800,000,000 rupee. The Union
Government of that time was accused of undercharging mobile telephone companies
for frequency allocation licenses, which they used to create 2G spectrum subscriptions for cell
phones. The Government chose NM Rothschild and Sons to design a first-of-its-kind e-auction
mechanism in the world, a US$2.27 billion landmark deal. The difference between the money
collected and that mandated to be collected was estimated by the Comptroller and Auditor
General of India at 1.76 trillion (US$25 billion), based on 2010 3G and BWA spectrum-
auction prices. In a charge sheet filed on 2 April 2011 by the Central Bureau of
Investigation (CBI), the loss was pegged at3,098,455 million . In a 19 August 2011 reply to the
CBI, the Telecom Regulatory Authority of India (TRAI) said that the government had gained
over 30 billion by selling 2G spectrum.

On 2 February 2012, the Supreme Court of India ruled on a Public interest litigation in India
filed by Subramanian Swamy related to the 2G spectrum allocation. The court declared the
allotment of spectrum "unconstitutional and arbitrary", cancelling the 122 licenses issued in 2008
under A. Raja, the Minister of Communications & IT from 2007 to 2009, the primary official
accused.8 According to the court, Raja "wanted to favour some companies at the cost of the
public exchequer" and "virtually gifted away important national asset. The zero-loss theory was
discredited on 3 August 2012 when, after a Supreme Court directive, the Government of India
revised the base price for 5-MHz 2G spectrum auctions to 140 billion raising its value to about
28 billion per MHz (near the Comptroller and Auditor General estimate of 33.5 billion

According to some analysts, many corruption scandals including the 2G spectrum case, the coal
mining scam, Adarsh Housing Society scam and the Commonwealth Games scam were major
factors behind the Indian National Congress-led UPA government's defeat in the 2014 Lok
Sabha election. Time magazine listed the India's Telecoms Scandal as one of the Top 10 abuses
of power.

7
"Performance Audit Report on the Issue of Licences and Allocation of 2G Spectrum"(PDF). Retrieved 8feb 2020.
8
"SC quashes 122 licences". Times of India . Retrieved 8feb 2020.

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On 21 December 2017, the special court in New Delhi acquitted all accused in the 2G spectrum
case including prime accused A Raja and Kanimozhi. This verdict was based on the fact
that CBI could not find any evidence against the accused in those 7 years. As per the judgement,
"Some people created a scam by artfully arranging a few selected facts and exaggerating things
beyond recognition to astronomical levels."

On 19 and 20 March 2018, the Enforcement Directorate and CBI respectively filed appeals
against this verdict in the Delhi High Court.

In Feb 2019, Justice Najmi Waziri ordered the defendants to plant 3,000 trees each for seeking
more time to file their responses on the appeal challenging their acquittal in a 2G scam case.9

The JPC consisted of half United Progressive Alliance members and half opposition members.
Twelve were from the Lok Sabha, and eight from the Rajya Sabha. Of the Lok Sabha MPs, eight
were from the Congress Party and four from the BJP

9
"2g Spectrum Scam Verdict Case: Court Judgement On A Raja And Kanimozhi". Amar Ujala. Retrieved
8feb 2020.

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 III. About the establishment and mission of SEBI
The SEBI10, that is, the Securities and the Exchange Board of India, is the national regulatory
body for the securities market, set up under the securities and Exchange Board of India act, 1992,
to “protect the interest of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith and incidental too.” SEBI has
its head office in Mumbai and it has now set up regional offices in the metropolitan cities of
Kolkata, Delhi, and Chennai. The Board of SEBI comprises a Chairman, two members from the
central government representing the ministries of finance and law, one member from the Reserve
Bank of India and two other members appointed by the central government. As per the SEBI act,
1992, the power and functions of the Board encompass the regulation of Stock Exchanges and
other securities markets; registration and regulation of the working stock brokers, sub-brokers,
bankers to an issue (a public offer of capital), trustees of trust deeds, registrars to an issues,
merchant bankers, under writers, portfolio managers, investment advisors and such other
intermediaries who may be associated with the stock market in any way; registration and
regulations of mutual funds; promotion and regulation of selfregulatory organizations;
prohibiting Fraudulent and unfair trade practices and insider trading in securities markets;
regulating substantial acquisition of shares and takeover of companies; calling for information
from, undertaking inspection, conducting inquiries and audits of stock exchanges, intermediaries
and selfregulatory organizations of the securities market; performing such functions and
exercising such powers as contained in the provisions of the Capital Issues (Control) Act,1947
and the Securities Contracts (Regulation) Act, 1956, levying various fees and other charges,
conducting necessary research for above purposes and performing such other functions as may
be prescribes from time to time. SEBI as the watchdog of the industry has an important and
crucial role in the market in ensuring that the market participants perform their duties in
accordance with the regulatory norms. The Stock Exchange as a responsible Self Regulatory
Organization (SRO) functions to regulate the market and its prices as per the prevalent
regulations. SEBI and the Exchange play complimentary roles to enhance the investor protection
and the overall quality of the market.

10
https://www.elearnmarkets.com/blog/sebi-purpose-objective-functions-sebi/. Retrieved 8feb 2020.

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Mission of sebi

SEBI acts as a watchdog11 for all the capital market participants and its main purpose is to
provide such an environment for the financial market enthusiasts that facilitate efficient and
smooth working of the securities market.
To make this happen, it ensures that the three main participants of the financial market are taken
care of, i.e. issuers of securities, investor, and financial intermediaries.

Securities & Exchange Boardof India (SEBI) formed under the SEBI Act, 1992 with the prime
objective of Protecting the interests of investors in securities, Promoting the development of, and
Regulating, the securities market and for matters connected therewith or incidental thereto.’

The primary objective of SEBI is to protect the interest of people in the stock market and provide
a healthy environment for them. SEBI is responsible for the orderly functioning of the capital
markets and keeps a close check over the activities of the financial intermediaries such as
brokers, sub-brokers, etc.

11
https://www.elearnmarkets.com/blog/sebi-purpose-objective-functions-sebi/. Retrieved 8feb 2020.

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 IV. Role of Sebi in Capital Market
SEBI has issued guidelines to Stock Exchanges12 to make their governing bodies more broad-
based. According to these guidelines, the governing body of a stock exchange should have five
elected members, not more than four members nominated by the government or SEBI and three
or fewer members nominated as public representatives. It introduced the system of registration of
intermediaries, such as brokers and sub-brokers. The registration is on the basis of certain
eligibility criteria such as capital adequacy. SEBI introduced the system of registration of
intermediaries, such as brokers and sub-brokers. The registration is on the basis of certain
eligibility criteria such as capital adequacy.

1. Power to make rules for controlling stock exchange: - SEBI has power to make new rules
for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5
PM in stock market.

2. To provide license to dealers and brokers: - SEBI has power to provide license to dealers
and brokers of capital market. If SEBI sees that any financial product is of capital nature, then
SEBI can also control to that product and its dealers. One of main example is UPIL’S case SEBI
said, " It is just like mutual funds and all banks and financial and insurance companies who want
to issue it, must take permission from SEBI."

3. To Stop fraud in Capital Market: - SEBI has many powers for stopping fraud in capital
market. It can ban on the trading of those brokers who are involved in fraudulent and unfair trade
practices relating to stock market. It can impose the penalties on capital market intermediaries if
they involve in insider trading.

4. To Control the Merger, Acquisition and Takeover the companies: - Many big companies
in India want to create monopoly in capital market. So, these companies buy all other companies
or deal of merging. SEBI sees whether this merge or acquisition is for development of business
or to harm capital market.

12
http://www.economicsdiscussion.net/india/sebi/securities-and-exchange-board-of-india-sebi-and-capital-market-
reforms. Retrieved 9 feb 2020.

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5. To audit the performance of stock market: - SEBI uses his powers to audit the performance
of different Indian stock exchange for bringing transparency in the working of stock exchanges.

13

13
http://www.advisorymandi.com/blog/securities-exchange-board-of-india-sebi-what-is-sebi/. Retrieved 10
feb 2020.

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 V. Conclusion and Suggestions
The role of the SEBI in maintaining the efficiency and transparency of the stock exchanges and
economy cannot be ignored. It also comes with certain regulations or guidelines according to the
need of the market and protecting interests of the investors. As long as SEBI performs its duty as
a financial market watchdog, it can be ensured that the market and economy will remain free
from scams and frauds.

The decision to amend the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997 has facilitated the merger and acquisition activities in India’s market. The amendments are
aimed at undoing the complications caused by the earlier amendments of 2004. Amongst other
modifications, the 2006 amendments have broadened the definition of a promoter. The 2006
amendments also seek to align the Takeover Regulations with recent changes to the listing
agreement relating to minimum public shareholding. The amendments propose that no acquirer,
including people acting in concert, holding 55 per cent or more, but less than 75 per cent of the
shares or voting rights in a target company, shall acquire any additional shares or voting rights,
unless he makes a public announcement concerning such acquisition of shares in accordance
with the Takeover Regulations. The provisions that prohibit preferential allotments or market
purchases of more than 55 per cent now stand deleted by virtue of the 2006 amendment.
However, creeping acquisitions continue to be permitted at up to 5 per cent in a financial year up
to a maximum limit of 55 per cent. As per the Takeover Regulations, any offer higher than such
prescribed limit would require an open offer. With the Takeover Regulations prohibiting
acquisition of more than 55 per cent through market purchase or preferential allotment and the
listing agreement prescribing different levels of public share holding for different companies,
lack of transparency in law led to a number of transactions having to be tortuously structured.

The Stock Watch system of insider trading is also being developed which would provide for
detection of possible insider trading cases, as the system would generate alerts on abnormal
trades prior to important events. The SEBI says besides the investigation of insider trading cases
being strengthened, compliance officers are being designated by companies under the advice of
SEBI who could be contacted by the exchanges to verify any rumours. This would also help to
prevent misuse of information. Interestingly, according to SEBI’s own data, none of the SEBI’s

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measures have helped to curb insider trading in the stock exchanges. According to SEBI, till date
none of the Indian stock exchanges have reported any case of insider trading.

Suggestions

In most case only the minimum information required under the Companies Act is made available
The manner in which the swap ratio is fixed and what the management thinks of the same is
largely taken for granted. Valuation reports are made available for inspection, but access is not
easy for all investors.

SEBI could initiate prosecution proceedings on insider trading only in one case and seven cases
on fraudulent and unfair practices. Only in seven of the 181 cases, SEBI resorted to cancellation
of registration during the last four years. Though SEBI has the power to impose a penalty of Rs
1.50 lakhs every time a person fails to furnish the requisite information, but rarely has this power
has been exercised by it. The provision for mandatory punishment of imprisonment in addition
to award for penalty has scarcely has been used.

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 Bibliography
BOOKS

1. Capital Market in India: Reforms and Regulations - Deepak R. Raste

2. Capital Markets of India: An Investor's Guide - Alan R. Kanuk

Webliography

1. http://www.economicsdiscussion.net/
2. https://www.thehansindia.com/
3. https://www.investopedia.com/
4. https://www.britannica.com
5. https://economics21.org

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