A

DISSERTATION REPORT

ON

THE STUDY OF ETHICAL ISSUES IN THE FINANCIAL SERVICES INDUSTRY

SUBMITTED TO

SAVITRIBAI PHULE UNIVERSITY OF PUNE

IN PARTIAL FULFILLMENT OF

MASTER OF BUSINESS ADMINISTRATION

(2018-2020)

SUBMITTED BY

TEJASWINI ATUL PAWAR

MBA (FINANCE)

UNDER THE GUIDANCE OF

PROF. SUPRIYA DESAI

SHREE CHANAKYA EDUCATION SOCIETIES

INDIRA GLOBAL BUSINESS SCHOOL,

PARANDWADI, PUNE
 DECLARATION

I hereby declare that I, Miss Tejaswini Atul Pawar student of MBA Finance of Indira Global
Business School, Pune have given the original information to the best of my knowledge in this
project report titled “The Study of Ethical Issues in the Financial Services Industry”.

I also confirm that the report is only prepared for my academic requirements. This work has not
been previously submitted to any other university for any examination.

Date: Student Signature

Place: Pune Tejaswini Atul Pawar

 ACKNOWLEDGEMENT

It is a great pleasure to present this report of dissertation on the topic “Study the Ethical Issues
in the Financial Services Industry” in partial fulfilment of MBA in Finance under Indira
Global Business School, affiliated to Savitribai Phule Pune University (SPPU).

I’d like to take this opportunity to offer my sincere gratitude and thanks to Prof. Supriya Desai,
who has been a constant mentor through my entire semester and without whom this dissertation
would not have been completed on time. She has offered continuous guidance, support and
encouragement through my entire dissertation phase. Her extensive knowledge, motivation and
patience through the semesters and dissertation phase have made her such an inspiration to work
with.

I want to take a moment to acknowledge the guidance and support of all my friends and for those
who offered to proof read the final dissertation document.

I would especially like to thank my family from across the globe for their continuous
encouragement, love and prayers. And most importantly, I want to thank God for keeping me
healthy through this and giving me the will power to complete this dissertation successfully.

Tejaswini Atul Pawar

 CERTIFICATE

This is to certify that the project entitled “The Study the Ethical Issues in the Financial
Services Industry” submitted in partial fulfilment of the requirement for the degree of Masters
In Business Administration in subject of Dissertation is a bonafide research work carried out
by Tejaswini Atul Pawar, student of the Indira Global Business School affiliated to Savitribai
Phule Pune University, under my Supervision and that no part of research has been submitted
for any other degree.

This assistance and help received during the course of this investigation has been fully
acknowledged.

Dr. Virendra Tatke Prof. Supriya Desai

Director Internal Project Guide

IGBS IGBS MBA

 ABSTRACT

The issue of ethics and economic

efficiency in the provisioning and delivery
of services becomes complex in the Indian
context. Ethical issues in the financial
services industry affect everyone, because
even if you don’t work in the field, you’re a
consumer of the services. Financial service
industry encompasses banks, securities
firms, insurance companies, mutual fund
organizations, investment banks, pensions
funds, mortgage lenders—any company
doing business in the financial arena. Because of its vast size, the industry tends to garner lots of
headlines, many of which tout its ethical lapses. This paper will try to look at the ethical aspects
of the financial service industry towards stakeholders. An attempt of identifying few ethical
issues relating Indian financial sector is made in this article.

Purpose:

At the present times, the field of Finance ethics is barely formed. Although standard business
ethics courses give some attention to ethical issues in finance, few financial departments include
a treatment of ethic. Interest in finance ethics is growing, however, and many people in finance
believe that ethics should receive some attention in finance education. This study aims to analyze
the current Indian scenario with reference to Ethical Behavior in Financial Sector including the
lessons learnt so far.

Approach:

The approach used in the study is descriptive in nature. This study comprises of the analyses of
major corporate scams exposed so far and understanding the role of ethics and morality in
avoiding these scams. It also describes the importance of values in Corporate Governance.
Findings:

The study focuses on understanding the nature and extent of ethical challenges in financial
sector. When talking of the ethical challenges in the financial sector, what happens is, just as we
are doing the SWOT analysis of our borrowers, of our customers; they also do the SWOT
analysis of the various executives in the financial system.

The metamorphosis of the financial sector is one of the reasons which justify the importance of
ethical standard in this sector.

The major findings in the study reveals that once a person has got a conviction that he will not
subdue to any sort of pressure, he will definitely continue to be of high ethical standard and of
high moral character.

Key Words:

Business Ethics
Morality
SWOT analysis
Metamorphosis
Stakeholders
Corporate Governance
Ethical issues
Financial Services
Moral behavior
Legal behavior
Scams.
 Table of Content

Chapter No. Chapter Title Page No.

1. Executive Summary 1

2. Objectives 3

3. Literature Review 5

4. Research Methodology 7

5. Industry Overview 9

6. Theoretical Background 13

7. Analysis and Interpretation 27

8. Recommendations and Suggestions 33

9. Limitations 35

10. Conclusion 37

11. References 39
 CHAPTER 1
EXECUTIVE SUMMARY
 EXECUTIVE SUMMARY

Ethics in general is concerned with human behavior that is acceptable or "right" and that is not
acceptable or "wrong" based on conventional morality. General ethical norms encompass
truthfulness, honesty, integrity, respect for others, fairness, and justice. They relate to all aspects
of life, including business and finance. Financial ethics is, therefore, a subset of general ethics.

There has been an effort to address the ethical problems in business and finance by reexamining
the conceptual foundation of the modern capitalist system and changing it to one that is
consistent with the traditional model of agency relationship. The proponents of a paradigm shift
question the rational-maximizer assumption that underlies the modern financial-economic theory
and reject the idea that all human actions are motivated by self-interest.

Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the
conceptual framework of modern financial-economic theory and the widespread use of a
principal-agent model of relationship in financial transactions. The financial-economic theory
that underlies the modern capitalist system is based on the rational-maximizer paradigm, which
holds that individuals are self-seeking (egoistic) and that they behave rationally when they seek
to maximize their own interests. The principal-agent model of relationships refers to an
arrangement whereby one party, acting as an agent for another, carries out certain functions on
behalf of that other. Such arrangements are an integral part of the modern economic and financial
system, and it is difficult to imagine it functioning without them. The behavioral assumption of
the modern financial-economic theory runs counter to the ideas of trustworthiness, loyalty,
fidelity, stewardship, and concern for others that underlie the traditional principal-agent
relationship. The traditional concept of agency is based on moral values. However, if human
beings are rational maximizes, then agency on behalf of others in the traditional sense is
impossible.

The most frequently occurring ethical violations in finance relate to insider trading, stakeholder
interest versus stockholder interest, investment management, and campaign financing.
Businesses in general and financial markets in particular are replete with examples of violations
of trust and loyalty in both public and private dealings. Fraudulent financial dealings, influence
peddling and corruption in governments, brokers not maintaining proper records of customer
trading, cheating customers of their trading profits, unauthorized transactions, insider trading,
misuse of customer funds for personal gain, mis-pricing customer trades, and corruption and
larceny in banking have become common occurrences.
CHAPTER 2
OBJECTIVES
1) To study the various ethical issues existing in Financial Service sector
2) To study the regulatory actions taken to control these issues
3) To know about the various scams that took place in Financial Service Sector
 CHAPTER 3
LITERATURE REVIEW
Saroj Upadhyay (2010) states that access to financial services is an important
tool for both economic growth and human development. Inclusion should be
viewed as a process of including the excluded as agents of development instead of
welfare targets. Inclusion should entail understanding the poor, their lives, their
needs, their productivity and their vulnerability. If a poor person has to participate
in economic growth, he should have the power to access a wide range of financial
services such as savings, payments, remittances and insurance. The success of FI
depends upon growth of credit which is to be matched by a corresponding growth
in deposits.

Chandan Kumar and Srijith Misra (2011) find that finance has become an
integral part of an economy. There is a two-way relationship between financial
system development and real sector growth. Developed financial system
drives real growth, while the growing economy’s demand leads to advancing
the financial sector. Banking system/institutions has a vital role in facilitating
the development of financial system.

Shetty (2006) insists that FI rests on three pillars, viz: access to financial
services, affordability of such services and actual utilisation of such services.
FI can be achieved only if all the three pillars show affirmative results. Thus,
the ABC of FI is Advice, Banking and Credit.

Bluebook (2006) states that the essence of FI is in trying to ensure that a range
of appropriate financial services is available to every individual and enabling
them to understand and access those services. FI does not require that
everyone who is eligible uses each of these services but they should be able to
choose them if they desired to use them.

Devendraprasad Pandey (2007) finds that the subject of FI has come to the
surface essentially as a consequence of the financial sector reform process of
the 1990s, which neglected the rural credit structure and thus excluded the vast
majority of rural artisans, farm community and micro enterprises from credit.

World Bank (2008) reports that in the absence of inclusive formal financial
system, poor individuals and small entrepreneurs have to rely on informal
sources to invest in better opportunities because of its timely availability and
easy accessibility but at a much greater interest burden. FI can help in
removing this impediment. Achieving FI in a country like India, with large
and diversified population with significant segments in rural and unorganised
sectors requires a high level of penetration by the formal financial system.
 CHAPTER 4
RESEARCH METHODOLOGY
The process used to collect information and data for the purpose of making business decisions.
The methodology may include publication research, interviews, surveys and other research
techniques, and could include both present and historical information.
There are 2 types of data.

1. Primary Data – refers to the data that the investigator collects for the very first time.
This type of data has not been collected either by this or any other investigator before. A
primary data will provide the investigator with the most reliable first-hand information
about the respondents. The investigator would have a clear idea about the terminologies
uses, the statistical units employed, the research methodology and the size of the sample.
Primary data may either be internal or external to the organization.
2. Secondary Data – refers to the data that the investigator collects from another source.
Past investigators or agents collect data required for their study. The investigator is the
first researcher or statistician to collect this data. Moreover, the investigator does not
have a clear idea about the intricacies of the data. There may be ambiguity in terms of the
sample size and sample technique. There may also be unreliability with respect to the
accuracy of the data.

The data used in this project is secondary data for the purpose of analysis.

Type of Research:

Type of research used in this project is Desk Research

Desk research, or secondary research, means finding relevant data which already exists, as
opposed to collecting your own bespoke research. While it may not be able to answer specific
questions, desk research can provide you with useful information.

The research is completely based on secondary data.

Research based on qualitative analysis considering:

i) Industry analysis
ii) Regulatory bodies
iii) Corporate Governance
iv) Scams
 CHAPTER 5
INDUSTRY OVERVIEW
Companies in the financial services industry are in the business of managing money. Globally, the
financial services industry leads the world in terms of earnings and equity market capitalization. Large
conglomerates dominate this sector, but it also includes a diverse range of smaller companies.

It includes:

 Commercial banking
 investment bank
 Financial advisors and discount brokerages
 portfolio management
 Private equity funds
 venture capital providers
 angel investors
India has a diversified financial sector undergoing rapid expansion, both in terms of strong
growth of existing financial services firms and new entities entering the market. The sector
comprises commercial banks, insurance companies, non-banking financial companies, co-
operatives, pension funds, mutual funds and other smaller financial entities. The banking
regulator has allowed new entities such as payments banks to be created recently thereby adding
to the types of entities operating in the sector. However, the financial sector in India is
predominantly a banking sector with commercial banks accounting for more than 64 per cent of
the total assets held by the financial system.

The Government of India has introduced several reforms to liberalise, regulate and enhance this
industry. The Government and Reserve Bank of India (RBI) have taken various measures to
facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These
measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises,
issuing guideline to banks regarding collateral requirements and setting up a Micro Units
Development and Refinance Agency (MUDRA). With a combined push by both government and
private sector, India is undoubtedly one of the world's most vibrant capital markets. In 2017,a
new portal named 'Udyami Mitra' has been launched by the Small Industries Development Bank
of India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium
Enterprises' (MSMEs) in the country. India has scored a perfect 10 in protecting shareholders'
rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).

Market Size

The Mutual Fund (MF) industry in India has seen rapid growth in Assets Under Management
(AUM). Total AUM of the industry stood at Rs 24.03 trillion (US$ 342.01 billion) between
April-November 2018. At the same time the number of Mutual fund (MF) equity portfolios
reached a high of 74.6 million as of June 2018.

Another crucial component of India’s financial industry is the insurance industry. The insurance
industry has been expanding at a fast pace. The total first year premium of life insurance
companies reached Rs 193,866.23 crore (US$ 30.10 billion) during FY18.

Along with the secondary market, the market for Initial Public Offers (IPOs) has also witnessed
rapid expansion. The total amount of Initial Public Offerings (IPO) increased to US$ 1.2 billion
raised from 37 between April – June 2018.

Over the past few years India has witnessed a huge increase in Mergers and Acquisition (M&A)
activity. In H12018, 74 deals of acquisition took place in financial sector. The total value of such
transactions was US$ 4.166 billion. *

Furthermore, India’s leading bourse Bombay Stock Exchange (BSE) will set up a joint venture
with Ebix Inc to build a robust insurance distribution network in the country through a new
distribution exchange platform.
Government Initiatives

 In December, 2018, Securities and Exchange Board of India (SEBI) proposed direct
overseas listing of Indian companies and other regulatory changes.
 Bombay Stock Exchange (BSE) introduced weekly futures and options contracts on
Sensex 50 index from October 26, 2018.
 In September 2018, SEBI asked for recommendations to strengthen rules which will
enhance the overall governance standards for issuers, intermediaries or infrastructure
providers in the financial market.
 The Government of India launched India Post Payments Bank (IPPB), to provide every
district with one branch which will help increase rural penetration. As of August 2018,
two branches out of 650 branches are already operational.

Road Ahead

 India is today one of the most vibrant global economies, on the back of robust banking
and insurance sectors. The relaxation of foreign investment rules has received a positive
response from the insurance sector, with many companies announcing plans to increase
their stakes in joint ventures with Indian companies. Over the coming quarters there
could be a series of joint venture deals between global insurance giants and local
players.
 The Association of Mutual Funds in India (AMFI) is targeting nearly five fold growth in
assets under management (AUM) to Rs 95 lakh crore (US$ 1.47 trillion) and a more
than three times growth in investor accounts to 130 million by 2025.
 India's mobile wallet industry is estimated to grow at a Compound Annual Growth Rate
(CAGR) of 150 per cent to reach US$ 4.4 billion by 2022 while mobile wallet
transactions to touch Rs 32 trillion (USD $ 492.6 billion) by 2022.

Exchange Rate Used: INR 1 = US$ 0.0142 as of Q2 FY19.

 CHAPTER 6
THEORETICAL BACKGROUND
The issue of ethics and economic efficiency in the provisioning and delivery of services becomes
complex in the Indian context. Ethical issues in the financial services industry affect everyone,
because even if you don’t work in the field, you’re a consumer of the services. The public seems
to have the perception that the financial services sector is more unethical than other areas of
business. This misperception persists for several reasons. First of all, the industry itself is quite
large. It encompasses banks, securities firms, insurance companies, mutual fund organizations,
investment banks, pensions funds, mortgage lenders—any company doing business in the
financial arena. Because of its vast size, the industry tends to garner lots of headlines, many of
which tout its ethical lapses.

India's services sector has always served the Indian economy well, accounting for nearly 57 per
cent of the gross domestic product (GDP). Here, the financial services segment has been a
significant contributor.
The financial services sector in India is dominated by commercial banks which have more than
60 per cent share of the total assets; other segments include mutual funds, insurance firms, non-
banking institutions, cooperatives and pension funds. The Government of India has introduced
reforms to liberalize, regulate and enhance the country's financial services industry. Presently,
the country can claim to be one of the world's most vibrant capital markets. In spite of the
challenges that are still there, the sector's future looks good. Present financial system in India:

The present situation of Indian financial service sector could be broadly represented as follows;

 RBI, at the Apex

 Commercial banks which includes public sector and private sector Banks,
 Development financial institutions which could be divided into all India institutions and
state level institutions,
 Insurance companies, which can be classified as, Life Insurance Corporation of India,
General Insurance Corporation of India, and private sector insurance companies,
 Other public sector financial institutions like Post Office Savings bank, National housing
bank, Export Import bank of India etc.
 Mutual funds
 Non Banking Finance Corporations
 Asset reconstruction companies
 Capital market intermediaries,
 Credit information companies.
 SEBI
Securities and Exchange Board of India was formed after the Indian parliament passed
Securities and Exchange Board of India Act, 1992 in response to financial Services Assessment
program, a program developed by the World Bank and International Monetary Fund that
observes and reports on global financial systems. The Indian government wanted to establish a
strong financial atmosphere and securities market with a regulator promoting the latest in
corporate governance standards. SEBI sets standards in which the securities market must operate,
protecting the rights of issuers and investors. SEBI has power to investigate circumstances where
market or its players have been harmed and can enforce govern standards with directives. An
appeal process in place ensures accountability and transparency. SEBI may terminate from the
securities list any company that does not comply with its governance standards and regulation.
Main aim of its origin was to curb the malpractices such as Lack of transparency in the trading
operations and prices charged to clients, Poor services due to delay in passing contract notes or
not passing contract notes, Delay in making payments to clients or in giving delivery of shares,
Persistence of odd lots and refusal of companies to stop this practice of allotting shares in odd
lots, Insider trading by agents of companies or brokers rigging and manipulating prices,
unofficial premium on new issue, violation of rules and regulations of stock exchange and listing
requirements. Due to these malpractices the customers started losing confidence and faith in
stock exchange. Many high profile corporate governance failure scams like the stock market
scam, the UTI scam, Ketan Parikh scam, Satyam scam, which was severely criticized by the
shareholders, called for a need to make corporate governance in India transparent as it greatly
affects the development of the country. Effective corporate governance is only key to regain the
trust of investors and safeguard their interest. This paper aims to study the role of SEBI in
corporate governance and maintenance.

Functions
SEBI sets governance standards in which the securities market must operate, protecting
the rights of issuers and investors. SEBI has power to investigate circumstances where the
market or its players have been harmed and can enforce governance standards with directives.
An appeal process in place ensures accountability and transparency. SEBI may terminate from
the securities list any company that does not comply with its governance standards and
regulations.
Pillars of Effective Corporate Governance
The important elements of good Corporate Governance are:

 Transparency
 Accountability
 Disclosure
 Equity
 Fairness
 Rule of Law
 Participatory
SEBI Role in Corporate governance
To make corporate governance more effective the SEBI since its setup in 1992 has taken
up number of initiatives, appointed various committees and has brought amendments to the
Clause 35B and the Clause 49 of listing agreement. Here the SEBI’s role in corporate
governance is illustrated through norms and provisions as stated these two clauses; the Clause
35B and the Clause 49 of listing agreement. SEBI norms and guidelines under Clause 35B and
49 of the listing agreement for effective Corporate Governance: Since its establishment, SEBI
has taken initiatives to align Indian corporate governance practices with the global standards
adopted in advanced economies. The recent amendments to Clause 35B and 49 of the listing
agreement make Governance more effective and rigorous in protecting the interest of all
stakeholders. The amended Clause 49 of listing agreement is in alignment with the new
Companies Act, 2013. This clause is applicable to listed companies but as per SEBI clarification,
in future this clause will be applicable to non-listing companies also.

Securities and Exchange Board of India Act, 1992

This Act was enacted to protect the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected therewith or
incidental thereto. For this purpose, the SEBI (the Board), by regulation, specify: (i) the matters
relating to issue of capital, transfer of securities and other matters incidental thereto; and (b) the
manner in which such matters shall be disclosed by the companies. No stock-broker, sub-broker,
share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant
banker, underwriter, portfolio manager, investment adviser and such other intermediary who may
be associated with securities market shall buy, sell or deal in securities except under, and in
accordance with, the conditions of a certificate of registration obtained from the Board in
accordance with the regulations made under this Act. No depository, participant, custodian of
securities, foreign institutional investor, credit rating agency, or any other intermediary
associated with the securities market as the Board may by notification in this behalf specify, shall
buy or sell or deal in securities except under and in accordance with the conditions of a
certificate of registration obtained from the Board in accordance with the regulations made under
this Act. Further, no person shall sponsor or cause to be sponsored or carry on or caused to be
carried on any venture capital funds or collective investment scheme including mutual funds,
unless he obtains a certificate of registration from the Board in accordance with the
regulations. Every application for registration shall be in such manner and on payment of such
fees as may be determined by regulations. The Board may, by order, suspend or cancel a
certificate of registration in a prescribed manner, as may be determined by regulations under this
Act. However, no order shall be made unless the person concerned has been given a reasonable
opportunity of being heard.
 A. SCAMS
Major Financial Scams in India: Security scams and financial scandals have led to the
manipulation of large amount of money, bloating stock markets and sensex. Even the financial
markets having regulatory authority and empowered legal sections have failed in providing good
corporate governance to some extent.

2G Spectrum Scam: Former Telecom Minister A. Raja is the prime accused who is considered
to be the mastermind in this scam by CBI. He stands accused of under-valuing spectrum as the
country's Telecom Minister and selling it to companies he favored, though they were largely
ineligible for licenses to run mobile networks. The loss to the national exchequer is pegged by
the government auditor at a mind-boggling Rs. 1.76 lakh crore.

IPO Scam: A number of key operators, including corporate stock brokers such as Karvy and
Indiabulls, were involved in the IPO scam during 2004-05. The modus operandi of the scam was
that the operators opened thousands of fake accounts to purchase shares in IPOs in the hope of
selling later at huge profits. A spate of IPOs issued during this period was heavily oversubscribed
due to this scam. Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the
scam. The Income-Tax Department in Ahmedabad has found that two major accused, Panchal
and Sugandh Investments, have together made Rs 60.62 crore in 18 months.

DSQ Software Scam: Mr.Dinesh Dalmia, Managing Director of DSQ Software was accused of
dubious aquisitions and biased allotment in the year 2000 and 2001.The amount involved in the
Scam was Rs.595 Crores.

Telgi Scam: Abdul Karim Telgi mastered the art of forgery in printing duplicate stamp papers
and sold them to banks and other institutions. He paid bribes to get access to the security press in
Nasik, where stamp papers and currency notes are printed. He later used this knowledge to print
fake stamp papers. Telgi‟s network spanned 14 states, 125 banks and more than 1000
employees. The Telgi clearly had a lot of support from government departments that were
responsible for the production and sale of high security stamps. The extent of this scam was
estimated to be about 200 crores.

Minorities Finance Corporation scam – Cheques issued to 16 fake companies Tuesday, 16

October 2012 - Hyderabad, October 16: (Siasat News) Court has to decide about the police
custody of four accused persons said to be involved in Minorities Finance Corporation scam.
They are Sai Kumar, Managing Director of „One Nation One Card‟, his companion
Venkataraman, Keshava Rao (Middleman between Finance Corporation and bank), Navin Sagar
(Assistant Manager of Vijaya Bank). Investigations made by C.I.D. have revealed some startling
information. Sai Kumar opened a current account bearing number 40013003011000242 in Kothi
and Nallakunta branches of Vijaya Bank. Although it was difficult task but Assistant Manager of
Vijaya Bank, Navin Sagar helped him. He got issued Rs. 55,47,580 in favour of 16 fake
companies. C.I.D. found that Keshava Rao got Rs. 68 and Rs. 10 crore deposited in the fixed
deposit accounts of Nallakunta, Bandlaguda and Kothi branches of Vijaya Bank.
Odisha Chit Fund Scam: CBI to Probe 44 Companies
At least chit fund companies operating in Odisha, have come under the CBI scanner. The
Supreme Court has ordered a CBI probe into the multi-crore chit fund scam, involving Saradha
Group of Companies in West Bengal and 43 others operating in Odisha and beyond.

Those are the few scams which happened only due to various ethical problems or issue. This
study has identified the following four issues influencing such scams.

1) Self-interest sometimes morphs into greed and selfishness, which is unchecked self-interest
at the expense of someone else. This greed becomes a kind of accumulation fever. If you
accumulate for the sake of accumulation, accumulation becomes the end, and if accumulation is
the end, there‟s no place to stop. The focus shifts from the long-term to the short-term, with a big
emphasis on profit maximization. For example, swaps (where two communication companies
agree to exchange the right to use excess bandwidth on their networks) fall into this category.
Each company recognizes the income generated in the quarter earned and defers the expenses
through capitalizing them as an asset and logging the cost as a recognized expense over time,
resulting in an inflated bottom line. Companies may make money out of their finance
department—not from selling products, not from doing what the company did, not from fulfilling
the company‟s mission, but from playing around with its asset mix.

2) Some people equate moral behavior with legal behavior, disregarding the fact that even
though an action may not be illegal, it still may not be moral. Everyone must remember that the
reason for all laws is that the moral agreement begins to break down, and the way to get other
people in line is to legislate so that we can stipulate punishments. Yet some people contend that
the only requirement is to obey the law. They tend to ignore the spirit of the law in only
following the letter of the law. For example, Companies Act, Contract Laws etc, regulations
repeatedly single out actions with “no legitimate business purpose” (like swaps.) If you are doing
things with no legitimate business purpose in order to avoid taxation, what are you doing?
You’re violating the spirit, are you not? You’re staying within the letter, but there‟s no purpose
there except to get you around the law.

3) Professional duty can conflict with company demands. For example, a faulty reward
system can induce unethical behavior. A purely self-interested agent would choose that course of
action which contains the highest returns to him or herself. For example, consider the misguided
practice of selling indexed annuities to the elderly. If a company is paying a high commission for
that product, say 15 percent, versus a lower commission for a more appropriate product, say 3
percent, a salesperson may disregard the needs of the client and/or assume that the company
supports this product and its applicability by its willingness to pay fivefold the compensation.
Sooner or later, people are going to give in to that temptation. The purely self-interested agent is
just responding to the reward system that is in place. “You need to take a look at what you are
rewarding.” In general, organizations get exactly what they reward. They just don’t realize that
their rewards structures are encouraging dysfunctional or counter-productive behavior or turn a
blind eye to the outcome.

4) Individual responsibility can wither under the demands of the client. Sometimes the push
to act unethically comes from the client. How many people expect their accountants to pad their
expenses where possible? How many clients expect their insurance agents to falsify their
applications or claims? “That’s the temptation—you like Business schools too often reduce
everything to an economic entity. They do this by saying the fundamental purpose of a business
is to make money, maximize profit, or the really jazzy words „maximize shareholder value,‟ or
something like that. And it never gets questioned. If the fundamental purpose never gets
questioned, the ethics never get questioned, because the fundamental purpose of something gives
you the reason for its existence.
 B. INSIDERS TRADING
Insider trading is the act of buying or selling company stocks and securities based on information
not known to the public. An insider is considered any officer, manager,

or executive of the firm in question; in some cases, it can also be a person who was given the
proprietary information by a company figurehead. Generally, insider trading is illegal, but there
are laws and regulations that some are willing to skirt in order to practice trading that they
consider “legal” insider trading.

Insider trading is considered by many people to be no different than outright stealing. U.S. laws
concerning insider trading have become increasingly more strict throughout the years and
include swift punishment for those who garnered the insider information to make the trades as
well as those who do the trading, regardless of their involvement or relationship (or lack thereof)
to the firm. Several laws now protect companies and employees from insider trading and its
negative impact on stocks and the open market in general. Even firms with highly globalized
presences with identities on all the world markets now have the legal protection to combat
insider trading.

Insider trading in India is basically determined by SEBI laws which govern the whole trading in
national stock exchange or Bombay stock exchange. The main aim of this law is that to ensure
traders that no one is gained by trading on ‘insider’ or ‘unpublished’ information- information
that is not made public. Another aim of this law is to make the information available to all the
participants. The enforcement of insider trading laws increases the market liquidity and
decreases the cost of equity. Insider trading laws are found in developed countries where strong
trading regulations are adopted. The main aim of government in the enactment of insider trading
laws is that all the participants in the market have the same information. When the Indian
economy was liberalized and security market was open to foreign institutional investors,
common investors aim to get quick returns in short period of time.

Case Laws

Hindustan Lever Limited v. SEBI (1996)

This case mainly concerns the purchase of 8 lakh shares by HLL of BBLIL from the Unit Trust
of India on March 25, 1996. This purchase was made barely two weeks prior to a public
announcement for a proposed merger of HLL and BBLIL. Upon investigation, SEBI found that
HLL was an insider at the time of purchase.

TISCO case (1992)

In this case, the profit of TISCO for the first half of the financial year 1992-93 felt to Rs. 50.22
crore in comparison to the profit of Rs. 278.16 crore for the financial year 1991-92. Before the
announcement of the half-yearly results, there was intense activity in the trading of share
between October 22, 1992, and October 29, 1992. However, the SENSEX saw a decline of 8.3%
during the same period. The insiders who had the knowledge of the same had manipulated the
market to make short sales. Small investors were hit badly. Due to the absence of insider trading
regulations in India, it was not possible to investigate the case.

DSQ Holdings Ltd. v. SEBI (1994)

DSQ biotech ltd. (DSQB) was originally promoted by KND engineering and technologies ltd.,
jointly with Tamil Nadu industrial development corp. DSQ Holdings Ltd. Is a same promoter
group company of DSQB. The board of directors held a meeting on 30 July 1994 considered
rights issue and same was communicated to the stock market. The purpose of sending
information to the public was to properly disseminate it.

Role and Power of SEBI in curbing Insider Trading

 In order to investigate SEBI may appoint officers who look after the books and records of
insider and other connected persons.
 It is the duty of SEBI to give a reasonable notice to the insider before starting the
investigation.
 The board can also appoint an auditor who may inspect the books of accounts and affairs
of an insider.
 After all the investigations, the officer has to submit the report within 1 month as per
SEBI 1992 regulations. It also depends on the investigating officer to take longer time if
he funds that the work could not be completed within the stipulated time.
 After the final report submission, SEBI has to communicate the findings to the insider
and issue a show cause to the insider or other person within 21 days of the receipt of the
communication.
 C. FRAUDULENT FINANCIAL DEALINGS

 Fraudulent financial reporting is a deliberate misstatement or omission of financial

accounting information intended to deceive the investors.
 The reasons for fraudulent financial reporting includes (a) pressures from owners,
creditors and the markets in general; (b) opportunities for fraud (due to lack of
emphasis on business ethics), etc. and (c) incentives and personal conflicts of interests.
 Controls designed to prevent fraudulent financial reporting include external auditing,
independent board of directors, active regulators, vigilant capital markets and overall
ethical corporate culture.
 Ten Percent Inc. is a company founded in Juba in 1997 and is engaged in assembling
electronic gadgets. The company has a decade long history of growing its net profit
margin by 10% or higher. By the third quarter of 2007, the company was able to attain
a sales growth of only 6%. The analysts still believed that the company will get to its
target of 10%. The CEO of the company owned 0.5 million shares in the company. Just
a week after the end of the financial year 2007, the CFO compiled draft income
statement and they had managed to earn 8% growth only. The CEO and CFO
concluded that this will result in a 15% drop in market capitalization. The CFO was
entitled to receive a bonus of 10% if they get the growth target. CEO was able to
convince CFO to knock off unearned revenue of $200 million and treat it as earned.
This resulted in a net profit margin growth of 11%. The management was able to get
the financial statements approved by the board because the directors were not well-
versed in accounting principles.
 The above example is a situation of fraudulent financial reporting because the
management has misstated the revenue and profit and ultimately the assets and retained
earnings.
 The factors that contributed to the misstatement included pressure from the capital
markets, the compensation system, the CEO's shareholding, poor corporate culture and
lack of effective corporate governance.
 Real life examples of fraudulent financial reporting include Enron, WorldCom, etc.
 D. INFLUENCE PEDDLING

Influence peddling is the illegal practice of using one's influence in government or connections
with persons in authority to obtain favours or preferential treatment for another, usually in return
for payment. Also called traffic of influence or trading in influence. In fact, influence peddling
is not necessarily illegal as the Organisation for Economic Co-operation and Development
(OECD) has often used the term "undue influence peddling" to refer to illegal acts of lobbying.
[1] However, influence peddling bears the stench of corruption that may de-legitimise
democratic politics with the general public.

E.g. Nira Radia, an Indian woman still under investigation for using her connections with Indian
politicians and members of the Indian media to tilt the auction of multi-million dollar licence
contracts in favour of certain companies and individuals.

E. UNAUTHORIZED TRANSACTIONS
An unauthorized transaction is any transaction that you didn’t make and you didn’t permit
anyone else to make. Unauthorized transactions could be made by someone you don’t know,
who finds or steals your card or your account information. Or they could be made by someone
you know but who didn’t have your permission to use the card. In either case, you would have to
dispute the transactions with your card issuer. The company will then investigate your dispute. If
a family member or friend used your card, you may have to sign a sworn statement that they took
the card without your permission.

If your credit or debit card is lost or stolen, contact the card issuer immediately—you can find
the number on your monthly statement. Check your account statements when you receive
them—or more often online—to catch any transactions you didn’t make and report them right
away.

F. LARCENY IN BANKING
Banks in India have lost Rs 235.96 crore in the last five years to incidents of burglary, robbery,
dacoity and theft. The number has been going up since 2013-14 when 587 such cases were
reported, amounting to a loss of Rs 34.346 crore. In 2017-18, 972 cases of theft and burglary
were recorded, an increase of 65 per cent, leading to a loss of Rs 44.49 crore.

Last year, that is in 2017-18, the highest numbers of such cases were reported by Bandhan Bank.
The bank that started as a microfinance company has a large presence in rural and semi urban
regions and saw 276 incidents of theft, burglary, robbery, etc. In terms of monetary loss, Axis
Bank suffered the maximum financial loss at Rs 11.99 lakh.
Bihar accounted for maximum number of such cases. There were 147 incidents in Bihar last
year, followed by West Bengal which had 105 cases and Uttar Pradesh with 85 cases.

"RBI has informed that it has advised banks to review and strengthen the security arrangement in
their branches and ATMs to deal with instances of robbery, etc. and for dealing with risk
perceptions emerging from such incidents. These include coverage of branch/ATM by CCTVs
and ensuring adequate training of security staff. In addition, RBI has also been forwarding
suggestions for improvement, received from police authorities in this regard to banks for
consideration and adoption," said Minister of State for Finance Shiv Pratap Shukla in Parliament.

Two years ago, the Delhi police entered the Limca Book of Records for solving one of the
largest cash robbery cases in India. On 27 November 2015, they tracked down the driver of a
cash transit van who drove away with over Rs 22.50 crore.
 CHAPTER 7
DATA ANALYSIS AND DATA
INTERPRETATION
 According to the report of IIM-B, about 455 frauds cases in ICICI Bank, 429 in SBI, 244 in
Standard Chartered Bank and 237 cases in HDFC Bank were caught in the first nine months of
the year 2017. The report says that bank employees were involved in the most of the banks
frauds.

Data shows that more than 60 employees of State Bank of India, 49 employees of HDFC Bank,
35 employees of Axis Bank have been arrested in the fraud cases. After the Nirav Modi case,
Punjab National Bank has suspended its 20 employees.

1. Neerav Modi Bank scam;

This bank scam is being called the biggest scam (Rs 11,400 crore) in the banking sector of India.
The main accused of the scandal is billionaire jeweller Nirav Modi and his uncle Mehul Surakshi
(owner of Gitanjali James). Both of them had received "Letter of Undertaking" from the consent
of the employees of PNB’s Mumbai branch and withdrawn the funds from the foreign banks on
the guarantee of Punjab National Bank. However, the Enforcement Directorate has seized assets
of Nirav worth over Rs 5870 crore.
2. Bank Scam by Vijay Mallya
Mallya's Kingfisher Airlines had borrowed Rs 9,432 crore from 13 banks till February 2018. The
State Bank of India was the biggest lender with 1600 cr. followed by the PNB 800 cr, IDBI 650
cr and Bank of Baroda lend 550 cr. Malya left India on March 2, 2016 and hiding in the London
and the government of India is fighting for his extradition
till date.

3. Satyam Case:
Mr. Ramalinga Raju, the former Chairman and Chief
Executive of Satyam Computer Services admitted to
falsification in the company accounts and various other
irregularities. The estimated fraud was Rs.700 Crore
billion. Coming on the back of global recession, this
incident busts the Indian Outsourcing Industry and the stock market.

4. Allahabad Bank Scam:

Kolkata-based Allahabad Bank has said it has an exposure of ₹2,363 crore in the PNB
fraud case. However, Allahabad Bank stressed that it is sure about the recovery of the
payment as the exposure was fully secured by Letter of Undertaking (LoU) documents.
“The bank, through our overseas branch at Hong Kong, has been taking exposure with
Punjab National Bank as counter-party under various Letters of Undertakings issued
through authenticated SWIFT message.

5. 2G Spectrum Scam:
Former Telecom Minister A. Raja is the prime accused who is considered to be the
mastermind in this scam by CBI. He stands accused of under-valuing spectrum as the
country's Telecom Minister and selling it to
companies he favored, though they were largely
ineligible for licenses to run mobile networks.
The loss to the national exchequer is pegged by
the government auditor at a mind-boggling Rs.
1.76 lakh crore.
 6. Harshad Mehta Scam:
The Harshad Mehta scam was discovered when attention was paid to the money missing from
the government securities market. As the scam broke loose, the valuations in the Bombay Stock
Exchange collapsed. The mega growth that had been witnessed by the exchange in one year
came crashing down in a matter of days. People lost their life savings in the scam. Some
investors were heavily leveraged and as a result committed suicide as a result of the fallout.

The issue rose to national prominence. Institutions like Reserve Bank of India, Central Bureau of
Investigation and Parliamentary Committees had to be involved. The matter became even more
convoluted as Harshad Mehta coughed up the name of Prime Minister of India , Shri P.V.
Narsimha Rao as being a beneficiary from the corruption and threatened to reveal many more
names.

Finally, the committee found Harshad Mehta directly responsible for embezzling worth Rs 1439
crores ($3 billion) and causing a scam that led to the loss of wealth to the tune of Rs 3542 crores
($7 billion). To this day, the Harshad Mehta scam brings up memories of unprecedented boom and
bust which was never witnessed earlier by the Bombay Stock Exchange.
 7. Saradha chit fund scam

Triggered by the collapse of a Ponzi

scheme run by Saradha Group, a
consortium of over 239 private
companies. The group collected money
from over 1.7 million depositors before it
collapsed in April 2013. The group ran
pyramid schemes, mobilised deposits
through four of its 239 registered
companies, namely, Saradha Tour &
Travels, Saradha Realty, Saradha Housing
and Saradha Garden Resorts & Hotels.
Bank frauds and NPAs

In the last three years, public sector banks (PSBs) in India have lost a total of Rs. 22,743 crore,
on account of various banking frauds. With various measures initiated by the RBI, numbers of
banking fraud cases have declined, but amount of money lost has increased in these years.
Frauds and NPAs in banks

Prima facie, an initial investigation in these cases has revealed involvement of not only midlevel
employees, but also of the senior most management as was reflected in the case of
Syndicate Bank and Indian Bank. This raises serious concern over the effectiveness of
corporate governance at the highest echelons of these banks. In addition, there has been a rising
trend of non-performing assets (NPAs), especially for the PSBs, thereby severely impacting
their profitability. Several causes have been attributed to risky NPAs, including global and
domestic slowdown, but there is some evidence of a relationship between frauds and NPAs as
well.

The correlation between rising level of NPAs of public sector banks and frauds probably
indicates lack of requisite standards of corporate governance leading to more instances of high
value bank loan default and possible collusion between corporate entities and high echelon
bank officials. Also, in case of private banks, high number of fraud cases with relatively low
cost of fraud indicates very nature of fraud - online/cyber/technology related frauds with a high
frequency of occurrence and relatively low associated cost.
 CHAPTER 8
SUGGESTIONS AND
RECOMMENDATIONS
First of all, consumers need to be better informed. It is customer’s responsibility to take control
of their own financial security, which doesn’t mean one need to know everything about the
product he/she is buying in advance, but he/she should read enough to know what some of the
right questions are to ask. Ask those insightful questions of an advisor whom you know, trust,
and who has the proper credentials, if applicable.

Other suggestions:

 Incentive compensation better aligned with customers‟ interests, rather than agents‟
 More industry trade associations supporting ethics initiatives
 The Center for Ethics in Financial Services growing in influence and impact
 Internal and external audit and a compliance department/compliance officer are needed to
avoid fraud and other unwanted ethical behavior.
 Conflict of interest should if possible be avoided
 Market manipulation should be curbed.
 CHAPTER 9
LIMITATIONS OF THE STUDY
Limitations of the Study:

i) The study is based only on ethical issues in financial services in India. Hence,
findings cannot be treated as representative of entire world’s financial service sector.
ii) The study can also not be generalized for public and private sector institutions of
India.
CHAPTER 10
CONCLUSION
As we all have read, there is an opinion that greed and unethical behavior by market participants
is a culprit for financial crises and therefore it would be unwise to ignore the area of ethics and
the requirements ethics put on market participants. Financial intermediaries must keep to rules of
law, industry standards and act ethically. Dealing with ethics is not a sideline of the financial
service industry but should be a part of its core. It could be properly said that financial service
industry must have absolute ethical standards.

Further, no person shall sponsor or cause to be sponsored or carry on or caused to be

carried on any venture capital funds or collective investment scheme including mutual funds,
unless he obtains a certificate of registration from the Board in accordance with the
regulations. Every application for registration shall be in such manner and on payment of such
fees as may be determined by regulations. The Board may, by order, suspend or cancel a
certificate of registration in a prescribed manner, as may be determined by regulations under this
Act. However, no order shall be made unless the person concerned has been given a reasonable
opportunity of being heard. Further, no person shall sponsor or cause to be sponsored or carry on
or caused to be
carried on any venture capital funds or collective investment scheme including mutual funds,
unless he obtains a certificate of registration from the Board in accordance with the
regulations. Every application for registration shall be in such manner and on payment of such
fees as may be determined by regulations. The Board may, by order, suspend or cancel a
certificate of registration in a prescribed manner, as may be determined by regulations under this
Act. However, no order shall be made unless the person concerned has been given a reasonable
opportunity of being heard.
CHAPTER 11
REFERENCES
http://www.ibef.org

http://shodhganga.inflibnet.ac.in/

http://www.investopedia.com

http://www.jagranjosh.com

http://shodhganga.inflibnet.ac.in

http://www.sebi.com

https://www.jagranjosh.com

http://www.legalservicesindia.com

https://www.researchgate.net

https://www.sciencedirect.com

https://www.scoopwhoop.com