CHALLENGES UNDER THE SECURITIES MARKET: AN ANALYSIS

PROJECT SUBMITTED IN THE FULFILMENT OF THE COURSE TITLED

CORPORATE LAW – I
FOR THE AWARD OF DEGREE OF B.A. LL.B(Hons.)

SUBMITTED BY SUBMITTED TO
NAME: SARTHAK CHATURVEDI MRS. NANDITA S. JHA
SEMESTER: VII FACULTY OF LAW

ROLL NO.: 1760

COURSE: B.A. LL.B.(HONS.)
SESSION: (2017-2022)

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR, PATNA – 800001
21stOctober,2020
 CERTIFICATE OF DECLARATION

I, Sarthak Chaturvedi, hereby declare that, this project report entitled, “CHALLENGES
UNDER THE SECURITIES MARKET: AN ANALYSIS” submitted to Chanakya
National Law University, Patna is record of a work done by me under the guidance of Mrs
Nandita S. Jha, Faculty of Law, Chanakya National Law University, Patna.

SARTHAK CHATURVEDI

Roll.No. 1760

VIIth SEMESTER

B.A. LL.B.(Hons.)

I
 ACKNOWLEDGEMENT

Any project completed or done in isolation is unthinkable. This project, although prepared by
me, is a culmination of efforts of a lot of people. Firstly, I would like to thank our Faculty of law,
Mrs. Nandita S. Jha Ma’am for her valuable suggestions towards the making of this project.

Further to that, I would also like to express my gratitude towards our seniors who have done a
lot of help for the completion of this project. The contributions made by my classmates and friends
are, definitely, worth mentioning.

SARTHAK CHATURVEDI

Roll.No. 1760

VIIth SEMESTER

B.A. LL.B.(Hons.)

II
 TABLE OF CONTENTS

Declaration of Originality I

Acknowledgments II

Introduction 4

Problems During Inception Phase 6

Problems during 1914-1947 7

Problems during post-independence period 8

Problems during 1969-1991 9

Current Problems in Securities Market 11

Scams in Indian Securities Market 18

Conclusions 24

3
 INTRODUCTION
Capital Market is a market for long-term funds. Capital market focuses on financing of
fixed investment. Capital market channelizes household savings to the corporate sector and
allocates funds to firms. Capital market enables the valuation of firms on an almost
continuous basis and plays an important role in the governance of the corporate sector.
In India, efforts have been made in recent years to set up an effective regulatory framework
covering major participants in the capital market. A stock market deals mainly in corporate
securities.

The securities are chiefly in form of equity shares and debentures. The purpose of these
securities is to raise long term funds for companies engaged in production. The function
of the stock market is twofold: (a) to arrange for rising of new capital and (b) to provide
liquidity to existing securities. The securities market has two interdependent and inseparable
segments, namely, the new issues (primary) market and the stock (secondary) market. The
primary market provides the channel for the creation and sale of new securities, while the
secondary market deals in the securities that were issued previously. The securities issued in
the primary market are issued by public limited companies or by government agencies.

The resources in this kind of market are mobilized either through a public issue or through a
private placement route. If anybody can subscribe for the issue, it is a public issue; if the
issue is made available only to a select group of people, it is known as private placement.

There are two major types of issuers of securities—corporate entities, who issue mainly debt
and equity instruments, and the government (central as well as state), which issues debt
securities (dated securities and treasury bills). The secondary market enables participants who
hold securities to adjust their holdings in response to changes in their assessment of risks and
returns. Once new securities are issued in the primary market, they are traded in the stock
(secondary) market. The secondary market operates through two mediums, namely, the over-
the-counter (OTC) market and the exchange-traded market. The OTC markets are informal
markets where trades are negotiated. Most of the trades in government securities take place in
the OTC market. All the spot trades where securities are traded for immediate delivery and
payment occur in the OTC market. The other option is to trade using the infrastructure
provided by the stock exchanges. The exchanges in India follow a systematic settlement
period.1
1
Gunjan Malhotra, Indian Capital Markets: Growths, Challenges and Future,
http://www.internationalseminar.org/XVI_AIC/TS5a_pdf/4Gunjan%20Malhotra.pdf (last accessed 20.10.19)

4
 CHAPTER 1: PROBLEMS DURING THE INCEPTION PHASE

During this phase, the capital market was faced with inevitable, natural problems. Since this
phase was only the beginning of the capital market in India, it experienced the following
problems.

1.1 Absence of formal structure:

There was no formal structure of the capital market during the inception phase. Even the
stock exchanges, in particular Bombay Stock Exchange (“BSE”) ,were formed as voluntary
non-profit-making associations2, and the operations and functions performed on the market
were based on practices developed by some of the brokers (called' Dalals'). During the initial
phase, there was no formal structural or functional system prevalent.

1.2 Dominant Markets:

This initial phase was characterized by the concentration or dominance of capital market
activities by only a few exchanges3, in particular BSE. It was almost a monopoly of BSE on
capital market operations and functions. Before 1914, there were only three stock exchanges.
Mumbai, Ahmadabad, and Kolkata. But there was still dominance in the activities of the
Mumbai Stock Exchange (BSE).

1.3 No response from public:

Since this was just the start of capital market operation in India, the response from the general
public was, of course, very poor.4 Due to the lack of data on capital market activities, there
was no interest among people for the capital market. Initially, the capital market was seen as
a place only for an elite class in society. Therefore, the majority of the population, both in the
middle class and in the lower middle class, were unaware of the capital market. This problem
also led to a liquidity crunch on the market, as only a few players were present on the market.
The scope for further growth was therefore limited.

2
Bhole L.M- “Financial Institutions and Markets”, Tata McGraw Hill Publishing Co. Ltd, New Delhi, 4th
Edition, 2004, pp.23.39.
3
Veena D.R.- “Stock Markets in India” – Ashish Publishing House, New Delhi, pp.222.
4
Gordon and Natarajan – “Financial Markets and Services”, Himalya Publishing House, Mumbai, 2nd Revised
Edition, 2003, pp.127.

5
 CHAPTER 2: PROBLEMS DURING 1914-1947

This period was marked by the growth of the umbrella. During this process, the number of
exchanges increased from three to seven. The number of companies listed in the stock
exchanges throughout the country has also risen to more than 1,000. As there was
quantitative growth in the Indian capital market, a number of inherent problems also
emerged during this phase.

2.1 MANIPULATION OF TRADE:

The stock exchanges provided the facility for the free transfer of securities and, as a result,
certain procedures for the transfer of securities were also established. At that time, however,
the device left room for the operator to exploit the market. Operators were in a position to
make these manipulations5 as the data flow was totally dominated by brokers. This was
also an explanation for restricted prevalence of the market.

2.2 LIQUIDITY

This characteristic of the industry has existed for almost a hundred years. The response from
the general public increased in quantitative terms, but this increase was still not sufficient
to provide liquidity. Due to low liquidity, 6 public access to the capital market remained
limited.

2.3 CUMBERSOME PROCEDURES

The processes involved in the operation of capital markets had been cumbersome. 7 There was
a lack of money on the application forms. Apart from these, there have been too many
intermediaries involved in the process. Brokers, sub-brokers, executives, managers and
collection centers had to play their part in the smooth functioning of the market. This added
both the cost and the time required to raise capital from the market. The New Issue
Market, also known as the Primary Market, was particularly confronted with this problem.
Some of these issues are still being addressed even today, even though the processes have
been reduced / simplified to a large extent.

5
Misra S K., Puri V.K – “Indian Economy”, Himalaya Publishing House, Mumbai, 23rd Revised Edition, 2005,
pp.734.
6
Rathnam P.V. and Lalitha P. – “Financial Management, Management Accounting and Financial Analysis”,
Kitab Mahal, Allahabad, Sixth Edition, 2005, pp.1157.
7
BhasinNiti – “Indian Financial System : Reforms, Policies and Prospects”, New Century publications, New
Delhi, 2004 pp.142.

6
 CHAPTER 3: PROBLEMS DURING POST-INDEPENDENCE PERIOD

In the first two decades after independence, there was only one new stock exchange in the
state, i.e. The Stock Exchange of Bangalore. Nevertheless, the number of companies listed in
the stock exchanges rose from 1125 in 1947 to more than 1500 in 1969. The capital of the
listed companies increased during the same period from Rs. 270 Crores to Rs. 1800 Crores.

3.1 PROBLEM OF MARKET SPECULATION

In India speculative influence8 had also begun along with other developments taking place.
With an increasing number of listed companies and a rise in capital formation, other
financial reasons have started to hit the market. Initially their volume of trading was
small, it gradually increased, and this particular downside is evident in Indian Capital
Market even today.

3.2 COST OF PUBLIC ISSUE

The growth of the capital market in general and of the primary market in particular was
affected by brokerage fee, subscription fee, prospectus printing and delivery were some
of the elements of cost9 involved in the public issue. Similarly, there was a time gap
between the declaration of the issue and the actual production of money. The firms were
also exposed to the risks involved. The massive amount of time and expense involved
made it a less feasible choice.

3.3 ISOLATION OF REGIONAL STOCK EXCHANGE

Stock brokers from one stock exchange have not been allowed to operate on their own
in any other stock exchange. Even the stock exchanges were not permitted to have branches
at different locations. Due to this issue, only a few stock exchanges, such as BSE, have
dominated trade in capital markets. This had excluded the other stock exchanges such as
stock exchanges are situated in distant locations.

3.4 HEAVY REGULATIONS

During the post-independence era, the Indian Companies Act was passed in 1956. The
Capital Issues (Control) Act also came into existence in 1947. The Securities Contract

8
Supra at 1.
9
Supra at 2.

7
(Regulation) Act was passed in 1956. Although the aims of these acts were great, some of
the provisions of these various acts were contradictory to each other.

CHAPTER 4: PROBLEMS FACED DURING 1969-1991

This stage of capital market growth was characterized by a number of characteristics. The
number of exchanges rose from just 8 in 1969 to 20 in 1991. The number of listed
companies also reached 6000 marks. The capital of listed companies have increased to Rs.
32000 Crores. This period saw a huge increase in the size of trade, trading hours, market
capitalisation, etc. There have also been few changes in people's trading patterns and
investment objectives during this phase. The numerous constraints on the functioning of the
capital market which have been identified in this process are listed below.

4.1 INVESTOR PROTECTION

Although some laws were enacted in the earlier period, there were no provisions to protect
investors.10 There was no separate mechanism for dealing with investor grievances. No
guidance has been given to different players in the market. That was one of the reasons why
there was still a poor response from households. Later, with the creation of SEBI, this issue
was solved. Now SEBI has issued guidelines for various participants of the capital market
and there is a separate mechanism for grievances redresses for investors.

4.2 ABSENCE OF INTERNATIONAL PRESENCE:

This phase saw improvement in a managed and constrained regime. The Indian market turned
into marching in advance with its inherent power. But the worldwide elements were now not
affecting valuation in India markets. Consequently, the Indian capital markets, to some extent
had been isolated from other global markets. afterward, with the advent of LPG policy,
Indian opened doors for foreign investors. This has each fantastic as well as egative results on
the Indian markets. However upto 1990’s the markets had been remoted, no longer stepping
into either manner that the worldwide markets had been growing.

Avadhani V.A.- “Marketing of Financial Services”- Himalaya Publishing House, Mumbai, 3rd Revised
10

Edition, 2006, pp.522.

8
4.3 FAILURE OF OPEN OUTCRY METHODS

Whilst the capital markets started functioning, few brokers used to return collectively at a
specific location and carry out trading sports. As the number of indexed businesses expanded
over six thousand and range of agents additionally expanded, it become difficult to perform
trading. Normally, some gestures and shouting became necessary to find the matching
alternate. For instance, if one would ought to purchase stocks of X. Ltd. in a precise quantity
at a particular price, he had to shout and locate some other person inclined to sell the shares
of the equal agency and then, he may want to negotiate the prices. Thisdevice had a hassle
that because of open outcry11 very few individuals confirmed theirinterest in buying and
selling. In addition, this type of market isn't appropriate for proper buyers asthey pull away
from open outcry. However in overdue 90’s the NSE came out with screen based totally
buying and selling gadget and on-line buying and selling also. This flow removed the
problem of open outcry and it also pressured different stock exchanges together with BSE to
begin screen based trading.

4.4 DELIVERY OF SHARES

Despite the fact that there was a remarkable increase within the variety of inventory
exchanges, listed agencies, buying and selling quantity and so forth, there was buying and
selling in securities with bodily switch. If one has to sell the securities, he individually had to
sign a certificate and hand it over to the broker, who, in flip could go to the stock exchanges
and region the order. In addition, the person that intended to buy the securities could acquire
share certificate for the number of shares bought. This particular ‘bodily transfer’ 12 required
pretty time. Due to this, when in reality the securities were traded the fees at that point have
been unique from those recorded for bodily delivery. This caused decrease volumes of
alternate inside the marketplace. Whilst trading in the market started out withdematerialized
shape, in the first decade of twenty first century, this hassle was removed.

4.5 DOMINANCE OF FINANCIAL INSTITUTION

For the duration of the pre-LPG length, few financial establishments like UTI, LIC and GIC
continued to dominate13 the Indian capital marketplace. Therefore the markets had been
substantially inspired by way of movements or operations of those few financial

11
Misra S K., Puri V.K – “Indian Economy”, Himalaya Publishing House, Mumbai, 23rd Revised Edition, 2005,
pp.734.
12
Id.
13
Supra at 3, pp.128.

9
establishments. This reduces the degree of competition and leads to attention of monetary
strength in few hands. This turned into now not a healthy aspect for the general growth of
capital markets in India. Some other function observed for the duration of this segment
changed into that most of those economic institutions have been public zone companies.
consequently, non-public sector had constrained success in equity mobilization at some point
of this segment.

4.6 SETTLEMENT PROCEDURES

At some point of initial section participants confronted a downside of bodily shipping of

securities. The settlement procedure14 worried bodily switch of securities inside the shape of
certificates from seller to his dealer after which to buyer’s dealer after which, in the long run
the consumer. This process made agreement of trades very inflexible and time ingesting.
There have been delays in transfer of securities as well as in payments. ‘Account length
agreement’ barely improved this wherein the trades have been settled in a cycle of fivedays.
However this gadget changed into present first of all simplest in OTC marketplace. Now, due
to technological development even faster settlement is feasible. however in the course of
thisparticular segment, the settlement technique was bulky.

4.7 SCARCITY OF FLOATING RESOURCES

The institutional investors all through this phase, owned majority of capital issued by means
of the agencies. Then again retail individual investors have been no longer much exposed to
wider investment. Majority of the corporations had issued very much less amount of capital
and the public protecting become also terrible. The holding of promoters and monetary
institutions changed into so big that public interest become very low. Consequently trading
couldn't take place in volumes.

14
Supra at 9, pp.575-76.

10
 CHAPTER 5: PROBLEMS POST 1991 PERIOD

Too many years have lapsed after India adopted the globalization policy as a weapon for
financial region reforms. From confined regime, slowly the economy moved towards open
economic system. as opposed to control and restrict, the phrases control and improvement
have been used often. Even legal terminologies were additionally comfortable to some
quantity. By means of the year 1991, the variety of listed agencies turned into over six
thousand which crossed 11,000 mark in the year 2011. The marketplace capitalization,each
day exchange volumes multiplied via leaps and boundaries over the last two many years.
Because thenon-public in addition to overseas funding become allowed in numerous sectors,
it provided ahuge improve to the capital markets in India. If we examine the index numbers
or shareexpenses of corporations, there has been big upswing after 1991, after inception
offinancial zone reforms. But while all this become going on, there had been a few
problemsand constraints being evolved in the financial market in preferred and capital
marketspecially. This a part of the chapter no longer simplest stresses on the problems
advanced in the previous years, however it additionally highlights some problems which were
advanced earlier,but they nevertheless persist within the Indian capital market.

5.1 INSIDER TRADING

Insider trading has come to be an inevitable exercise in capital market in India. Inside the
organizational shape, there are some folks who've get facts through distinctive feature of their
function within the company. If those people use this sensitive data fortheir own benefit, it
constitutes as an insider trading.15 SEBI has added a few guidelines towards insider
trading but still it is tough to absolutely dispose of this disadvantage. in the market
operators, it's far normally argued that stopping insider trading is as tough as controlling
black money.

5.2 PRICE RIGGING

This drawback is normally observed when companies come up with capital issue in the
primary market. The prices of shares are artificially16 pulled up before issue of securities
by companies. This artificial increase in price is done by some buyers and sellers among
themselves or among group which engages itself in such type of activities. This push-up
results into bull movement in the market.

15
Subramani B.- “An Overview of Capital/Financial Markets”, Shivaji Unversity, Kolhapur-2006, pp.15.
16
Supra at 3, pp. 125.

11
5.3 PROBLEM OF LIQUIDITY

Even though there are greater than ten thousand organizations listed in Indian stock markets,
the shares of simplest few companies are actively traded inside the market. Out of the
total turnover taking location inside the stock exchanges greater than 50 % of such trade is
focused in only 10 company stocks. Therefore buyers of other corporations find it hard to
carry out the alternate. This outcomes into intense hassle of liquidity 17 which prevails inside
the Indian marketplace. It can also be proved from the exchange volumes of ‘A’ and ‘B’
institution trades in BSE. whilst trades in ‘A’ group companies increase in volume, trades in
‘B’ institution corporations decline in volume. as a result most effective actively traded
shares have the liquidity. however common, in nearly ninety % of the groups there's no
liquidity. It without a doubt shows that Indian markets are laid low with negative skewed
liquidity.

5.4 LACK OF TRANSPARENCY

At some stage in this period, there was emergence of SEBI as a regulating authority
inIndian Capital marketplace. but in spite of its efforts to maintain transparency inside
the Indianmarkets, there has no longer been 100 % achievement in this respect. Many
brokers are concerned in unethical practices, violating rules imposed in the market. some of
the informationreferring to opening, last, excessive costs are suggested, however concerning
volumes of trade executed at the very best and lowest charges, the proper facts isn't
alwaysfurnished to the investors. The time taken to execute a transaction is also no longer
reported.this could cause fee distortions18 and undue benefit is taken by means of the
brokers. Dueto this proper traders discover it hard to have full and perfect know-how
approximately themarket, leaving loss of transparency inside the marketplace.

5.5 OVERCROWDED MARKETS

Because of the benefits of primary marketplace, the organizations are interested to raise the
capital through primary marketplace. but if variety of organizations queue up for elevating
the capital at a time,19 then the market receives crowd. Whilst the secondary marketplace
plays nicely, primary marketplace gets flooded with new troubles via the agencies. It
additionally has been experienced within the ultimate decade that time and again, in a single
week there are eight to ten new problems in the market at a time. that is risky to the
17
Id.
18
Supra at 3, pp. 127.
19
Supra at 9, pp.473-74.

12
organizations in addition to the investors. due to the fact that some of businesses give you the
difficulty at a time, the buyers get divided and the agency won't get whole subscription. From
investor’s point of view also it's miles hard for them to opt for a specific organisation. If at a
time there are a wide variety of issues ongoing, research, analysis and danger evaluation
becomes difficult investors may get stressed.

5.6 COST OF CAPITAL

Normally, debt form of capital is preferred by the companies for tax advantage. The equity
capital is cheaper over debt, but if opportunity cost or alternative use of capital is considered,
it is not the cheapest form of capital. In order to satisfy the investor, companies have to
pay dividend to the investors. Apart from this, the cost20 involved in the primary market like
prospectus printing and distribution, arrangement and collection of subscription,
commission and brokerage are also important cost considerations.

5.7 VOLATILITY IN MARKET

At some stage in the recent years, Indian markets have experienced high volatility. 21 over the
past 20 years, there has been huge increase in the popular indices like Sensex or Nifty. but
inside the in the meantime, there had been massive quantity of fluctuations. This volatility
has essential motives. firstly, the growing have an effect on of FIIs (Foreign Institution
Investors) in the marketplace which is authorized at some point of this section simplest. any
other thing which is associated with that is that delivery-based totally-trading is declining
even as the day-buying and selling activities are growing. shipping based totally trading is
typically a actual investment activity while day-buying and selling is speculative in nature.
As an increasing number of trades are within the shape of day-buying and selling, it makes
the market risky. within the latest beyond, the banks and financial establishments, foreign
institutional traders and home mutual finances have pumped in big funds inside the
market. but every time there are bad sentiments, all such finances are withdrawn which
make the markets even extra risky and unpredictable.

5.8 DISADVANTAGEOUS TO NEW COMPANIES

20
Supra at 9, pp.474.
21
Supra at 3, pp.128.

13
In primary markets, the funds can be raised in huge quantity by the companies. If the track
record of a company is sound and the company has a good reputation in the market, it can
further raise the funds by way of follow on public offer or rights issue. But a company which
is totally new, which is newly registered and not much popular, finds it difficult to raise the
funds. In this case, company formed recently, may have good prospects, but still investors
prefer the established company. This fact underlines the reality that even though primary
market is for new issues of capital, still the new companies have lot of problems 22 while
raising the funds from the market.

5.9 SHAM COMPANIES

In Indian capital market, there had been the studies that the capital is raised by means ofthe
promoters and administrators. however after tapping the capital from marketplace, those
promotersand administrators disappear23 from the market. those groups also are called
asVanishing agencies. This effects into lack of faith most of the investors as they have gotto
go through general loss in case of such funding in vanishing organizations. lately, SEBIhas
initiated action towards promoters and directors of such ‘Fly-via night time
companies.’because of this flow with the aid of SEBI, the threat of presence of such
companies within the marketplace hasbeen reduced.

5.9 HOSTILE BIDS

The primary marketplace is a boon to the financial system as it presents capital to the
organizations. but there are some unethical practices24 being advanced within the primary
market also. for example, a large unlisted company receives merged with small listed
organisation via open offer. Here massive enterprise which isn't listed, purchases stocks of a
small indexed organization in a big way and such mergers are dangerous as the identity of the
company may additionally get modified.

5.10 BAD MOUTH

22
Supra at 9, pp.471-72.
23
Institute of Chartered Accountants of India- “Management Accounting and Financial Analysis”,ICAI, 2006,
pp. 4.27.
24
Id, pp. 4.28.

14
Most of the time marketplace is driven by using rumours 25proximating a selected company or
standard marketplace. Rumours may get floated inside the marketplace via websites,
information organizations, and monetary newspapers or maybe by means of phrase of mouth.
It may show up that management of the company, with the assist of the brokers spread the
rumours in the marketplace. This affects the investor’s notion approximately valuation of
securities. The agents or maybe promoters of a agency can also get undue gain out of such
rumours. it's miles predicted that the traders have to preserve themselves away from the
rumours, they must desist from appearing on rumours.

5.11 Engaging in malpractices

Numerous individuals in the marketplace viz. existing groups, new agencies, marketers,
agents and different intermediaries are every now and then involved in unethical practices 26 in
diverse ways. Mergers and acquisitions through malpractices, entering into insider trading,
rigging up of rate before a new trouble, spreading incorrect information or rumours,
promoting fake stocks are some unethical practices winning inside the market. In spite of
SEBI’s continuous take a look at in opposition to such practices, overall manipulate on such
sports is far flung.To a degree, SEBI has been successful in controlling unethical practices,
but nonetheless plenty desires to be achieved to manipulate these practices.

5.12 Oligopolistic nature

Earlier, during the initial phases of development of capital market, BSE was the dominant
stock exchange. Apart from this now NSE has taken over BSE, but collectively these two
stock exchanges account for more than 90% of trades in stock exchanges. Membership of
these exchanges is also restricted.27 The traders/brokers also speculate in shares without
processing them. This hampers the general belief that capital market is a perfectly
competitive market.

5.13 Price Speculations

An excessive hypothesis in the inventory exchanges has now end up a properly

settled/mounted reality. Proportion costs within the marketplace are decided with the aid of
the speculative28 forces and those prices have very low references of basics or performance of
economic system, enterprise or agency. The sellers, traders, insiders, fund managers and
25
Rathnam P.V. and Lalitha P- “Financial Management, Management Accounting and Financial Analysis”,
Kitab Mahal, Allahabad, Sixth Edition, 2005, pp.1157.
26
Subramani B- “An Overview of Capital/ Financial Markets”, Shivaji University, Kolhapur, 2006, pp.16
27
Supra at 1, pp.23.41.

15
many others. try to speculate the costs of share. As this has nothing to do with the overall
performance of agency/enterprise, an actual and studied investor attempts to be aloof from
the trading. This reduces the presence of genuine buyers and thereby increases the speculative
motive most of the other market participants also.

5.14 Underdeveloped Debt market

The shares issued inside the primary marketplace are later on traded in the secondary markets
i.e. stock exchanges. but a part of primary market-place additionally entails debenture
financing. The debentures are issued inside the primary market. However in stock exchanges
there is no room for buying and selling in debentures. The secondary market in commercial
debentures remained underdeveloped over the years. even though equity marketplace has
advanced swiftly all through the ultimate two a long time, the debentures marketplace has
remained underdeveloped.29 This results into less enthusiasm of long term buyers within the
market.

5.15 FAILURE OF DELIVERY

Due to excessive speculative business beyond manageable resources, the market has
experienced payment crises30 frequently. Monitoring and controlling these speculative
transactions has become difficult even for the regulators. Due to this, settlements have been
delayed many times. Such bad deliveries are crippling the market. One of the reasons for this
may be lack of professionalism among brokers and intermediaries. These bad deliveries limit
liquidity considerably.

28
Desai Vasant – “The Indian Financial System and Development”, Himalaya Publishing House, Mumbai, 1st
Edition, 2005, pp. 323-24.
29
Supra at 9, pp.479.
30
Supra at 1, pp.23.39.

16
 CHAPTER 6: SCAMS IN INDIAN SECURITIES MARKETS’

6.1 First Scam: Share mania scam

Despite the fact that officially, we had a beginning of inventory exchange in 1875, the
stocktrading and comparable sports by using agents had been achieved by using the agents
informallyconsidering 1830’s onwards, even though with a completely small quantity. these
transactions have been inthe character of trading and loans. The ‘share Mania’ in the course
of 1860-sixty five is seemed as firstscam 31 in Indian markets. because of American Civil war
in 1860, deliver of cotton fromthe USA to Europe become definitely stopped. This made
huge upward thrust in export and earnings ofIndian cotton enterprise as after US, India
became the main alternative for cotton left forEurope marketplace. This resulted into
pumping in massive capital in cotton enterprise and allied enterprise gadgets. considering the
big scope for the enterprise within the complete globe, traders in Mumbai have become wild
with spirit of speculation. businesses were started foreach conceivable purpose banks,
economic corporates, cotton clearing, urgent andspinning, inn organizations, land
reclamation, brick making businesses and so forth.during this period capital raised from the
market changed into nearly Rs. 30 Crores, butpremium raised became Rs. 38 Crores.

The quantity of premium collected via theseorganizations changed into more than paid up
capital of companies.Asiatic Banking employer and financial institution of Bombay raised
large capital at top class. A number of the banks and financial institutions recovered a top
class of 50% to 100% ofthe paid up value with out being tested through the basics. in
addition, the shares of other agencies like again Bay Reclamation, Port Canning, Mazgaon
Land and many others. had atop class of 10 instances its paid up value. The Asiatic bank
share of Rs. 2 hundred was quotedRs.460 and financial institution of Bombay proportion
valued Rs.500 was stretched to Rs. 2850.all and sundry began experiencing the growth and
involved to get benefited from it. Forthis, the transactions have been taking place even at
better expenses.This madness approximately ‘scrips’ , ‘allotments’, ‘stocks’, crippled into the
market. Thesewords became buzzwords within the streets of Mumbai as all of us was
enthusiasticapproximately those transactions. however later on, the yankee Civil warfare got
here to an end. In July1865, after knowing that the capacity which changed into speculated

31
BSE – “History of Stock Market in India”, Mumbai, 1990

17
approximately various businesses won’t come authentic, all of us rushed to sell the assets
bought at top class.

The disaster began due to a big promoting strain without buying enthusiasm. as a result,
bargains had been tough to settle. A percentage of financial institution of Bombay which had
reachedRs.2850 could be offered at simply Rs. 87. lower back Bay Reclamation which had
generated almost value of Rs 50,000 came to be offered at Rs. 1750 only. The bubble turned
into burstand every-body once more started fearing about ‘shares’, ‘scrips’ and so on. all of it
happened at some point of1861 to 1865 due to massive desolation. A big range of groups had
to close down their operations in Mumbai.

6.2 Harshad Mehta Scam32

This scam passed off due to use of illegal bank cash for percentage transactions. The
preliminary public offers (IPOs) had been weapons utilized by public zone businesses to
generate the capital from the marketplace. the amount raised, changed into required to be
deposited one at a time through the bankers and to take delivery of to the companies. but in
some cases, the cash was not at once deposited with the agencies. alternatively, the equal cash
turned into briefly used for investment in shares for a brief period of time. This cash turned
into used to have extra capital advantage of quick term nature. Artificially, liquidity and call
for stocks changed into created with the use of this cash. This resulted in surprising and
artificial Bull Run in the stock trade all through 1991-92. From April 1991 to June 1991, the
SENSEX rose to 1361 from 1193(greater than 16% in 2 half months.) with the aid of
December 1991, it reached 1915 factors and similarly to 2302 in January 1992 to 4467 on
April 1992. This became an remarkable boom in SENSEX. An amount of Rs. 3650 Crore
changed into pumped in into the marketplace with the aid of this illegal way. After April ‘92,
when the quantity changed into to be taken back via those agents, the marketplace crashed
and inside a week SENSEX came down by extra than 10 %. some of the notified agents and
businesses involved on this scams aside from Harshad Mehta, have been- Fairgrowth
economic offerings Ltd., Hiten Dalal, bank of Karad, Bhupen Dalal, T.D. Ruia, A D
Narottam and so on. In all, this scam become a planned misuse of public cash through
securities transactions with an intention to get speculative go back. The lacunas which
allowed this rip-off have been non transparency and non- accountability of the banking
device, absence of governance in capital market, lack of expertise of traders, information
32
“Report of the Joint Parliamentary Committee on Harshad Mehta Scam” – Parliament of India, New Delhi,
1992-93

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inefficiency and many others. enormous use of bank receipts changed into made by using the
intermediaries involved inside the scam for ahead transactions.

6.3 Vanishing Company Scam

Vanishing businesses scam got here to be recognised in 1990’s, but even in 1978-79 and
1984-85, there have been IPO Booms inside the Indian markets. number one markets had
been flooded with public issues. about seven-hundred organizations entered within the
marketplace during 1984 to 1986. the quantity of public trouble ranged among Rs. 60 lakhs to
Rs. 100 lakhs. However lamentably, a number of the promoters and agents noticed in it, an
opportunity to raise budget. Then a section got here when 80 % of the newly registered
companies disappeared after producing capital. these businesses are usually called ‘Vanishing
Companies’33 which generate capital after which disappear. for the duration of 1993 to 1997,
a complete of 4797 businesses gathered Rs.43 339 Crores from the market with the aid of
way of IPO. but the vanishing companies rip-off turned into so disastrous that when 1997,
within the subsequent six years simplest 263 groups entered the marketplace and could
generate most effective Rs. 9209 Crore of capital. This drastic hunch within the primary
market became typically because of rate rigging. This scam specially got here out simply
when the financial system started to circulate from ‘managed’ to ‘open’ regime. The abolition
of Controller of Capital issues, created an opening. With-out proper schooling, face pricing
policy for IPOs turned into brought in. all these shocks came in a brief period of time. The
dubious promoters, speculative brokers and manipulative control have been chargeable for
collection of crores of rupees from public after which absolutely vanished.

6.4 Ketan Parekh Scam (2000-01)34

Ketan Parekh rip-off had resemblance with two in advance big scams of the Indian stock
market viz. ‘percentage mania’ of 1860-65 and ‘Harshad Mehta rip-off’ of 1992. Initially, it
had a few relevance with emergence of I.T. organizations in Indian Markets. In a while,
communique organizations and some amusement corporations also participated within the
Bull Run (Teji) in the market. In February 2000, Sensex crossed 6000 factors. but this was
artificially created upward motion. In January 2001, BSE Sensex changed into hovering
around 4000 points. After presentation of the finances within the Parliament, Sensex reached
at 4271 and further at 4321 on the subsequent day. Throughout this phase, besides the

33
“690 Plantation Firms May Have to Wind-up”, The Business Standard, 19th March, 2002.
34
“Report of the Joint Parliamentary Committee on Ketan Parekh Scam” – Parliament of India, New Delhi,
2001-02.

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volatility within the movement of the index, prices of ‘a few’ groups registered violent
fluctuations. The SEBI instituted an research against such fluctuations. This began with six
broking entities and became eventually increased to cover the entire gamut of rip-off.

It changed into Ketan Parekh who commenced to speak approximately destiny of I.T.
agencies in India. His projections approximately future and anticipated profitability of those
corporations had driven upward expenses of such businesses. Ketan Parekh, then, emerged as
a key participant in the market as his projections were quoted with the aid of many agents.
Ketan Parekh obtained massive sums of cash from the banks in addition to a few corporate
entities. at some stage in the equal time, but, Sensex came falling. This become enough for
the investigators to accept as true with that there is a nexus among the banks, company
entities and Ketan Parekh. It was no longer handiest an ‘man or woman Case’ however
‘continual and pervasive misappropriation of public finances and concerning the issues of
governance’ which ends up in a ‘scam’. Then SEBI similarly investigated into this
manipulation and 23 entities had been discovered to have association with Ketan Parekh.

SEBI has subsequently found that Ketan Parekh changed into operating through a large
number of entities with a nexus among corporate homes, banks, financial institutions and
even FIIs. This helped him to arrange waft of finances from banks and corporates into the
stock markets. in order to keep away from the detection of manipulation, Ketan Parekh had
accomplishedthe transactions in the call of different companies, not concentrating on any
person orfew agencies. He used the network of FIIs and also systematically offered his
holdingsto e-book earnings and similarly to take position there from to once more growth the
prices ofstocks in addition. He had identified the corporations with distinctly low floating
shares andobtained widespread holdings through various friends. He also used quantity of
tocks exchanges and exclusive settlement cycles to shift positions from change toexchange.
against the sanctioned limit of Rs. 205 Crores, there was an great stability ofRs. 888 Crores in
opposition to Ketan Parekh group towards Madhavpura MercantileCooperative bank. As
against a restriction of Rs. 92 Crores, the equal financial institution had an
amounttremendous to the volume of Rs.225 Crores from Mukesh Babu institution.
Chargeproblem in Calcutta inventory alternate in 2001 and crash of Madhavpura
MercantileCooperative financial institution (MMCB) were the effects of the Ketan Parekh
scam.

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SEBI in addition found out that the amount first-rate from Ketan Parekh entities/institution
tothe corporate houses turned into to the song of Rs. 1273 Crores on the cease of April,
2001.Dues of the Ketan Parekh institution to Madhavpura Mercantile Cooperative financial
institution wereround R. 888 Crores and to international believe bank were round Rs. 266
Crores. afterward,MMCB definitely crashed while GTB were given merged. The small
investors also needed to sufferhuge losses because the artificial Bull Run manipulated by
means of Ketan Parekh led to crash inthe stock marketplace when sensex plunged from 6000
points in February 2000 to 3700points in April 2001. concurrently, cash invested in mutual
budget, UTI andmonetary institutions turned into additionally lost to a extremely good
quantity as those institutions also had aconsiderable funding in the stock marketplace.

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 CONCLUSION

A study of capital markets significantly involves a study of problems which emerged in

various phases of development of capital market in India. This chapter has presented these
problems in a phased manner. Apart from this, an attempt has also been made to analyze the
frauds which have taken place during last one and half century. The problems experienced in
the Indian capital markets as well as the scams were significant as they proved to be
hindrances in the smooth functioning of capital markets. Due to these hindrances a genuine
investor has remained aloof from the market while more and more speculators and
institutional investors continued to dominate the capital markets in India. This has also
resulted into increased volatility in the Indian capital market. When the financial sector
reforms were initiated, it was also emphasized to have a strong regulator for the Indian capital
market. This task of regulation is being shouldered by SEBI to a great extent along with other
regulators like RBI, Department of Company Affairs etc.

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 BIBLIOGRAPHY

RESEARCH ARTICLES

 Jadhav, N. (2011)., “Development of Securities Market – The Indian Experience”,

Annual conference Association for Financial Professionals (AFP), (pp. 1-21).
 K.S. Chalapati Rao, M. M. (1999).,”Some Aspects of The Indian Stock Market in The
Post-Liberalisation Period”, Journal of Indian School of Political Economy , 11 (4).
 Sabarinathan, G. (2010)., “SEBI’s Regulation of the Indian Securities Market: A
Critical Review of the Major Developments”, Vikalpa , 35 (4), 13-26.
 SHALLU. (2014)., “Indian Capital Market and Impact of SEBI", Tactful
Management Research Journal , 2 (4)
 Goswami, C. (2003)., “How Does Internet Stock Trading in India Work?” Vikalpa, 28
(1), 91-98.

WEBSITE REFERRED

 http://www.investopedia.com/terms/s/security.asp.
 http://finance.zacks.com/differences-between-securities-stocks-5654.html.
 http://www.sebi.gov.in/sebiweb/home/list/4/32/0/0/Handbook-of-Statistics.
 http://businesstoday.intoday.in/story/creating-wealth-in-2015-stock-markets-
dreamrun/1/214102.html

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