Scams
Content
The Regulator
The Indian economy was liberalized in 1991. In order to achieve the full potential of liberalization and enable the Indian stock market to attract huge investments from foreign institutional investors (FIIs), it was necessary to introduce a series of stock market reforms. SEBI's efforts to boost investments in the capital markets faced a severe setback in 1992 when Mehta's illegal activities led to a stock market scam. Mehta had managed to obtain huge funds from top banks and financial institutions in India, including State Bank of India, Stanchart, National Housing Bank, Citibank and ANZ Grindlays, to manipulate stock prices, which rose significantly. Between September 1991 and April 1992, the BSE index went up by 143%. However, when the prices crashed, several small investors lost their hard-earned money. The amount involved in this crisis was approximately Rs.54 bn. SEBI's inefficiency in regulating the markets was brought to light for the first time. A journalist commented, "Harshad Mehta in 1992 had caught the SEBI napping"...
The Setback
In the mid-1990s, another incident happened, which had a negative impact on SEBI's reputation. In 1995, Pawan Sachdeva, the Managing Director and a major shareholder in a shoe manufacturing company - MS Shoes was alleged to have rigged the prices of his company's shares. MS Shoes launched a public issue of Rs 4.28 bn in February 1995 at Rs 199 per share. Simultaneously, the company had also planned to have a rights issue totaling Rs 2.71 bn. The company went for an advertisement campaign just before the public issue, highlighting that the share offered to the public at Rs. 199 was at a steep discount as compared to the existing market price of Rs 505 on the BSE...
The Reformer
In spite of the setbacks faced by SEBI, it continued its efforts to introduce more capital market reforms in India, making the markets an attractive investment destination for FIIs. According to SEBI, a significant increase was witnessed in the volume and amount of stock transactions done on BSE and NSE. In the fiscal 1993-94, the average amount of total transactions per day was valued at Rs 8 bn, which had increased ten fold to Rs. 80 bn in 1998-99...
The Crash
SEBI's role as a regulator of Indian capital markets was once again questioned on March 02, 2001, when the BSE index crashed by 176 points. This was the result of the large position taken by a stockbroker - Ketan Parikh (KP) in ten stocks, popularly known as K10. The companies in which KP held high equity stakes included Amitabh Bachchan Corporation Limited, Mukta Arts, Tips, Pritish Nandy Communications, HFCL, Global Telesystems, Zee Telefilms, Crest Communications and PentaMedia Graphics. He had huge exposures in these stocks, which required a lot of money. Reportedly, KP borrowed from various companies and banks for this purpose...
The Reasons
Analysts felt that the major reason for SEBI's failure to protect investors against scams was lack of skilled human capital. For instance, they quoted the example of the KP scam in which KP had taken huge positions in ten stocks. In spite of SEBI possessing this information, it could not gauge KP's vested interests in acquiring these huge positions and his illegitimate plans...
Restoring Investor Confidence
In a poll conducted in early 2002 by Equity Master, an equity research company in India, over 90% of the respondents believed that the regulatory environment was not sufficient to protect the rights of retail investors in India. Bajpai realized that SEBI had to change this belief of retail investors. He said, "Restoring the confidence of retail investors in the market will be an important task of SEBI." Bajpai decided to achieve this objective by focusing on investor education, corporate governance, transparency and enforcement of regulations...
SCAMS
1.Byrraju Ramalinga Raju. The biggest corporate scam in Indiahas come from one of the most respected businessmen. Satyam founder Byrraju Ramalinga Raju resigned as its chairman after admitting to cooking up the account books. His efforts to fill the "fictitious assets with real ones" through Maytas acquisition failed, after which he decided to confess the crime. With a fraud involving about Rs 8,000 crore (Rs 80 billion), Satyam is heading for more trouble in the days ahead. On Wednesday, India's fourth largest IT company lost a staggering Rs 10,000 crore (Rs 100 billion) in market capitalisation as investors reacted sharply and dumped shares, pushing down the scrip by 78 per cent to Rs 39.95 on the Bombay Stock Exchange.. The NYSE-listed firm could also face regulator action in the US. "I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju said in a letter to SEBI and the Board of Directors, while giving details of how the profits were inflated over the years and his failed attempts to "fill the fictitious assets with real ones." Raju said the company's balance sheet as of September 30 carries "inflated (non-existent) cash and bank balances of Rs 5,040 crore (Rs 50.40 billion) as against Rs 5,361 crore (Rs 53.61 billion) reflected in the books." 2.Harshad Mehta. He was known as the 'Big Bull'. However, his bull run did not last too long. He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a premium across many segments. Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to stockbrokers between April 1991 to May 1992. Harshad Mehta worked with the New India Assurance Company before he moved ahead to try his luck in the stock markets. Mehta soon mastered the tricks of the trade and set out on dangerous game plan. Mehta has siphoned off huge sums of money from several banks and millions of investors were conned in the process. His scam was exposed, the markets crashed and he was arrested and banned for life from trading in the stock markets. He was later charged with 72 criminal offences.
A Special Court also sentenced Sudhir Mehta, Harshad Mehta's brother, and six others, including four bank officials, to rigorous imprisonment (RI) ranging from 1 year to 10 years on the charge of duping State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the securities scam that rocked the financial markets in 1992. He died in 2002 with many litigations still pending against him. 3.Ketan Parekh. Ketan Parekh followed Harshad Mehta's footsteps to swindle crores of rupees from banks. A chartered accountant he used to run a family business, NH Securities. Ketan however had bigger plans in mind. He targetted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names. His dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips). Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan alongwith his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank. According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer. 4.C R Bhansali. The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion). He first launched the finance company CRB Capital Markets, followed by CRB Mutual Fund and CRB Share Custodial Services. He ruled like a financial wizard 1992 to 1996 collecting money from the public through fixed deposits, bonds and debentures. The money was transferred to companies that never existed. CRB Capital Markets raised a whopping Rs 176 crore in three years. In 1994 CRB Mutual Funds raised Rs 230 crore and Rs 180 crore came via fixed deposits. Bhansali also succeeded to to raise about Rs 900 crore from the markets. However, his good days did not last long, after 1995 he received several jolts. Bhansali tried borrowing more money from the market. This led to a financial crisis. It became difficult for Bhansali to sustain himself. The Reserve Bank of India (RBI) refused banking status to CRB and he was in the dock. SBI was one of the banks to be hit by his huge defaults. 5.Cobbler scam. Sohin Daya, son of a former Sheriff of Mumbai, was the main accused in the multi-crore shoes scam. Daya of Dawood Shoes, Rafique Tejani of Metro Shoes, and Kishore Signapurkar of Milano Shoes were arrested for creating several leather co-operative societies which did not exist. They availed loans of crores of rupees on behalf of these fictitious societies. The scam was exposed in
1995. The accused created a fictitious cooperative society of cobblers to take advantage of government loans through various schemes. Officials of the Maharashtra State Finance Corporation, Citibank, Bank of Oman, Dena Bank, Development Credit Bank, Saraswat Co-operative Bank, and Bank of Bahrain and Kuwait were also charge sheeted. 6.Dinesh Dalmia. Dinesh Dalmia was the managing director of DSQ Software Limited when the Central Bureau of Investigation arrested him for his involvement in a stocks scam of Rs 595 crore (Rs 5.95 billion). Dalmia's group included DSQ Holdings Ltd, Hulda Properties and Trades Ltd, and Powerflow Holding and Trading Pvt Ltd. Dalmia resorted to illegal ways to make money through the partly paid shares of DSQ Software Ltd, in the name of New Vision Investment Ltd, UK, and unallotted shares in the name of Dinesh Dalmia Technology Trust. Investigation showed that 1.30 crore (13 million) shares of DSQ Software Ltd had not been listed on any stock exchange. 7.Abdul Karim Telgi. He paid for his own education at Sarvodaya Vidyalaya by selling fruits and vegetables on trains. He is today famous (or infamous) for being he man behind one of . The Telgi case is another big scam that rocked India. The fake stamp racket involving Abdul Karim Telgi was exposed in 2000. The loss is estimated to be Rs 171.33 crore (Rs 1.71 billion), it was initially pegged to be Rs 30,000 crore (Rs 300 bilion), which was later clarified by the CBI as an exaggerated figure. In 1994, Abdul Karim Telgi acquired a stamp paper license from the Indian government and began printing fake stamp papers. Telgi bribed to get into the government security press in Nashik and bought special machines to print fake stamp papers. Telgi's networked spread across 13 states involving 176 offices, 1,000 employees and 123 bank accounts in 18 cities. 8.Virendra Rastogi. Virendra Rastogi chief executive of RBG Resources was charged with for deceiving banks worldwide of an estimated $1 billion. 9.The UTI Scam. Former UTI chairman P S Subramanyam and two executive directors -- M M Kapur and S K Basu -and a stockbroker Rakesh G Mehta, were arrested in connection with the 'UTI scam'.
UTI had purchased 40,000 shares of Cyberspace between September 25, 2000, and September 25, 2000 for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were no buyers for the scrip. The market price was around Rs 830. The CBI said it was the conspiracy of these four people which resulted in the loss of Rs 32 crore (Rs 320 million). Subramanyam, Kapur and Basu had changed their stance on an investment advice of the equities research cell of UTI. The promoter of Cyberspace Infosys, Arvind Johari was arrested in connection with the case. The officals were paid Rs 50 lakh (Rs 5 million) by Cyberspace to promote its shares. He also received Rs 1.18 crore (Rs 11.8 million) from the company through a circuitous route for possible rigging the Cyberspace counter.
He was also involved in the duty-drawback scam to the tune of Rs 43 crore (Rs 430 milion) in India. The CBI said that five companies, whose directors were the four Rastogi brothers -- Subash, Virender, Ravinde and Narinder -- exported bicycle parts during 1995-96 to Russiaand Hong Kongby heavily over invoicing the value of goods for claiming excess duty draw back from customs.
10.Uday Goyal. Uday Goyal, managing director of Arrow Global Agrotech Ltd, was yet another fraudster who cheated investors promising high returns through plantations. Goyal conned investors to the tune of over Rs 210 crore (Rs 2..10 billion). He was finally arrested. The plantation scam was exposed when two investors filed a complaint when they failed to get the promised returns. Over 43,300 persons had fallen into Goyal's trap. Several criminal complaints were filed with the Economic Offences Wing. The company's directors and their relatives had misused the investors' money to buy properties. The High Court asked the company to sell its properties and repay its investors.
The Indian economy was liberalized in 1991. In order to achieve the full potential of liberalization and enable the Indian stock market to attract huge investments from foreign institutional investors (FIIs), it was necessary to introduce a series of stock market reforms. SEBI's efforts to boost investments in the capital markets faced a severe setback in 1992 when Mehta's illegal activities led to a stock market scam. Mehta had managed to obtain huge funds from top banks and financial institutions in India, including State Bank of India, Stanchart, National Housing Bank, Citibank and ANZ Grindlays, to manipulate stock prices, which rose significantly. Between September 1991 and April 1992, the BSE index went up by 143%. However, when the prices crashed, several small investors lost their hard-earned money. The amount involved in this crisis was approximately Rs.54 bn. SEBI's inefficiency in regulating the markets was brought to light for the first time. A journalist commented, "Harshad Mehta in 1992 had caught the SEBI napping"...
The Setback
In the mid-1990s, another incident happened, which had a negative impact on SEBI's reputation. In 1995, Pawan Sachdeva, the Managing Director and a major shareholder in a shoe manufacturing company - MS Shoes was alleged to have rigged the prices of his company's shares. MS Shoes launched a public issue of Rs 4.28 bn in February 1995 at Rs 199 per share. Simultaneously, the company had also planned to have a rights issue totaling Rs 2.71 bn. The company went for an advertisement campaign just before the public issue, highlighting that the share offered to the public at Rs. 199 was at a steep discount as compared to the existing market price of Rs 505 on the BSE...
The Reformer
In spite of the setbacks faced by SEBI, it continued its efforts to introduce more capital market reforms in India, making the markets an attractive investment destination for FIIs. According to SEBI, a significant increase was witnessed in the volume and amount of stock transactions done on BSE and NSE. In the fiscal 1993-94, the average amount of total transactions per day was valued at Rs 8 bn, which had increased ten fold to Rs. 80 bn in 1998-99...
The Crash
SEBI's role as a regulator of Indian capital markets was once again questioned on March 02, 2001, when the BSE index crashed by 176 points. This was the result of the large position taken by a stockbroker - Ketan Parikh (KP) in ten stocks, popularly known as K10. The companies in which KP held high equity stakes included Amitabh Bachchan Corporation Limited, Mukta Arts, Tips, Pritish Nandy Communications, HFCL, Global Telesystems, Zee Telefilms, Crest Communications and PentaMedia Graphics. He had huge exposures in these stocks, which required a lot of money. Reportedly, KP borrowed from various companies and banks for this purpose...
The Reasons
Analysts felt that the major reason for SEBI's failure to protect investors against scams was lack of skilled human capital. For instance, they quoted the example of the KP scam in which KP had taken huge positions in ten stocks. In spite of SEBI possessing this information, it could not gauge KP's vested interests in acquiring these huge positions and his illegitimate plans...
Restoring Investor Confidence
In a poll conducted in early 2002 by Equity Master, an equity research company in India, over 90% of the respondents believed that the regulatory environment was not sufficient to protect the rights of retail investors in India. Bajpai realized that SEBI had to change this belief of retail investors. He said, "Restoring the confidence of retail investors in the market will be an important task of SEBI." Bajpai decided to achieve this objective by focusing on investor education, corporate governance, transparency and enforcement of regulations...
SCAMS
1.Byrraju Ramalinga Raju. The biggest corporate scam in Indiahas come from one of the most respected businessmen. Satyam founder Byrraju Ramalinga Raju resigned as its chairman after admitting to cooking up the account books. His efforts to fill the "fictitious assets with real ones" through Maytas acquisition failed, after which he decided to confess the crime. With a fraud involving about Rs 8,000 crore (Rs 80 billion), Satyam is heading for more trouble in the days ahead. On Wednesday, India's fourth largest IT company lost a staggering Rs 10,000 crore (Rs 100 billion) in market capitalisation as investors reacted sharply and dumped shares, pushing down the scrip by 78 per cent to Rs 39.95 on the Bombay Stock Exchange.. The NYSE-listed firm could also face regulator action in the US. "I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju said in a letter to SEBI and the Board of Directors, while giving details of how the profits were inflated over the years and his failed attempts to "fill the fictitious assets with real ones." Raju said the company's balance sheet as of September 30 carries "inflated (non-existent) cash and bank balances of Rs 5,040 crore (Rs 50.40 billion) as against Rs 5,361 crore (Rs 53.61 billion) reflected in the books." 2.Harshad Mehta. He was known as the 'Big Bull'. However, his bull run did not last too long. He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a premium across many segments. Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to stockbrokers between April 1991 to May 1992. Harshad Mehta worked with the New India Assurance Company before he moved ahead to try his luck in the stock markets. Mehta soon mastered the tricks of the trade and set out on dangerous game plan. Mehta has siphoned off huge sums of money from several banks and millions of investors were conned in the process. His scam was exposed, the markets crashed and he was arrested and banned for life from trading in the stock markets. He was later charged with 72 criminal offences.
A Special Court also sentenced Sudhir Mehta, Harshad Mehta's brother, and six others, including four bank officials, to rigorous imprisonment (RI) ranging from 1 year to 10 years on the charge of duping State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the securities scam that rocked the financial markets in 1992. He died in 2002 with many litigations still pending against him. 3.Ketan Parekh. Ketan Parekh followed Harshad Mehta's footsteps to swindle crores of rupees from banks. A chartered accountant he used to run a family business, NH Securities. Ketan however had bigger plans in mind. He targetted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names. His dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips). Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan alongwith his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank. According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer. 4.C R Bhansali. The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs 12 billion). He first launched the finance company CRB Capital Markets, followed by CRB Mutual Fund and CRB Share Custodial Services. He ruled like a financial wizard 1992 to 1996 collecting money from the public through fixed deposits, bonds and debentures. The money was transferred to companies that never existed. CRB Capital Markets raised a whopping Rs 176 crore in three years. In 1994 CRB Mutual Funds raised Rs 230 crore and Rs 180 crore came via fixed deposits. Bhansali also succeeded to to raise about Rs 900 crore from the markets. However, his good days did not last long, after 1995 he received several jolts. Bhansali tried borrowing more money from the market. This led to a financial crisis. It became difficult for Bhansali to sustain himself. The Reserve Bank of India (RBI) refused banking status to CRB and he was in the dock. SBI was one of the banks to be hit by his huge defaults. 5.Cobbler scam. Sohin Daya, son of a former Sheriff of Mumbai, was the main accused in the multi-crore shoes scam. Daya of Dawood Shoes, Rafique Tejani of Metro Shoes, and Kishore Signapurkar of Milano Shoes were arrested for creating several leather co-operative societies which did not exist. They availed loans of crores of rupees on behalf of these fictitious societies. The scam was exposed in
1995. The accused created a fictitious cooperative society of cobblers to take advantage of government loans through various schemes. Officials of the Maharashtra State Finance Corporation, Citibank, Bank of Oman, Dena Bank, Development Credit Bank, Saraswat Co-operative Bank, and Bank of Bahrain and Kuwait were also charge sheeted. 6.Dinesh Dalmia. Dinesh Dalmia was the managing director of DSQ Software Limited when the Central Bureau of Investigation arrested him for his involvement in a stocks scam of Rs 595 crore (Rs 5.95 billion). Dalmia's group included DSQ Holdings Ltd, Hulda Properties and Trades Ltd, and Powerflow Holding and Trading Pvt Ltd. Dalmia resorted to illegal ways to make money through the partly paid shares of DSQ Software Ltd, in the name of New Vision Investment Ltd, UK, and unallotted shares in the name of Dinesh Dalmia Technology Trust. Investigation showed that 1.30 crore (13 million) shares of DSQ Software Ltd had not been listed on any stock exchange. 7.Abdul Karim Telgi. He paid for his own education at Sarvodaya Vidyalaya by selling fruits and vegetables on trains. He is today famous (or infamous) for being he man behind one of . The Telgi case is another big scam that rocked India. The fake stamp racket involving Abdul Karim Telgi was exposed in 2000. The loss is estimated to be Rs 171.33 crore (Rs 1.71 billion), it was initially pegged to be Rs 30,000 crore (Rs 300 bilion), which was later clarified by the CBI as an exaggerated figure. In 1994, Abdul Karim Telgi acquired a stamp paper license from the Indian government and began printing fake stamp papers. Telgi bribed to get into the government security press in Nashik and bought special machines to print fake stamp papers. Telgi's networked spread across 13 states involving 176 offices, 1,000 employees and 123 bank accounts in 18 cities. 8.Virendra Rastogi. Virendra Rastogi chief executive of RBG Resources was charged with for deceiving banks worldwide of an estimated $1 billion. 9.The UTI Scam. Former UTI chairman P S Subramanyam and two executive directors -- M M Kapur and S K Basu -and a stockbroker Rakesh G Mehta, were arrested in connection with the 'UTI scam'.
UTI had purchased 40,000 shares of Cyberspace between September 25, 2000, and September 25, 2000 for about Rs 3.33 crore (Rs 33.3 million) from Rakesh Mehta when there were no buyers for the scrip. The market price was around Rs 830. The CBI said it was the conspiracy of these four people which resulted in the loss of Rs 32 crore (Rs 320 million). Subramanyam, Kapur and Basu had changed their stance on an investment advice of the equities research cell of UTI. The promoter of Cyberspace Infosys, Arvind Johari was arrested in connection with the case. The officals were paid Rs 50 lakh (Rs 5 million) by Cyberspace to promote its shares. He also received Rs 1.18 crore (Rs 11.8 million) from the company through a circuitous route for possible rigging the Cyberspace counter.
He was also involved in the duty-drawback scam to the tune of Rs 43 crore (Rs 430 milion) in India. The CBI said that five companies, whose directors were the four Rastogi brothers -- Subash, Virender, Ravinde and Narinder -- exported bicycle parts during 1995-96 to Russiaand Hong Kongby heavily over invoicing the value of goods for claiming excess duty draw back from customs.
10.Uday Goyal. Uday Goyal, managing director of Arrow Global Agrotech Ltd, was yet another fraudster who cheated investors promising high returns through plantations. Goyal conned investors to the tune of over Rs 210 crore (Rs 2..10 billion). He was finally arrested. The plantation scam was exposed when two investors filed a complaint when they failed to get the promised returns. Over 43,300 persons had fallen into Goyal's trap. Several criminal complaints were filed with the Economic Offences Wing. The company's directors and their relatives had misused the investors' money to buy properties. The High Court asked the company to sell its properties and repay its investors.
