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Vicky black book stock market scam

Bachelors of commerce (Accountancy and finance) (University of Mumbai)

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UNIVERSITY OF MUMBAI

T.Y.B.M.S.
(VI SEMESTER)
A PROJECT ON
“STOCK MARKET SCAM”

ACADEMIC YEAR
2021-2022

BY
VICKY ANIL VISHWALKARMA
ROLL NO: - F-25

PROJECT GUIDE
PROF. MINAL PAREKH

NIRANJANA MAJITHIA COLLEGE OF COMMERCE

KANDIVALI (E) MUMBAI

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DECLARATION
I Mr. Vicky Vishwakarma, Student of Niranjana Majithia
College of Commerce studying in T.Y. Bms (Management
Studies) Semester VI hereby declare that I have completed
the project on “STOCK MARKET SCAM” in the academic year
2021-2022. The information submitted here is true and
original to the best of my knowledge.

_____________________ _____________________

Date of Submission Signature of Student

(Mr. Vicky vishwakarma)

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CERTIFICATE

This is to certify that Mr. Vicky Vishwakarma of T.Y. BMS

(Management Studies) of Niranjana Majithia College of Commerce
has successfully completed the project on “STOCK MARKET SCAM”
for academic year 2021-2022. The information submitted is true and
original to the best of my knowledge.

___________________ _____________________

Signature of Principal Guide Signature of Project Guide

(Prof. Minal Parekh)

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AKNOWLEDGEMENT

I would like to thank Niranjana Majithia College of Commerce & the

faculty members of BMS for giving me an opportunity to prepare a
project on “STOCK MARKET SCAM”. It has truly been an invaluable
learning experience. Completing a tasking is tasking is never one
man’s efforts, it is often the result of invaluable contribution of a
number of individuals in direct or indirect way of shaping success and
achieving it.

I would like to thank principal of the college Dr. Reshma Vaja and Co-
Ordinator Dr. Sakshi Khatri for granting permission for this project. I
would like to extend my sincere gratitude and appreciation to Prof.
Minal Parekh who guide me in study of this project. It has indeed
been a great learning experience and working under him during the
course of the project.

I would like to thank the librarian of the college for helping me in

finding out the relevant material for my project. I would also to
appreciate all my colleagues and family members who gave me
support and backing and always came forward whenever a helping
hand was needed. I would like to express my gratitude to all those
who gave me the possibility to complete this thesis.

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EXECUTIVE SUMMARY

The findings are based on a comprehensive survey, cutting across

several industrial sectors, both public and private. 'Strikes, Closures

and Unrest' emerged as the number one risk in the survey report. In

the year 2012, it did not surface among the top five risks in the

'Overall Risk Rating'. The risk of 'Political and Governance Instability'

has significantly changed position from number eight last year to

number two this year. 'Information and Cyber Insecurity', 'Fire' and

'Crime' have been rated at number three, five and six respectively.

They have maintained their position among the top six risks from the

India Risk Survey 2012 onwards. The risk of 'Corruption, Bribery and

Corporate Frauds' has been acknowledged as risk number four. In

2012, India was ranked 94 among 176 countries on the Corruption

Perception Index and the Financial Stability Report of the Reserve

Bank of India revealed that losses of INR 4,448 crores (approx. USD

8.2 billion) to Indian banks from financial frauds in 2012 were the

highest ever.

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INDEX
1. CHAPTER
INTRODUCTION
HISTORY OF STOCK EXCHANGES
HISTORY OF INDIAN STOCK EXCHANGES
MEANING OF STOCK EXCHANGE
DEFINITION OF STOCK EXCHANGE
CLASSIFICATION OF STOCK MARKETS AND SECURITIES

2. CHAPTER
DATA ANAYLSIS AND INTERPRETATION: -
Case study
a) Harshad Mehta’s Securities scam
b) Ketan Parekh Scam – The crash that shook the nation
c) Roopal Ben Panchal – Benami Demat accounts scam
d) Satyam Computers – An accounting scam
e) CRB Scam – Scam of Dummy Companies
f) Dinesh Dalmia – Fake share scam
g) Dinesh Singhania scam
h) Vanishing Companies Scandal
SEBI’s role after scam
Some Fraudulent Methods Used in the Stock Markets

3. CHAPTER
CORPORATE GOVERNANCE
a) Principals of corporate governance
b) Corporate governance in India
c) Mandated Corporate Governance Guidelines

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Conclusion

INTRODUCTION
Over the few years, there has been a rapid change in
Indian securities market, especially in the secondary
market. Advanced technology and online based
transactions have modernized the stock exchanges.
Computerized online trading of securities, netting up of
clearing houses and trade guarantee funds were made
compulsory for stock exchanges. Stock exchange were
permitted to expand their trading to locations outside
their jurisdiction through computer terminals Trading is
much more transparent and quicker than in the past
stock market refers to a market place where investors
can buy and sell securities primary market deals with
only new issue of shares, debentures and bonds,
whereas secondary market provides a place for
securities which have already been issued in an initial or
public offering. After the securities are listed in primary
market, they are traded in the secondary market by the
investors. Secondary market consists different parties
mainly stock exchanges, companies issuing securities,
investors, brokers and the regulators. The stock
exchanges along with a host of intermediaries provides
the necessary platform for trading in secondary market
and for clearing and settlement.
The term stock market can be used to denote individual
stock exchanges at various places or one market
comprising all individual stock exchanges in the country.
The stock market or equities market, occupies a

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disproportionately large space in the discussions in the

print and electronic media. The industry, business, rich
and middle classes tend to be highly preoccupied with
this market, and regard it as the barometer of the health
of the economy. They frequently stress the essentiality
of the growth and spread of what has come to be called
the equity culture or equity cult or risk capital for
industrial growth. The chapter, therefore, begins with
the discussion of the theory of equity culture, that is,
the case for against the over-emphasis on the role of
equities market.

History of stock exchanges:

Stock market evolved along with capitalism. The history
of stock exchange can be traced back to 12th century in
France, where the first brokers were believed to have
originated, trading in debt and government securities.
Unofficial share markets existed across Europe through
the 1600s, where brokers would meet outside or in
coffee house to make trades. Amsterdam Stock
Exchange was created in 1602. It is considered as the
oldest stock exchange in the world. The Dutch started
joint stock companies, which allowed shareholders to
invest in business ventures and get a share of their profit
or losses. In 1602s, the Dutch East India Company issued
the first share on the Amsterdam Stock Exchange. This
was the first to issued stocks and bonds. It was later
renamed as the Amsterdam Bourse and was the first to
begin trading in securities. Since the 17th century, stock

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exchange was constantly growing in importance and

complexity. During the second half of the seventeenth
century there existed a considerable volume of
securities, both commercial and gilt deed, and the need
to facilitate their transfer was becoming necessary. In
1688 the trading of stocks began on a stock exchange in
London. Towards the end of seventeenth century, an
organized market existed in England for the purchase
and sale of stocks and shares. Brokers were licensed by
the Lord Mayor of the City of London, and carried a
silver medal as evidence thereof. These brokers were
entitled to trade in any commodity or commodities
within the city. After the financial crisis of 1696, the
government attempted to regulate the market and in
1697 passed an “Act” to restrain their numbers from
unethical practices. By the early 1700s, there were
operational stock exchanges in France, England and
America followed suit in the part of the century The New
York Stock Exchange was formed in 1792. The Bombay
Stock Exchange (BSE) is the oldest stock exchange in Asia
which commenced its operation in the year 1875. In the
19th century, exchanges were opened to forward
contracts on commodities. These commodity exchanges
later started offering future contracts on other products,
such as interest rates and shares, as well as options
contracts. They are now generally known as futures
exchanges.

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History of Indian Stock Exchanges:

Indian stock markets have a history date back to the
eighteenth century until the end of the nineteenth
century, securities trading was unorganized and the
main trading centers Bombay and Calcutta. Of the two
Bombay was the chief trading center wherein Bank
shares were the major trading stock. Business on
corporate stocks and shares in cotton presses started in
Bombay in the 1930’s. during the American Civil War
(1860-61) the trading activities in Bombay were
nourished resulting in a boom in share prices. Trading at
that time limited to a dozen brokers and their trading
place was under a banyan tree in front of the Town Hall
in Bombay.

The rapid development of commercial enterprise in the

1850s brought more brokers into the business. In 1860,
the number of brokers increased to 60. Due to the hectic
and swift development of share trading business by
1874, brokers used to gather in the Dalal Street, Bombay
for transacting their business. Consequently, these
stockbrokers organized an informal association in 1875
called “The Native Share and Stock Brokers” Association
Bombay. The capital market was not well organized and
developed during the British rule because the British
government was not interested in the economic growth
of the country. As a result, many foreign companies

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depended on London capital market for funds rather

than on the Indian capital market.

The year1880 witnessed the emergence of many cotton

mill industries in several parts of the country especially
in Maharashtra and Gujarat the concept of regional
stock exchanges gained a momentum from the year
1894 with the establishment of Ahmedabad share and
stock brokers association Thus, the first national stock
exchange to come into begin was the Ahmedabad stock
exchange CASE there was a sharp spurt in share price of
jute industries following a boom in to stock and coal in
1880s and 1990s. in the year 1908, Calcutta Stock
Exchange (CSE) was formed as the second one in the
string of regional stock exchanges. Madras witnessed a
boom in business and as a result, the Madras Stock
Exchange was established in1920 with 100 brokers.
However, the depression close on the heels of
independence led to the closure of many exchanges in
the country, Lahore Stock Exchange was closed down
after the partition of India, and later on it merged with
the Delhi Stock Exchange. Bangalore Stock Exchange
Limited was registered in 1957 but got government
recognition only by 1963. Most of the exchanges
remained in a deplorable state till 1957 since they
applied for recognition under the securities contracts
(Regulations) Act, 1956. In the post- independence
period also, the size of the capital market remained
small the strictly regulation by Controller of Capital

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Issues (CCI) discouraged many companies form going

public. During the early sixties, there were only very few
recognized regional stock exchanges in India. The
number remained the same for the ensuring two
decades and they were that of Ahmedabad, Calcutta,
Madras, Delhi, Hyderabad, Bangalore and Indore for
almost forty-five years.
The 1980s are considered as turning point in the history
of India Stock Exchanges, during which many regional
stock exchanges were incorporated.
Government polices during the 1980s played a decisive
role in the development of Indian stock markets. The
1990s was the most important decade in the history of
India capital market. Liberalization, Globalization and
repeal of the Capital Issues Control Act of 1947 were the
important developments in the capital market. The
decade was characterized by a new industrial policy,
emergence of SEBI as regulator for capital market,
advent of foreign institutional investors, euro-issues,
free pricing new trading practices, new stock exchanges,
entry of new players such as private sector mutual funds
and private sector banks and primary market boom. The
stock market in India has been a long journey. The stock
market in India is now well organized, fairly integrated,
more global and modernized. Advances in computer and
communications technology are shattering geographical
boundaries and enlarging investor class. The India stock
markets are now getting integrates with global markets

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the stock market in India now consists of Stock

Exchanges.

Active stock exchanges (June 2011), including Over the

counter exchange of India (OTCE) for providing trading
access to small and emerging companies. The two
prominent Exchange buses of the Indian stock market
are the National Stock Exchange if India (NSE) and the
Bombay stock exchange (BSE). Many of the regional
stock exchange have the membership of these two stock
exchanges.

Meaning of Stock Exchange:

The word Stock means a fraction of the capital of a

company and the word exchange means place for buying
and selling something. The market or place where
securities are exchanged or traded is called stock
exchange or stock market. A stock exchange thus
provides a trading platform for the sale and purchase of
securities. Stock exchange is a structured market place
for the proper conduct of trading activities in share,
stocks and other securities issued by companies and
government. Stock exchange provides marketability and
price continuity for shares and helps affair evaluation of
securities in terms of their intrinsic worth stock
exchange are formal organizations approved and
regulated by the regulatory authorities of a country

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Stock exchanges deals in securities like shares,

debentures or bonds issued by the companies or
corporations in the private as well as public sector and
bonds issued by the central and state government,
municipal corporations etc. in addition, the stock
exchange sometimes buys and sells certificates
representing commodities of trade Stock exchanges also
facilitate the issued and redemption of securities and
other financial instruments. Members are only
permitted to trade those securities, which are generally
entered in the official list of the exchange. The right to
trade securities or make market on an exchange floor is
granted only to an individual or firm on becoming a
member of the exchange. An organized and recognized
stock market ensure liquidity and marketability to
securities, encourage investments in securities and
support corporate growth.

Definition of Stock Exchange:

“The Securities Contract (Regulations) Act, 1956

defines stock exchanges an association, organization or
body of individuals, whether incorporated or not
established for the purpose of assisting, regulating and
controlling the business of buying, selling and dealing in
securities”

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Classification of stock markets and securities:

A stock is a certificate representing partial ownership
in a company. Stock is issued by the companies that need
long-term funds. There are two types explain the types of
market segments in the stock market:
1. Primary market or new issue market segment in
market (NIM)
2. Secondary market (SM).
While the NIM supplies fresh or the stock markets,
additional capital to the companies, the securities
already issued or floated on securities traded and the
NIM are traded on the SM. The SM does not play and
direct role in marking valuation techniques of funds
available to the corporate; its role in this respect ids only
indirect, that is, stock it helps to encourage investors to
invest in industrial securities by making them liquid, that
is, by providing facilities for continuous, regular and
ready buying and selling of those securities. NIM deals in
new securities, whereas SM deals in already existing or
old securities which have been listed on it. The investors
acquire or buy securities directly from the companies on
the NIM, while they trade securities so acquired among
themselves in the SM.
Business concerns raise capital through two major types
of securities from the stock market. They are:

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a) Ordinary shares or variable dividend securities or

common stock, and
b) Ordinary shares and preference share are also known
as equities.

Unlike bank deposits and units, these securities are the

major primary securities in the financial markets of any
country. They differ in their investment characteristics
and as such satisfy different preference of various
investors and enjoy differing degrees of popularity.

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DATA ANALYSIS
AND
INTERPRETATION

 Harshad Mehta’s Securities Scam

Year of scam: 1992

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Amount of scam: Rs.5,000 crores (approx.)

Period of the scam: 1991-1992

Brief description of the scam:

During 1991, the opening up of the Indian economy

allowed private investments in the country, thus paving
the way of prosperity. Anticipating the good tidings for
the private sector, the stock market Sensex rose from
around 1000 in February 1991 to a peak of 4500 in
March 1992 just before the scam came to light. This also
required increase in the scale of finance required by
operators in the stock market. Bombay Stock Exchange
also imposed heavy margins on settlement trading
which added to the fund’s requirement.

The nationalized banks too were under the same

pressure to improve their profitability. The proposed
increase in capital adequacy requirement, as mandated

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by the Narasimha Committee report further pressurized

the banks.

Portfolio management Scheme (PMS) had just come

into existence in the Indian economy then. The scheme
was designed to deploy large amounts of surplus cash
available with several public sector undertakings (PSUs).
A large part of this surplus cash was generated from
borrowings in the international markets largely by PSUS,
to strengthen the country’s unstable foreign exchange
reserves. An intense competition developed among the
banks for these funds. To compete for PMS funds from
the PUSs as well as to enhance their own profitability,
banks were forced to look for higher returns. This was
happening at the same time when there was a growing
need for funds in the stock market to finance stock
market operations.

Harshad Mehta, a broker at the Bombay Stock

Exchange understood the gap and tried to fill it. Though
initially may have been just to earn a quick buck, but
over period of time, greed took over and his operations
turned out to be one of the biggest scams of Indian
stock market which engulfed some of the top politicians
in its trap.

Banks in India were required to maintain 38.5% of

their demand and time liabilities (DTL) in government

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securities and certain approved securities which are

collectively known as Statutory Liquidity Ratio (SLR)
securities. Banks often enter into a Ready Forward (RF)
deal whereby it effectively borrows the securities from a
bank which had surplus SLR securities with an
agreement to give it back at a premium once the need
DTL requirement is over. To bring the deal through, a
broker is required. The broker’s only function is to bring
the buyer and seller together and help them negotiate
the terms, for which he earns a commission from both
the parties. He neither handles the cash nor the
securities. However, during the scam, the RF deal
happened between two banks, without they knowing
each other, but with complete faith on the broker as an
intermediary. All the transactions were mediated
through him. Delivery and payments started getting
touted through the broker instead of being made
directly between the transacting banks. Over a period of
time the broker, soon found a way of persuading the
leading bank to dispense with security for the loan or to
accept worthless security. The brokers instead of merely
bringing buyers and sellers together started taking
positions in the market. The broker provided contract
notes for this purpose with fictitious counterparties, but
arranged for the actual settlement to take place with the
correct counterparty. On the other hand, a broker
intermediated settlement allowed him to lay his hands
on the cheque as it went from one bank to another
through him. Banks extensively used Bank Receipts
(BRs). BRs acted as a receipt for the money received by

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the selling bank with a promise to deliver the securities

to buyer. There was no physical delivery of securities
required when BRs could simply be cancelled and
returned when the deals were reversed. Further, BRs
were also conveniently used by banks which may short
sell securities, that is, it sells securities it does not have.
This would be done if the bank thinks that the prices of
these securities would decrease. When the securities do
fall in value, bank buys them at lower prices and
discharges the BR by delivering the securities sold. Short
selling of securities was though a common practice in
the bond markets, an outright sale using a BR which is
not backed by securities violated the RBI guidelines.
Bank which often simply wanted an unsecured loan
issued a “fake” BR (BR without any securities) giving an
impression of an RF deal to the lender bank. Harshad
Mehta perfected the art of using fake BRs to obtain
unsecured loans from the banking system. He persuaded
some small and little-known banks- the Bank of Karad
(BOK) and the Metropolitan Cooperative Bank (MCB)- to
issues BRs as and when required. These BRs could then
be used to do RF deals with other banks. The cheques in
favors of BOK were, of course, credited into his accounts.
In effect, several large banks made huge unsecured
loans to the BOK/MCB which in turn made the money
available to the brokers.
Besides taking money under the pretext of a ‘fake’ BR,
securities which were pledged /sold were also
represented only by allotment letters rather than

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certificates on security paper. However, reduction in

interest rates, window dressing of financial statement by
banks created lot of distortion in the valuation of the
securities involved. This thus brought the scam to light.
The immediate impact of the scam was a sharp fall in
the share prices. The index fell from 4500 to 2500
representing a loss of Rs. 100,000 crores in market
capitalization. Since the accused were active broker in
the stock market, the number of the shares which had
passed through their hands in the last one year was
colossal. All these shares became “tainted” shares, and
overnight they became worthless pieces of paper as
they could not be delivered in the market. Genuine
investors who had bought these share shares well before
the scam came to light and even got them registered in
their names found themselves being robbed by the
government.

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

R E A D Y F O R WA R D (RF)

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 History of Harshad Mehta:

Harshad Mehta was born in 29th July in Guajarati Jain

family. Moved from small town Raipur to find his future
in Mumbai. First job as dispatch clerk in new India
assurance. Worked with stock brokers and soon
managed to get a broker’s card.

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Soon started his own ventures grown more research and

assets management company ltd. He became a dream
seller and celebrity of the financial world. People started
to address him as the “Big Bull of Market “. On April
23,1992 journalist Suchita Dalal in a column in times of
India exposed the dubious ways of Harshad Mehta. He
was later charged with 72 criminal offences and 600 civil
actions were filed against him. He died in 2002 due to a
massive attack in a jail in thane, with much litigation still
pending against him.

 Overview of the scam:

This scam can be categorized as a capital market scam in

which it is done by manipulating the facts in order to
attain enormous profits. There were 4 different aspects
of tis scam: Diversion of funds

 Diversion of funds from the banking system to

brokers for financing their operations in the stock
market.
 Intra- day trading the modus operand mainly
included investing heavily in certain shares at the
start of the day which led to a sharp increase in the

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price of the tock and then chasing in at the end of

the day to reap huge benefits.
 Following two aspects shall be explained in detail
later. Use of Ready Forward (RF) to maintain SLR
Fake Bank receipts (BR).
Taking advantages of the loopholes in the banking
system, Harshad and his associates triggered a
securities scam diverting funds to the tune of Rs.4000
Cr. From the banks to stockbrokers from April 1991 to
May 1992. He caused the steep rise in the stock
market index in the year 1992 by bidding at a
premium for many shares.

Some of the stock which were highly invested in the

by Harshad Mehta were:

 ACC
 Apollo Tyers
 Reliance
 Tata Iron and Steel Co. (TISCO)
 BPL
 Sterlite
 Videocon

 Lapse which led to the scam:

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Banking rules by passed by bankers for personal profit:

The broker through whom the payment passed on its
way from one bank to another found a way of crediting
the money into his account though the account payee
cheque was drawn in favor of a bank. This effectively
transformed and RF into a loan to a broker rather than
to a bank. In the settlement process of RF deals,
deliveries of securities and payments are made through
the broker. The buyer and seller did not even know
whom they have traded with, both being known only to
the broker. Some banks were persuaded to part with
cheques without actually receiving securities in return or
against a fake BR. The officials concerned were bribed
and/or negligent. The banks senior/top management
might have been fully aware of this and turned a blind
eye to it to benefit from higher returns the brokers could
offer by diverting the funds to the stock market. Banks
were not allowed to short sell government securities
according to the RBI guidelines. But this this was
completely ignored by banks in greed of making quick
profits from debt markets.

Inefficient working of the RBI: In case of government

securities, the RBI had issued a directive that BRs should
not be used. The reason was that, for these securities,
the RBI, through its Public Debt Office (PDO), acts as the
custodian. Physical securities are never issued, and the
holding of these securities ids represented by book
entries at the PDO. Had the PDO functioned efficiently

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and carried out its book-keeping without delays, RBI

would have been justified in not permitting use of BRs
for government securities. Unfortunately, the PDO was
very inefficient and old fashioned in its functioning.
This was a very serious matter because, like a cheque, an
SGL from can also bounce if the seller does not have
sufficient holding of securities in his SGL account.

Widespread corruption in the Indian government: to

make a scam of such stature, a part of the money was
spent as bribes and kickbacks to the various accomplices
in the banks and possibly in the bureaucracy and in the
political system. It is rumored that a part of the money
was sent out of India through the hawala racket,
converted into dollars/pounds, and brought back as
India Development Bonds. These bonds are redeemable
in dollars/ponds and the holders cannot be asked to
disclose the source of their holdings. Thus, this money is
beyond the reach of any of the investigating agencies.
Harshad Mehta openly claimed that he had bribed P.V.
Narasimha Rao, then prime minister, with a paltry Rs. 1
crore.

 After math of the scam:

Just five years after the 1992 scam, Harshad Mehta was
on a comeback trail. He set up a whole network of

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entities called Damayanti group to conduct his market

operations; the group openly operated out of his
Nariman point office which was technically under the
custodian. SEBI watched in silence and allowed him to
ramp up the shares of BPL, Videocon and Sterlite
Industries in style. Investigations began only when the
bubble had burst. Without direct access to bank funds or
even a legitimate trading membership, this was bound
to happen. In June 1998, he had created
www.harshad.com and would have cashed in on the
dotcom bubble. On 31st December, 2001 Harshad Mehta
died of a massive heart attack in a suburban Mumbai jail
after he was arrested for a second time. The
unceremonious end to a story that had fired the dreams
of every middle-class Indian was tragic. The man actually
lived his dreams of fabulous riches, a sprawling
10,400sq.ft. house with a putting green and a fleer of
expensive car and prestige only for a very short while.
Over the next nine years, all these who fawningly called
him the Amitabh Bachchan or Einstein of the markets
faded away from his life. And, in the end, he seemed just
a tired scamster, still trying to regain lost gory with
variations of the same old scam. But, without the mega
bucks of banks and institutions to finance him, there was
no way he could recreate the magic. Ironically, prime
minister P.V. Narasimha Rao, who Harshad claimed to
have bribed, remained unaffected as did every other
politician who colluded with the scamsters. Each of the
associated politician bounced back, for instance Mr. P.
Chidambaram had resigned over owning shares of Fair

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Growth Financial Services but came back to power

without any one remembering about his relations to Fair
growth. One more example is B Shankaranand, the then
powerful petroleum minister got away without paying a
price.

 Ketan Parekh Scam - The Crash that Shook the

Nation
Year of scam: 2001
Amount of scam: Rs. 120 crores (approx.)
Period of the scam: 1999 – 2001

Brief description of the scam:

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Ketan Parekh had single handily caused one of the

biggest scams in the history of Indian financial markets.
He was charged with defrauding Bank of India (Bol) of
about $30 million among other charges. For two years,
market men followed his every action because all he
touched turned to gold. KP was a chartered accountant
by profession and used to manage a family business, NH
Securities started by his father. He was known as the
'Bombay Bull' and had connections with movie stars,
politicians and even leading international entrepreneurs
like Australian media tycoon Kerry Packer, who
partnered KP in KPV Ventures, a $250 million venture
capital fund that invested mainly in new economy
companies. Over the years, KP built a network of
companies, mainly in Mumbai, involved in stock market
operations. The rise of ICE (Information,
Communications, and Entertainment) stocks all over the
world in early 1999 led to a rise of the Indian stock
market as well. The dotcom boom contributed to the
Bull Run led by an upward trend in the NASDAQ. The
companies in which KP held stakes included Amitabh
Bachchan Corporation Limited (ABCL), Mukta Arts, Tips
and Pritesh Nandi Communications. He also had stakes
in HFCL, Global Tele systems (Global), Zee Telefilms,
Crest Communications, and Penta Media Graphics. KP
selected these companies for investment with help from
his research team, which listed high growth companies
with a small capital base. These stocks eventually came
to be known as the 'K-10' stocks. The shares were held
through KP's company, Triumph International. The

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buoyant stock market from January to July 1999 helped

the K-10 stocks increase in value substantially. HFCL
soared by 57% while Global increased by 200%. As a
result, brokers and fund managers started investing
heavily in K-10 stocks. Mutual funds like Alliance Capital,
ICICI Prudential Fund and UTI also invested in K-10
stocks, and saw their net asset value soaring. By January
2000, K-10 stocks regularly featured in the top five
traded stocks in the exchanges. As such huge amounts of
money were being pumped into the markets, it became
tough for KP to control the movements of the scrips.
Also, it was reported that the volumes got too big for
him to handle.

According to market sources, though KP was a successful

broker, he did not have the money to buy large stakes.
Analysts claimed that KP borrowed from various
companies and banks for this purpose. He bought shares
when they were trading at low prices and saw the prices
go up in the bull market while continuously trading.
When the price was high enough, he pledged the shares
with banks as collateral for funds. He also borrowed
from companies like HFCL. This could not have been
possible out without the involvement of banks. A small
Ahmedabad-based bank, Madhavpura Mercantile
Cooperative Bank (MMCB) was KP's main ally in the
scam. In December 2000, when KP faced liquidity
problems in settlements he used MMCB in two different
ways. First was the pay order route, wherein KP issued

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cheques drawn on Bol to MMCB, against which MMCB

issued pay orders. The pay orders were discounted at
Bol. The second route was borrowing from a MMCB
branch at Mandvi (Mumbai), where different companies
owned by KP and his associates had accounts. KP used
around 16 such accounts, either directly or through
other broker firms, to obtain funds. KP's modus operandi
of raising funds by offering shares as collateral security
to the banks worked well as long as the share prices
were rising, but it reversed when the markets started
crashing in March 2000. Be it investment firms, mostly
controlled by promoters of listed companies, overseas
corporate bodies or cooperative banks, all were ready to
hand the money to Parekh, which he used to rig up stock
prices by making his interest apparent. But the vicious
cycle of fraud did not end with price rigging. The inflated
stocks had to be dumped onto someone in the end, for
which Parekh used financial institutions like the UTI. A
bear cartel started disrupting Parekh's party by
hammering prices of the K-10 stocks, precipitating a
payment crisis in Kolkata. In December 2000, the
NASDAQ crashed again and technology stocks took the
hardest beating ever in the US. Led by doubts regarding
the future of technology stocks, prices started falling
across the globe and mutual funds and brokers began
selling them. KP began to have liquidity problems and
lost a lot of money during that period.

 Lapses which led to the scam:

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> Laxed attitude of SEBI in monitoring the stock market

activities: The market regulator was blamed for being lax
in handling the issue of unusual price movement and
tremendous volatility in certain shares over an 18-month
period prior to February 2001. Analysts also opined that
SEBI's market intelligence was very poor. Media reports
commented that KP's arrest was also not due to the
SEBI's timely action but the result of complaints by Bol.
When prices moved up, SEBI watched these as 'normal'
market movements. It ignored the large positions built
up by some operators. It asked no questions at all. It had
to investigate these things, more as a probing agency
than as a regulatory body coordinating with other
agencies. An equally crucial question was raised by
media regarding SEBI's ignorance of the existence of an
unofficial market at the CSE. Had the regulatory
authorities been alert, the huge erosion in values could
have been avoided or at least controlled. > Existence of
long trading cycles and Badla system: long trading cycles
in the stock which was then 7 days gave more chances to
manipulation than the now trading cycle of 2 days. Also,
the investors got the money/ shares only on the 7th day
of doing such a transaction. Badla trading involved
buying stocks with borrowed money with the stock
exchange acting as an intermediary at an interest rate
determined by the demand for the underlying stock and
a maturity not greater than 70 days. Badla system
though was a hedging technique was largely used as a
tool for speculation. Thus, cash and forward transactions
were performed in the same market where there existed

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both investors as well as speculators. > Over exposure to

the stock market by the Banks; MMCB was the main
bank through which Ketan Parekh conveniently operated
for financing the stock market. It was alleged that MMCB
issued funds to KP without proper collateral security and
even crossed its capital market exposure limits. As per
an RBI inspection report, MMCB’s loans to the stock
market were around Rs 10 billion of which over Rs 8
billion were lent to KP and his firms.

> Management of the Bank hands in gloves with the

broker for figging of their own shares: Apart from direct
borrowings by KP-owned finance companies through 16
different accounts in MMCB, a few brokers were also
believed to have taken loans on his behalf. It was alleged
that Madhur Capital, a company run by Vinit Parikh, the
son of MMCB Chairman Ramesh Parikh, had acted on
behalf of KP to borrow funds. It was also alleged that
another bank which went bust during the scam, Global
Trust Bank (GTB) issued loans to KP and its exposure to
the capital markets was above the prescribed limits.
According to media reports, KP and his associates held
around 4-10% stake in the bank. There were also
allegations that KP, with the support of GTB's former
CMD Ramesh Gelli, rigged the prices of the GTB scrip for

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a favourable swap ratio before its proposed merger with

UTI Bank.

 After math of the scam:

The stock bubble created by Ketan Parekh, which went
bust in 2001-01 and took down two banks- Global Trust
Bank Madhavpura Mercantile Co-operation Bank, was
kept alive for more than 10 years, due to its political
connections. Ironically, Dr Mehta, the then SEBI
chairman who allowed this to happen under his watch,
was allowed to remain in office for seven years.
Interestingly, Satyam Computers of Ramalinga Raju who
confessed to a fraud in 2008 was a part of the K-10
scrips which were ramped up by Ketan Parekh. A second
JPC was appointed to probe the Ketan Parekh scam with
Pramod Mahajan, as the strategist for the BJP-led
government, ensuring that it was packed with
sympathisers of the accused. Most of the culprits of
these scam got away. Every corporate / promoter who
colluded with Ketan Parekh (such as Himachal Futuristic
Communications, Zee, Padmini Technologies, Shonkh
Technologies) has got away scot-free. Some, like Manoj
Tirodkar, the 45- year-old chairman & managing director
of GTL Group have even snagged massive loans from
banks to go nearly bust. Himachal Futuristic walked
away by paying Rs.10 crore under a consent deal with
SEBI in 2010. Ironically, the 15th action taken report of
the finance ministry mentions that charges against the
company were dropped after adjudication on 11 March

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2009. The Zee group was similarly discharged by SEBI’s

whole-time members, immediately after C.B. Bhave took
over as chairman. The biggest beneficiaries of the scams
have been lawyers and law firms. Unlike journalists,
activists, investigators and regulators, they are not
required to take a moral stand on who they represent.
Consequently, the best brains in India are always and
invariably working at getting scamsters and crooks off
the hook for enormous fees. These fees are linked to
conferences and court appearances and not the
completion of cases or their success. The worst victims
are innocent, or just weak, bank officials who couldn’t
say no. They are slowly destroyed in decades of court
appearances and the absence of decent legal
representation. Ironically, the office of the custodian
which claims that it has filed 11,000 cases (disputed by
all others involved in the trial) has continued to file fresh
ones. After a decade, the custodian finally woke up in
February 2012 to ask Ketan Parekh (and 19 entities
connected with him) the source of over Rs72 crore that
he repaid in instalments to Bank of India and
Madhavpura Bank under a court order. On 31st March
2012, a media report said that it was set to contest the
discharge by a magistrate’s court of two key cronies of
Ketan Parekh—one Mr. Dharmesh Doshi, who worked
with him, and another a stockbroker Mukesh Babu.
Ketan Parekh’s skill was in his trading prowess and ability
to sense the market pulse. He has been allegedly
operating through fronts and has been dealing with
many brokers on a profit-sharing basis. He is also said to

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have actively engaged many foreign funds to invest in

the scrips, which he operates through fronts. Rumours
also suggest that many top managers of foreign funds
have been structuring their portfolios with the active
‘guidance’ of the banned operator, Parekh is also known
to structure complex deals through tax havens to
manipulate the stock price. People who know him
closely say he has managed to pull on thus far because
of his strong connections with financiers in Kolkata.

 Roopal Ben Panchal - Benami Demat accounts

scam
Year of scam: 2005
Amount of scam: Rs. 45 crores (approx.)
Period of the scam: 2003 -2005

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Brief description of the scam:

The IPO scam came to light in 2005 when the private

'Yes Bank' launched its initial public offering. It involved
manipulation of the primary market by financiers and
market players by using fictitious or benami Demat
accounts. During early 2006, when SEBI started scanning
an entire spectrum of IPOs launched over 2003, 2004
and 2005. It was found that Ms. Roopal ben Panchal, a
resident of Ahmedabad had allegedly opened several
fake Demat accounts and subsequently raised finances
on the shares allotted to her through Bharat Overseas
Bank branches. She was funded to the tune of Rs 30
crore to invest in the two IPOs. While investigating the
Yes Bank scam, SEBI found that certain entities had
illegally obtained IPO shares reserved for retail
applicants through thousands of benami Demat
accounts. They then transferred the shares to financiers,
who sold on the first day of listing, making windfall gains
from the price difference between the IPO price and the
listing price. Ms. Roopal ben Panchal and associates
made a neat profit of Rs 32 crore by creating benami
demat accounts and cornering shares meant for retail
investors in the initial public offers of Yes Bank Ltd and
IDFC. The modus operandi in the IPO scam was unique.
Ms Panchal advertised in local dailies in Ahmedabad that
people could get themselves photographed and get free
copies of their pictures. She then used copies of these
photos to open thousands of fictitious accounts with

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banks and depository participants. More than 6,000

fictitious accounts were opened in this fashion, mostly
with two branches of Bharat Overseas Bank in Mumbai
and applications for the Yes Bank IPO routed through
these accounts. Each applicant was allotted 150 shares
under the retail category. On July 6, 2005, almost 9.5
lakh Yes Bank shares were transferred from these
accounts to the demat account of Ms Panchal. These
shares were then transferred to the demat accounts of
several conspirators through off-market deals on July 11,
a day prior to the listing of Yes Bank. Majority of these
shares were sold the day Yes Bank was listed at a price
much higher than the allotment price. 105 IPOs from
2003-2005 which included the offerings of Jet Airways,
Sasken Communications, Suzlon Energy, Punj Lloyds, JP
Hydro Power, NTPC, PVR Cinema, Shringar Cinema and
others were reported by SEBI to be covered by this
scam. The fraudsters targeted the primary market to
make a quick buck at the expense of the gullible small
investors.

 Lapse which led to the scam:

> Non-existence of KYC norms: Bharat Overseas Bank
opened as many as 6000 fictitious accounts without
personally seeing the persons opening these accounts
and thus a major flaw in Know Your customer. These
accounts were opened by Ms. Roopal Ben Panchal and
her allies with an intention to accumulate all the shares
before listing and dispose them off on the listing day at a

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high price. Blind faith by the bankers made it possible to

open the accounts in any person’s name which were
introduced by the scamsters leading to a scam which
questioned the banking system. The Reserve Bank of
India introduced KYC guidelines for all banks in 2002. In
2004, RBI directed that all banks ensure that they are
fully compliant with the KYC provisions before December
31, 2005. By then the damage was already done.
> Lack of Vigilance by SEBI: Ms Panchal and a few others
got over 72 lakh shares of IDFC by transferring these
from as many as 27,000 demat accounts. Sugandh
Estates, a related party, cornered another 27 lakh shares
of IDFC by creating about 10,000 fictitious bank and
demat accounts. These shares were transferred to a
bunch of financiers, who then sold them on the day of
the listing reaping huge profits between the IPO price
and the listing price. Had SEBI tracked this movement of
transfer at the first instance of the scam, many more
IPOs could have been saved from being giving benefits
only to few. > Delayed results of the probe of the scam
by SEBI: The scam came to light in the year 2005, and on
December 15, 2011 SEBI declared results of its probe,
and slapped a penalty of Rs. 38 crores. Further on
January 11 2012, SEBI discovered huge rigging in the
IDFC IPO. It was again on October 10 2011; Income Tax
Authorities raided a businessman Purshottam Budhwani
accidentally found he was controlling over 5,000 demat
accounts. Delayed justice is justice denied and these
things give courage to many others to copy the modus

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operandi of the scams which have happened and have

not been punished for.

 After math of the scam:

In the year 2011, the Enforcement Directorate (ED)
attached the properties of a publishing company running
a leading Gujarati daily in connection with the 2005,
Roopal Panchal IPO scam. Roopal Panchal and her family
had cornered shares under fake names between 2003
and 2005 were transferred to the accounts of M/s Lok
Prakashan Ltd. According to the ED officials, shares
worth Rs 3.80 crore had travelled to the demat accounts
of the company's Managing Director Bahubali Shah and
a city-based financier and realtor Dhiren Vora. Roopal's
family members Devangi Panchal, Bhargav Panchal, Aijav
Panchal, Dipak Panchal, Hina Panchal and their friend
Parag Jhaveri are the others involved in the scam.
According to the details, Rupal and six members of her
family made over Rs 45 crore between 2003 and 2005
from 18 IPOs. SEBI had passed an order against Rupal in
2003 stating that she and five others of her family had
made irregular dealing in IPOs. The SEBI barred the six
family members from trading and also slapped a penalty
of Rs 38 crore. The adjudicating authority had, however,
kept aside the attachment proceedings. The ED
appealed before the Appellate Tribunal under the
Prevention of Money Laundering Act. The Tribunal
stated in its order that the properties should be attached
as the shares were indeed a part of Proceeds of Crime

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by way of money laundering. However, it took around

8years for this course of action.

 Satyam Computers – An Accounting scam

Year of scam: 2009
Amount of scam: Rs. 7136 crores
Period of the scam: 2002-2009

Brief description of the scam:

In 1987, Ramalinga Raju founded Satyam Computer

Services along with one of his brothers-in-law, DVS Raju.
The company went public in 1992 and its issue was
oversubscribed 17 times. In July 1993, Satyam entered into
a joint venture with Dun and Bradstreet. Satyam Computer

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Services Ltd. Thus became one the leading global

consulting and IT services company that offered end-to-
end IT solution for a range of key verticals and horizontals.
Satyam achieved huge number of awards and
achievements under the leadership of Mr. Ramalinga Raju.
The company was trying to join the Big Three – Tata
Consultancy Services, Infosys and Wipro. Mr. Raju fuelled
greed using a combination of powerful branding, systemic
lacunae and opportunity provided by the system. He was
always at an arm’s length with the most powerful
politicians, rulers, officials and bankers. He got many
contracts for his son’s operations in Maytas Infra and
Maytas Properties. Several SEZs were also sanctioned for
these companies. Thousands of acres of land were bought
either with money which seems to have evaporated or
with the influence by being ‘Satyam’ by its subsidiary
Maytas Properties. As the event unfolds, Satyam had
announced to acquire 51% in Maytas Infra and 100% stake
in Maytas Properties and consequently aborted the deal in
less than 24 hours due to lot of pressure from other
stakeholders. People invested in Satyam due to its IT
services and not due to its investment in construction.
Institutional Investors did not like the idea of Satyam
investing 100% in Maytas at an overvalued figure of the
asset that too in a low realty market and therefore forced
the management to abort the deal. With that, Satyam’s
share lost half its value in one day which was triggered by
bad corporate governance issues. The situation unfolded
into a major crisis which resulted in the stock price falling
77% on Jan 7,2009, when the Satyam Computer Services’

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chairman Ramalinga Raju tendered his resignation and

released a letter of confession to the shareholders the
contents of which reflect the large-scale accounting
malpractices committed by Satyam.

Some of the excerpts from the letter were:

1. The balance sheet has inflated (non-existent) cash

of Rs 5040 cr. (Against the Rs 536Icr reported on 30th
September 2008 in the books).

2. Accrued interest is non-existent (against Rs 376 cr.)

3. Total Liability is understated by Rs 1230 cr. (the sum was
arranged by pledging the promoter shares)

4. Actual Debtor position of Rs 490cr (against Rs 265

cr. reported on the books)
5. Actual revenue of Rs 2700cr and operating margin
of Rs 61 cr. against reported revenue of Rs 2700 cr. and
operating margin of Rs 649cr. 6. Huge gaps present in
the balance sheet on account of inflation of profits over
a period of several years.

 Lapses which led to the scam:

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> Absence of Whistle blowing technique in the company:

The fraud that Raju described, involves multiple staff
from multiple teams of sales accounting and finance and
also those in the management committees. Secondly,
how could it be that Satyam was running at an operating
margin of 3%? The software sector would not be
recruiting tens of thousands of people every year if it
was such a low margin business. The revenue structure
of software firms is standard and it is impossible that
Satyam alone, among the software companies, was
running on such thin margins. It is rather impossible to
believe that the company was able to even survive on an
operating margin of 3%, for more than a few quarters, all
of which have good growth and fat margins, to attract
the cream of Indian talent. The fact seems to be that
Satyam had made profit but was squirreled away. It was
neither a shady operation nor it seems possible for one
person to sit and cook the books for years together and
not benefit in financial terms. But there was not a word
of discomfort or any signal by people at the helm of
affairs that something was not quite right in the
company. Independent directors who had to put up their
independent views also maintained silence. They, in the
pursuit of profits, give little importance to good
governance practices leading to such crisis as that at
Satyam.
> Poor vigilance by SEBI: The first is SEBI which failed to
see through the falsified financial statements. One may
admit that SEBI may not have the necessary expertise to

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analyse the financial data submitted to them but still

they need to develop such an expertise at least for the
future. Also, when all the News channels were giving a
‘BUY’ advice to the investors for Satyam shares just
couple of months before the scam burst, and in the
meanwhile, the top management of the company were
offloading their stakes from Satyam. This should have
rung the bell in the SEBI’s ears and could have prevented
huge damage to small investors investing further in the
stock.
> Shunning of responsibility by Auditors: Satyam scam
came to light as one of the most popular scams in
accounting. Huge inflated Balance Sheet, unrecorded
liabilities and differences in the actual and reported
incomes could not have gone un- noticed by the auditors
of the company. Their auditors PWC is one of the big five
auditing firms of the country. Also, this forgery in
accounting was not a one-year story, but was built up to
such a large scale over a period of time and is impossible
without the auditors kept in the loop.
> Casual approach by the Income tax department:
Income tax department is one of the most important
departments of the country who is liable for collecting
the revenues for the government. In case of Satyam, it
had shown an interest income of RS. 270.01 crores after
deducting tax of Rs. 61.04 crores. The IDS certificates
were also faked. It is surprising that how the IT
department could not spot such a huge discrepancy.

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 After math of the scam:

The failure of Satyam has also brought to light the in

effectiveness of appointing an Independent Director. The
policy for independent directors prescribed under the
companies Act and SEBI in Clause 49 of the Listing
Agreement is week and have major lacunae. The clause
stops at laying down a few disqualifications, which do
not include criminal backgrounds or illiteracy. There are
no norms on qualifications or experience required for
independent directors. Companies, therefore, often tap
celebrities, especially just before hitting the market for
funds through IPOs. It is important to have independent
directors with strength of character who are willing to
blow the whistle and be assertive. In reality, companies
often induct retired bureaucrats as independent
directors to take advantage of their lack of domain
knowledge. Though regulations disallow promoters to
appoint their relatives as independent director, a
‘relative’ excludes cousins and other close relation from
the wife and mother’s side. The concept of independent
director is to protect small shareholder’s internet but
they land up adding value to the company with their
‘brand’ or helping it in network better.
Raju’s story is unbelievable and stink of political
involvement. One clue is that the entire government
machinery took its own sweet time to arrest Raju.

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Corporate circles say that Raju has worked out a political

deal whereby his family is protected. The politicians who
received large chunks of the vanished money remain
unnamed and he claims that the cash which vanished
didn’t exist at all.

 CRB Scam – Scam of Dummy companies

Years of scam: 1997
Amount of scam: Rs. 1,200 crores
Period of the scam: 1992-97

Brief description of the scam:

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Bom in a jut trader’s house in Calcutta, Bhansali was a

studious person. After obtaining a degree in commerce,
Bhansali completed Chartered Accountancy in1980. In
the same year, he started a financial consultancy firm,
CRB Consultancy. Through Bhansali’s personal contacts,
CRB Consultancy soon managed to secure the business
of providing issue management services to few well-
known companies in Calcutta. Over the years, Bhansali
acquired other degrees as well including ACs, Ph.D., MIT
A(US) and a diploma in journalism. Though he made a
lot of money, Bhansali found it difficult to find
recognition in Calcutta. He then moved to New Delhi to
join one of the country’s leading registrars of companies.
However, when Bhansali was caught short- charging the
registrars clients. He had to leave. Bhansali then
established ‘CRB Consultants’, a private limited company
in new Delhi in 1985. In 1992, the name of the company
was changed to CRB Capital Markets (CRB Caps) and it
was converted into a public limited company. The
company offered various services including merchant
banking, leasing and hire purchase, bill discounting and
corporate funds management, fixed deposit and
resources mobilization, mutual funds and asset
management, international finance and forex
operations. CRB Caps was also very active in stock-
broking having a card both on the BSE and the NSE. The
company raised over Rs 176 crore from the public by
January 1995. He ruled like a financial wizard 1992 to
1996 collecting money from the public through fixed
deposits, bonds and debentures. The A+ rating given by

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CARE and upfront cash incentives of 7% -10% attracted

investors in hordes to Bhansali's schemes. The money
was transferred to companies that never existed.
Bhansali was reported to have specialized in setting up
dummy investment companies. He had established good
contacts in the Registrar of Companies and the
Controller of Capital Issues offices. He registered
companies with practically no equity and then stage-
managed the dummy company's maiden public issue
with a few hundred investors, largely from Calcutta's
close knit Marwari Jain community. Having had a
company listed on the stock exchange, Bhansali then
sold it for a profit to businessmen who needed dummy
public limited companies in a hurry.
Bhansali used his own money to rig share prices in order
to raise more money from the markets in two ways.
Firstly, he bought his own stock through private finance
companies owned by him. Secondly, he used his other
public companies to buy into each other as cross-
holdings. 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 raise about Rs 900 crore
from the markets. In May 1996, CRB Caps opened a
current account in SBI's main Mumbai branch, for
payment of interest, dividend and redemption cheques.
The payment warrants could be presented at any of the
4,000 SBI branches for payment. Bhansali was granted
only a current account facility and did not enjoy any

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overdraft facility. He was expected to deposit cash

upfront into the current account, along with a list of
payments that had to be honoured. Claiming that the
logistics of payment were very complex and that it was
not possible for every branch to check with the head
office before honouring a dividend warrant, the
branches gradually began treating these instruments just
like a demand draft. For about nine months, the setup
worked very well. However, in March 1997, SBI realized
that the account had been overdrawn to the extent of a
few crores. RBI had given Bhansali 72 hours to come up
with a plan to repay his liabilities following over 400
complaints from depositors in his company's financial
schemes. Most top officials of CRB were untraceable
from the second week of May itself. The Central Bureau
of Investigation (CBI) locked and sealed the offices of the
CRB Group. However, Bhansali did not show up. With
the expiry of the RBI deadline, the CRB Group collapsed,
shattering the dreams of thousands of investors across
the country.

 Lapses which led of the scam:

> Negligence on the part of Registrar of Companies
(ROC): The authorities registering the companies had to
keep a check on the companies being registered by Mr,
Bhansali without any equity capital. This could only be
done merely because of good contacts between the

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people concerned. The rules of registering a company

were overlooked for personal gains.
> Negligence on the part of SEBI during listing of such
companies on the stock exchange: SEBI being the
regulatory authority, completely failed to recognise the
dummy companies floated by Mr. Bhansali for his own
profit motive at the cost of defrauding the gullible
investors. Though the onus of registering the company is
on ROC, a thorough check by SEBI is a must during listing
as the companies then collect huge amounts as capital
from these markets once listed.

 After math of the scam:

The collapse of the CRB group seemed to be a fraud
allowed by supervisors despite the regulations in place.
The lack of clear communication channels between the
banks, RBI and the government seemed to have worked
to Bhansali's advantage to a great extent. Frequent
clashes occurred between RBI and SEBI in the media,
with both of them trying to prove how the other was
responsible for not acting early enough. The RBI claimed
that it had no powers to examine the asset quality of the
CRB group and thereby was not in a position to pass any
judgment on the character of asset generation or
deployment of the funds raised by the group. In a
meeting with SEBI, the finance minister criticized the
regulator severely. In October 1998, the SEBI appointed
an administrator for CRB's Arihant scheme to finalize a

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scheme for payment to the unit holders. Under the

scheme, the investors were prematurely paid Rs 4.95 per
unit, which was its NAY as of 31 March 1998. When the
administrator had taken over, the assets of the scheme
comprised the fund's frozen bank accounts worth Rs 81
lakh, plus some dividends from investments. Besides,
there were a large number of listed, but thinly traded
and unlisted shares amounting to Rs 17.5 crore.

 Dinesh Dalmia – Fake shares scam

Years of scam: 2001
Amount of scam: Rs. 595 crores
Period of the scam:2000 - 2001

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Brief description of the scam:

Mr. Dinesh Dalmia was the managing director of DSQ

Software Limited and he took advantage of the dotcom
euphoria in 2000-01 to increase DSQ’s capital by 50 per
cent without informing the stock exchanges. He
introduced 1.30 crore shares in the market (originally
allotted to three Mauritius-based shell companies)
without getting these listed. DSQ group allegedly issued
duplicate fake shares of DSQ Software’s and DSQ
Industries through stockbroker Harish Biyani and his
associates. These fake shares were issued at a price of
Rs.180 - Rs. 120 per share making the total close to Rs.
20 crores. It was suspected that Dalmia helped in
artificial price rigging of these stocks. The ultimate
beneficiary of this allotment was Dalmia himself. It’s a
classic case of forgery, cheating, fund diversion, price
rigging and shameless violation of laws of the land.
Despite having a host of regulatory orders against him,
Dalmia was hiring and paying top lawyers in India to
fight long legal battles without so much as setting foot in
the country. Subsequent to the scam the Securities
Appellate Tribunal (SAT) ordered Dinesh Dalmia to buy

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back unlisted shares introduced by him in the open

market.

 Lapses which led to the scam:

Lack of control over the brokers by the regulator or the
stock exchanges: It is indeed very surprising to know,
that a company without being listed can issue shares
with the help of one broker of such a large stock market.
This shows a wide gap, where in the reins of the stock
market knowingly or unknowingly was controlled to a
large extent by these brokers.
Lack of investors’ knowledge: This scam of the stock
market shows the ignorance of the investors, who just
go by the return given by few companies, may be dot
com companies during that period and complete blind
faith on the brokers of such markets, who made them
invest in the companies not listed at all on the stock
exchange.

 Dinesh Singhania scam

Year of scam: 2010
Amount of scam: Rs. 150 crores
Period of the scam: 2001 – 2010

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Brief description of the scam:

Singhania was based out of Kolkata and was allegedly

involved in the 2001 payment crisis at the Calcutta Stock
Exchange. People familiar with Singhania’s technique
said that he posed himself as one of the biggest
financiers in equities, attracting promoters facing a
financial crunch. His targets were generally market-savvy
promoters, who wanted to keep their share prices
maintained at good levels. Through his front companies,
he approached various broking houses and financiers to
finance transaction in these shares. He charged interest
ranging from 18 -22% from promoters and paid it to his
financiers. In 2010, an Intelligence Bureau report said
that Ketan Parekh’s associate Dinesh Singhania was
involved in rigging scrips. Singhania first created
pressure on the shares so as to demand more margin
from promoters. Margin is the amount of money kept by
the promoter, when he takes finance against the shares.
If the value of shares decline, then the margin kept by
the promoter is higher and vice versa. After a certain
point, when a promoter was sure to default, Mr.
Singhania created panic and all the shares were sold
under pressure. He bought those scrips through a string
of entities to makes 40- 60% profit straight away.

 Lapses which led the scam:

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> Lack of Vigilance by SEBI: Had these kinds of

transactions been kept a track of by SEBI by watching
carefully the movements of certain stocks in a particular
manner, this would have been traced initially. Also, the
final sale of shares of different companies to entities
belonging to one person would have been noticeable
over a period of time. It shows either the officials in SEBI
were not having a watchful eye, enough to notice this
scam or it lacked the necessary manpower to keep a
strong watch on such manipulators.

 Vanishing Companies Scandal

Year of scam: 1996
Amount of scam: Not known
Period of the scam: 1992 – 1996

Brief description of the scam:

In the case of the ‘vanishing companies’ scandal that

surfaced between 1992 and 1996, around 3,911
companies raised Rs 25,000 crore in the primary capital
markets and then simply disappeared. They just did not

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set up the projects for which the money was raised and
the funds vanished. Asian Consolidated raised Rs 115
crore from investors, promising to set up a project to
make 500 million aluminium beverage cans a year, but
never set up the unit. Last heard, the company was
being wound up. The Asian Group, by the way, also set
up a factory to produce beer, and raised funds
separately to make the seals for the top of beverage
cans; that firm was called Asian Tops. But neither SEBI,
the Department of Company Affairs (DCA), any of the
country’s various stock exchanges, or even the police,
bothered to penalise the group for the loss to investors
through their fraudulent behaviour. For many years, in
fact, SEBI argued that this was not its jurisdiction, as did
the DCA.

 Lapses which led to the scam:

Lack of vigilance by the Regulators: This scam went on
for couple of years extracting money from the investors
to the tune of few crores and yet our regulators being
the DCA or SEBI could not identify the motive of such
companies at the first stance. This shows the
lackadaisical approach of the regulators.
Absence of clarity regarding the regulator’s jurisdiction:
Most often, different regulators govern different aspects
of a company. When a scam of a unique nature comes to
light, these governing bodies, often shun their
responsibility towards the investors by passing on the

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buck by saying that the scam is out of their scope of

work. Immediate action from these regulators would
help punish the guilty and would prevent others from
doing such scams in future.

 SEBI’s role after scam:

An additional 10% deposit margin was imposed on

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

 Some Fraudulent Methods Used in the Stock

Markets –

Worldwide Investment advisors and stockbrokers are

responsible for providing information that is accurate
and complete to investors. Investment fraud occurs
when an advisor, stockbroker, or brokerage firm offers
inaccurate, incomplete, or biased information in an

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effort to control the market or draw business. One

powerful and most common measure going on the stock
market is a small group of evil players being primarily
responsible for the events on the market. The easiest
case is a stock which is liquid. A manipulative cartel
develops which rigs the liquidity and price. They actively
trade it amongst themselves, to a point where "innocent
bystanders" feel the stock is liquid and valuable. This
tempts innocent bystanders to step in and buy shares. At
this point, the manipulative cartel has made profits
because the innocent bystander has been persuaded to
part with his money at a falsely elevated price. There are
many variations on this theme. Such efforts often involve
collusion with journalists and the senior management of
the company, so that glowing stories about the company
appear on the front page of the pink papers. Some
variations of the price rigging are as follows:

 Circular Trading:

A fraudulent trading scheme where sell orders are

entered by a broker who knows that offsetting buy
orders, the same number of shares at the same time and
at the same price, either have been or will be entered.
These trades do not represent a real change in the
beneficial ownership of the security. This happens most

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often among the cartel and constant demand and supply

of the shares creates an artificial movement in the prices
which is not known by the genuine investors.

 Bucket Shop:

1. A fraudulent brokerage firm that uses aggressive

telephone sales tactics to sell securities that the
brokerage owns and wants to get rid of. The securities
they sell are typically poor investment opportunities,
and almost always penny stocks.
2. A brokerage that makes trades on a client's behalf and
promises a certain price. The brokerage, however, waits
until a different price arises and then makes the trade,
keeping the difference as profit.

 Boiler Room:

A place where high-pressure salespeople use

banks of telephones to call lists of potential
investors (known as a "sucker lists") in order to
peddle speculative, even fraudulent, securities. A
boiler room is called as such because of the high-

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pressure selling. A broker using boiler-room tactics

gives customers only positive information about
the stock and discourages them from doing any
outside research. Boiler-room salespeople typically
use catchphrases like "it's a sure thing" or
"opportunities like this happen once in a lifetime"

 Front Running:
The unethical practice of a broker trading an equity
based on information from the analyst department
before his or her clients have been given the
information. For example, analysts and brokers who buy
up shares in a company just before the brokerage is
about to recommended the stock as a strong buy are
practicing front running. Another example is a broker
who buys himself 200 shares in a stock just before his or
her brokerage plans to buy a large block of 400,000
shares.

 Cross Trade:
A practice where buys and sell orders for the same stock
are offset without recording the trade on the exchange,
which is outlawed on most major stock exchanges. This
also occurs when a broker executes both a buy and a sell

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for the same security from one client account to another

where both accounts are managed by the same portfolio
manager. Typically, this is yet another way for a broker to
rip you off. When the trade doesn't get recorded
through the exchange, there is a good chance that one
client didn't get the best price. However, cross trades are
permitted in very selective situations such as when both
the buyer and the seller are clients of the same asset
manager. The portfolio manager can effectively “swap
out” a bond or other fixed income product from one
client to another and eliminate the spreads on both the
bid and ask side of the trade. The broker and manager
must prove a fair market price for the transaction and
record the trade as a cross for proper regulatory
classification.

 Pump and Dump:

A scheme attempting to boost the price of a stock

through recommendations based on false, misleading,
or greatly exaggerated statements. The perpetrators of
this scheme, who already have an established position in
the company's stock, sell their position after the hype
has led to a higher share price. The victims of this
scheme will often lose a considerable amount of their
investment as the stock often falls back down after the
process is complete Traditionally, this type of scheme

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was done through the cold-calling of individuals but with

the advent of the internet this illegal practice has
become even more prevalent. Pump and dump schemes
usually target micro- and small-cap stocks, as they are
the easiest to manipulate. Due to the small float of these
types of stocks it does not take a lot of new buyers to
push a stock higher. Claims being made about how a
stock is set to break out based on the next greatest thing
or generate returns of hundreds or thousands of
percent, should be met with a considerable amount of
caution. It is important to always do your own research
in a stock before making an investment.

 Poop and Scoop:

This is a highly illegal practice occurring mainly on the

Internet. A small group of informed people attempt to
push down a stock by spreading false information and
rumours. If they are successful, they can purchase the
stock at bargain prices. Poop and scoop are the opposite
of pump and dump.

 Jitney:

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1. A situation in which one broker who has direct access

to a stock exchange performs trades for a broker who
does not have access.
2. A fraudulent activity involving two brokers trading a
stock back and forth to rack up commissions and give
the impression of trading volume. For example, a small
firm whose volume of business is not sufficient enough
to maintain a trader on the exchange would give its
orders to a large dealer for execution. Jitney, or "the
jitney game," is basically the same thing as circular
trading. The term originated from "Jitney buses," which
was a derogatory slang term for Ford buses at the
beginning of the century. A reporter coined the term by
alluding to the five-cent piece it cost back then for a bus
ride. It has since been used to refer to something that is
cheaply and poorly made.

 Short and Distort:

An illegal practice employed by unethical internet

investors who short sell a stock and then spread
unsubstantiated rumours and other kinds of unverified
bad news in an attempt to drive down the equity's price
and realized a profit. Due to recent corporate scandals
and investor uncertainty, fraudsters have an easier time
spreading doom and gloom by claiming that a firm is

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losing a very costly class action suit or is suffering from

low earnings. In order to prevent being conned,
investors should do their own due diligence and be
critical of the authenticity of news from unverified
sources.

 Tailgating:

This is an action of a broker or advisor purchasing or

selling a security for his or her client(s) and then
immediately making the same transaction in his or her
own account. This is not illegal like front running, but it
is not looked upon favourably because the broker is
mostly likely placing a trade for his or her own account
based on what the client knows (like inside information).
It is extremely tough to find evidence of coordination of
trades between cartel members, except where cartel
members are foolish enough to speak into voice
recording systems. It is hard to prove links between the
cartel and journalists, and the senior management of
the company. This leaves us with orders and trades,
which are completely observable on the electronic
exchange. In the case of highly illiquid stocks, it is
sometimes possible to pinpoint the domination of a
small cartel in the orders and trades of the stock. In this
case, it may be possible for an enforcement agency to

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pinpoint the culprits and enforce against them. The

evidence that can be amassed is; (a) illiquidity of the
stock, (b) orders and trades which are highly
concentrated within a cartel (c) coordination of trades
between cartel members, (d) collusion with journalists
and senior management of the company. The ideal
enforcement agency would be able to put together
evidence about these four issues, and it could then have
a strong case.

CONCLUSION
while the corporate governance framework in the country is
seen at par with other developed markets, the same has to
be implemented in letter as well as spirit.

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The fact that while collar crime continues to occur, and

seemingly at an increasing rate, suggests that the expected
costs do not outweigh the expected benefits from cheating.
Stronger penalties are needed.
So, this concludes the list of Indian scams of all times.
According to the compilation, the total amount of money
involved in various scams over the last 12 years alone, since
1992, is estimated to be over Rs. 80 lakh crores (Rs. 80
trillion) or $1.80 trillion. To many people abroad, India is seen
sentimentally as Mahatma Gandhi’s country of khadi cloth,
good ethics, and care for the poor. To some it is an economic
miracle and a future super power, while to others it is an
unkind cruel place of caste, ethic and rich-poor divisions and
violence. Above all however, and not far below the surface,
India is a maze of unethical, unlawful and illegal swindles that
link most politicians, many bureaucrats, and a large number
of businessmen and others.

REFERENCE
www.wikipedia.org
The Scam (who won, who lost, who got away) book: -
Written by Sucheta Dala, Debashis Basu

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www.slideshare.com
Absolute power book Written by Sucheta Dala, Debashis Basu

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