ACCOUNTING AND FINANCIAL FRAUDS: CONSEQUENTIAL LAWS

(Project submitted towards the fulfilment of continuous assessment in the subject of

Corporate Finance Law and Policy)





Submitted To Submitted By
Dr. Rituparna Das

Astha Misra
S. Prathyusha
Shalini Wunnava






National Law University, Jodhpur
Summer Session
(July to November 2014)



Available at - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2510538



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TABLE OF CONTENTS
Introduction ................................................................................................................................ 1
Satyam Scam .............................................................................................................................. 3
Impct ...................................................................................................................................... 5
Governance Flaws Noticed ................................................................................................ 6
Unethical Conduct ............................................................................................................. 6
A Case of Insider Trading .................................................................................................. 7
A Case of False Books and Bogus Accounting ................................................................. 7
Unconvinced Role Of Independent Directors .................................................................... 8
Questionable Role of Audit Committee ............................................................................. 8
Dubious Role of Rating Agencies...................................................................................... 8
Questionable Role of Banks............................................................................................... 9
False Disclosures ............................................................................................................... 9
No Action on Whistleblowers Information .................................................................... 10
SAHARA SCAM ..................................................................................................................... 10
Issue by SIRECL.................................................................................................................. 11
Nature Of Securities Issued By SIRECL ......................................................................... 12
Issue by SHICL .................................................................................................................... 13
Nature Of Securities Issued By SHICL ........................................................................... 13
Impact .................................................................................................................................. 14
Goldman Sachs Case Study ..................................................................................................... 16
Impact .................................................................................................................................. 20
Conclusion ............................................................................................................................... 23
Bibliography ............................................................................................................................ iii


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INTRODUCTION
The stability of a financial market is deeply intertwined with the regulatory framework of the
country; like any other system even the financial market evolves, undergoes a change with
the change in circumstances that may be political, economic, or social. At times these
changes are triggered by in the spirit of the market players and the scandals of the market. A
schemer utilises the lacunae in the laws and compliance to ones personal advantage; the only
suffer of such scams or frauds, are the investors, depositors and the market itself. There are
broadly two types of fraud 1) accounting fraud wherein financial reports are the means
intentional misstatement or omission of amount or disclosure in financial statements or books
of accounts to deceive users or management. 2) Financial fraud - a deliberate act that is
contrary to law, rule, or policy with intent to obtain unauthorized financial benefit
1
. Fraud
may constitute misappropriation of assets which involve the theft of entitys assets,
embezzlement of receipts and causing entity to pay for goods and services not received by
entity. The word fraud has an independent meaning under the Penal Code, wherein is stands
for any wrongful gain or loss of another, therein under the law is not not adequate to cover
the variety of white collar crimes that are seen today.
It all starts with a malicious intention. Fraud is a vivid range of illicit practices consisting of
acts involving intentional deception, misrepresentation and other such illegal acts in order to
secure unfair and unlawful gains. A mistake is not fraud. The particular individual should
have knowledge while committing the said act, that the act may give rise to unauthorised
gains to himself or to the entity or to any third party. Indeed fraud actually takes place when a
group of malicious individual manipulate the working and the activities of a business entity in
order to generate illegal and unlawful gains for themselves. This might be in the form of
money or assets. Fraud is such a phenomenon which is worldwide and is done on various
scales ranging from petty frauds to humongous scandals. These frauds rob the business of its
fair profits and may result in a loss of goods, money, credibility, accountability and goodwill.
It is thus absolutely necessary for all organisations to create such processes of day to day
business activities that the employee should not be in any position to commit any kind of a
fraud. The companies should also ensure the presence of such checks and balances that detect
and kind of fraudulent activities going on inside the organisation. Organisations of all types,

1
J. WANG, Y. LIAO, T. TSAI, & G. HUNG, Technology-based financial frauds in Taiwan: issue and approaches,
IEEE CONFERENCE ON: SYSTEMS, MAN AND CYBERSPACE Oct (2006) 11201124.

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sizes and natures are susceptible to fraud. We see large public companies indulging in fraud
and we can also see small time fraud going in any shop around the corner. To prevent such
acts, the business organisations should ensure that they earn the loyalty of its employees in
one way or the other. Good pay, good perks and incentives, good working conditions,
efficiency of communication within the company etc all ensure the satisfaction of an
employee. And a satisfied employee is rarely a fraudulent one. There are several different
stratum inside a business organisation that commit fraud. They include the top and senior
level management, the mid and low level employees and the organisational criminals. As we
can clearly see that it is not actually very easy to trace and track fraudulent activities inside
large corporations, the process of financial auditing is highly essential to make sure that the
business entity is free from such activities and thus prevented from loss of profits or goodwill
and reputation. Although their is a loophole here also. Large companies give a lot of big
business to auditing firms and are thus very easily arm-twisted by the big companies. Thus
the auditing firms put in less effort because of their fear of losing business. The situation of
financial frauds in India is quite different. This is due to the reason that India has a majority
of family ownerships. Family ownerships really make it hard to determine, who is the de
facto in charge of the goings on but it can't be generalised owing to the fact that family
ownership held organisations also have reputations to uphold. The problem in regulation is
not the lack of laws and legal framework but it is the lack of efficient implementation of
those laws. Technology and less paperwork has made the word a lot more easier for fraud
perpetrators. The auditors essentially need to be up to date with the information technology.
Thus technology has also made it the detection of such crimes tougher and more
challenging. Forensic accountants add value through their understanding of business,
financial reporting, accounting, auditing, and gathering of evidence, investigation and
litigation procedures. They also play an important proactive role in risk reduction by
administering elaborate procedures as part of the statutory audit and fraud deterrence. Thus
forensic accounting plays an important role in both preventing and detecting fraud. However,
Indian companies are yet to embrace it. Forensic accounting must be made a preliminary
requirement that clears the company of any suspected fraud. In fact, all the major auditing
firms must be able to carry out forensic accounting through a separate department. So ideally,
only after the forensic accounting division clears the company of any suspicion, should the
audit division start its work. The task of Forensic Accountants is handled by Chartered
Accountants who apart from handling traditional practice of auditing as required under the
Companies Act, 1956 or Income Tax Act are called upon by the law enforcement agencies or

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the companies or private individuals to assist in investigating the financial crime or scam.
The CA or CWAs in India are best suited for this profession due to their financial acumen
acquired during their rigorous training which can be further honed by introducing post
qualification degree or diploma in Investigating and Forensic Accounting similar to one
introduced by CICA. There are a lot of reforms in this regard that are expected to come. It is
essentially more important for us to understand the mindset of the Indian fraudster and
bringing in regulations which are not copied versions of their US or European counterparts
but are more suited to the Indian conditions. It is imperative that we understand that
technology can both help and hurt our cause in this case.
SATYAM SCAM
From Enron, WorldCom and Satyam, it appears that corporate accounting fraud is a major
problem that is increasing both in its frequency and severity. Research evidence has shown
that growing number of frauds have undermined the integrity of financial reports, contributed
to substantial economic losses, and eroded investors confidence regarding the usefulness and
reliability of financial statements. The increasing rate of white-collar crimes demands stiff
penalties, exemplary punishments, and effective enforcement of law with the right spirit. An
attempt is made to examine and analyze in-depth the Satyam Computers creative-
accounting scandal, which brought to limelight the importance of ethics and corporate
governance (CG). The fraud committed by the founders of Satyam in 2009, is a testament to
the fact the science of conduct is swayed in large by human greed, ambition, and hunger for
power, money, fame and glory. Unlike Enron, which sank due to agency problem, Satyam
was brought to its knee due to tunnelling effect. The Satyam scandal highlights the
importance of securities laws and CG in emerging markets. Indeed, Satyam fraud spurred
the government of India to tighten the CG norms to prevent recurrence of similar frauds in
future .Thus, major financial reporting frauds need to be studied for lessons-learned and
strategies-to-follow to reduce the incidents of such frauds in the future.
There is a great irony that the company that was behind one of the biggest financial
accounting scandals of India, is named 'Satyam' which means truth. This company was highly
accredited for its accountability and steep rise in stature. It was established in 1987 by
Ramalinga Raju and some of his associates. It started its operations with 20 employees.
Satyam was one of the fastest rising companies in the Indian outsourced IT-industry. It grew

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rapidly into a global business. It offered IT and business process outsourcing services
spanning various sectors. It was one of the most award-winning business organisations and
was called as a symbol of India's success. Many awards were given to the company while
several others were given to Raju as well. Five months after it had won the Global Peacock
Award, the company became the centrepiece of what was to be the biggest financial scandal
in the history of India.
As the 21st century started, the company started growing at a rapid pace beating all
benchmarks and was singled out. Its share value grew immensely at a very great percentage
and at one point of time it showed a nearly 300% improvement in share price. On January 7,
2009, Mr. Raju confessed through a letter that he had been manipulating the company's
accounts for years. He had overstated the balance sheet by $ 1.47 billion. The company
claimed to own nearly $ 1.04 billion in bank loans and cash which was non-existent.
Liabilities were understated and the income was over stated in every quarter in order to meet
analyst expectations. Mr. Raju and the companys global head of internal audit used a
number of different techniques to perpetrate the fraud. Mr. Raju falsified the bank accounts
to inflate the balance sheet with balances that did not exist. He inflated the income statement
by claiming interest income from the fake bank accounts. Mr. Raju also revealed that
he created 6000 fake salary accounts over the past few years and appropriated the money
after the company deposited it. The companys global head of internal audit created fake
customer identities and generated fake invoices against their names to inflate revenue. The
global head of internal audit also forged board resolutions and illegally obtained loans for the
company. There were also certain amounts of money raised by American
Depository Receipts, which did not feature in the company's balance sheets. The CBI
ascertained that the fraudulent activities date back from April 1999 when the revenue growth
started to get into double figures.
In the end of 2008 and the beginning of 2009, Raju had been planning to get a 51% stake in
Maytas Infrastructure Limited for $300 million. Raju and his family members already had a
stake of 37% in the company whose total turnover was $350 million and the net profit was of
$20 million. He also had a 35% share in Maytas Properties, a real estate firm. On December
16, 2008, the Satyam board, including its five independent directors had approved Raju's
proposal to buy the stake in Maytas Infra and all of Maytas Properties which were owned by
his own family members for $1.6 billion. This was done without shareholder's approval. The
said decision was reversed in 12 hours because the investors sold Satyam's stock and

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threatened legal action against the management. The World Bank banned Satyam from
conducting business for 8 years due to inappropriate payments to staff. Four independent
Directors quit the Board of Satyam. Investment bank DSP Merrill Lynch had been appointed
by Satyam to look for a partner or buyer for the company, finally turned whistle blower after
it found irregularities in the financial statements. On January 7, 2009, Satyams Chairman
Ramalinga Raju resigned and notified the board members and SEBI about the falsifications in
the accounts. He faked figures to the extent of Rs. 5040 crore of non-existent cash and bank
balances as against Rs. 5361 crore in the books, accrued interest of Rs. 376 crore (non-
existent), understated liability of Rs. 1230 crore on account of funds raised by Raju, and an
overstated debtors position of Rs. 490 crore. He accepted that Satyam had reported revenue
of Rs. 2700 crore and an operating margin of Rs. 649 crore, while the actual revenue was Rs.
2112 crore and the margin was Rs. 61 crore. Global auditing firm, PricewaterhouseCoopers
(PwC) were the auditor of Satyam since 2000 till the discovery of the fraud. Many a people
also hold them responsible for failing to detect the fraud and thus being responsible for it.
IMPCT
In the aftermath of these scandals, all noteworthy companies terminated their agreements
with Satyam. All awards, honours and accreditations were taken back and Satyam was
stripped of all its honours. Criminal charges were brought against Raju which included
criminal conspiracy, breach of trust and forgery. After Raju confessed, new board members
were immediately appointed so that they could work to keep the company afloat. Indian
government quickly started an investigation. The goal of the new board was to make the
company able enough for it to be sold within a 100 days. The board met with bankers,
lawyers, accountants and government officials immediately to devise a plan of sale. Goldman
Sachs and Avendus Capital were hired and given the charge of the sale of the company. After
some time several big companies were interested in the auction of Satyam. SEBI appointed
Retired Supreme Court Judge Justice Bharucha to oversee the process. Tech Mahindra was
the winning bidder and it got each share for $1.13 which was one third of the price before
Raju confessed.
Many of Raju's family members were charged in the case along with a former managing
director, the company's head of internal audit, its CFO and also several of the company's
auditors. Many Indian political leaders were also implicated in the case. Civil and criminal
litigation is pending in both India and the USA.

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This case has been called India's Enron.
The case was primarily filed under Sections 120B, 496, 420, 467, 471, 477A of the IPC
although the legal scope of the case kept increasing with ongoing investigations and with
time.
This case damaged not only the reputation of the company but also the reputation and the
goodwill of the stellar Indian IT-industry which was earlier held in high esteem globally. It
was such an elaborate scam that it shocked investors to the core and made them wary. Many
procedural guidelines were overlooked by a lot of entities in this whole scenario like the
Company, the auditors, the banks etc. If any of these entities had been following the existing
guidelines prescribed for them, such an elaborate fraud could not have taken place. It is just a
plain and simple case where greed overtook accountability, trust, ethics and morals and led a
person to negatively motivate him to such great lengths that he devised such ingenious
methods of fraud not caring anything about the company he once started himself. And clearly
many such malicious participants joined forces with him to devise one of the biggest
corporate frauds know to mankind and the biggest corporate and financial fraud India had
ever seen and hopefully it will never see such a fraud again. To us, the laymen it is just a case
of fraud whereas for the investors, which included middle class people of India, it was a
painful ordeal they never want to be reminded of because where Raju wanted to get more and
more money illegally, these people trusted him to do it for them, legally.
Governance Flaws Noticed
Following are the common governance problems, which have been noticed in the collapse of
Satyam:
Unethical Conduct
In Satyams case, for its founder B.Ramalinga Raju, honesty was not something that he
wanted to pursue as hard as profits. He wanted to make money any which way by avoiding
paying taxes, cooking books, and pay offs. January 7, 2009 revealed some alarming truths
that he was concealing for a long period by confessing to a fraud of Rs 7800 crores ($1.47
billion) on Satyams balance sheet. He and his brother B. Rama Raju who was Satyams
managing director, had disguised all this from the companys board, senior managers and
auditors for several years.

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There was no explicit or implicit code of ethics surrounding Satyams corporate culture;
bribery, corruption, and exchange of favors, within and outside the company, appear to have
occurred with frequency at various levels. It was too late when World Bank in the 3rd week
of December, 2008 publicized Satyams unethical work culture by announcing Satyam being
imposed with charges of data theft and bribing the staff and was barred from business with
World Bank for eight years for providing Bank staff with improper benefits. Ethical
standards thus in the company were poor. Both the CEO and CFO have been charged putting
self-interests ahead of the company's interests. They were actively selling large portions of
their shareholdings in the company a few months before the confession of scandalous fraud.
The companys most senior executives behaved unethically and there was no evidence of
basic moral conduct or behavior at the top executives level that exploited the company's
resources for personal gain for several years. The internal controls appear not to have
detected the fraudulent activities for an extended period of time.
A Case of I nsider Trading
Investigations into Satyam scam by the Crime Investigation Department (CID) of the State
Police and Central agencies have established that the promoters indulged in nastiest kind of
insider trading of the companys shares to raise money for building a large land bank. The
funds collected by the former chairman B. Ramalinga Raju, his brother Rama Raju and their
relatives were used to purchase lands in the names of 330 companies and about 30
individuals. According to the SFIO findings, promoters of Satyam and their family members
during April 2000 to January 7, 2009 sold almost 3.9 crore shares collecting in Rs 3029.67
crore The promoters on the basis of the inflated books posed a healthy financial state of the
company in the market. As the brand built strong amongst the peers, the share price started
shooting up. During this course of time, the promoters kept their objective straight of
offloading their shares at frequent intervals. Thus, the promoters not only manipulated share
prices to make personal gains but also cheated the other shareholders and investors. During
this course, whereas, his brother Rama Raju, sold 1.1 crore shares pocketing Rs 894.32
crores.
A Case of False Books and Bogus Accounting
According to the findings of SFIO, Satyams balance sheet as on September 7, 2008 carried
an accrued interest of Rs. 376 crore, which was non-existent. These figures of accrued

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interest were shown in balance sheets in order to suppress the detection of such non-existent
fixed deposits on account of inflated profits. The investigations also detailed that the
company had deliberately paid taxes of about 186.91 crores on account of the non-existent
accrued interests of Rs 376 crores, which was a considerable loss for the company. SFIO
report clearly states that the company had created a false impression about its fixed deposits
summing to be about Rs 3318.37 crore while they actually held FDRs of just about Rs 9.96
crores
Unconvinced Role Of I ndependent Directors
The Satyam episode has brought out the failure of the present corporate governance structure
that hinges on the independent directors, who are supposed to bring objectivity to the
oversight function of the board and improve its effectiveness. They serve as watchdogs over
management, which involves keeping their eyes and ears open at Board deliberations with
critical eye raising queries when decisions scent wrong. Stakeholders place high expectations
on them but the Satyams casereveals such expectations are misplaced.
Questionable Role of Audit Committee
The true role of audit committee in prcis is to ensure transparency in the company, that
financial disclosures and financial statements provide a correct, sufficient and creditable
picture and that, cases of frauds, irregularities, failure of internal control system within the
organization, were minimized, which the committee failed to carry out. The timely action on
the information supplied by a whistleblower to the chairman and members of the audit
committee (an e-mail dated December 18, 2008 by Jose Abraham), could serve as an SOS to
the company, but, they chose to keep silent and did not report the matter to the shareholders
or the regulatory authorities. The Board members on audit committee who failed to perform
their duties alertly be therefore tried out under the provisions of the Securities Contracts
(Regulation) Act, 1956.
Dubious Role of Rating Agencies
Credit rating agencies have been consistently accused of their lax attitude in assessing issuers
and giving misleading ratings without thorough analysis, as has been the case of Enron and
now in Satyam, they failed to warn market participants about the deteriorating condition of
company. On December 2, 2001, Enron Corporation, the USAs 7th largest corporation

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declared bankruptcy when it was rated investment grade by all the credit rating agencies even
four days before its bankruptcy. None of the watchdogs barked, including the credit rating
agencies, which had greater access to Enrons books.35 In the case of Satyam, credit rating
agencies have been heavily criticized as regards their role and for the accuracy of their
ratings. The rating agencies were allowed to look into companys books for making
assessments but they never investigated the financial condition of Satyam. The rating
agencies displayed lack of due diligence in their coverage and assessment of Satyam. They
based their analysis on fraudulently prepared and audited financial statements and thereby
failed to warn investors about Satyams deteriorating condition
Questionable Role of Banks
The ICAI Probe Panel has hit out at banks for not doing due diligence on Satyam Software
Services Ltd before giving it loans. While sanctioning short term loans why not the banks
posed any question as to why the company which was supposedly cash rich as per the
financial statements was taking loans from them. The Panel wondered why the government
put Deepak Parikh on its Board despite his HDFC group being a major creditor to the
company. The banks that gave loans to Satyam during 2000-08 despite the company claiming
huze surpluses were HDFC Bank (Rs 530 Crore, Citibank (223.87 Crore), Citicorp Finance
(Rs222.28 Crore), ICICI Bank (Rs 40 Crore), and BNP Paribas (Rs 20 Crore) totaling Rs
122.161 Crore.
False Disclosures
The SFIO findings reveal that the company was also involved in making false disclosures to
the Stock Exchanges. The company used the name of Chintalapati Srinivasa amongst its
directors, friends and relatives list till December 31, 2008 at the Stock Exchanges, who in fact
was a director from 1990 till Jan 23, 2003 and held the post of executive director only till 31
August 2000. Further, the company, in its annual reports for the year 2002-03, had reported
certain extra ordinary items, which on a deduction would have brought the company under
losses. Additionally, Satyam preferring to indulge in the fraudulent activities displayed an
EPS of Rs 9.77 per share, which on correction stands at (-) 1.93 per share. As EPS is one of
the major factors leading the prices of the company in the stock markets, the false
fundamentals kept the scrip moving in tandem with the market sentiments.

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No Action on Whistleblowers Information
According to the SFIO findings, it was in December 2008 that one Jose Abraham, an ex-
senior executive of the company, blew the whistle on the Satyam scam. In an e-mail dated
December 18, 2008, Jose Abraham sent his findings to KG Palepu, an independent director in
the company, who then forwarded the mail to M Rammohan Rao, the chairman of the audit
committee of the company. M Rammohan in turn forwarded the same to other members of
the audit committee, the statutory auditor S Gopalakrishna, and also to B Ramalinga Raju, the
chairman. Realising that the beans were already spilt, Raju, fearing regulatory actions,
confessed the fraud ultimately.
SAHARA SCAM
On August 31, 2012, the Supreme Court gave a verdict against two Sahara Group companies,
this case study endeavours to provide a glimpse into the underbelly of the unregulated
financial markets by putting together some of the important facts and figures of the money
game that continues, though the solution continues to be elusive. The Sahara Group had two
companies under its flagship, the Sahara India Real Estate Corporation Limited (SIRECL)
and Sahara Housing Investment Corporation Limited (SHICL) had invited general public
including cobblers, labourers, artisans and peasants to subscribe to Optional Fully
Convertible Debentures (OFCD). SIRECL and SHICL together shall be referred to as
Sahara Group. OCFD defined in general parlances as is a kind of debenture which can be
converted into shares at the expiry of a certain period at a predetermined price, if the debt
holder (investor) wishes to do so. In the eyes of Indian Law, OCFDs are hybrid securities
that are defined under Section 2(19A), which is defined as any security which has the
character of more than one type of security, including their derivatives. The Sahara Group is
responsible for issue of these securities to a large numbers of persons. Between April 2008
April 2011, the Sahara Group had collected about of Rs. 40,000 Crores from about 3 Crores
of investors through more than 10 Lakhs agents and more than 2900 branches. While the
biggest IPO ever in Indian markets was that of Coal India in October 2010 whose size was
about Rs.15,000 Crores and the next biggest public offer subsequently was that of Bharti
Infratel of about Rs.4,500 Crores in December 2012.
2
Ironically, the issue of OFCDs came
to the notice of SEBI when Sahara Prime City Limited, another group company, submitted

2
Bharti Infratel hopes to raise over Rs 4,500 crore from IPO, TIMES OF INDIA, Dec 1, 2012

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the RHP with SEBI for its IPO in January 2010, the fresh issue never took off due to the
pending SEBI investigation.
The Sahara Group carried out issue of OFCDs, SIRECL and SHICL had issued the OFCDs
pursuant to a Special Resolution passed on 3.3.2008 and 16.9.2009 respectively, to public
including to friends, associates, group companies, workers/employees and other individuals
associated/affiliated or connected in any manner with Sahara Group of Companies without
giving any advertisement to general public, it collected monies for the same, there were
irregularities found by the regulator that is SEBI (Securities Exchange Board of India), it
halted the further issue and order the refund of the money collected.
ISSUE BY SIRECL
SIRECL, in its Extraordinary General Meeting held on 3.3.2008, resolved through a special
resolution passed to raise funds through unsecured OFCDs by way of private placement.
Company authorized its Board of Directors to decide the terms and conditions and revision
thereof, namely, face value of each OFCD, minimum application size, tenure, conversion and
interest rate. Board of Directors of SIRCEL, consequently, held a meeting on 10.3.2008 and
resolved to issue unsecured OFCDs by way of private placement, the details of which were
mentioned in the Red Herring Prospectus (hereinafter referred as RHP) filed with the
Registrar of Companies (hereinafter referred as RoC), Kanpur. SIRECL had specifically
indicated in the RHP that they did not intend to get their securities listed on any recognized
stock exchange. It was also stated in the RHP that only those persons to whom the
Information Memorandum (hereinafter referred as IM) was circulated and/or approached
privately who were associated/affiliated or connected in any manner with Sahara Group,
would be eligible to apply SIRECL, under Section 60B of the Companies Act, filed the RHP
before the RoC, Uttar Pradesh on 13.3.2008, which was registered on 18.3.2008. In April
2008, circulated IM along with the application forms to its so called friends, associated group
companies, workers/employees and other individuals associated with Sahara Group for
subscribing to the OFCDs by way of private placement. IM carried a recital that it was
private and confidential and not for circulation. Sahara had issued and circulated an IM prior
to the opening of the offer and that RHP issued by SIRECL dated 13.3.2008 was filed with
RoC, Uttar Pradesh and Uttarakhand and RHP issued by SIHCL dated 6.10.2009 was filed
with RoC, Maharashtra.

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IM proposed the company SIRECL shall the carry out infrastructural activities and the
amount collected from the issue would be utilized in financing the completion of projects,
namely, establishing/constructing the bridges, modernizing or setting up of airports, rail
system or any other projects which might be allotted to the company from time to time in
future.
SIRCEL floated the issue of the OFCDs as an open ended scheme, that is, the offer of units
for sale without specifying any duration for redemption. It remains open (always) to accept
money from investors and have an obligation to return money back to the investors. Such
a scheme does not have any fixed maturity and is meant to be carried on till it is closed down
under any of the rules of the regulations. This gives investors the flexibility to enter or exit
from the scheme based on their individual needs. Some unit-holders may exit from the
scheme, wholly or partly, but this does not affect the continuity of the scheme and it
continues operations with the remaining investors. SIRCEL collected an amount of
Rs.19400.87 Crores from 25.4.2008 to 13.4.2011 and had had a total collection of
Rs.17656.53 Crores as on 31.8.2011, after meeting the demand for premature redemption.
The aforesaid amounts were collected from 2,21,07,271 investors. Following is the nature of
the securities issued by SIRCEL
Nature Of Securities I ssued By SI RECL
PARTICULARS NATURE OF OFCDS

ABODE BOND
REAL ESTATE
BOND
NIRMAAN BOND
TENURE 120 months 60 months 48 months
FACE VALUE Rs. 5000/- Rs. 12000/- Rs. 5000/-
REDEMPTION
VALUE
Rs. 15530/- Rs. 15254/- Rs. 7728/-
EARLY
REDEMPTION
After 60 months NIL After 18 months
CONVERSION
Conversion On
completion of 120
months
On completion
of 60 months
On completion of 60
months On completion of
48 months

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MINIMUM
APPLICATION SIZE
Rs. 5000/- Rs. 12000/- Rs. 5000/-
ISSUE BY SHICL
SHICL, a member of Sahara Group companies, in an Annual General Meeting on 16.9.2009
to raise funds by issue of OFCDs, by way of private placement. On 6.10.2009 RHP was filled
under Section 60B of the Companies Act with the RoC, Mumbai, Maharashtra, which was
registered on 15.10.2009. The money collected was of Rs.6,380.50 crores till 13.4.2011. On
31.8.2011 SHICL had a total collection of Rs.6,373.20 crores, after meeting the demand for
premature redemption. The aforesaid amounts were collected from 11.78 lakhs investors.
Following is the nature of the securities issued by SHICL
Nature Of Securities I ssued By SHI CL
PARTICULARS NATURE OF OFCDS

HOUSING BOND INCOME BOND MULTIPLE BOND
TENURE 120 months 60 months 48 months
CONVERSION
PRICE
Rs. 5000/- of 5
bonds
Rs. 6000/- of 6
bonds
Rs. 24000/- for 2
bonds
As previously stated on 12.1.2010, SEBI, had come to know of the large scale collection of
money from the public by Sahara Group through OFCDs, while processing the RHP
submitted by Sahara Prime City Limited, another Company of the Sahara Group, for its initial
public offer. SEBI then addressed a letter dated 12.1.2010 to Enam Securities Private
Limited, merchant bankers of Sahara Prime City Limited about the complaint received from
one Roshan Lal alleging that Sahara Group was issuing Housing bonds without complying
with Rules/Regulations/Guidelines issued by RBI/MCA/NHB.
SEBI issued a show cause notice dated 24.11.2010 to both SIRECL and SHICL for the
issuance of OFCDs are public issue and which under the Indian Law are bound to be listed.
Hence, directed to refund the money solicited and mobilized through the prospectus issued
with respect to the OFCDs, since they had violated the provisions of the Companies Act,
SEBI Act, erstwhile DIP Guidelines and ICDR 2009. SIRECL questioned such decision
before the Allahabad High Court (Lucknow Bench). This was further appealed before the
SAT (Securities Appellate Tribunal), the Appellate Tribunal passed an order on 18.10.2011

- 14 -
directing Sahara to refund the money to the investors. Sahara Group aggrieved from the order
of SAT, filed an appeal before Supreme Court which came up for admission on 28.11.2011.
The SEBI order was upheld by all the superior courts. The securities issued in any manner are
to be governed by the SEBI in India, the company cannot escape or surpass the regulator
itself. The Supreme Court made the following observations
OFCDs issued by Sahara Group was public issue of debentures, hence well within
the meaning of securities. If there is an intention to issue shares or debentures to the
public, it is/was obligatory to make an application to one or more recognized stock
exchanges, prior to such issue.
Sahara Group could not have filed RHP or any Prospectus with RoC, without
submitting the same to SEBI under Clauses 1.4, 2.1.1. and 2.1.4 of DIP Guidelines
Registration of RHPs to ROC does not mean that the mandatory provisions of
Sections 67(3), 73(1) and DIP Guidelines be not followed.
Unlisted companies like Sahara Group when made an offer of shares or debentures to
fifty or more persons, it was mandatory to follow the legal requirements of listing
their securities. Once the number 49 is crossed, the proviso to Section 67(3) becomes
effective and it is an issue to the public, which attracts Section 73(1) and an
application for listing becomes mandatory which fall under the administration of
SEBI under Section 55A(1)(b) of the Companies Act.
SEBI under Section 11A of SEBI Act has a duty to protect the interests of investors in
securities either listed or which are required to be listed under the law or intended to be listed.
Under Section 11B, SEBI has the power to issue appropriate directions in the interests of
investors in securities and securities market to any person who is associated with securities
market. SEBI, in the facts and circumstances of the case, has rightly claimed jurisdiction over
the OFCDs issued by Saharas. Saharas have no right to collect Rs.27,000 crores from three
million (3 crore investors) without complying with any regulatory provisions contained in the
Companies Act, SEBI Act, Rules and Regulations already discussed
IMPACT
The Companies Act, 2013 clarifies that any offer to more than 49 persons whether the
payment for the securities has been received or not or whether the company intends to list its
securities or not on any recognised stock exchange in or outside India, shall be deemed to be

- 15 -
a public offer and shall be regulated by the provisions of the Act as prescribed for a public
offer. In addition, compliance with applicable provisions SCRA and SEBI will also be
required
3
.
In September 2013, Securities Law (Amendment) Ordinance 2013 amended Section 11AA of
the SEBI Act, 1992 to empower SEBI to investigate into money collection schemes involving
corpus of Rs. 100 Crores or more by deeming them as Collective Investment Scheme. This
enabled SEBI to investigate into the allegations of irregular collection of monies in Sahara Q
Shop schemes.
Whether these steps alone will solve all the concerns of investor protection? There are
various methods employed for mobilizing public funds such as deposits, collective
investment schemes, bonds, etc. While some regulatory powers are vested with the RBI
(banking and non-banking financial entities) others are with the SEBI (listed companies) and
MCA (unlisted companies). The questionable strategy of regulatory arbitrage and trying to
choose a convenient regulator is the biggest shortcoming presently.
A unified regulator will, most probably, pre-empt legal challenges of the type mounted by
Sahara. That is where the suggestions of the Justice Srikrishna panel to set up a unified
financial agency become important. The recently-released discussion paper will, after a wide
discussion, form the basis of the new legislation, which will integrate the regulatory functions
now undertaken by different regulators
4
.
And then there are a numerous companies in the money circulation business (or ponzi
schemes
5
) with over-priced products as fronts to overcome the Prize Chits and Money
Circulation Schemes (Banning) Act, 1978. There are millions who get attracted into these
schemes to make quick bucks. Lack of information and hard data on such companies,
schemes and operators is a great hurdle in convincing the gullible common man to avoid
getting into these traps and fooling themselves. Investor education and awareness are of
greatest urgency. The market regulator and the government cannot shun this responsibility
and just allow the simple man on the street to continue to freely exercise his right to be
wronged and fend for himself when all is lost.

3
Section 42 of the Companies Act, 2013
4
C.R.L. Narasimhan, Sahara judgment and beyond, THE HINDU, Oct 14, 2012
5
Defined by Investopedia as A fraudulent investing scam promising high rates of return with little risk to
investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam
actually yields the promised returns to earlier investors, as long as there are more new investors. These
schemes usually collapse on themselves when the new investments stop. The Ponzi scam is named after Charles
Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919.,
http://www.investopedia.com/terms/p/ponzischeme.asp#axzz2Jk1TezwP last visited on Nov 29, 2013

- 16 -
GOLDMAN SACHS CASE STUDY
It is generally stated in India that the investment by the non-resident is only allowed only as
Foreign Institutional Investment under the Portfolio Investment Scheme commonly known as
Stock Exchange. It is required for the non-resident to get registered, as a Foreign Institutional
Investor (FII) or as a sub-account of an existing FII, with the Securities & Exchange Board of
India (SEBI), in order to gain eligibility for investment under this route.
Various conditions are given by SEBI which needs to be fulfilled by the non-resident in order
to get registered as an FII. It is also important that the entity should be regulated by the
appropriate regulatory authority overseas where it was incorporated, should have a proper
track record, and should fall within one of the prescribed categories, etc. There are few
further requirements given by the SEBI that in any sub-account wants to be getting registered
under an FII then only the FII should be the investment manager for such sub-account.
Indian stock market is one of those markets in international markets which are emerging and
developing speedily, and has a huge demand among the overseas investors. Though out of
these overseas investors, there are some investors who do not want to get themselves
registered with SEBI, or are not able to get themselves registered due to the conditions
prescribed for the FII registration prescribed by the SEBI. Due to this in the recent years the
practice of issuing Offshore Derivatives Instruments (ODIs) such as Participatory Notes,
Equity Linked Notes, etc. by FIIs to such overseas investors. These ODIs derive their value
from the underlying Indian security. In practice the FIIs does the trade on behalf of such
overseas investors and also issues them ODIs like Participatory Notes.
In India if anyone wants to invest in the Indian Securities then it is necessary to be get
registered with the SEBI, which is a regulatory body that controls the markets. All the FIIs
are those entities which are incorporated or established outside India, but they intend to make
investments in the Indian Market. For the working of the FIIs very strict, programmed and
well organised environment are required and it is also necessary for them to act in
consonance with the guidelines which are prescribed and set by the SEBI (Foreign
Institutional Investors) Guidelines, 1995. But it is also necessary for the FIIs to act in
accordance with the regulatory notifications which are issued by the Reserve Bank of India
(RBI), as the RBI has the power to have the final say on the matters specifically related with
the foreign exchange. As mentioned earlier these FIIs need to be registered with the SEBI.

- 17 -
The entities or the funds which are permitted to be registered as FIIs includes pension funds,
mutual funds, insurance companies/reinsurance companies, investment trusts, banks,
international or multilateral organisations or agencies or a foreign government agency or a
foreign central bank, university funds, endowments which are serving broader social
objectives, foundations which are serving broader social objectives, and charitable
trusts/charitable societies, Portfolio managers, trustees, investment managers/advisors and
asset management companies (AMCs).
The numbers of regulations which are needed to be followed by the non-resident in order to
get registered with the SEBI in order to invest in the Indian Securities are enormous. Also
constant scrutiny is carried out by the regulators. Participatory notes which are also known as
P-Notes or PNs, acts as an easy way or solutions from being registered with the SEBI. P-
notes makes it possible for the investors or the hedge funds to invest in the Indian securities
even they are not registered with the SEBI.
As already mentioned the activities of Foreign Institutional Investor (FIIs) and their sub-
accounts is regulated by the Securities and Exchange Board of India now will be considered
as (board) which framed the Foreign Institutional Investors Regulations, 1995 (for short
Regulations).it was provided by the Regulations that no person shall buy, sell or otherwise
deal in securities as an FII unless he holds a certificate granted by the Board under the
Regulations. An FII is also required to seek from the Board registration of each sub-account
on whose behalf he proposes to make investments in India. Regulation 20 enjoins that every
FII shall, as and when required by the Board or the Reserve Bank of India, submit to the
Board or the Reserve Bank of India, as the case may be, any information, record or
documents in relation to its activities as an FII.
But after some time the board found out that some FIIs in violation of above mentioned
Regulations, were issuing derivatives/financial instruments against Indian securities under
different names such as participatory notes, equity linked notes etc. In order to monitor and
stop this kind of investment by the FIIs the Board issued a circular on 31 October 2001 in
which it ordered that FIIs should report the issuance/renewal/cancelation/redemption of these
instruments to it in a prescribed format. It was further advised by the board that the report
shall be submitted by only those FIIs which issue such instruments and that the reports were
to be submitted only on issuance/renewal/cancellation/redemption of the aforesaid
instruments and only for the month (s) during which the FIIs had issued/ renewed/

- 18 -
cancelled/redeemed those instruments. These reports were required to be submitted on a
monthly basis within a week of the end of the month duly signed and approved by the
compliance officer.
On 8 August 2003 the Board again issued the circular in which the format for reporting the
issuance/renewal/cancellation/redemption of derivatives/financial instruments was revised.
The reports were needed to be submitted in two forms. first report was the one time report
needed to be submitted once only in which the FIIs was required to indicate the outstanding
off-shore derivatives. After this, the FIIs were required to furnish the following undertaking:-
We undertake that we/associates/clients have not issued/ subscribed/purchased any of the
offshore derivative instruments directly or indirectly to/from Indian\
residents/NRIs/PIOs/OCBs.
The second report was need to be submitted for every fortnight from the first day of the
month to the 15th day of the same month and from 16th day of the month till the last day of
the month. The information for each fortnight is required to be submitted within three
working days from the closure of the fortnight. The fortnightly report is also required to
contain an undertaking by the FII or the subaccount, as the case may be, in the following
words:
We undertake that we/associates/clients have not issued/subscribed/purchased any of the off-
shore derivative instruments directly or indirectly to/from Indian residents/NRIs/PIOs/OCBs
during the Statement Period.
This circular was issued under the regulation 20 of the Regulations.
In the case of Goldman Sachs I nvestments (Mauritius) Limited v. Securities and Exchange
Board of I ndia.
6

Goldman Sachs Investment (Mauritius) limited (hereinafter referred to as GSIML) was a
registered sub-account with Board and Gold Sachs & Co was the registered FII. On 25th
November 2002 it issued as a sub-account Off-Shore Derivatives instruments to an Overseas
Corporate Body namely Magnus Corporations LTD. (hereinafter referred to as MCCL). It
was stated by the SEBI that GSIML violated the declaration furnished in the fortnightly
statement on issue of Off-shore derivative instruments submitted to SEBI.

6
Appeal No: 156 of 2006 in the Securities Appellate Tribunal, Mumbai

- 19 -
It was noted that the undertaking, submitted by the Goldman Sachs to SEBI was modified
and different from the prescribed undertaking by the SEBI in their circulars related to
reporting of foreign investment and was qualified by the words as far as it is aware. The
undertaking which was submitted states that:
Goldman Sachs Investment (Mauritius) International Ltd., undertake on behalf of itself and
its affiliates (Goldman Sachs) that as far as it is aware, Goldman Sachs has not entered into
any offshore derivatives on Indian Underlyes directly with Indian Residents, NRIs or OCBs
(each as defined under relevant Indian laws and regulations) during the statement period. As
agreed with SEBI, this undertaking does not extends to persons of Indian Origin, whether
comprising part of the above categories of persons or otherwise.
Due to these faults in the report submitted by the Goldman Sachs to SEBI, the SEBI initiated
the proceeding under chapter VIA of the Securities and Exchange Board of India Act, 1992
(hereinafter called the Act) against the Goldman Sachs & Co as it stated that the aforesaid
company violated the circular and the regulation 13 (1) of the Regulations, by serving the
notice, to show cause why penalty be not imposed in terms of Section 15HB of the Act. The
adjudicating officer imposed a penalty of Rs 1. Crore on Goldman Sachs Investment
(Mauritius) Limited in connection with its issuance of ODIs.
Against this Goldman Sachs Investment (Mauritius) Limited filed appeal in the Securities
Appellate Tribunal, which set aside the order of the SEBI to pay the penalty. It was done
primarily on the two grounds:-
1. Since there was no bar on the FIIs and their sub-accounts to issue/ subscribe/ purchase any
derivative instrument to/ from Indian residents or OCDs, it would be reasonable to presume
that many of them may have dealt with such persons in the course of their business activities.
Consequently, they cannot be asked to furnish an undertaking in the absence of any bar to
deal with such persons.
2. The adjudication officers show cause notice is confusing and does not spell out clearly the
allegations against Goldman Sachs. This, in effect, represents a failure of natural justice.
In an unusual move, SAT also awarded costs to Goldman Sachs to the extent of Rs. 100,000.
The appeal was filed by the SEBI against order of SAT, in the Supreme Court were even the
Supreme Court maintain the order given by the SAT in the favour of Goldman Sachs.

- 20 -
Though it is important to note here that even after the SAT ruled in Goldman Sachs favour,
the undertaking required by the SEBI was still in place and required to be followed by the
FIIs.
IMPACT
The impact of this case was that in order to stop FIIs and their sub-accounts, who are not
registered with SEBI, from issuing P-notes and other offshore derivative Instrument (ODIs),
closing the market to many foreign investors, in the month of October 2007 SEBI made an
announcement regarding the amendment of the regulations governing FIIs. With this another
step was taken by the SEBI in which it relaxations was given regarding the requirements for
registration as an FII or sun-accounts of a FII , in order to encourage direct investment,
instead of P-Notes, especially in the cases of pensions, endowments and foundations. But on
October 2008, l less than one year later, SEBI made another announcement in which it stated
that the October 2007 restrictions on P-Note issuance for securities and derivatives were
suspended effective at the close of market hours on October 7, 2008. All these changes were
implemented through amendments to the FII Regulations on 22 May, 2008. But due to the
ambiguity and lack and definitions, it made difficult for the investors including hedge funds,
and intermediaries to invest in India for their own account and for their clients.
PNs are the market instruments which are created and traded overseas, so Indian regulators
do not have the powers to ban the issue of them. But they can be regulated, and in practice in
present time they are regulated by the securities market regulator in India, SEBI. If any PN is
traded on an overseas exchange, then the regulator of that jurisdiction would have the
authority to regulate that trade.
Participatory notes are used by those FIIs which are not permitted to invest in the Securities
Market and are not specifically dealt with under regulations until 2003. According to
Regulation 15(A) of SEBI regulations 1995, which was inserted in the year of 2004 and later
on amended in the year of 2008 for fulfilling the objective of tightening regulations regarding
PNs which can be issued by those entities, regulated by the relevant regulatory authority in
the countries in which they are incorporated and are subject to compliance of Know Your

- 21 -
Client norms.
7
If the FIIs issues any ODIs against the underlying Indian securities then they
are required to report the issued and outstanding ODIs to SEBI in a prescribed format.
8

In order to control the issuance of off-shore derivatives instrument in October 2007, SEBI in
consultation with the Government decided to impose certain restrictions on the issue of
Participatory Notes (PNs) by FIIs and their sub-accounts. With the changes of 2007, sub-
accounts were made ineligible to issues ODIs and no ODI was allowed to make reference
derivatives traded on an Indian exchange as its underlying asset. The time period of 18
months, until 31 march 2009, was given to FIIs and sub-accounts to close out, cancel or
redeem any non-conforming ODI and further limitations were put on their ability to issue
ODIs which were based on the volume of outstanding instrument. Pursuant to the 2007 FII
Regulations, where the total value of outstanding ODI exceeded 40% of the total assets under
custody on 30 September 2007, the FII was not allowed to issue any additional ODIs except
in the case where it has to replace instrument that have been redeemed or cancelled, and then
only in amounts not in excess of the value of the cancelled or redeemed derivative
instruments, or in respect of bonus shares allotted to the underlying assets of the outstanding
derivatives. Afterward both the restrictions were lifted from the FIIs
9
in order to moderate
the surge in the foreign capital inflows into the country and to address the know-your-client
concerns for the PN holders. However it was noted that such restrictions were in effective. So
in October 2008, SEBI reviewed its earlier decision and decided to remove the above
mentioned restrictions due to the above mentioned factors
10
.
In the year of 2011 another circular was issued by the SEBI in which the new disclosure
norms were silent on the topic of status of NRIs transacting with FIIs
11
. Though the new
disclosure requirement specify an undertaking that needed to be furnished stating that the FII
has not transacted with NRIs and PIOs. Thus by implication, NRIs was able to invest in ODIs
however it remained a grey area as it do not explicitly mentioned that they can invest.
In 2014 SEBI again issued another regulation namely SEBI (Foreign Portfolio Investors)
Regulations 2014 in order to control the issue of OCDs by the FIIs to off-shore investors , on

7
Regulation 15A(1), Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995
8
SEBI circular No. FITTC/CUST/14/2001 dated October 31, 2001.
9
Marilyn Selby Okoshi, India Update: Are P-Notes Okay or Not Okay, available at
http://www.kattenlaw.com/files/Publication/bb5bca57-26b5-4cae-8067-
01ee78a77c65/Presentation/PublicationAttachment/d5546a69-14f3-4880-8466-08e92345f736/Okoshi--
MFA_Reporter--P_Notes.pdf as accessed on September 23, 2014.
10
SEBI circular no.IMD/FII & C/31/2008 dated October 7, 2008.
11
SEBI circular no. CIR/IMD/FIIC/1/2011 dated January 17, 2011

- 22 -
the Indian securities, which are not registered with SEBI and to encourage and simplify
foreign portfolio investments. The objective of the FPI Regulations is to simplify compliance
requirements and have uniform guidelines for various categories of Foreign Portfolio
Investors (FPIs) like Foreign Institutional Investors (FIIs) including their sub-accounts, if any
and Qualified Foreign Investors (QFIs). The Ministry of Finance set up a Working Group on
Foreign Investment (WGFI) in 2010. Based on guidance received from the WGFI, the
Securities and Exchange Board of India (SEBI) constituted a Committee in December 2012
under the Chairmanship of K.M. Chandrashekhar. The Committee, in line with certain policy
announcements made by the Finance Minister in his Budget 2013 speech, proposed a Foreign
Portfolio Investor (FPI) regime. Based on recommendations of the Committee, draft SEBI
(Foreign Portfolio Investors) Regulations, 2013 were released in October 2013. These draft
regulations have now been finalised and notified
12
in the form of SEBI (Foreign Portfolio
Investors) Regulations, 2014 (FPI Regulations).
The FPI Regulations replace the existing SEBI (Foreign Institutional Investor) Regulations,
1995 (FII Regulations) and the Qualified Foreign Investors (QFI) framework, and are
effective from 7 January 2014. in the form of SEBI (Foreign Portfolio Investors) Regulations,
2014 (FPI Regulations).
It was made to put in place a framework for registration and procedures with regard to
foreign investors who propose to make portfolio investment in India. Now these non-
residents are allowed to get registered with SEBI as FPIs:-
Resident of a country whose securities market regulator is a signatory to International
Organization of Securities Commissions Multilateral Memorandum of
Understanding, or
Resident of a country which is signatory to bilateral Memorandum of Understanding
with SEBI, or
If the applicant is a bank, then the bank should be a resident of a country whose
central bank is a member of Bank for International Settlements, or
The applicant should not be resident in a country identified in the public statement of
Financial Action Task Force as a jurisdiction having Anti-Money Laundering (AML)
or combating the Financing of Terrorism (CFT) deficiencies.

12
Notification No. LAD-NRO/GN/2013-14/36/12 dated January 7, 2014

- 23 -
This regime acts as a safeguard as well as barrier from similar scenario preceding the
Goldman Sachs case SEBI as a regulator is making a giant effort to avoid any further
inappropriate transactions undertaken by Goldman Sachs in the grab of an action by a diligent
foreign institutional investors.
CONCLUSION
There are several instance of financial frauds in India, starting from Harshad Mehta, where he
swindled money through fake bank guarantees, to C R Bhansali scam, Ketan Parekh for
circular trading, Vanishing Companies Scam where many companies were reported to have
disappeared from Dalal Street after raising money from the public in 1998, UTI Scam, Home
trade Scam, DSQ Sotware by Dinesh Dalmia, Ramaliga Raju for faking the companies
account, and Subrata Roy wherein he in contempt of court for not repaying the improper
issue of optionally fully convertible debentures. These scams only proved the delay that
existed in the regulatory framework and did not perform the checks and balances required,
and did not cover the greys in the law which worked to the advantage of the defrauder and
against the investor. The investors have not been diligent or have been the recipient of
auditors who have manipulated the accounts and doctored the books, to actively defraud
them. Dishonest corporate issuers, with the help of conniving merchant bankers, financial
institutions and banks and exploiting the utter apathy of the regulatory authorities to crack
down on the wrong doing by the issuers, manipulate cost and income projections through
trickery played in showing sales figures and prices applied (division of domestic as well as
export market sales) or capacity utilization or working capital requirement or exchange or
interest rate fluctuations and defraud the small investors.
The Satyam fraud has shattered the dreams of different categories of investors, shocked the
government and regulators alike and led to questioning the accounting practices of statutory
auditors and corporate governance norms in India. Severe corporate governance problems
emerge out of the above-mentioned corporate wreckage. Corporate scandals especially in the
United States triggered reforms in corporate governance, accounting practices and disclosures
the world over. Enron debacle in 2001 and number of other scandals involving large US
companies around that period set in motion the corporate governance reform process and
resulted in the passing of the Sarbanes-Oxley Act, 2002. The main objective of the Oxley Act
is to repose investors confidence by preventing corporate frauds and ensuring transparency

- 24 -
and disclosures. Similar kinds of corporate governance reforms are needed in India too. There
is need to reform corporate governance in India by taking harsh policy measures. Even
though corporate governance mechanisms cannot prevent unethical activity by top
management completely, but they can at least act as a means of detecting such activity before
it is too late.
The FPI Regulations are expected to simplify & expedite the entry norms for portfolio
investors into India. These regulations rationalize the categorization of investors, KYC
requirements and investment conditions. This is a welcome development and is expected to
facilitate portfolio investments in the country. The implementation of FPI Regulations would
necessitate appropriate re-alignment in income tax laws, FDI Policy, Foreign Exchange
Management laws and other laws. SEBI might also need to issue clarifications with respect to
compliance of certain aspects of the FPI Regulations (such as revised investment caps,
Participatory Note structures, investment in unlisted shares etc.) by existing FIIs. In order to
remove uncertainty in tax treatment of FPIs, the Department of Economic Affairs, GOI has
recently issued a communication to SEBI and CBDT stating that all the three categories of
FPIs would get similar treatment as presently available to FIIs. However, the same can be
implemented only once it is formalized by CBDT either through a notification or a specific
amendment to the income tax law.

- iii -
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1. TANNANS BANKING LAW AND PRACTICE, ML Tannan (LexisNexis Butterworth, 23
rd
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2. CORPORATE GOVERNANCE AND SATYAM SCAM, Jitender Kumar Rajender Kumar,
Vignettes of Research Vol. I Issue IV, 45 (Oct. 2013).
3. Corporate Governance: An International Review, Volume 12 No. 1 Jan. 2004.
4. Corporate Governance: Experiences from the Regional Corporate Governance
Roundtable, A survey of OECD Countries, OECD 2004. www.oecd.org /daf/corporate-
affairs.
5. Does Better Corporate Governance lead to Stock market Development and Capital
Accumulation? A Case Study of India. Prabirjit. Sarkar University of Cambridge: Queens
College (2007).
6. Investors Beware: How Small Investors Lost-out in the Spiral of Booms and Bust,
Virender Jain McMillan India Limited, 78-130.
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