FINANCIAL MARKET SCAMS

Bachelor of Commerce
(Financial Markets)
Semester V
(2013-14)

Submitted by
NAME OF STUDENT

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)
MUMBAI-50

FINANCIAL MARKET SCAMS

Bachelor of Commerce
(Financial Markets)
Semester V
(2013-14)

Submitted
In Partial Fulfillment of the requirements
For the Award of Degree of Bachelor of
Commerce Banking & Insurance

By
TWINKLE KESWANI

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)
MUMBAI-50

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)
MUMBAI-50
CERTIFICATE
(2013 2014)
This is to certify thatTWINKLE KESWANI of B.Com (Financial Markets) Semester
V (2013-14) has successfully completed the project on FINANCIAL MARKET
SCAMS under the guidance of Ms. MEGHNA R. MENON.
Date:Place:-

Prof. Ms. HARSHA HARDASANI

(Course Coordinator)

Prof. Ms. MEGHNA R. MENON

(Project Guide)
External Examiner

Dr. ASHOK VANJANI

(Principal)

DECLARATION

Date:-

I,Miss. TWINKLE KESWANI the student of B.Com (Financial Markets) Semester

V

(2013-14)

hereby

declare

that

have

completed

the

project

FINANCIAL MARKET SCAMS successfully.

The information submitted is true and original to the best of my knowledge.

Thank you,

Yours faithfully,

TWINKLE KESWANI

on

ACKNOWLEDGEMENT

At the beginning, I would like to thank Almighty God for his shower of blessing. The
desire of completing this dissertation was given a way by my guide Prof. MEGHNA
R. MENON. I am very much thankful to her for the guidance, support and for sparing
his precious time from a busy and hectic schedule.
I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College. My
sincere thanks to Prof. HARSHA HARDASANI who always motivated and
provided a helping hand for conceiving higher education.
I would fail in my duty if I dont thank my parents who are pillars of my life. Finally,
I would express my gratitude to all those persons who directly and indirectly helped
me in completing dissertation.

TWINKLE KESWANI

DECLARATION

Date:-

I the undersigned Prof. MEGHNA R. MENON, have guidedTWINKLE

KESWANI for her project, he/she has completed the project FINANCIAL
MARKET SCAMS successfully.

I hereby, declared that information provided in this project is true as per the best of
my knowledge.

Thank you,

Yours faithfully,

Prof. MEGHNA R. MENON

EXECUTIVE SUMMARY
This research seeks to outline what we know (and what we have yet to learn) about
financial market scams its prevalence, victims, perpetrators, and methods.
Particular attention is paid to works with original data and research, and the
examination is limited to those publications directly concerned with fraud.
Prevalence:
There is no question that financial fraud is a major problem. With tens of billions of
dollars lost each year to tens of millions of victims, fraud is a pressing concern. This
urgency is reflected in priorities of the American government, with the US Attorney
General naming financial fraud one of three top priorities, after terrorism and violent
crime. Yet current estimates of frauds impact likely understate the costs, as underreporting and under-admitting hamper our best efforts to measure fraud. It is possible
that measurable fraud losses are but a fraction and potentially a minor fraction
of the fraud costs to individuals and society.
Victims:
The safest assumption is that everyone is susceptible to fraud, though the degree of
either exposure or susceptibility may vary by fraud type. Some people may, through
circumstance or behavior, find themselves frequently targeted by fraudsters and
occasionally victimized, while other individuals may be less exposed and thus go
victimized, regardless of their susceptibility to the tactics of con artists. Although
research has yet to identify unique markers of personal vulnerability, the
demographic, behavioral and psychological profiles of victims are relatively well
studied.

Fraudsters:
Fraudsters are, by intention, largely hidden. This complicates systematic research and
profiling efforts. In spite of these limitations, interviews, surveys, anecdotal evidence,
and emerging experimental studies are beginning to identify the correlations and
causes of fraudulent behavior. What information is available aligns with popular
stereotypes that con men are likely to be white, young or middle-aged men from
middle-class backgrounds, often characterized as middle class failures. However,
these stereotypes and initial studies make substantial use of common sense
assumptions that may be mistaken. Additional data and experimentation is necessary
before we can make conclusive statements about the nature and motivations of
fraudsters.
Methods:
Successful fraud looks just good enough to be true. By mimicking the persuasive
strategies, communication streams, and payment mechanisms of legitimate
commerce, skilled fraudsters give few indications that their offers are scams.
Fraudsters methods anticipate informed, skeptical consumers by providing numerous
markers of legitimacy, authenticity, and appeals to trust.

Scams covered:1.) The Harshad Mehta Scam

2.) The Satyam Scam
3.) The 2g Spectrum Scam
4.) The Ketan Parekh Scam

INDEX
SR.N
O.

TOPIC

1
INTODUCTION
2
THE HARSHAD MEHTA SCAM
3
Harshad Mehta, the high profile stock
broker
4
Transition from ordinary broker to the big
bull
5
The making of the 1992 scam
6
The 1992 scam and its exposure
7
Complicit Leaders
8
Outcome
9

10

I-T, PSBs recover dues nine years after

Mehta's death
Harshad Mehta scam: Rs 2,196 cr
released

11
THE SATYAM SCAM
12
Background

PAGE

13
Emergence of Satyam computer services
14
Satyams Founder, Chairman and CEO, Mr.
Rajus Letter to his Board of Directors
15
Auditors role and factors contributing to
fraud
16
Aftermath of Satyam Scandal
17
Investigation: Civil and Criminal Charges
18
Corporate governance issues at Satyam
19
Lessons learnt from Satyam scam
20
2G SPECTRUM SCAM
21
THE KETAN PAREKH SCAM
22
The crash that shook the nation
23
The man who triggered the cash
24
The system that bred these factors
25
The people that the system duped
26
CONCLUSION
27
REFERENCES

INTRODUCTION

Financial fraud can be broadly defined as an intentional act of deception involving

financial transactions for purpose of personal gain. Fraud is a crime, and is also a civil
law violation. Many fraud cases involve complicated financial transactions conducted
by 'white collar criminals' such as business professionals with specialized knowledge
and criminal intent.
An unscrupulous investment broker may present clients with an opportunity to
purchase shares in precious metal repositories, for example. His status as a
professional investor gives him credibility, which can lead to justified credibility
among potential clients. Those who believe the opportunity to be legitimate contribute
substantial amounts of cash and receive authentic-looking bond documentation in
return. If the investment broker is fully aware that no such repositories exist and still
receives payments for worthless bonds, then victims may sue him for fraud.
Fraudsters can contact their potential victims through many methods, which include
face- to-face interaction, by post, phone calls, sms and/or emails. The difficulty of
checking identities and legitimacy of individuals and companies, the ease with which
fraudsters can divert visitors to dummy sites and steal personal financial information,
the international dimensions of the web and ease with which fraudsters can hide their
true location, all contribute to making internet fraud the fastest growing area of fraud.

THE HARSHAD MEHTA SCAM

Harshad Mehta: the high-profile stockbroker

Harshad Shantilal Mehta (1954-2002) was an Indian stockbroker who grabbed
headlines for the notorious BSE security scam of 1992. Born in a lower middle-class
Gujarati Jain family, Mehta spent his early childhood in Mumbai where his father was
a small-time businessman. The family relocated to Raipur in Chhattisgarh after
doctors advised Mehtas father to shift to a drier place on account of his health.
Transition from an ordinary broker to Big Bull
Mehta studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur. He quit
his job at The New India Assurance Company in 1980 and sought a new one with
BSE-affiliated stockbroker P. Ambalal before going on to become a jobber on the BSE
for stockbroker P.D. Shukla. In 1981, Mehta became a sub-broker for stockbrokers
J.L. Shah and NandalalSheth. Having gained considerable experience as a sub-broker,
he teamed up with his brother Sudhir to float a new venture called Grow More
Research and Asset Management Company Limited. When the BSE auctioned a
brokers card, the Mehta duos company bid for it with the financial support of J.L.
Shah and NandalalSheth. Another name that is rumored to have a crucial hand in the
scam was Nimesh Shah. However, Shah could keep a safe distance from the
accusations and is currently known to be a heavy player in the Indian stock market.
By year 1990, Mehta became a prominent name in the Indian stock market. He started
buying shares heavily. The shares of India's foremost cement manufacturer Associated
Cement Company (ACC) attracted him the most and the scamster is known to have
taken the price of the cement company from 200 to 9000 (approx.) in the stock market
implying a 4400% rise in its price. It is believed that It was later revealed that Mehta
used the replacement cost theory to explain the reason for the high-level bidding. The
replacement cost theory basically states that older companies should be valued on the

basis of the amount of money that would be needed to create another similar
company. By the latter half of 1991, Mehta had come to be called the Big Bull as
people credited him with having initiated the Bull Run.

The making of the 1992 security scam

Mehta, along with his associates, was accused of manipulating the rise in the Bombay
Stock Exchange (BSE) in 1992. They took advantage of the many loopholes in the
banking system and drained off funds from inter-bank transactions. Subsequently,
they bought huge amounts of shares at a premium across many industry verticals
causing the Sensex to rise dramatically. However, this was not to continue. The
exposure of Mehta's modus operandi led banks to start demanding their money back,
causing the Sensex to plunge almost dramatically as it had risen. Mehta was later
charged with 72 criminal offences while over 600 civil action suits were filed against
him..
The 1992 security scam and its exposure
Mehta's illicit methods of manipulating the stock market were exposed on April 23,
1992, when veteran columnist SuchetaDalal wrote an article in India's national daily
The Times of India. Dalals column read: The crucial mechanism through which the
scam was effected was the ready forward (RF) deal. The RF is in essence a secured
short-term (typically 15-day) loan from one bank to another. Crudely put, the bank
lends against government securities just as a pawnbroker lends against jewelers. The
borrowing bank actually sells the securities to the lending bank and buys them back at
the end of the period of the loan, typically at a slightly higher price. In a readyforward deal, a broker usually brings together two banks for which he is paid a
commission. Although the broker does not handle the cash or the securities, this was

not the case in the prelude to the Mehta scam. Mehta and his associates used this RF
deal with great success to channel money through banks.

The securities and payments were delivered through the broker in the settlement
process. The broker functioned as an intermediary who received the securities from
the seller and handed them over to the buyer; and he received the check from the
buyer and subsequently made the payment to the seller. Such a settlement process
meant that both the buyer and the seller may not even know the identity of the other
as only the broker knew both of them. The brokers could manage this method expertly
as they had already become market makers by then and had started trading on their
account. They pretended to be undertaking the transactions on behalf of a bank to
maintain a faade of legality.
Mehta and his associates used another instrument called the bank receipt (BR).
Securities were not traded in reality in a ready forward deal but the seller gave the
buyer a BR which is a confirmation of the sale of securities. A BR is a receipt for the
money received by the selling bank and pledges to deliver the securities to the buyer.
In the meantime, the securities are held in the sellers trust by the buyer.
Complicit lenders
Armed with these schemes, all Mehta needed now were banks which would readily
issue fake BRs, or ones without the guarantee of any government securities. His
search ended when he found that the Bank of Karad (BOK), Mumbai and the
Metropolitan Co-operative Bank (MCB) two small and little known lenders, were
willing to comply. The two banks agreed to issue BRs as and when required. Once
they issued the fake BRs, Mehta passed them on to other banks who in turn lent him
money, under the false assumption that they were lending against government
securities. Mehta used the money thus secured to enhance share prices in the stock
market. The shares were then sold for significant profits and the BR retired when it
was time to return the money to the bank.

Outcome
Mehta continued with his manipulative tactics, triggering a massive rise in the prices
of stock and thereby creating a feel-good market trajectory. However, upon the
exposure of the scam, several banks found they were holding BRs of no value at all.
Mehta had by then swindled the banks of a staggering Rs 4,000 crore. The scam came
under scathing criticism in the Indian Parliament, leading to Mehta's eventual
imprisonment. The scams exposure led to the death of the Chairman of the
VijayaBank who reportedly committed suicide over the exposure. He was guilty of
having issued checks to Mehta and knew the backlash of accusations he would have
to face from the public.
A few years later, Mehta made a brief comeback as a stock market expert and started
providing investment tips on his website and in a weekly newspaper column. He
worked with the owners of a few companies and recommended the shares of those
companies only. When he died in 2002, Mehta had been convicted in only one of the
27 cases filed against him. What attracted the taxmans attention was Mehta's advance
tax payment of Rs 28-crore for the financial year 1991-92. Another eye-catcher was
his extravagant lifestyle.
I-T, PSBs recover dues nine years after Mehta's death
Nine years after Harsad Mehta died, the I-T department and public sector banks
(PSBs) have successfully recovered a significant portion of their claims emerging out
of the securities scam from his liquidated assets. The Supreme Court directed the
Custodian of the attached properties and assets of the Harshad Mehta Group (HMG)
in March 2011 to make payments of Rs1,995.66-crore to the I-T department and Rs
199.25-crore to the State Bank of India (SBI), making the two institutions two of the
earliest claimants to recover their dues.
While the SBIs total principal amount claim of Rs 1,000-crore have been largely
settled, financial institutions have also received some money. However, Standard

Chartered Bank, which had claimed Rs 500-crore, has yet to recover its dues it was
one of the late claimants. Although the total claim over the HMG is of more than
Rs.20, 000 crore, the apex court has said that for the present, it would only consider
Harshad Mehta scam: Rs 2,196 cr released

Nearly Rs 2,000 crore has been added to the government kitty as the Custodian
appointed by the Central government to deal with the securities scam of 1992
involving Harshad Mehta on Wednesday released the payment of Rs 2,196 crore to
the affected parties.Of this, while the Income-Tax Department, which claimed top
priority for income-tax liability over liabilities of banks and other creditors, got the
lion's share of Rs 1,995.66 crore, State Bank of India received Rs 199.25
crore.SatishLoomba, Custodian (Trial of Offences Relating to Transactions in
Securities), finance ministry, handed over the amount to the I-T and SBI officials. It
was the second tranche of payments settled by the Custodian from the liquidated
assets of the Harshad Mehta Group (HMG) of entities against the pending claims so
far.The amount was released after the Supreme Court declined to grant any stay
against the distribution order made by Justice DK Deshmukh of the Special Court,
Mumbai on February 25, 2011 in respect of payments to be made to IT and the SBI.
"Standard Chartered Bank (which is likely to be paid Rs 500 crore), CanFin, Andhra
Bank Financial Services are among entities which are yet to get their dues from the
settlement," said Loomba. "National Housing Bank (NHB) doesn't figure in the list of
available decree. In the earlier settlement, we had made a payment of Rs 600 crore to
the SBI and this time we paid them around Rs 200 crore."
The Joint Parliamentary Committee, set up to probe the scam, had estimated the scam
at around Rs 4,400 crore. As the I-T department had earlier got Rs 1,227 crore in two
stages till 2004, the total recovery of the I-T Department works out to around Rs

3,222 crore. "We have available assets which has been allowed to be paid from the
HMG kitty at Rs 4,500 crore," said Loomba, adding that the remaining amount of Rs
400-500 crore would be settled later. "Though the entire amount involved in the case
may run into Rs 34,000 crore, we are assessing only Rs 20,000 crore in the case.
However, we are initially settling the principal amount only, while things like interest
and penalty would be settled later," said NilimaMansukhani, chief commissioner of
income tax, Maharashtra

SATYAM SCAM

BACKGROUND

Ironically, Satyam means truth in the ancient Indian language Sanskrit. Satyam
won the Golden Peacock Award for the best governed company in 2007 and in
2009. From being Indias IT crown jewel and the countrys fourth largest
company with highprofile customers, the outsourcing firm Satyam Computers has
become embroiled in the nations biggest corporate scam in living memory (Ahmad,
et al., 2010). Mr. RamalingaRaju (Chairman and Founder of Satyam; henceforth
called Raju), who has been arrested and has confessed to a
$1.47 billion (or Rs. 7,800 crore) fraud, admitted that he had made up profits for
years. According to reports, Raju and his brother, B. Rama Raju, who was the
Managing Director, hid the deception from the companys board, senior managers,
and auditors. The case of Satyams accounting fraud has been dubbed as Indias
Enron. In order to evaluate and understand the severity of Satyams fraud, it is
important to understand factors that contributed to the unethical decisions made by
the companys executives. First, it is necessary to detail the rise of Satyam as a
competitor within the global IT services market-place. Second, it is helpful to evaluate
the driving-forces behind Satyams decisions: RamalingaRaju. Finally, attempt to
learn some lessons from Satyam fraud for the future.

EMERGENCE OF SATYAM COMPUTER SERVICES

Satyam Computer Services Limited was a rising-star in the Indian outsourced ITservices industry. The company was formed in 1987 in Hyderabad (India) by Mr.
RamalingaRaju. The firm began with 20 employees and grew rapidly as a global
business. It offered IT and business process outsourcing (BPO) services spanning
various sectors. Satyam was as an example of Indias growing success. Satyam won

numerous awards for innovation, governance, and corporate accountability. As

Agrawal and Sharma (2009) states, In 2007, Ernst & Young awarded Mr. Raju with
the Entrepreneur of the Year award. On April 14, 2008, Satyam wonawards from
MZ Consults for being a leader in India in CG and accountability. In September
2008, the World Council for Corporate Governance awarded Satyam with the Global
Peacock Award for global excellence in corporate accountability. Unfortunately, less
than five months after winning the Global Peacock Award, Satyam became the
centerpiece of a massive accounting fraud. By 2003, Satyams IT services businesses
included 13,120 technical associates servicing over 300 customers worldwide. At that
time, the world-wide IT services market was estimated at nearly $400 billion, with an
estimated annual compound growth rate of 6.4%. The markets major drivers at that
point in time were the increased importance of IT services to businesses worldwide;
the impact of the Internet on eBusiness; the emergence of a highquality IT services
industry in India and their methodologies; and, the growing need of IT services
providers who could provide a range of services. (Caraballo, 2010) To effectively
compete, both against domestic and global competitors, the company embarked on a
variety of multipronged business growth strategies. From 2003-2008, in nearly all
financial metrics of interest to investors, the company grew measurably. Satyam
generated USD $467 million in total sales. By March 2008, the company had grown
to USD $2.1 billion. The company demonstrated an annual compound growth rate of
35% over that period. Operating profits averaged 21%. Earnings per share similarly
grew, from $0.12 to $0.62, at a compound annual growth rate of 40%. Over the same
period (20032009), the company was trading at an average trailing EBITDA multiple
of 15.36. Finally, beginning in January 2003, at a share price of 138.08 INR, Satyams
stock would peak at 526.25 INRa 300% improvement in share price after nearly five
years (www.capitaliq.com). Satyam clearly generated significant corporate growth
and shareholder value. The company was a leading starand a recognizable namein a

global IT marketplace. The external environment in which Satyam operated was

indeed beneficial to the companys growth. But, the numbers did not represent the full
picture.

EXHIBIT 1: Satyams Founder, Chairman and CEO, Mr. Rajus Letter to his
Board of Directors
To The Board of Directors,
Satyam Computer Services Ltd.
From: B. RamalingaRaju
Chairman, Satyam Computer Services Ltd.
January 7, 2009
Dear Board Members,
It is with deep regret, and tremendous burden that I am carrying on my conscience,
that I would like to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008: (a) Inflated (non-existent)
cash and bank balances of Rs.5,040crore (as against Rs. 5,361 crorereflected in the
books); (b) An accrued interest of Rs. 376 crore which is non-existent; (c) An
understated liability of Rs. 1,230 crore on account of funds arranged by me; and (d)
An over stated debtors position of Rs. 490 crore (as against Rs. 2,651 reflected in the
books).
2. For the September quarter (Q2), we reported a revenue of Rs.2,700crore and an
operating margin of Rs. 649 crore (24% of revenues) as against the actual revenues

ofRs. 2,112 crore and an actual operating margin of Rs. 61 Crore (3% of revenues).
This has resulted in artificial cash and bank balances going up by Rs. 588 crore in Q2
alone. The gap in the Balance Sheet has arisen purely on account of inflated profits
over a period of last several years (limited only to Satyam standalone, books of
subsidiaries reflecting true performance). What started as a marginal gap between
actual operating profit and the one reflected in the books of accounts continued to
grow over the years. It has attained unmanageable proportions as the size of company
operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the
September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in
the real profits and the one reflected in the books was further accentuated by the fact
that the company had to carry additional resources and assets to justify higher level of
operations thereby significantly increasing the costs. Every attempt made to
eliminate the gap failed. As the promoters held a small percentage of equity, the
concern was that poor performance would result in a take-over, thereby exposing the
gap. It was like riding a tiger, not knowing how to get off without being eaten.The
aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with
real ones.
Maytas investors were convinced that this is a good divestment opportunity and a
strategic fit.
Once Satyams problem was solved, it was hoped that Maytas payments can be
delayed. But that was not to be. What followed in the last several days is common
knowledge. I would like the Board to know:
1. That neither myself, nor the Managing Director (including our spouses) sold any
shares in the last eight yearsexcepting for a small proportion declared and sold for
philanthropic purposes.

2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam
(not reflected in the books of Satyam) to keep the operations going by resorting to
pledging all the promoter shares and raising funds from known sources by giving all
kinds of assurances (Statement enclosed, only to the members of the board).
Significant dividend payments, acquisitions, capital expenditure to provide for growth
did not help matters. Every attempt was made to keep the wheel moving and to ensure
prompt payment of salaries to the associates. The last straw was the selling of most of
the pledged share by the lenders on account of margin triggers.
3. That neither me, nor the Managing Director took even one rupee/dollar from the
company and have not benefitted in financial terms on account of the inflated results.
4. None of the board members, past or present, had any knowledge of the situation in
which the company is placed. Even business leaders and senior executives in the
company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda,
VirenderAgarwal, A.S. Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish Mehta,
Murali V, SriramPapani, KiranKavale, Joe Lagioia, RavindraPenumetsa, Jayaraman
and Prabhakar Gupta are unaware of the real situation as against the books of
accounts. None of my or Managing Directors immediate or extended family
members has any idea about these issues. Having put these facts before you, I leave it
to the wisdom of the board to take the matters forward.
However, I am also taking the liberty to recommend the following steps:
1. A Task Force has been formed in the last few days to address the situation arising
out of the failed Maytas acquisition attempt. This consists of some of the most
accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and
VirenderAgarwal, representing business functions, and A.S. Murthy, Hari T and
Murali V representing support functions. I suggest that Ram Mynampatibe made the

Chairman of this Task Force to immediately address some of the operational matters
on hand. Ram can also act as an interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger
opportunities.
3. You may have a restatement of accounts prepared by the auditors in light of the
facts that I have placed before you. I have promoted and have been associated with
Satyam for well over twenty years now. I have seen it grow from few people to
53,000 people, with 185 Fortune 500 companies as customers and operations in 66
countries. Satyam has established an excellent leadership and competency base at all
levels. I sincerely apologize to all Satyamites and stakeholders, who have made
Satyam a special organization, for the current situation. I am confident they will stand
by the company in this hour of crisis. In light of the above, I fervently appeal to the
board to hold together to take some important steps. With the hope that members of
the Task Force and the financial advisor, Merrill Lynch (now Bank of America) will
stand by the company at this crucial hour, I am marking copies of this statement to
them as well. Under the circumstances, I am tendering my resignation as the chairman
of Satyam and shall continue in this position only till such time the current board is
expanded. I am now prepared to subject myself to the laws of the land and face
consequences thereof.
Signature
(B. RamalingaRaju)

Greed for money, power, competition, success and prestige compelled Mr. Raju to
ride the tiger, which led to violation of all duties imposed on them as fiduciariesthe

duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards
the stakeholders. According to Damodaran (2012), The Satyam scandal is a classic
case of negligence of fiduciary duties, total collapse of ethical standards, and a lack of
corporate social responsibility. It is human greed and desire that led to fraud. This
type of behavior can be traced to: greed overshadowing the responsibility to meet
fiduciary duties; fierce competition and the need to impress stakeholders especially
investors, analysts, shareholders, and the stock market; low ethical and moral
standards by top management; and, greater emphasis on shortterm performance.
According to CBI, the Indian crime investigation agency, the fraud activity dates back
from April 1999, when the company embarked on a road to doubledigit annual
growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion
dollars. Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited, a
leading infrastructure development, construction and project management company,
for $300 million. Here, the Rajusshad a 37% stake. The total turnover was $350
million and a net profit of $20 million. Rajus also had a 35% share in Maytas
Properties, another real-estate investment firm. Satyam revenues exceeded $1 billion
in 2006. In April, 2008 Satyam became the first Indian company to publish IFRS
audited financials.
On December 16, 2008, the Satyam board, including its five independent directors
had approved the founders proposal to buy the stake in Maytas Infrastructure and all
of Maytas Properties, which were owned by family members of Satyams Chairman,
RamalingaRaju, as fully owned subsidiary for $1.6 billion. Without shareholder
approval, the directors went ahead with the managements decision. The decision of
acquisition was, however, reversed twelve hours after investors sold Satyams stock
and threatened action against the management. This was followed by the law-suits
filed in the U.S. contesting Maytas deal. The World Bank banned Satyam from

conducting business for 8 years due to inappropriate payments to staff and inability to
provide information sought on invoices. Four independent directors quit the Satyam
board and SEBI ordered promoters to disclose pledged shares to stock exchange.
According to Investors Protection and Redressal Forum, Investment bank DSP
Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for the
company, ultimately blew the whistle and terminated its engagement with the
company soon after it found financial irregularities (Blakely, 2009).
In the context of whistle-blowing, Bowen et al., (2010) concludes that Our results
suggest whistle-blowing is far from a trivial nuisance for targeted firms, and on
average, appears to be a useful mechanism for uncovering agency issues. On 7
January 2009, Saytams Chairman, RamalingaRaju, resigned after notifying board
members and the Securities and Exchange Board of India (SEBI) that Satyams
accounts had been falsified. Raju confessed that Satyams balance sheet of September
30, 2008, contained the following irregularies. He faked figures to the extent of Rs.
5,040 crore of non-existent cash and bank balances as against Rs. 5,361 crore in the
books, accrued interest ofRs. 376 crore (non-existent), understated liability of Rs.
1,230 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. 2,700 crore and an operating
margin of Rs. 649 crore, while the actual revenue was Rs. 2,112 crore and the margin
was Rs. 61 crore. In other words, Raju: (a) inflated figures for cash and bank
balances of US$1.04 billion vs. US$1.1 billion reflected in the books; (b) an accrued
interest of US$77.46 million which was nonexistent; (c) an understated liability of
US$253.38 million on account of funds was arranged by himself; and (d) an
overstated debtors' position of US$100.94 million vs. US$546.11 million in the
books.Raju claimed in the same letter that neither he nor the managing director had

benefited financially from the inflated revenues, and none of the board members had
any knowledge of the situation in which the company was placed.
The fraud took place to divert company funds into real-estate investment, keep high
earnings per share, raise executive compensation, and make huge profits by selling
stake at inflated price. In this context, Kirpalani (2009) stated, The gap in the balance
sheet had arisen purely on account of inflated profits over a period that lasted several
years starting in April 1999. What accounted as a marginal gap between actual
operating profit and the one reflected in the books of accounts continued to grow over
the years. This gap reached unmanageable proportions as company operations grew
significantly, Ragu explained in his letter to the board and shareholders. He went on
to explain, Every attempt to eliminate the gap failed, and the aborted Maytas
acquisition deal was the last attempt to fill the fictitious assets with real ones. But the
investors thought it was a brazen attempt to siphon cash out of Satyam, in which the
Raju family held a small stake, into firms the family held tightly.
Fortunately, the Satyam deal with Matyas was salvageable. It could have been saved
only if the deal had been allowed to go through, as Satyam would have been able to
use Maytasassetsto shore up its own books. Raju, who showed artificial cash on
his books, had planned to use this non-existent cash to acquire the two Maytas
companies (Besson, 2009). As part of their tunneling strategy, the Satyam
promoters had substantially reduced their holdings in company from 25.6% in March
2001 to 8.74% in March 2008. Furthermore, as the promoters held a very small
percentage of equity (mere 2.18%) on December 2008, as shown in Table 5, the
concern was that poor performance would result in a takeover bid, thereby exposing
the gap. It was like riding a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the final, desperate effort to cover up the
accounting fraud by bringing some real assets into the business. When that failed,

Raju confessed the fraud. Given the stake the Rajus held in Matyas, pursuing the deal
would not have been terribly difficult from the perspective of the Rajufamily.
As pointed out by Shirur (2011), Unlike Enron, which sank due to agency problem,
Satyam was brought to its knee due to tunneling. The company with a huge cash pile,
with promoters still controlling it with a small per cent of shares (less than 3%), and
trying to absorb a real-estate company in which they have a majority stake is a deadly
combination pointing prima facie to tunneling. The reason why RamalingaRaju
claims that he did it was because every year he was fudging revenue figures and since
expenditure figures could not be fudged so easily, the gap between actual profit and
book profit got widened every year. In order to close this gap, he had to buy Maytas
Infrastructure and Maytas Properties. In this way, fictitious profits could be absorbed
through a self-dealing process. The auditors, bankers, and SEBI, the market
watchdog, were all blamed for their role in the accounting fraud.THE

AUDITORS ROLE AND FACTORS CONTRIBUTING TO FRAUD

Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyams books from
June 2000 until the discovery of the fraud in 2009. Several commentators criticized
PwC harshly for failing to detect the fraud (Winkler, 2010). Indeed, PwC signed
Satyams financial statements and was responsible for the numbers under the Indian
law. One particularly troubling item concerned the $1.04 billion that Satyam claimed
to have on its balance sheet in non-interest-bearing deposits. According to
accounting professionals, any reasonable company would have either invested the
money into an interest-bearing account, or returned the excess cash to the
shareholders. The large amount of cash thus should have been a red-flag for the
auditors that further verification and testing was necessary. Furthermore, it appears

that the auditors did not independently verify with the banks in which Satyam claimed
to have deposits (Blakely, 2009). Additionally, the Satyam fraud went on for a
number of years and involved both the manipulation of balance sheets and income
statements.
Whenever Satyam needed more income to meet analyst estimates, it simply created
fictitious sources and it did so numerous times, without the auditors ever discovering
the fraud. Suspiciously, Satyam also paid PwC twice what other firms would charge
for the audit, which raises questions about whether PwC was complicit in the fraud.
Furthermore, PwC audited the company for nearly 9 years and did not uncover the
fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence in
merely 10 days (Thaindian News, 2009). Missing these red-flags implied either that
the auditors were grossly inept or in collusion with the company in committing the
fraud. PWC initially asserted that it performed all of the company's audits in
accordance with applicable auditing standards. Numerous factored contributed to the
Satyam fraud.
The independent board members of Satyam, the institutional investor community, the
SEBI, retail investors, and the external auditornone of them, including professional
investors with detailed information and models available to them, detected the
malfeasance. The following is a list of factors that contributed to the fraud: greed,
ambitious corporate growth, deceptive reporting practiceslack of transparency,
excessive interest in maintaining stock prices, executive incentives, stock market
expectations, nature of accounting rules, ESOPs issued to those who prepared fake
bills, high risk deals that went sour, audit failures (internal and external),
aggressiveness of investment and commercial banks, rating agencies and investors,
weak independent directors and audit committee, and whistle-blower policy not being
effective.

AFTERMATH OF SATYAM SCANDAL

Immediately following the news of the fraud, Merrill Lynch terminated its
engagement with Satyam, Credit Suisse suspended its coverage of Satyam, and
PricewaterhouseCoopers (PwC) 1998, compared to a high of 544 rupees in 2008. In
the New York Stock Exchange, Satyam shares peaked in 2008 at US$ 29.10; by
March 2009 they were trading around US $1.80. Thus, investors lost $2.82 billion in
Satyam (BBC News, 2009). Unfortunately, Satyam significantly inflated its earnings
and assets for years and rolling down Indian stock markets and throwing the industry
into turmoil (Timmons and Wassener, 2009). Criminal charges were brought against
Mr. Raju, including: criminal conspiracy, breach of trust, and forgery. After the
Satyam fiasco and the role played by PwC, investors became wary of those companies
who are clients of PwC (Blakely), which resulted in fall in share prices of around 100
companies varying between 515%. The news of the scandal (quickly compared with
the collapse of Enron) sent jitters through the Indian stock market, and the benchmark
Sensex index fell more than 5%. Shares in Satyam fell more than 70%. The chart
titled as Fall from grace, shown in Exhibit 3 depicts the Satyams stock decline
between December 2008 and January 2009:came under intense scrutiny and its
license to operate was revoked. Coveted awards won by Satyam and its executive
management were stripped from the company (Agarwal and Sharma, 2009). Satyams
shares fell to 11.50 rupees on January 10, 2009, their lowest level since March
Exhibit 3: Stock Charting of Satyam from December 2008 to January 2009

By mid-March, several major players in the IT field had gained enough confidence in
Satyams operations to participate in an auction process for Satyam. The Securities
and Exchange Board of India (SEBI) appointed a retired Supreme Court Justice,
Justice Bharucha, to oversee the process and instill confidence in the transaction.
Several companies bid on Satyam on April 13, 2009. The winning bidder, Tech
Mahindra, bought Satyam for $1.13 per shareless than a third of its stock market
value before Mr. Raju revealed the fraudand salvaged its operations [32]. Both Tech
Mahindra and the SEBI are now fully aware of the full extent of the fraud and India
will not pursue further investigations. The stock has again stabilized from its fall on
November 26, 2009 and, as part of Tech Mahindra, Saytam is once again on its way
toward a bright future.

INVESTIGATION: CRIMINAL AND CIVIL CHARGES

The investigation that followed the revelation of the fraud has led to charges against
several different groups of people involved with Satyam. Indian authorities arrested
Mr. Raju, Mr. Rajus brother, B. RamuRaju, its former managing director,
SrinivasVdlamani, the companys head of internal audit, and its CFO on criminal
charges of fraud. Indian authorities also arrested and charged several of the companys
auditors (PwC) with fraud. The Institute of Chartered Accountants of India [33] ruled
that the CFO and the auditor were guilty of professional misconduct. The CBI is
also in the course of investigating the CEOs overseas assets. There were also several
civil charges filed in the US against Satyam by the holders of its ADRs. The
investigation also implicated several Indian politicians. Both civil and criminal
litigation cases continue in India and civil litigation continues in the United States.
Some of the main victims were: employees, clients, shareholders, bankers and Indian
government.

In the aftermath of Satyam, Indias markets recovered and Satyam now lives on.
Indias stock market is currently trading near record highs, as it appears that a global
economic recovery is taking place. Civil litigation and criminal charges continue
against Satyam. Tech Mahindra purchased 51% of Satyam on April 16, 2009,
successfully saving the firm from a complete collapse. With the right changes, India
can minimize the rate and size of accounting fraud in the Indian capital markets.

CORPORATE GOVERNANCE ISSUES AT SATYAM

On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which
he committed amounted to nearly $276 million. In the process, Satyam grossly
violated all rules of corporate governance [34]. The Satyam scam had been the
example for following poor CG practices. It had failed to show good relation with
the shareholders and employees. CG issue at Satyam arose because of non-fulfillment
of obligation of the company towards the various stakeholders. Of specific interest are
the following: distinguishing the roles of board and management; separation of the
roles of the CEO and chairman; appointment to the board; directors and executive
compensation; protection of shareholders rights and their executives.
LESSONS LEARNT FROM SATYAM SCAM

The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly
governed corporate leader. As the fallout continues, and the effects were felt
throughout the global economy, the prevailing hope is that some good can come from
the scandal in terms of lessons learned [35]. Here are some lessons learned from the
Satyam Scandal:

Investigate All Inaccuracies: The fraud scheme at Satyam started very small,
eventually growing into $276 million white-elephant in the room. Indeed, a lot of
fraud schemes initially start out small, with the perpetrator thinking that small
changes here and there would not make a big difference, and is less likely to be

detected. This sends a message to a lot of companies: if your accounts are not
balancing, or if something seems inaccurate (even just a tiny bit), it is worth
investigating. Dividing responsibilities across a team of people makes it easier to
detect irregularities or misappropriated funds.

Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the
whole industry and a country. Indias biggest corporate scandal in memory threatens
future foreign investment flows into Asias third largest economy and casts a cloud
over growth in its once-booming outsourcing sector. The news sent Indian equity
markets into a tail-spin, with Bombays main benchmark index tumbling 7.3% and the
Indian rupee fell. Now, because of the Satyam scandal, Indian rivals will come under
greater scrutiny by the regulators, investors and customers.

Corporate Governance Needs to Be Stronger: The Satyam case is just another

example supporting the need for stronger CG. All public-companies must be careful
when selecting executives and top-level managers. These are the people who set the
tone for the company: if there is corruption at the top, it is bound to trickle-down.

Also, separate the role of CEO and Chairman of the Board. Splitting up the roles,
thus, helps avoid situations like the one at Satyam.
The Satyam Computer Services scandal brought to light the importance of ethics and
its relevance to corporate culture. The fraud committed by the founders of Satyam is a
testament to the fact that the science of conduct is swayed in large by human greed,
ambition, and hunger for power, money, fame and glory.

2G SPECTRUM SCAM

The 2g spectrum scam is well explained in this project through frequently asked
questions regarding the same. Also, the names taken as to present this scam are as

specified in various case studies and it has nothing to do with the view of developer
of this project.

1) What is spectrum? What is its relation with mobile phone services?

Spectrum is airwaves. Each operator is assigned a set of frequencies. In normal basic
telephone service, a pair of wires is used for communication. But in case of
mobile/wireless communications, airwaves are used instead of wires. These
spectrum/airwaves are licensed by the Government. It is allocated in Mega Hertz
(MHz) in telecom licenses. 4.2 MHz is given as start-up spectrum, which is topped up
by 1.8 MHz to make it 6 MHz (4.2 + 1.8 MHz), and so on.

2) Why spectrum is called a scarce national resource?

Worldwide different frequencies are used for different purposes depending on the
characteristics of each frequency. For enabling seamless communication throughout
the world, the international telecom organizations (operators, manufacturers,
government of each country) have specified certain frequency bands for mobile
services. These frequencies have been standardised. Every second, there are
thousands of simultaneous calls. Every call has to be assigned a different frequency so
that they do not cause interference. The frequencies are limited. This is why it is
called scarce resource.

3) What is the 2G spectrum and 3G?

2G is the 2nd Generation of mobile phone services. Next phase of mobile services is
3G, or 3rd Generation. The difference between 2G and 3G is that we can have faster
internet services in 3G, whereas in 2G the speed is slow.

4) How the telecom operation is administered?

The entire country is divided into 22 Telecom Circles and Metros. Each state is one
circle, like Bihar, UP (E), UP (W), Tamil Nadu, etc. All the seven sisterly states in the
North East except Assam, comes under a single circle called North East Circle. There
are now three Metros (Delhi, Mumbai, and Kolkata), the fourth Metro (Chennai) was
combined in Tamil Nadu circle. For every Circle or a Metro, a separate telecom
license is issued. For each license, separate applications are to be submitted. We call a
company as having a Pan-India license, when that company has telecom licenses for
all the 22 Telecom Circles and Metros. A Pan-India license (in fact 22 licenses) was
issued for an Entry Fee of Rs 1,658 crore during an open bidding in the year 2001.
This rate eventually became reference rates for licenses issued in future under FCFS
policy, and is a matter of scam.

5) What is FCFS policy?

Under First Come First Serve (FCFS) policy, licenses with start-up spectrum (4.2
MHz) were issued for mobile services on the basis of who applies first. This policy
was good only when there were very less takers for licenses. Between 2003 and 2006,
there were only 51 applications for the licenses and all of them were issued licenses
on FCFS basis. That means there were very less takers at that time. They were

charged Entry Fess @ Rs 1,658 crore for pan-India license determined in the year
2001.But in February 2007, Hutchison sold its entire stake to Vodafone for a very
high value. After this, many companies applied for telecom licenses as they realized
that the value of licenses has gone up. After this, the Government stopped issuing
telecom licenses. But it continued to receive applications. Over a few months, the
number of applications piled up. As on October 1, 2007, the Government had received
575 applications for telecom licenses but it had very limited spectrum. Therefore, with
so many pending applications, the government should have opted for auction route for
awarding telecom licenses instead of following FCFS policy.

6) What is the 2G spectrum Scam?

The government awarded 122 telecom licenses with 2G spectrum in January 2008 at
2001 rates (Rs 1,685 crore) ignoring the current market value of the spectrum. In
February 2007, Hutch sold its 67% equity to Vodafone at Rs 75,000 cr signaling
substantial increase in spectrum value. Even if 15% of this is considered to be
spectrum value, then it is Rs 11,250 crore per pan-India licenses. However, Raja
ignored this price. In November 2007, S-TEL offered Rs 6,000 cr for pan-India
license; in December 2007, it increased the offer to Rs 13,752 crore. This was also
ignored by Raja. After obtaining licenses at cheap rates, the private companies sold
(diluted) their equities to foreign telecom companies at a very high price. Every
company that had pan-India licenses was valued at about Rs 10,000 cr in which it had
assets of 2G spectrum (Rs 1,659 cr.) Thus, the difference in these figures (Rs 10,000
cr and Rs1,659cr) is per pan-India license loss to the Government and gain to private
companies.

- Shyam Telecom: Sold 74% to Sistema of Russia (MTS brand)

- Unitech: Sold 67% to Telenor of Norway (Uninor brand)
- Swan Telecom: Sold DB Group about 45% to Etisalat, UAE (Cheers brand) and
5% to Genex, Chennai
- Tata Teleservice: Sold 26% to NTT of Japan (DoCoMo brand)

7) What was the role of the former telecom minister A Raja in this scam?
He played multiple tricks to ensure that the spectrum is allocated to his favourite
companies. First, Reliance Communication (Anil Ambani Group) wanted entry into
GSM segment as there was not much of demand in CDMA. The company applied for
fresh license through Swan, and also applied for dual-technology permission. In
October 2007, Mr Raja allowed dual technology. As soon, as Reliance
Communication (ADAG group) got permission for GSM license, it gave away the
control of Swan to DB Group owned by ShahidBalwa. DB Realty is a real estate
company with no experience in telecom operations. ShahidBalwa was close to Mr
Raja. The advantage with this company (Swan) was that it had already applied for
licenses in March 2007. Second, Essar Group (Ruias brother) also applied for a
license under Loop Telecom through their sister MsKiranKhaitan. MsKhiatanspentRs
1 lakh to create Loop Telecom and the balance money of Rs. 1,700 crore came from
Ruias. The Ruias could not have applied for license directly as they already had
operation through VodafoneEssarCompany in which they had 33% equity stake. This
major illegality was ignored by Raja.Third, he also had old association with the
Unitech Group, which had interest in the construction activities. This group under
different names applied for Pan-Indian licenses on 24.09.2007. Fourth, Shyam

Telecom (Mr Rajiv Malhotra, MD) has very close relationship with Congress because
of which MrMalhotra also had close relationship with Mr Raja. This company applied
for 21 licenses on 25.09.2007. These dates 24th (For Unitech) and 25th for Shyam are
very important as discussed later. Only Raja knew in advance what he is going to do
with the policy. On 25.09.2007 he issued a Press Release (dated 24.09.2007) declaring
the cut-off date for receiving applications as 01.10.2007. So, Mr Raja ensured that
after his favourite companies have submitted the applications, the window is closed
shortly.

He opened the window for only five working days. But even during those five days as
many as 343 new applications were received. This, he did not expect. As on October

1, 2007, the government had 575 pending applications for telecom licenses. So, then
Mr Raja sought advice of Ministry of Law. The ministry replied that the matter should
be referred to GoM. Mr Raja protested on this. He wrote to the PM. Within his
ministry, two senior officers had objected to his approach. Mr Raja waited for their
retirement on December 31, 2007. He brought in his favourite officer
(MrSiddharthaBehura as Secretary DoT). Thereafter, he got the PMs nod on January
3, 2008. On January 10, 2008, he issued first Press Release on DoTs web site stating
that the applications of only those have been considered who had applied till
25.09.2007. This way he preponed the cut-off date to suit his favourite companies.
Thereafter, he put up another Press Release at about 2:45pm on the same day
disclosing a list of shortlisted companies and asking them to come between 3:30 to
4:30 PM to collect the LOIs (Letter of Intent). He also said that whosoever complies
with the conditions of LOIs first (that means deposit of Rs 1,658 crore by draft, Bank
Guarantees worth several hundred crores separate for each service areas), will be
issued spectrum first. So, his friends knew about these conditions. They kept their
drafts and guarantees ready one day in advance and were first to comply with LOI
condition and were first to get spectrum. This way even the FCFS policy was altered;
earlier it used to be date of application and everyone used to be given 15 days time for
compliance; Mr Raja even changed the FCFS policy to date of compliance of LOIs.
Later, the CAG found that out of 122 licenses, 85 did not meet eligibility criteria.

8) Were senior officers involved in this scam?

Yes. He kept his close confidants in the chain of officers who would listen to his
directions. Two top most officers of the DoT did not agree with his approach. One

was Mr D.S. Mathur, Secretary-DoT, and another one was Ms Manu Madhavan,
Member (Finance), DoT. Mr Raja waited for their retirement till December 31, 2007.
From 1st January 2008, he brought his own person MrSiddharthaBehura as Secretary
DoT. He completely followed Rajas instructions.

9) Is there any relation between the 2G spectrum scam and the Radia tapes?
Yes. MsNiira Radia runs many consultancy and Public Relation companies. Her main
client was the Tata group. Later, she got Unitech, Reliance (MukeshAmbani Group),
Bharti also as her clients. From the leaked tapes, it is revealed that she was all the
time talking for release of spectrum to Tatas. She had very close relationship with
Mr.Raja, and the family members of Tamil Nadu Chief Minister Mr M Karunanidhi.
The Supreme Court has taken these issues very seriously.

10) What was the role of the Finance Minister in this scam?
Money collected by the DoT on account of Entry Fee is deposited into the accounts of
the Finance Ministry. Therefore, the DoT must consult the Finance Ministry for a
policy change that has impact on its revenue. The Finance Ministry took a u-turn and
allowed this scam to happen. A number of times, the Finance Ministry had in writing
objected to the DoTs plan to award licenses at 2001 rates. One such letter was written
by the Finance Secretary on November 22, 2007 to the DoT Secretary. After DoT
issued 122 LOIs (Letter of Intents) on January 10, 2008, the Finance Minister, P
Chidambaram, wrote a consenting letter to Mr Raja that whatever hashappened is ok,
but next time the spectrum should be auctioned. After this, on 25.01.2008 Mr Raja
converted LOIs into Licenses. If the Finance Minister really wanted to stop further

process of converting LOIs into Licenses, then he could have issued direction to the
DoT to stop further process.

11) Is the PM involved in this scam?

On November 2, 2007, the Prime Minister wrote a two page letter to Mr A Raja
asking him to consider the auction route. Subsequently Mr Raja sent three letters to
the Prime Minister explaining in detail how he wants to deal with the applications,
and insisting to follow FCFS policy and awarding licenses @ Rs 1,658 crore. He
wrote last such letter to the PM on December 26, 2007. This was accepted by the PM
in his letter dated January 3, 2008 to Mr Raja. Why did PM change his stand?
Thereafter, Mr Raja awarded 122 licenses in just about 45 minutes on January 10,
2008.

12) Who has estimated that this scam caused the government a loss of Rs
1,76,000crore?
Comptroller Auditor General of India (CAG) started auditing of new licenses in
March 2010. On 8.11.2010, CAG submitted its report to the President of India in
which it estimated the loss on account of 2G scam as Rs 1.76 lakh crore. Apart from
this, it also found that of the 122 licenses issued on 10.01.2008, 85 licenses were
issued to companies which were not eligible to get license.

13) What has been the role of the investigative agencies CBI, ED in this scam?

The case was initially referred by the Central Vigilance Commission to the CBI for
further investigation on 12.10.2009 as the DoT officers were not forthcoming with the
right answers/information. On 21.10.2009, the CBI registered an FIR against
unknown persons and officials. On 22.10.2009, the CBI raided the DoTs headquarter
and took away all the relevant files. Subsequently the offices of private companies
who got the licenses were also raided. The officials were questioned by the CBI. The
ED also carried out its investigation independently.Initially CBI as well as
Enforcement Directoratewere investigating the matter properly, but after sometime,
they also started playing into the hands of their political bosses and corporates who
were the beneficiaries. Practically, further investigation was stopped. Then further
exposure could be done through PIL.

14) Which were the bodies which brought out this scam in the public domain?
Initially, a Delhi based NGO, Telecom Watchdog, complained to the investigating
agencies. When the investigation was slow or non-existent, later two Delhi based
NGOs (Centre for Public Interest Litigation, Telecom Watchdog) and one senior
journalist MrPranjoyGuhaThukrata filed a PIL in Delhi High Court pleading for Court
monitored investigation. It was dismissed. Thereafter an appeal was filed by them in
the Supreme Court, which was allowed. Now, the Supreme Court is directly
monitoring the investigation of this case.

15) What has the honorable Supreme Court said about this scam?
During the hearing of the PIL, the Honble Supreme Court made several observations
including the one that the same minister is still continuing, that eventually led to the

exit of Mr Raja. The investigation was expedited after SCs comments, does CBI do
this kind of slow investigation in every matter, how long will it take .... 20 years. The
SC also said, You (CBI, ED, I-T) have to do your job without any fear and favour.
The SC also ordered that the Court will monitor investigation. It also suggested
creation of Special Court for this 2G scam. It is suspecting that the Government and
Corporates might still interfere in the investigation because of which it has ordered
that before filling of the charge-sheet, the investigating agencies (CBI, ED, I-T) must
produce before the SC the charges that it is likely to file and the evidence collected to
support them. The SC also took strong view on MrKapilSibals statement that the
figure of loss pointed by the CAG is erroneous. After that MrSibal stopped attacking
CAG. The SC also said why no one has been arrested in this case.

16) What action has the government taken till now against this corruption case?
Infact the Government did not do anything. Whatever is happening, it is because of
the Supreme Court, pressure from the opposition parties, and media. First, Mr Raja
resigned. Thereafter, after MrKapilSibal took over as Telecom Minister, he issued
show-cause notices to certain companies and collected about Rs 280 crore as penalty
from them for not fulfilling the rollout obligations. Thereafter the Government has not
taken any step.

17) What did the government do to cover up this scam?

MrKapilSibal started a campaign against the CAG calling their figure of loss of
Rs1.76 crore as erroneous. He also said that no loss has happened. Later, he started

saying that the Government followed the same policy of FCFS as was followed
during NDA period.

18) Were bribes paid to Raja?

Yes. The CBI and EDs investigations have revealed that substantial investment
(money) coming into the accounts of people/companies associated with Mr. Raja.
This money is coming from many companies in India and abroad. As per media
reports, so far Rs.3,000 crore has been linked to the bribes paid to Mr. Raja and DMK
party and MrKarunanidhis relatives. This is even revealed in Radio tapes.

19) Which are the companies that are being investigated?

The following companies received the licenses in January 2008 from Mr Raja:
Unitech (Uninor), Swan Telecom (DB Etisalat), Loop Telecom, STel,
Datacom/Videocon, Shyam Telecom (MTS), Spice, Idea, Reliance Communications,
and Tata. The investigation is being done against all of them. In addition, certain
companies of Rajas associates and Ms Nira Radia are also being investigated for the
routing of money.
20) What can now be done to recover this loss?
A PIL in the Supreme Court to cancel these 122 licenses was filed by the same group
of NGOs and individuals. After hearing, the Supreme Court has reserved the
judgment. The only way that the government can recover the loss is by cancelling all
the 122 licenses and recover spectrum from them. Thereafter, the spectrum can be put
on sale and even these 122 licensees should be able to participate in the auction

process to resume their services. This should be done independent of the criminal
proceedings that will be initiated against them for bribing.

21) If the government recovers the money from the operators/cancels licenses,
will it lead to rise in tariff of telecom services?
No. There is already enough competition in the market. When the cancelled licenses
are re-auctioned, then again the new operators, in order to get market share, will
reduce their tariffs. Even at high level of Entry Fee decided through auction, there is
no possibility of any hike in tariff. You have to remember that the original new
licensees had got the spectrum for cheap but sold it for a very high premium. The
telecom operators like Telenor (brand Uninor) who bought 2G spectrum privately
from the original allottees did not hike the tariff but rather to get marketshare brought
down the tariff. Payment of Entry Fee is viewed as an opportunity cost to get into this
lucrative business.

THE KETAN PAREKH SCAM

THE CRASH THAT SHOOK THE NATION

The 176-point Sensex crash on March 1, 2001 came as a major shock for the
Government of India, the stock markets and the investors alike. More so, as the Union
budget tabled a day earlier had been acclaimed for its growth initiatives and had
prompted a 177-point increase in the Sensex. This sudden crash in the stock markets
prompted the Securities Exchange Board of India (SEBI) to launch immediate
investigations into the volatility of stock markets. SEBI also decided to inspect the
books of several brokers who were suspected of triggering the crash. Meanwhile, the
Reserve Bank of India (RBI) ordered some banks to furnish data related to their
capital market exposure. This was after media reports appeared regarding a private
sector bank having exceeded its prudential norms of capital exposure, thereby
contributing to the stock market volatility. The panic runs on the bourses continued
and the Bombay Stock Exchange (BSE) President AnandRathi's (Rathi) resignation
added to the downfall. Rathi had to resign following allegations that he had used some
privileged information, which contributed to the crash. The scam shook the investor's
confidence in the overall functioning of the stock markets. By the end of March 2001,
at least eight people were reported to have committed suicide and hundreds of
investors were driven to the brink of bankruptcy. The scam opened up the debate over
banks funding capital market operations and lending funds against collateral security.
It also raised questions about the validity of dual control of co-operative banks.
(Analysts pointed out that RBI was inspecting the accounts once in two years, which
created ample scope for violation of rules.) The first arrest in the scam was of the
noted bull Ketan Parekh (KP), on March 30, 2001, by the Central Bureau of

Investigation (CBI). Soon, reports abounded as to how KP had singled handedly

caused one of the biggest scams in the history of Indian financial markets. He was
charged with defrauding Bank of India (BoI) of about $30 million among other
charges. KP's arrest was followed by yet another panic run on the bourses and the
Sensex fell by 147 points. By this time, the scam had become the 'talk of the nation,'
with intensive media coverage and unprecedented public outcry.
[1] A change of Re. 1 in the price of a share when one speaks of a share rising or
falling by so many points. In stock market indices, however, a point is one unit of the
composite weighted average on market capitalization of rupee values.
[2] A stock market index indicating weighted average of 30 scrips, also known as the
BSE Sensitive Index. The daily closing figure of this index broadly reflects the
performance of the capital markets.
[3] It was alleged that Global Trust Bank exceeded its Capital market exposure.
[4] Co-operative banks are under the dual control of RBI and the Registrar of
Cooperative Societies. The RBI regulates banking functions while the registrar looks
after the managerial and administrative functions.
[5] An investor who expects share prices to go up and hence buys them.

According to market sources, though Ketan Parekh [KP] was a successful broker, he
did not have the money to buy large stakes. According to a report [1] 12 lakh shares of
Global in July 1999 would have cost KP around Rs 200 million. The stake in Aftek
Infosys would have cost him Rs 50 million, while the Zee and HFCL stakes would
have cost Rs250 million each. Analysts claimed that KP borrowed from various
companies and banks for this purpose. His financing methods were fairly simple. 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, Madhavapura Mercantile Cooperative Bank (MMCB)
was KP's main ally in the scam. KP and his associates started tapping the MMCB for
funds in early 2000. 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 chequesdrawn on BoI to MMCB, against which MMCB issued
pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued
funds to KP without proper collateral security and even crossed its capital market
exposure limits. As per a RBI inspection report, MMCB's loans to stock markets were
around Rs 10 billion of which over Rs 8 billion were lent to KP and his firms 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. Apart
from direct borrowings by KP-owned finance companies, 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. KP reportedly used his BoI accounts to discount 248
pay orders worth about Rs 24 billion between January and March 2001. BoI's losses
eventually amounted to well above Rs 1.2 billion.The MMCB pay order issue hit
several public sector banks very hard. These included big names such as the State
Bank of India, Bank of India and the Punjab National Bank, all of whom lost huge
amounts in the scam. It was also alleged that 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 a favorable swap ratio before its proposed
merger with UTI Bank. 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. The crash, which was
led by a fall in the NASDAQ, saw the K-10 stocks also declining. KP was asked to
either pledge more shares as collateral or return some of the borrowed money. In
either case, it put pressure on his financials. By April 2000, mutual funds substantially
reduced their exposure in the K-10 stocks. In the next two months, while the Sensex
declined by 23% and the NASDAQ by 35.9%, the K-10 stocks declined by an
alarming 67%. However, with improvements in the global technology stock markets,
the K-10 stocks began picking up again in May 2000. HFCL nearly doubled from Rs
790 to Rs 1,353 by July 2000, while Global shot up to Rs 1,153. Aftek Infosys was
also trading at above Rs 1000. 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. KPbegan to have liquidity problems and lost a
lot of money during that period.
It was alleged that 'bear hammering' of KP's stocks eventually led to payment
problems in the markets. The Calcutta Stock Exchange's (CSE) payment crisis was
one of the biggestsetbacks for KP. The CSE was critical for KP's operation due to
three reasons. One, the lack of regulations and surveillance on the bourse allowed a
highly illegal and volatile badla business (Refer Exhibit III). Two, the exchange had
the third-highest volumes in the country after NSE and BSE. Three, CSE helped KP to
cover his operations from his rivals in Mumbai. Brokers at CSE used to buy shares at
KP's behest. Though officially the scrips were in the brokers' names, unofficially KP

held them. KP used to cover any losses that occurred due to price shortfall of the
scrips and paid a 2.5% weekly interest to the brokers. By February 2001, the scrips
held by KP's brokers at CSE were reduced to an estimated Rs 6-7 billion from their
initial worth of Rs 12 billion. The situation worsened as KP's badla payments of Rs 56 billion were not honored on time for the settlement and about 70 CSE brokers,
including the top three brokers of the CSE (Dinesh Singhania, Sanjay Khemani and
Ashok Podar) defaulted on their payments. By mid-March, the value of stocks held by
CSE brokers went down further to around Rs 2.5-3 billion. The CSE brokers started
pressurizing KP for payments. KP again turned to MMCB to get loans.The outflow of
funds from MMCB had increased considerably from January 2001. Also, while the
earlier loans to KP were against proper collateral and with adequate documentation, it
was alleged that this time KP was allowed to borrow without any security. By now,
SEBI was implementing several measures to control the damage. An additional 10%
deposit margin was imposed on outstanding net sales in the stock markets. Also, the
limit for application of the additional volatility margins was lowered from 80% to
60%. To revive the markets, SEBI imposed restriction on short sales and ordered that
the sale of shares had to be followed by deliveries. It suspended all the broker member
directors of BSE's governing board. SEBI also banned trading by all stock exchange
presidents, vice-presidents and treasurers. A historical decision to ban the badla
system in the country was taken, effective from July 2001, and a rolling settlement
system for 200 Group Ashares was introduced on the BSE.

THE MAN WHO TRIGGERED THE CASH

Ketan Parekh [KP] was a chartered accountant by profession and used to manage a
family business, NH Securities started by his father. Known for maintaining a low
profile, KP's only dubious claim to fame was in 1992, when he was accused in the
stock exchange scam. 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 markets 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), MuktaArts, Tips and PritishNandy Communications.
He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest
Communications, and PentaMedia Graphics KP selected these companies for
investment with help from his research team, which listed high growth companies
with a small capital base. According to media reports, KP took advantage of low
liquidity in these stocks, which eventually came to be known as the 'K-10' stocks.
The shares were held through KP's company, Triumph International. In July 1999, he
held around 1.2 million shares in Global. KP controlled around 16% of Global's
floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL. The buoyant
stock markets from January to July 1999 helped the K-10 stocks increase in value
substantially (Refer Exhibit I for BSE Index movements). 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 .
HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded
value in the Sensex was Rs 51.8 billion. 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. Analysts
and regulators wondered how KP had managed to buy such large stakes.

[1] When the interest rates were freed in mid-1989, it made the price of both bonds
and money more volatile, and increased the link between the securities and money
markets. With price volatility and increased volumes, securities broking became a
profitable activity. The rising volumes were funded by banks through bank receipts
(BR is a document issued by a bank acknowledging that it has sold certain
government securities to a party and received payment). The scam came to light when
RBI asked the SBI to show the bank receipts, and it was found that Rs 6.22 billion not
been reconciled and was untraceable. The money involved in the scam was eventually
ascertained to be well over Rs 30 billion.
[2] The e-commerce revolution had led to a massive upsurge in the value of
technology stocks across the globe, especially Internet ventures. This came to be
known as the dotcom boom.
[3] A bull run is an uptrend in the stock markets caused by the rise in the price of
shares,
sustained by buying pressure of actual investors or news of favorable economic
growth, decontrol and political developments.
[4] The National Association of Securities Dealers Automated Quotation System
(NASDAQ) is a US-based stock exchange, which comprises largely of technology
stocks. Started in 1971, NASDAQ is the first screen-based, floor less trading system
and the second largest stock market in the US.

THE SYSTEM THAT BRED THESE FACTORS

The small investors who lost their life's savings felt that all parties in the functioning
of the market were responsible for the scams. They opined that the broker-banker-

promoter nexus, which was deemed to have the acceptance of the SEBI itself, was the
main reason for the scams in the Indian stock markets.
SEBI's measures were widely criticized as being reactive rather than proactive. 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 Bo. I. A market watcher said,"When prices
moved up, SEBI watched these as 'normal' market movements. It ignored the large
positions built up by some operators. Worse, it asked no questions at all. It had to
investigate these things,
not as a regulatory body, but as deep-probing agency that could coordinate with other
agencies. Who will bear the loss its inefficiency has caused?"An equally crucial
question
was raised by media regarding SEBI's ignorance of the existence of an unofficial
market
at the CSE. Interestingly enough, there were reports that the arrest was motivated by
the government's efforts to diffuse the Tehelka controversy .Many exchanges were not
happy with the decision of banning the badla system as they felt it would rig the
liquidity in the market. Analysts who opposed the ban argued that the ban on badla
without a suitable alternative for all the scrips, which were being moved to rolling
settlement, would rig the volatility in the markets. They argued that the lack of
finances for all players in the market would enable the few persons who were able to
get funds from the banking system - including co-operative banks or promoters - to
have an undue influence on the markets.

THE PEOPLE THAT THE SYSTEM DUPED

KP was released on bail in May 2001. The duped investors could do nothing knowing
that the legal proceedings would drag on, perhaps for years. Observers opined that in
spite of the corrective measures that were implemented, the KP scam had set back the
Indian economy by at least a year. Reacting to the scam, all KP had to say was, "I
made mistakes."
It was widely believed that more than a fraud; KP was an example of the rot that was
within the Indian financial and regulatory systems. Analysts commented that if the
regulatory authorities had been alert, the huge erosion in values could have been
avoided or at least controlled. After all, Rs.2000 billion is definitely not a small
amount - even for a whole nation.

CONCLUSION

While many improvements have been made to fraud prevention tactics over the years,
significant research advances are needed to understand and combat fraud. The
development of these research advancements, and the multi-disciplinary initiative that
will help turn academic achievements into real-world improvements, is the goal of
this center. It is our hope that this interdisciplinary hub will facilitate the intellectual
and practical connections necessary for more groundbreaking work in the study and
prevention of financial fraud.The worst thing about these scams is that you never
know until it's too late. Those convicted of fraud might serve several years in prison,
which in turn costs investors/taxpayers even more money. These scammers can pick a
lifetime's worth of garbage and not even come close to repaying those who lost their
fortunes. The Security bodies works hard to prevent such scams from happening, but
with thousands of public companies in the World, it is nearly impossible to ensure that
disaster never strikes again. Is there a moral to this story? Sure. Always invest with
care and diversify, diversify, diversify. Maintaining a well-diversified portfolio will
ensure that occurrences like these don't run you off the road, but instead remain mere
speed bumps on your path to financial independence.

REFERENCES
1.) www.indianexpress.com
2.) www.indiatoday.com
3.) www.smicra.edu.in
4.) www.wikipedia.com
5.) www.scribd.com
6.) www.indianpulse.in
7.) www.economictimes.com
8.) www.dailyjag.com
9.) www.flame.org.in
10.)

www.bullrider.in

11.)

www.business-standard.com

12.)

www.moneylife.in

13.)

www.livemint.com