CHAPTER 6: STOCK MARKET SCAMS IN INDIA

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 Chapter 6: STOCK MARKET SCAMS IN INDIA

One of the objectives of the present research work is to protect the

interest of investors. For this purpose one has to critically analyse the
scams in the past and identify causes, lapses, negligence on part of the
either of the concerned parties. In this chapter, the researcher proposes to
give a brief account of major scams that took place after formation of
SEBI and which shook the whole nation along with the Indian Capital
Markets. The researcher has also identified famous modus operandi of
some of the malicious activities in the stock markets worldwide.

6.1 Harshad Mehta’s Securities Scam

Year of scam: 1992
Amount of scam: Rs.5,000 crores ( approx)
Period of the scam: 1991 -1992
Brief description of the scam:
During 1991, the opening up of the Indian economy allowed private
investments in the country, thus paving the way of prosperity.
Anticipating the good tidings for the private sector, the stock market
Sensex rose from around 1000 in February 1991 to a peak of 4500 in
March 1992 just before the scam came to light. This also required
increase in the scale of finance required by operators in the stock market.
Bombay Stock Exchange also imposed heavy margins on settlement
trading which added to the funds requirement.
The nationalized banks too were under the same pressure to improve their
profitability. The proposed increase in capital adequacy requirement, as
mandated by the Narasimham Committee report further pressurised the
banks.
Portfolio Management Scheme (PMS) had just come into existence in the
Indian economy then. The scheme was designed to deploy large
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 amounts of surplus cash available with several public sector undertakings
(PSUs). A large part of this surplus cash was generated from borrowings
in the international markets largely by PSUs, to strengthen the country's
unstable foreign exchange reserves. An intense competition developed
among the banks for these funds. To compete for PMS funds from the
PSUs as well as to enhance their own profitability, banks were forced to
look for higher returns. This was happening at the same time when there
was a growing need for funds in the stock market to finance stock market
operations.
Harshad Mehta, a broker at the Bombay Stock Exchange understood the
gap and tried to fill it. Though initially his intention may have been just
to earn a quick buck, but over a period of time, greed took over and his
operations turned out to be one of the biggest scams of the Indian stock
market which engulfed some of the top politicians in its trap.
Banks in India were required to maintain 38.5% of their demand and time
liabilities (DTL) in government securities and certain approved securities
which are collectively known as Statutory Liquidity Ratio (SLR)
securities. Banks often enter into a Ready Forward ( RF ) deal whereby it
effectively borrows the securities from a bank which had surplus SLR
securities with an agreement to give it back at a premium once the need
DTL requirement is over. To bring the deal through, a broker is
required. The broker's only function is to bring the buyer and seller
together and help them negotiate the terms, for which he earns a
commission from both the parties. He neither handles the cash nor the
securities.
However during the scam, the RF deal happened between two banks,
without they knowing each other, but with complete faith on the broker as
an intermediary. All the transactions were mediated through him.
Delivery and payments started getting routed through the broker instead

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of being made directly between the transacting banks. Over a period of
time the broker, soon found a way of persuading the lending bank to
dispense with security for the loan or to accept worthless security. The
brokers instead of merely bringing buyers and sellers together started
taking positions in the market. The broker provided contract notes for
this purpose with fictitious counterparties, but arranged for the actual
settlement to take place with the correct counterparty. On the other hand,
a broker intermediated settlement allowed him to lay his hands on the
cheque as it went from one bank to another through him. Banks
extensively used Bank Receipts ( BRs). BRs acted as a receipt for the
money received by the selling bank with a promise to deliver the
securities to the buyer. There was no physical delivery of securities
required when BRs were issued. BRs could simply be cancelled and
returned when the deals were reversed. Further, BRs were also
conveniently used by banks which may short sell securities, that is, it sells
securities it does not have. This would be done if the bank thinks that the
prices of these securities would decrease. When the securities do fall in
value, the bank buys them at lower prices and discharges the BR by
delivering the securities sold. Short selling of securities was though a
common practice in the bond markets, an outright sale using a BR which
is not backed by securities violated the RBI guidelines. Bank which often
simply wanted an unsecured loan issued a "fake" BR (BR without any
securities) giving an impression of an RF deal to the lender bank.
Harshad Mehta perfected the art of using fake BRs to obtain unsecured
loans from the banking system. He persuaded some small and little
known banks - the Bank of Karad (BOK) and the Metropolitan
Cooperative Bank (MCB) - to issue BRs as and when required. These
BRs could then be used to do RF deals with other banks. The cheques in
favour of BOK were, of course, credited into his accounts. In effect,

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several large banks made huge unsecured loans to the BOK/MCB which
in turn made the money available to the brokers.
Besides taking money under the pretext of a ‘fake’ BR, securities which
were pledged / sold were also represented only by allotment letters rather
than certificates on security paper.
However reduction in interest rates, window dressing of financial
statements by banks created lot of distortion in the valuation of the
securities involved. This thus brought the scam to light. The immediate
impact of the scam was a sharp fall in the share prices. The index fell
from 4500 to 2500 representing a loss of Rs. 100,000 crores in market
capitalization. Since the accused were active brokers in the stock market,
the number of shares which had passed through their hands in the last one
year was colossal. All these shares became "tainted" shares, and
overnight they became worthless pieces of paper as they could not be
delivered in the market. Genuine investors who had bought these shares
well before the scam came to light and even got them registered in their
names found themselves being robbed by the government.
Lapses which led to the scam:
> Banking Rules bypassed by Bankers for personal profit: The
broker through whom the payment passed on its way from one bank to
another found a way of crediting the money into his account though the
account payee cheque was drawn in favour of a bank. This effectively
transformed an RF into a loan to a broker rather than to a bank. In the
settlement process of RF deals, deliveries of securities and payments are
made through the broker. The buyer and the seller did not even know
whom they have traded with, both being known only to the broker.
Some banks were persuaded to part with cheques without actually
receiving securities in return or against a fake BR. The officials
concerned were bribed and/or negligent. The banks' senior/top

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management might have been fully aware of this and turned a blind eye
to it to benefit from higher returns the brokers could offer by diverting the
funds to the stock market.
Banks were not allowed to short sell government securities according to
the RBI guidelines. But this was completely ignored by Banks in greed
of making quick profits from the debt markets.
> Inefficient working of the RBI: In case of government securities,
the RBI had issued a directive that BRs should not be used. The reason
was that, for these securities, the RBI, through its Public Debt Office
(PDO), acts as the custodian. Physical securities are never issued, and the
holding of these securities is represented by book entries at the PDO. Had
the PDO functioned efficiently and carried out its bookkeeping without
delays, RBI would have been justified in not permitting use of BRs for
government securities. Unfortunately, the PDO was very inefficient and
old fashioned in its functioning. This was a very serious matter because,
like a cheque, an SGL form can also bounce if the seller does not have
sufficient holding of securities in his SGL account.
> Widespread corruption in the Indian government: To make a
scam of such stature, a part of the money was spent as bribes and
kickbacks to the various accomplices in the banks and possibly in the
bureaucracy and in the political system. It is rumoured that a part of the
money was sent out of India through the havala racket, converted into
dollars/pounds, and brought back as India Development Bonds. These
bonds are redeemable in dollars/pounds and the holders cannot be asked
to disclose the source of their holdings. Thus, this money is beyond the
reach of any of the investigating agencies. Harshad Mehta openly
claimed that he had bribed P.V. Narasimha Rao, the then prime minister,
with a paltry Rs 1 crore.

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After math of the scam:
Just five years after the 1992 scam, Harshad Mehta was on a comeback
trail. He set up a whole network of entities called the Damayanti group to
conduct his market operations; the group openly operated out of his
Nariman Point office which was technically under the custodian. SEBI
watched in silence and allowed him to ramp up the shares of BPL,
Videocon and Sterlite Industries in style. Investigations began only when
the bubble had burst. Without direct access to bank funds or even a
legitimate trading membership, this was bound to happen. In June 1998,
he had created www.harshad.com and would have cashed in on the
dotcom bubble. On 31 December 2001, Harshad Mehta died of a massive
heart attack in a suburban Mumbai jail after he was arrested for a second
time. The unceremonious end to a story that had fired the dreams of every
middle-class Indian was tragic. The man actually lived his dream of
fabulous riches, a sprawling 10,400sq ft house with a putting green and a
fleet of expensive cars and prestige only for a very short while. Over the
next nine years, all those who fawningly called him the Amitabh
Bachchan or the Einstein of the markets faded away from his life. And, in
the end, he seemed just a tired scamster, still trying to regain lost glory
with variations of the same old scam. But, without the mega bucks of
banks and institutions to finance him, there was no way he could recreate
the magic. Ironically, prime minister PV Narasimha Rao, who Harshad
claimed to have bribed, remained unaffected as did every other politician
who colluded with the scamsters. Each of the associated politician
bounced back, for instance Mr. P Chidambaram had resigned over
owning shares of Fairgrowth Financial Services but came back to power
without any one remembering about his relations to Fairgrowth. One
more example is B Shankaranand, the then powerful petroleum minister
got away without paying a price.

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6.2Ketan Parekh Scam - The Crash that Shook the Nation
Year of scam: 2001
Amount of scam: Rs. 120 crores (approx)
Period of the scam: 1999 - 2001
Brief description of the scam:
Ketan Parekh had single handedly caused one of the biggest scams in the
history of Indian financial markets. He was charged with defrauding
Bank of India (Bol) of about $30 million among other charges.
For two years, market men followed his every action because all he
touched turned to gold. KP was a chartered accountant by profession and
used to manage a family business, NH Securities started by his father. He
was known as the 'Bombay Bull' and had connections with movie stars,
politicians and even leading international entrepreneurs like Australian
media tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250
million venture capital fund that invested mainly in new economy
companies. Over the years, KP built a network of companies, mainly in
Mumbai, involved in stock market operations.
The rise of ICE (Information, Communications, and Entertainment)
stocks all over the world in early 1999 led to a rise of the Indian stock
market as well. The dotcom boom contributed to the Bull Run led by an
upward trend in the NASDAQ. The companies in which KP held stakes
included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts,
Tips and Pritish Nandy 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.
These stocks eventually came to be known as the 'K-10' stocks. The
shares were held through KP's company, Triumph International. The
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buoyant stock market from January to July 1999 helped the K-10 stocks
increase in value substantially. HFCL soared by 57% while Global
increased by 200%. As a result, brokers and fund managers started
investing heavily in K-10 stocks. Mutual funds like Alliance Capital,
ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw
their net asset value soaring. By January 2000, K-10 stocks regularly
featured in the top five traded stocks in the exchanges. As such huge
amounts of money were being pumped into the markets, it became tough
for KP to control the movements of the scrips. Also, it was reported that
the volumes got too big for him to handle.

According to market sources, though KP was a successful broker, he did

not have the money to buy large stakes. Analysts claimed that KP
borrowed from various companies and banks for this purpose. He bought
shares when they were trading at low prices and saw the prices go up in
the bull market while continuously trading. When the price was high
enough, he pledged the shares with banks as collateral for funds. He also
borrowed from companies like HFCL. This could not have been possible
out without the involvement of banks. A small Ahmedabad-based bank,
Madhavapura Mercantile Cooperative Bank (MMCB) was KP's main ally
in the scam. In December 2000, when KP faced liquidity problems in
settlements he used MMCB in two different ways. First was the pay order
route, wherein KP issued cheques drawn on Bol to MMCB, against
which MMCB issued pay orders. The pay orders were discounted at Bol.
The second route was borrowing from a MMCB branch at Mandvi
(Mumbai), where different companies owned by KP and his associates
had accounts. KP used around 16 such accounts, either directly or
through other broker firms, to obtain funds.
KP's modus operandi of raising funds by offering shares as collateral

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security to the banks worked well as long as the share prices were rising,
but it reversed when the markets started crashing in March 2000. Be it
investment firms, mostly controlled by promoters of listed companies,
overseas corporate bodies or cooperative banks, all were ready to hand
the money to Parekh, which he used to rig up stock prices by making his
interest apparent. But the vicious cycle of fraud did not end with price
rigging. The inflated stocks had to be dumped onto someone in the end,
for which Parekh used financial institutions like the UTI. A bear cartel
started disrupting Parekh's party by hammering prices of the K-10
stocks, precipitating a payment crisis in Kolkata. In December 2000, the
NASDAQ crashed again and technology stocks took the hardest beating
ever in the US. Led by doubts regarding the future of technology stocks,
prices started falling across the globe and mutual funds and brokers
began selling them. KP began to have liquidity problems and lost a lot
of money during that period.
Lapses which led to the scam:
> Laxed attitude of SEBI in monitoring the stock market
activities : The market regulator was blamed for being lax in handling
the issue of unusual price movement and tremendous volatility in certain
shares over an 18 month period prior to February 2001. Analysts also
opined that SEBI's market intelligence was very poor. Media reports
commented that KP's arrest was also not due to the SEBI's timely action
but the result of complaints by Bol. When prices moved up, SEBI
watched these as 'normal' market movements. It ignored the large
positions built up by some operators. It asked no questions at all. It had to
investigate these things, more as a probing agency than as a regulatory
body coordinating with other agencies. An equally crucial question was
raised by media regarding SEBI's ignorance of the existence of an

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unofficial market at the CSE. Had the regulatory authorities been alert,
the huge erosion in values could have been avoided or at least controlled.
> Existence of long trading cycles and Badla system: Long
trading cycles in the stock which was then 7 days gave more chances to
manipulation than the now trading cycle of 2 dyays. Also the investors
got the money/ shares only on the 7th day of doing such a transactions.
Badla trading involved buying stocks with borrowed money with the
stock exchange acting as an intermediary at an interest rate determined by
the demand for the underlying stock and a maturity not greater than 70
days. Badla system though was a hedging technique was largely used as
a tool for speculation. Thus cash and forward transactions were
performed in the same market where there existed both investors as well
as speculators.
> Over exposure to the stock market by the Banks; MMCB was
the main bank through which Ketan Parekh conveniently operated for
financing the stock market. It was alleged that MMCB issued funds to
KP without proper collateral security and even crossed its capital market
exposure limits. As per a RBI inspection report, MMCB’s loans to the
stock market were around Rs 10 billion of which over Rs 8 billion were
lent to KP and his firms.
> Management of the Bank hands in gloves with the broker for
figging of their own shares: Apart from direct borrowings by KP-owned
finance companies through 16 different accounts in MMCB, a few
brokers were also believed to have taken loans on his behalf. It was
alleged that Madhur Capital, a company run by Vinit Parikh, the son of
MMCB Chairman Ramesh Parikh, had acted on behalf of KP to borrow
funds. It was also alleged that another bank which went bust during the
scam, Global Trust Bank (GTB) issued loans to KP and its exposure to

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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.
After math of the scam:
The Stock bubble created by Ketan Parekh, which went bust in 2000-01
and took down two banks - Global Trust Bank and Madhavpura
Mercantile Co-operative Bank, was kept alive for more than 10 years, due
to its political connections. Ironically, Dr Mehta, the then SEBI chairman
who allowed this to happen under his watch, was allowed to remain in
office for seven years. Interestingly, Satyam Computers of Ramalinga
Raju who confessed to a fraud in 2008 was a part of the K-10 scrips
which were ramped up by Ketan Parekh. A second JPC was appointed to
probe the Ketan Parekh scam with Pramod Mahajan, as the strategist for
the BJP-led government, ensuring that it was packed with sympathisers of
the accused. Most of the culprits of these scam got away. Every
corporate / promoter who colluded with Ketan Parekh (such as Himachal
Futuristic Communications, Zee, Padmini Technologies, Shonkh
Technologies) has got away scot-free. Some, like Manoj Tirodkar, the 45-
year-old chairman & managing director of GTL Group have even
snagged massive loans from banks to go nearly bust. Himachal Futuristic
walked away by paying RslO crore under a consent deal with SEBI in
2010. Ironically, the 15th action taken report of the finance ministry
mentions that charges against the company were dropped after
adjudication on 11 March 2009. The Zee group was similarly discharged
by SEBI’s whole-time members, immediately after C.B. Bhave took over
as chairman. The biggest beneficiaries of the scams have been lawyers

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and law firms. Unlike journalists, activists, investigators and regulators,
they are not required to take a moral stand on who they represent.
Consequently, the best brains in India are always and invariably working
at getting scamsters and crooks off the hook for enormous fees. These
fees are linked to conferences and court appearances and not the
completion of cases or their success. The worst victims are innocent, or
just weak, bank officials who couldn’t say no. They are slowly destroyed
in decades of court appearances and the absence of decent legal
representation. Ironically, the office of the custodian which claims that it
has filed 11,000 cases (disputed by all others involved in the trial) has
continued to file fresh ones. After a decade, the custodian finally woke up
in February 2012 to ask Ketan Parekh (and 19 entities connected with
him) the source of over Rs72 crore that he repaid in instalments to Bank
of India and Madhavpura Bank under a court order. On 31st March 2012,
a media report said that it was set to contest the discharge by a
magistrate’s court of two key cronies of Ketan Parekh—one Mr.
Dharmesh Doshi, who worked with him, and another a stockbroker
Mukesh Babu. Ketan Parekh’s skill was in his trading prowess and
ability to sense the market pulse . He has been allegedly operating
through fronts and has been dealing with many brokers on a profit-
sharing basis. He is also said to have actively engaged many foreign
funds to invest in the scrips, which he operates through fronts. Rumours
also suggest that many top managers of foreign funds have been
structuring their portfolios with the active ‘guidance’ of the banned
operator, Parekh is also known to structure complex deals through tax
havens to manipulate the stock price. People who know him closely say
he has managed to pull on thus far because of his strong connections with
financiers in Kolkata.

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6.3Roopal Ben Panchal - Benami Demat accounts scam
Year of scam: 2005
Amount of scam: Rs. 45 crores ( approx)
Period of the scam: 2003 -2005
Brief description of the scam:
The IPO scam came to light in 2005 when the private 'Yes Bank'
launched its initial public offering. It involved manipulation of the
primary market by financiers and market players by using fictitious or
benaami demat accounts. During early 2006, when SEBI started scanning
an entire spectrum of IPOs launched over 2003, 2004 and 2005. It was
found that Ms Roopalben Panchal, a resident of Ahmedabad had
allegedly opened several fake demat accounts and subsequently raised
finances on the shares allotted to her through Bharat Overseas Bank
branches. She was funded to the tune of Rs 30 crore to invest in the two
IPOs. While investigating the Yes Bank scam, SEBI found that certain
entities had illegally obtained IPO shares reserved for retail applicants
through thousands of benaami demat accounts. They then transferred the
shares to financiers, who sold on the first day of listing, making windfall
gains from the price difference between the IPO price and the listing
price. Roopalben Panchal and associates made a neat profit of Rs 32 crore
by creating benami demat accounts and cornering shares meant for retail
investors in the initial public offers of Yes Bank Ltd and IDFC.
The modus operandi in the IPO scam was unique. Ms Panchal advertised
in local dailies in Ahmedabad that people could get themselves
photographed and get free copies of their pictures. She then used copies
of these photos to open thousands of fictitious accounts with banks and
depository participants. More than 6,000 fictitious accounts were opened
in this fashion, mostly with two branches of Bharat Overseas Bank in
Mumbai and applications for the Yes Bank IPO routed through these

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accounts. Each applicant was allotted 150 shares under the retail
category. On July 6, 2005, almost 9.5 lakh Yes Bank shares were
transferred from these accounts to the demat account of Ms Panchal.
These shares were then transferred to the demat accounts of several
conspirators through off-market deals on July 11, a day prior to the listing
of Yes Bank. Majority of these shares were sold the day Yes Bank was
listed at a price much higher than the allotment price.
105 IPOs from 2003-2005 which included the offerings of Jet Airways,
Sasken Communications, Suzlon Energy, Punj Lloyds, JP Hydro Power,
NTPC, PVR Cinema, Shringar Cinema and others were reported by SEBI
to be covered by this scam. The fraudsters targeted the primary market to
make a quick buck at the expense of the gullible small investors.
Lapses which led to the scam:
> Non existence of KYC norms: Bharat Overseas Bank opened as
many as 6000 fictitious accounts with out personally seeing the persons
opening these accounts and thus a major flaw in Know Your customer.
These accounts were opened by Ms. Roopal Ben Panchal and her allies
with an intention to accumulate all the shares before listing and dispose
them off on the listing day at a high price. Blind faith by the bankers
made it possible to open the accounts in any person’s name which were
introduced by the scamsters leading to a scam which questioned the
banking system. The Reserve Bank of India introduced KYC guidelines
for all banks in 2002. In 2004, RBI directed that all banks ensure that they
are fully compliant with the KYC provisions before December 31, 2005.
By then the damage was already done.
> Lack of Vigilance by SEBI: Ms Panchal and a few others got
over 72 lakh shares of IDFC by transferring these from as many as 27,000
demat accounts. Sugandh Estates, a related party, cornered another 27
lakh shares of IDFC by creating about 10,000 fictitious bank and demat

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accounts. These shares were transferred to a bunch of financiers, who
then sold them on the day of the listing reaping huge profits between the
IPO price and the listing price. Had SEBI tracked this movement of
transfer at the first instance of the scam, many more IPOs could have
been saved from being giving benefits only to few.
> Delayed results of the probe of the scam by SEBI: The scam
came to light in the year 2005, and on December 15, 2011 SEBI declared
results of its probe, and slapped a penalty of Rs. 38 crores. Further on
January 11 2012, SEBI discovered huge rigging in the IDFC IPO. It was
again on October 10 2011, Income Tax Authorities raided a businessman
Purushottam Budhwani accidentally found he was controlling over 5,000
demat accounts. Delayed justice is justice denied and these things give
courage to many others to copy the modus operandi of the scams which
have happened and have not been punished for.
After math of the scam:
In the year 2011, the Enforcement Directorate (ED) attached the
properties of a publishing company running a leading Gujarati daily in
connection with the 2005, Rupal Panchal IPO scam. Rupal Panchal and
her family had cornered shares under fake names between 2003 and 2005
were transferred to the accounts of M/s Lok Prakashan Ltd.
According to the ED officials, shares worth Rs 3.80 crore had travelled to
the demat accounts of the company's Managing Director Bahubali Shah
and a city-based financier and realtor Dhiren Vora. Rupal's family
members Devangi Panchal, Bhargav Panchal, Aijav Panchal, Dipak
Panchal, Hina Panchal and their friend Parag Jhaveri are the others
involved in the scam. According to the details, Rupal and six members of
her family made over Rs 45 crore between 2003 and 2005 from 18 IPOs.
SEBI had passed an order against Rupal in 2003 stating that she and five
others of her family had made irregular dealing in IPOs. The SEBI barred

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the six family members from trading and also slapped a penalty of Rs 38
crore.
The adjudicating authority had, however, kept aside the attachment
proceedings. The ED appealed before the Appellate Tribunal under the
Prevention of Money Laundering Act. The Tribunal stated in its order
that the properties should be attached as the shares were indeed a part of
Proceeds of Crime by way of money laundering. However it took around
8 years for this course of action.

6.4Satyam Computers - An accounting scam

Year of scam: 2009
Amount of scam: Rs. 7136 crores
Period of the scam: 2002 - 2009
Brief description of the scam:
In 1987, Ramalinga Raju founded Satyam Computer Services along with
one of his brother-in-law, DVS Raju. The company went public in 1992
and its issue was oversubscribed 17 times. In July 1993, Satyam entered
into a joint venture with Dun & Bradstreet. Satyam Computer Services
Ltd. thus became one of the leading global consulting and IT services
company that offered end-to-end IT solutions for a range of key verticals
and horizontals. Satyam achieved huge number of awards and
achievements under the leadership of Mr. Ramalinga Raju. The company
was trying to join the Big Three - Tata Consultancy Services, Infosys and
Wipro. Mr. Raju fuelled greed using a combination of powerful
branding, systemic lacunae and opportunity provided by the system. He
was always at an arms length with the most powerful politicians, rulers,
officials and bankers. He got many contracts for his son’s operations in
Maytas Infra and Maytas Properties. Several SEZs were also sanctioned
for these companies. Thousands of acres of land were bought either with

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money which seems to have evaporated or with the influence by being
‘Satyam’ by its subsidiary Maytas Properties. As the event unfolds,
Satyam had announced to acquire 51% in Maytas Infra and 100% stake in
Maytas Properties and consequently aborted the deal in less than 24 hours
due to lot of pressure from other stakeholders. People invested in
Satyam due to its IT services and not due to its investment in
construction. Institutional Investors did not like the idea of Satyam
investing 100% in Maytas at an overvalued figure of the asset that too in
a low realty market and therefore forced the management to abort the
deal. With that, Satyam’s share lost half its value in one day which was
triggered by bad corporate governance issues. The situation unfolded into
a major crisis which resulted in the stock price falling 77% on Jan 7,2009,
when the Satyam Computer Services’ chairman Ramalinga Raju tendered
his resignation and released a letter of confession to the shareholders the
contents of which reflect the large scale accounting malpractices
committed by Satyam.
Some of the excerpts from the letter were:
1. The balance sheet has inflated (non existent) cash of Rs 5040 cr
(against the Rs 536Icr reported on 30th September 2008 in the books).
2. Accrued interest is non existent (against Rs 376 cr)
3. Total Liability is understated by Rs 1230 cr (the sum was arranged by
pledging the promoter shares)
4. Actual Debtor position of Rs 490cr (against Rs 265 Icr reported on the
books)
5. Actual revenue of Rs 2700cr and operating margin of Rs 61 cr against
reported revenue of Rs 2700 cr and operating margin of Rs 649cr.
6. Huge gaps present in the balance sheet on account of inflation of
profits over a period of several years.

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Lapses which led to the scam:
y Absence of Whistle blowing technique in the company: The
fraud that Raju described, involves multiple staff from multiple teams of
sales accounting and finance and also those in the management
committees. Secondly, how could it be that Satyam was running at an
operating margin of 3%? The software sector would not be recruiting
tens of thousands of people every year if it was such a low margin
business. The revenue structure of software firms is standard and it is
impossible that Satyam alone, among the software companies, was
running on such thin margins. It is rather impossible to believe that the
company was able to even survive on an operating margin of 3%, for
more than a few quarters, all of which have good growth and fat margins,
to attract the cream of Indian talent. The fact seems to be that Satyam
had made profit but was squirreled away. It was neither a shady
operation nor it seems possible for one person to sit and cook the books
for years together and not benefit in financial terms. But there was not a
word of discomfort or any signal by people at the helm of affairs that
something was not quite right in the company. Independent directors
who had to put up their independent views also maintained silence.
They, in the pursuit of profits, give little importance to good governance
practices leading to such crisis as that at Satyam.
> Poor vigilance by SEBI: The first is SEBI which failed to see
through the falsified financial statements. One may admit that SEBI may
not have the necessary expertise to analyse the financial data submitted to
them but still they need to develop such an expertise at least for the
future. Also when all the News channels where giving a ‘BUY’ advice
to the investors for Satyam shares just couple of months before the scam
burst, and in the mean while, the top management of the company were
offloading their stakes from Satyam. This should have rung the bell in the

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SEBI’s ears and could have prevented huge damage to small investors
investing further in the stock.
> Shunning of responsibility by Auditors: Satyam scam came to
light as one of the most popular scams in accounting. Huge inflated
Balance Sheet, unrecorded liabilities and differences in the actual and
reported incomes could not have gone un- noticed by the auditors of the
company. Their auditors PWC is one of the big five auditing firms of the
country. Also this forgery in accounting was not a one year story, but
was built up to such a large scale over a period of time and is impossible
without the auditors kept in the loop.
> Casual approach by the Income tax department: Income tax
department is one of the most important departments of the country who
is liable for collecting the revenues for the government. In case of
Satyam, it had shown an interest income of RS. 270.01 crores after
deducting tax of Rs. 61.04 crores. The IDS certificates were also faked.
It is surprising that how the IT department could not spot such a huge
discrepancy.
After math of the scam:
The failure of Satyam has also brought to light the in effectiveness of
appointing an Independent Director. The policy for independent directors
prescribed under the Companies Act and SEBI in Clause 49 of the Listing
Agreement is weak and have major lacunae. The clause stops at laying
down a few disqualifications, which do not include criminal backgrounds
or illiteracy. There are no norms on qualifications or experience required
for independent directors. Companies, therefore, often tap celebrities,
especially just before hitting the market for funds through IPOs. It is
important to have independent directors with strength of character who
are willing to blow the whistle and be assertive. In reality, companies
often induct retired bureaucrats as independent directors to take

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advantage of their lack of domain knowledge. Though regulations
disallow promoters to appoint their relatives as independent director, a
‘relative’ excludes cousins and other close relations from the wife and
mother’s side. The concept of independent director is to protect small
shareholders’ interest but they land up adding value to the company with
their ‘brand’ or helping it in network better.
Rajus’s story is unbelievable and stinks of political involvement. One
clue is that the entire government machinery took its own sweet time to
arrest Raju. Corporate circles say that Raju has worked out a political
deal whereby his family is protected. The politicians who received large
chunks of the vanished money remain unnamed and he claims that the
cash which vanished didn’t exist at all.

6.5 CRB Scam - Scam of Dummy Companies

Year of scam: 1997
Amount of scam: Rs. 1,200 crores
Period of the scam: 1992 - 97
Brief description of the scam:
Bom in a jute trader's house in Calcutta, Bhansali was a studious person.
After obtaining a degree in commerce, Bhansali completed Chartered
Accountancy in 1980. In the same year, he started a financial consultancy
firm, CRB Consultancy. Through Bhansali's personal contacts, CRB
Consultancy soon managed to secure the business of providing issue
management services to a few well-known companies in Calcutta. Over
the years, Bhansali acquired other degrees as well including ACS, Ph.D.,
MIT A (US) and a diploma in Journalism. Though he made a lot of money,
Bhansali found it difficult to find recognition in Calcutta. He then moved
to New Delhi to join one of the country's leading registrars of companies.
However when Bhansali was caught short-charging the registrar's clients.

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he had to leave. Bhansali then established 'CRB Consultants,' a private
limited company in New Delhi in 1985. In 1992, the name of the
company was changed to CRB Capital Markets (CRB Caps) and it was
converted into a public limited company. The company offered various
services including merchant banking, leasing and hire purchase, bill
discounting and corporate funds management, fixed deposit and resources
mobilization, mutual funds and asset management, international finance
and forex operations. CRB Caps was also very active in stock-broking
having a card both on the BSE and the NSE. The company raised over Rs
176 crore from the public by January 1995. He ruled like a financial
wizard 1992 to 1996 collecting money from the public through fixed
deposits, bonds and debentures. The A+ rating given by CARE and
upfront cash incentives of 7% -10% attracted investors in hordes to
Bhansali's schemes. The money was transferred to companies that never
existed. Bhansali was reported to have specialized in setting up dummy
investment companies. He had established good contacts in the Registrar
of Companies and the Controller of Capital Issues offices. He registered
companies with practically no equity and then stage-managed the dummy
company's maiden public issue with a few hundred investors, largely
from Calcutta's close knit Marwari Jain community. Having had a
company listed on the stock exchange, Bhansali then sold it for a profit to
businessmen who needed dummy public limited companies in a hurry.
Bhansali used his own money to rig share prices in order to raise more
money from the markets in two ways. Firstly, he bought his own stock
through private finance companies owned by him. Secondly, he used his
other public companies to buy into each other as cross-holdings. CRB
Capital Markets raised a whopping Rs 176 crore in three years. In 1994
CRB Mutual Funds raised Rs 230 crore and Rs 180 crore came via fixed
deposits. Bhansali also succeeded to to raise about Rs 900 crore from the

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markets. In May 1996, CRB Caps opened a current account in SBI's
main Mumbai branch, for payment of interest, dividend and redemption
cheques. The payment warrants could be presented at any of the 4,000
SBI branches for payment. Bhansali was granted only a current account
facility and did not enjoy any overdraft facility. He was expected to
deposit cash upfront into the current account, along with a list of
payments that had to be honoured. Claiming that the logistics of payment
were very complex and that it was not possible for every branch to check
with the head office before honouring a dividend warrant, the branches
gradually began treating these instruments just like a demand draft. For
about nine months, the setup worked very well. However in March 1997,
SBI realized that the account had been overdrawn to the extent of a few
crores. RBI had given Bhansali 72 hours to come up with a plan to repay
his liabilities following over 400 complaints from depositors in his
company's financial schemes. Most top officials of CRB were
untraceable from the second week of May itself. The Central Bureau of
Investigation (CBI) locked and sealed the offices of the CRB Group.
However, Bhansali did not show up. With the expiry of the RBI deadline,
the CRB Group collapsed, shattering the dreams of thousands of investors
across the country.
Lapses which led to the scam:
> Negligence on the part of Registrar of Companies ( ROC): The
authorities registering the companies had to keep a check on the
companies being registered by Mr, Bhansali without any equity capital.
This could only be done merely because of good contacts between the
people concerned. The rules of registering a company were overlooked
for personal gains.
> Negligence on the part of SEBI during listing of such
companies on the stock exchange: SEBI being the regulatory authority,

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 completely failed to recognise the dummy companies floated by Mr.
Bhansali for his own profit motive at the cost of defrauding the gullible
investors. Though the onus of registering the company is on ROC, a
thorough check by SEBI is a must during listing as the companies then
collect huge amounts as capital from these markets once listed.
After math of the scam:
The collapse of the CRB group seemed to be a fraud allowed by
supervisors despite the regulations in place. The lack of clear
communication channels between the banks, RBI and the government
seemed to have worked to Bhansali's advantage to a great extent.
Frequent clashes occurred between RBI and SEBI in the media, with both
of them trying to prove how the other was responsible for not acting early
enough. The RBI claimed that it had no powers to examine the asset
quality of the CRB group and thereby was not in a position to pass any
judgment on the character of asset generation or deployment of the funds
raised by the group. In a meeting with SEBI, the finance minister
criticized the regulator severely. In October 1998, the SEBI appointed an
administrator for CRB's Arihant scheme to finalize a scheme for payment
to the unit holders. Under the scheme, the investors were prematurely
paid Rs 4.95 per unit, which was its NAY as of 31 March 1998. When the
administrator had taken over, the assets of the scheme comprised the
fund's frozen bank accounts worth Rs 81 lakh, plus some dividends from
investments. Besides, there were a large number of listed, but thinly
traded and unlisted shares amounting to Rs 17.5 crore.

6.6 Dinesh Dalmia - Fake shares scam

Year of scam: 2001
Amount of scam: Rs. 595 crores
Period of the scam: 2000 - 01

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Brief description of the scam:
Mr. Dinesh Dalmia was the managing director of DSQ Software Limited
and he took advantage of the dotcom euphoria in 2000-01 to increase
DSQ’s capital by 50 per cent without informing the stock exchanges. He
introduced 1.30 crore shares in the market (originally allotted to three
Mauritius-based shell companies) without getting these listed. DSQ group
allegedly issued duplicate fake shares of DSQ Softwares and DSQ
Industries through stockbroker Harish Biyani and his associates. These
fake shares were issued at a price of Rs.180 - Rs. 120 per share making
the total close to Rs. 20 crores. It was suspected that Dalmia helped in
artificial price rigging of these stocks. The ultimate beneficiary of this
allotment was Dalmia himself. It’s a classic case of forgery, cheating,
fund diversion, price rigging and shameless violation of laws of the land.
Despite having a host of regulatory orders against him, Dalmia was hiring
and paying top lawyers in India to fight long legal battles without so
much as setting foot in the country. Subsequent to the scam the
Securities Appellate Tribunal (SAT) ordered Dinesh Dalmia to buy back
unlisted shares introduced by him in the open market.
Lapses which led to the scam:
> Lack of control over the brokers by the regulator or the stock
exchanges: It is indeed very surprising to know, that a company without
being listed can issue shares with the help of one broker of such a large
stock market. This shows a wide gap, where in the reins of the stock
market knowingly or unknowingly was controlled to a large extent by
these brokers.
> Lack of investors’ knowledge: This scam of the stock market
shows the ignorance of the investors, who just go by the return given by
few companies, may be dot com companies during that period and

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complete blind faith on the brokers of such markets, who made them
invest in the companies not listed at all on the stock exchange.

6.7Dinesh Singhania scam

Year of scam: 2010
Amount of scam: Rs. 150 crores
Period of the scam: 2001 - 2010
Brief description of the scam:
Singhania was based out of Kolkata and was allegedly involved in the
2001 payment crisis at the Calcutta Stock Exchange. People familiar with
Singhania’s technique said that he posed himself as one of the biggest
financiers in equities, attracting promoters facing a financial crunch. His
targets were generally market-savvy promoters, who wanted to keep their
share prices maintained at good levels. Through his front companies, he
approached various broking houses and financiers to finance transaction
in these shares. He charged interest ranging from 18 -22% from
promoters and paid it to his financiers. In 2010, an Intelligence Bureau
report said that Ketan Parekh’s associate Dinesh Singhania was involved
in rigging scrips. Singhania first created pressure on the shares so as to
demand more margin from promoters. Margin is the amount of money
kept by the promoter, when he takes finance against the shares. If the
value of shares decline, then the margin kept by the promoter is higher
and vice versa. After a certain point, when a promoter was sure to
default, Mr. Singhania created panic and all the shares were sold under
pressure. He bought those scrips through a string of entities to makes 40-
60% profit straight away.
Lapses which led to the scam:
> Lack of Vigilance by SEBI: Had these kind of transactions been
kept a track of by SEBI by watching carefully the movements of certain

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

6.8 Vanishing Companies Scandal

Year of scam: 1996
Amount ofscam: Not known
Period of the scam:1992 -1996
Briefdescription of the scam:
In the case of the ‘vanishing companies’ scandal that surfaced between
1992 and 1996, around 3,911 companies raised Rs 25,000 crore in the
primary capital markets and then simply disappeared. They just did not
set up the projects for which the money was raised and the funds
vanished. Asian Consolidated raised Rs 115 crore from investors,
promising to set up a project to make 500 million aluminium beverage
cans a year, but never set up the unit. Last heard, the company was being
wound up. The Asian Group, by the way, also set up a factory to produce
beer, and raised funds separately to make the seals for the top of beverage
cans; that firm was called Asian Tops. But neither SEBI, the Department
of Company Affairs (DCA), any of the country’s various stock
exchanges, or even the police, bothered to penalise the group for the loss
to investors through their fraudulent behaviour. For many years, in fact,
SEBI argued that this was not its jurisdiction, as did the DCA.
Lapses which led to the scam:
> Lack of vigilance by the Regulators: This scam went on for
couple of years extracting money from the investors to the tune of few

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crores and yet our regulators being the DCA or SEBI could not identify
the motive of such companies at the first stance. This shows the
lackadaisical approach of the regulators.
> Absence of clarity regarding the regulators jurisdiction: Most
often, different regulators govern different aspects of a company. When a
scam of a unique nature comes to light, these governing bodies, often
shun their responsibility towards the investors by passing on the buck by
saying that the scam is out of their scope of work. Immediate action from
these regulators would help punish the guilty and would prevent others
from doing such scams in future.

6.9 Some Fraudulent Methods Used In the Stock Markets -

Worldwide
Investment advisors and stockbrokers are responsible for providing
information that is accurate and complete to investors. Investment fraud
occurs when an advisor, stockbroker, or brokerage firm offers inaccurate,
incomplete, or biased information in an effort to control the market or
draw business. One powerful and most common measure going on the
stock market is a small group of evil players being primarily responsible
for the events on the market. The easiest case is a stock which is liquid. A
manipulative cartel develops which rigs the liquidity and price. They
actively trade it amongst themselves, to a point where "innocent
bystanders" feel the stock is liquid and valuable. This tempts innocent
bystanders to step in and buy shares. At this point, the manipulative cartel
has made profits because the innocent bystander has been persuaded to
part with his money at a falsely elevated price. There are many variations
on this theme. Such efforts often involve collusion with journalists and
the senior management of the company, so that glowing stories about the

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company appear on the front page of the pink papers. Some variations
of the price rigging are as follows:
Circular Trading
A fraudulent trading scheme where sell orders are entered by a broker
who knows that offsetting buy orders, the same number of shares at the
same time and at the same price, either have been or will be entered.
These trades do not represent a real change in the beneficial ownership of
the security. This happens most often among the cartel and constant
demand and supply of the shares creates an artificial movement in the
prices which is not known by the genuine investors.
Bucket Shop
1, A fraudulent brokerage firm that uses aggressive telephone sales tactics
to sell securities that the brokerage owns and wants to get rid of. The
securities they sell are typically poor investment opportunities, and
almost always penny stocks.
2. A brokerage that makes trades on a client's behalf and promises a
certain price. The brokerage, however, waits until a different price arises
and then makes the trade, keeping the difference as profit.
Boiler Room
A place where high-pressure salespeople use banks of telephones to call
lists of potential investors (known as a "sucker lists") in order to peddle
speculative, even fraudulent, securities. A boiler room is called as such
because of the high-pressure selling. A broker using boiler-room tactics
gives customers only positive information about the stock and
discourages them from doing any outside research. Boiler-room
salespeople typically use catchphrases like "it's a sure thing" or
"opportunities like this happen once in a lifetime"
Front Running

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The unethical practice of a broker trading an equity based on information
from the analyst department before his or her clients have been given the
information. For example, analysts and brokers who buy up shares in a
company just before the brokerage is about to recommended the stock as
a strong buy are practicing front running. Another example is a broker
who buys himself 200 shares in a stock just before his or her brokerage
plans to buy a large block of 400,000 shares.
Cross Trade
A practice where buy and sell orders for the same stock are offset without
recording the trade on the exchange, which is outlawed on most major
stock exchanges. This also occurs when a broker executes both a buy and
a sell for the same security from one client account to another where both
accounts are managed by the same portfolio manager. Typically, this is
yet another way for a broker to rip you off. When the trade doesn't get
recorded through the exchange, there is a good chance that one client
didn't get the best price. However, cross trades are permitted in very
selective situations such as when both the buyer and the seller are clients
of the same asset manager. The portfolio manager can effectively “swap
out” a bond or other fixed income product from one client to another and
eliminate the spreads on both the bid and ask side of the trade. The
broker and manager must prove a fair market price for the transaction and
record the trade as a cross for proper regulatory classification.

Pump and Dump

A scheme attempting to boost the price of a stock through
recommendations based on false, misleading, or greatly exaggerated
statements. The perpetrators of this scheme, who already have an
established position in the company's stock, sell their position after the

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hype has led to a higher share price. The victims of this scheme will
often lose a considerable amount of their investment as the stock often
falls back down after the process is complete Traditionally, this type of
scheme was done through the cold-calling of individuals but with the
advent of the internet this illegal practice has become even more
prevalent. Pump and dump schemes usually target micro- and small-cap
stocks, as they are the easiest to manipulate. Due to the small float of
these types of stocks it does not take a lot of new buyers to push a stock
higher. Claims being made about how a stock is set to break out based
on the next greatest thing or generate returns of hundreds or thousands of
percent, should be met with a considerable amount of caution. It is
important to always do your own research in a stock before making an
investment.
Poop and Scoop
This is a highly illegal practice occurring mainly on the Internet. A small
group of informed people attempt to push down a stock by spreading
false information and rumours. If they are successful, they can purchase
the stock at bargain prices. Poop and scoop is the opposite of pump and
dump.
Jitney
1. A situation in which one broker who has direct access to a stock
exchange performs trades for a broker who does not have access.
2. A fraudulent activity involving two brokers trading a stock back and
forth to rack up commissions and give the impression of trading volume.
For example, a small firm whose volume of business is not sufficient
enough to maintain a trader on the exchange would give its orders to a
large dealer for execution. Jitney, or "the jitney game," is basically the
same thing as circular trading. The term originated from "Jitney buses,"
which was a derogatory slang term for Ford buses at the beginning of the

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century. A reporter coined the term by alluding to the five-cent piece it
cost back then for a bus ride. It has since been used to refer to something
that is cheaply and poorly made.
Short and Distort
An illegal practice employed by unethical internet investors who short-
sell a stock and then spread unsubstantiated rumors and other kinds of
unverified bad news in an attempt to drive down the equity's price and
realized a profit. Due to recent corporate scandals and investor
uncertainty, fraudsters have an easier time spreading doom and gloom by
claiming that a firm is losing a very costly class action suit or is suffering
from low earnings. In order to prevent being conned, investors should do
their own due diligence and be critical of the authenticity of news from
unverified sources.
Tailgating
This is an action of a broker or advisor purchasing or selling a security for
his or her client(s) and then immediately making the same transaction in
his or her own account. This is not illegal like front running, but it is not
looked upon favourably because the broker is mostly likely placing a
trade for his or her own account based on what the client knows (like
inside information).
It is extremely tough to find evidence of coordination of trades between
cartel members, except where cartel members are foolish enough to speak
into voice recording systems. It is hard to prove links between the cartel
and journalists, and the senior management of the company. This leaves
us with orders and trades, which are completely observable on the
electronic exchange. In the case of highly illiquid stocks, it is sometimes
possible to pinpoint the domination of a small cartel in the orders and
trades of the stock. In this case, it may be possible for an enforcement
agency to pinpoint the culprits and enforce against them. The evidence
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that can be amassed is; (a) illiquidity of the stock, (b) orders and trades
which are highly concentrated within a cartel (c) coordination of trades
between cartel members, (d) collusion with journalists and senior
management of the company. The ideal enforcement agency would be
able to put together evidence about these four issues, and it could then
have a strong case.

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