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Over the last few years, there has been a rapid change in the Indian securities

market, especially in the secondary market. Advanced technology and online

based transactions have modernized the stock exchanges. Computerized online

trading of securities, netting up of clearing houses and trade guarantee funds were

made compulsory for stock exchanges. Stock exchanges were permitted to

expand their trading to locations outside their jurisdiction through computer

terminals Trading is much more transparent and quicker than in the past

Stock market refers to a market place where investors can buy and sell

securities Primary market deals with only new issue of shares, debentures and

bonds, whereas secondary market provides a place for securities which have

already been issued in an initial private or public offering. After the securities are

listed in the primary market, they are traded in the secondary market by the

investors. Secondary market consist different parties mainly stock exchanges,

companies issuing securities, investors, brokers and the regulators. The stock

exchanges along with a host of intermediaries provide the necessary platform for

trading in secondary market and for clearing and settlement

The term stock market can be used to denote individual stock exchanges at various

places or one market comprising all individual stock exchanges in the country. The

stock market or equities market, occupies a disproportionately large space in the

discussions in the print and electronic media. The industry, business, rich and

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middle classes tend to be highly preoccupied with this market, and regard it as the

barometer of the health of the economy. They frequently stress the essentiality of

the growth and spread of what has come to be called the equity culture or equity

cult or risk capital for faster industrial growth. The chapter, therefore, begins with

the discussion of the theory of equity culture, that is, the case for and against the

over-emphasis on the role of equities market.

History of Stock Exchanges:

Stock markets evolved along with capitalism. The history of stock exchanges can

be traced back to 12th century in France, where the first brokers were believed to

have originated, trading in debt and government securities. Unofficial share

markets existed across Europe through the 1600s, where brokers would meet

outside or in coffee houses to make trades. Amsterdam Stock Exchange was

created in 1602. It is considered as the oldest stock exchange in the World. The

Dutch started joint stock companies, which allowed shareholders to invest in

business ventures and get a share of their profits or losses. In 1602, the Dutch East

India Company issued the first shares on the Amsterdam Stock Exchange. This

was the first company to issue stocks and bonds. It was later renamed as the

Amsterdam Bourse and was the first to begin trading in securities.

Since the 17th century, stock exchanges were constantly growing in

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importance and complexity. During the second half of the seventeenth century

there existed a considerable volume of securities, both commercial and gilt

deed, and the need to facilitate their transfer was becoming necessary. In 1688

the trading of stocks began on a stock exchange in London. Towards the end of

seventeenth century, an organized market existed in England for the purchase and

sale of stocks and shares. Brokers were licensed by the Lord Mayor of the City

of London, and carried a silver medal as evidence thereof. These brokers were

entitled to trade in any commodity or commodities within the city. After the

financial crisis of 1696, the Government attempted to regulate the market and in

1697 passed an "Act" to restrain their numbers from unethical practices. By the

early 1700s, there were operational stock exchanges in France, England and

America followed suit in the part of the century The New York Stock Exchange

was formed in 1792. The Bombay Stock Exchange (BSE) is the oldest stock

exchange in Asia which commenced its operation in the year 1875. In the 19th

century, exchanges were opened to trade forward contracts on commodities. These

commodity exchanges later started offering future contracts on other products,

such as interest rates and shares, as well as options contracts. They are now

generally known as futures exchanges.

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History of Indian Stock Exchanges:

Indian stock markets have a history dates back to the eighteenth century

until the end of the nineteenth century, securities trading were unorganized and

the main trading centers were Bombay and Calcutta. Of the two Bombay was the

chief trading centre wherein bank shares were the major trading stock. Business

on corporate stocks and shares in cotton presses started in Bombay in the 1930's.

During the American Civil War (1860-61) the trading activities in Bombay were

nourished resulting in a boom in share prices. Trading at that time was limited to

a dozen brokers and their trading place was under a banyan tree in front of the

Town Hall in Bombay.

The rapid development of commercial enterprises in the 1850s brought more

brokers into the business. In 1860, the number of brokers increased to 60. Due to

the hectic and swift development of share trading business by 1874, brokers used

to gather in the Dalal Street, Bombay for transacting their business. Consequently

these stockbrokers organized an informal association in 1875 called "The Native

Share and Stock Brokers' Association Bombay. The capital market was not well

organized and developed during the British rule because the British government

was not interested in the economic growth of the country. As a result many

foreign companies depended on the London capital market for funds rather than

on the Indian capital market.

several parts of the country especially in Maharashtra and Gujarat The concept

of regional stock exchanges gained a momentum from the year 1894 with the

establishment of the Ahmedabad Share and Stock Brokers' Association

Thus, the first national stock exchange to come into being was the Ahmedabad

Stock Exchange CASE There was a sharp spurt in share prices of jute industries

following a boom in to stocks and coal in1880s and 1990s. In the year 1908,

Calcutta Stock Exchange (CSE) was formed as the second one in the string of

regional stock exchanges. Madras witnessed a boom in business and as a result,

The Madras Stock Exchange was established in 1920 with 100 brokers.

However, the depression close on the heels of Independence led to the closure

of many exchanges in the country, Lahore Stock Exchange was closed down after

the partition of India, and later on it merged with the Delhi Stock Exchange

Bangalore Stock Exchange Limited was registered in 1957 but got government

recognition only by 1963. Most of the other Exchanges remained in a deplorable

state till 1957 since they applied for recognition under the Securities Contracts

(Regulations) Act, [Link] the post-Independence period also, the size of the

capital market remained small. The strict regulations by the Controller of Capital

Issues (CCI) discouraged many companies form going public. During the early

sixties, there were only very few recognized regional stock exchanges in India. The

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number remained the same for the ensuring two decades and they were that of

Ahmedabad, Calcutta, Madras, Delhi, Hyderabad, Bangalore and Indore for

almost forty five years.

The 1980s are considered as turning point in the history of Indian stock exchanges,

during which many regional stock exchanges were incorporated

Government policies during the 1980s played a decisive role in the development

of Indian stock markets .The 1990s was the most important decade in the history of

Indian capital market. Liberalization, globalization and repeal of the Capital Issues

Control Act of 1947 were the important developments in the capital market. The

decade was characterized by a new industrial policy, emergence of SEBI as

regulator for capital market, advent of foreign institutional investors, euro-issues,

free pricing .new trading practices, new stock exchanges, entry of new players such

as private sector mutual funds and private sector banks and primary market boom.

The stock market in India has been a long journey. The stock market in India

is now well organized, fairly integrated, more global and modernized. Advances

in computer and communications technology are shattering geographical

boundaries and enlarging investor class. The Indian stock markets are now

getting integrates with global markets. The stock market in India now consists of

Stock Exchanges.

Active stock exchanges (June 2011), including Over the Counter Exchange of

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India (OTCE) for providing trading access to small and emerging companies

The two prominent Exchange buses of the Indian stock market are the

National Stock Exchange of India (NSE) and the Bombay Stock Exchange

(BSE) Many of the regional stock exchanges have the membership of these two

stock exchanges.

Meaning of Stock Exchange:

The word Stock' means a fraction of the capital of a company and the word

exchange means a place for buying and selling something. The market or place

where securities are exchanged or traded is called stock exchange or stock

market. A stock exchange thus provides a trading platform for the sale and

purchase of securities. Stock exchange is a structured market place for the proper

conduct of trading activities in shares, stocks and other securities issued by

companies and government. Stock exchange provides marketability and price

continuity for shares and helps a fair evaluation of securities in terms of their

intrinsic worth Stock exchanges are formal organizations approved and regulated

by the regulatory authorities of a country Stock exchanges deals in securities like

shares, debentures or bonds issued by the companies or corporations in the

governments, municipal corporations etc. In addition, the stock exchange

sometimes buys and sells certificates representing commodities of trade Stock

exchanges also facilitate the issue and redemption of securities and other financial

instruments. Members are only permitted to trade those securities, which are

generally entered in the official list of the exchange. The right to trade securities or

make markets on an exchange floor is granted only to an individual or firm on

becoming a member of the exchange. An organized and recognized stock market

ensures liquidity and marketability to securities, encourage investments in

securities and support corporate growth

Definition of Stock Exchange:

The Securities Contracts (Regulations) Act, 1956 defines stock exchanges

an association, organization or body of individuals, whether incorporated

or not established for the purpose of assisting, regulating and controlling

the business of buying, selling and dealing in securities"

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CLASSIFICATION OF STOCK MARKETS AND SECURITIES:

A stock is a certificate representing partial ownership in a company. Stocks

are issued by the companies that need long-term funds. There are two types

Explain the types of market segments in the stock market: (i ) primary market or

new issue market segments in market (NIM) and (ii) secondary market (SM).

While the NIM supplies fresh or the stock markets, additional capital to the

companies, the securities already issued or floated on securities traded and

the NIM are traded on the SM. The SM does not play any direct role in making

valuation techniques of funds available to the corporate ; its role in this respect is

only indirect, that is, stocks it helps to encourage investors to invest in industrial

securities by making them liquid, that is, by providing facilities for continuous,

regular and ready buying and selling of those securities. NIM deals in new

securities, whereas SM deals in already existing or old securities which have been

listed on it. The investors acquire or buy securities directly from the companies on

the NIM, while they trade securities so acquired among themselves on the SM.

Business concerns raise capital through two major types of securities from the

stock market. They are:

(a) Ordinary shares or variable dividend securities or common stock, and

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(b) Ordinary shares and preference shares are also known as 'equities'.

Unlike bank deposits and units, these securities are the major primary securities in

the financial markets of any country. They differ in their investment characteristics

and as such satisfy different preferences of various investors and enjoy differing

degrees of popularity.

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  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

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Indian economy then. The scheme was designed to deploy large

amounts of surplus cash available with several public sector undertakings

(PSUs). A large part of this surplus cash was generated from borrowings

in the international markets largely by PSUs, to strengthen the country's

unstable foreign exchange reserves. An intense competition developed

among the banks for these funds. To compete for PMS funds from the

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

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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 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

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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,

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

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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.

 History of Harshad Mehta:

Harshad Mehta was born n 29th July in a Guajarati Jain family. Moved from small

town Raipur to find his future in Mumbai. First job as dispatch clerk in new India

assurance. Worked with stock brokers and soon managed to get a broker’s card.

Soon started his own ventures grow more research and assets management

company ltd. He became a dream seller and celebrity of the financial world.

People started to address him as the” Big Bull of Market”. On April 23, 1992

journalist Suchita Dalal in a column in the Times of India exposed the dubious

ways of harshad Mehta. He was later charged with 72 criminal offences and 600

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civil actions were filed against him. He died in 2002 due to a massive heart attack

in a jail in thane, with much litigation still pending against him.

 Overview of the scam:

This scam can be categorized as a Ca p ital market scam in which it is

done by manipulating the facts I n order to attain enormous profits. There

were 4 different aspects of this scam: Diversion of funds

 Diversion of funds from the banking system to brokers for financing their

operations in the stock market.

 Intra-day trading-the modus operand mainly included investing heavily in

certain shares at the start of the day which led to a sharp increase in the price of

the stock and then cashing in at the end of the day to reap huge benefits.

 Following two aspects shall be explained in detail later .Use of Ready Forward

(RF) to maintain SLR Fake Bank receipts (BR).

Taking advantages of the loopholes in the banking system, Harshad and his

associates triggered a securities scam diverting funds to the tune of Rs 4000 Cr.

from the banks to stockbrokers from April1991 to May 1992. He caused the steep

rise in the Stock market index in the year 1992 by bidding at a premium for many

shares.

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Some of the stocks which were highly invested in by Harshad Mehta were:

 ACC Apollo Tyres.

 Reliance

 Tata Iron and Steel Co. (TISCO)

 BPL

 Sterlite

 Videocon

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

concerned were bribed and/or negligent. The banks' senior/top

management might have been fully aware of this and turned a blind eye

to it to benefit from higher returns the brokers could offer by diverting the funds to

the stock market. Banks were not allowed to short sell government securities

according to the RBI guidelines. But this 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

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kickbacks to the various accomplices in the banks and possibly in the

bureaucracy and in the political system. It is rumored that a part of the

money was sent out of India through the 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.

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 [Link] and would have cashed in on the

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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 Fair growth Financial Services but came back to power

without any one remembering about his relations to Fair growth. One

more example is B Shankaranand, the then powerful petroleum minister

got away without paying a price.

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  Ketan Parekh Scam - The Crash that Shook the Nation

Year of scam: 2001

Amount of scam: Rs. 120 crores (approx)

Period of the scam: 1999 - 2001

Brief description of the scam:

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

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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

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.

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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

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

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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

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but the result of complaints by Bol. When prices moved up, SEBI

watched these as 'normal' market movements. It ignored the large

positions built up by some operators. It asked no questions at all. It had to

investigate these things, more as a probing agency than as a regulatory

body coordinating with other agencies. An equally crucial question was

raised by media regarding SEBI's ignorance of the existence of an

unofficial market at the CSE. Had the regulatory authorities been alert,

the huge erosion in values could have been avoided or at least controlled.

> Existence of long trading cycles and Badla system: Long

trading cycles in the stock which was then 7 days gave more chances to

manipulation than the now trading cycle of 2 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

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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

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:

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

42
by SEBI’s whole-time members, immediately after C.B. Bhave took over

as chairman. The biggest beneficiaries of the scams have been lawyers

and law firms. Unlike journalists, activists, investigators and regulators,

they are not required to take a moral stand on who they represent.

Consequently, the best brains in India are always and invariably working

at getting scamsters and crooks off the hook for enormous fees. These

fees are linked to conferences and court appearances and not the

completion of cases or their success. The worst victims are innocent, or

just weak, bank officials who couldn’t say no. They are slowly destroyed

in decades of court appearances and the absence of decent legal

representation. Ironically, the office of the custodian which claims that it

has filed 11,000 cases (disputed by all others involved in the trial) has

continued to file fresh ones. After a decade, the custodian finally woke up

in February 2012 to ask Ketan Parekh (and 19 entities connected with

him) the source of over Rs72 crore that he repaid in instalments to Bank

of India and Madhavpura Bank under a court order. On 31st March 2012,

a media report said that it was set to contest the discharge by a

magistrate’s court of two key cronies of Ketan Parekh—one Mr.

Dharmesh Doshi, who worked with him, and another a stockbroker

Mukesh Babu. Ketan Parekh’s skill was in his trading prowess and

43
ability to sense the market pulse . He has been allegedly operating

through fronts and has been dealing with many brokers on a profitsharing

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.

44
  Roopal 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

45
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

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

46
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

accounts. These shares were transferred to a bunch of financiers, who

47
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

48
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

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

8years for this course of action.

49
 Satyam Computers - An accounting scam

Year of scam: 2009

Amount of scam: Rs. 7136 crores

Period of the scam: 2002 - 2009

Brief description of the scam:

In 1987, Ramalinga Raju founded Satyam Computer Services along with

one of his 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

50
for these companies. Thousands of acres of land were bought either with

money which seems to have evaporated or with the influence by being

‘Satyam’ by its subsidiary Maytas Properties. As the event unfolds,

Satyam had announced to acquire 51% in Maytas Infra and 100% stake in

Maytas Properties and consequently aborted the deal in less than 24 hours

due to lot of pressure from other stakeholders. People invested in

Satyam due to its IT services and not due to its investment in

construction. Institutional Investors did not like the idea of Satyam

investing 100% in Maytas at an overvalued figure of the asset that too in

a low realty market and therefore forced the management to abort the

deal. With that, Satyam’s share lost half its value in one day which was

triggered by bad corporate governance issues. The situation unfolded into

a major crisis which resulted in the stock price falling 77% on Jan 7,2009,

when the Satyam Computer Services’ 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).

51
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.

Lapses which led to the scam:

> 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

52
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

SEBI’s ears and could have prevented huge damage to small investors

investing further in the stock.

53
> 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

54
down a few disqualifications, which do not include criminal backgrounds

or illiteracy. There are no norms on qualifications or experience required

for independent directors. Companies, therefore, often tap celebrities,

especially just before hitting the market for funds through IPOs. It is

important to have independent directors with strength of character who

are willing to blow the whistle and be assertive. In reality, companies

often induct retired bureaucrats as independent directors to take

advantage of their lack of domain knowledge. Though regulations

disallow promoters to appoint their relatives as independent director, a

‘relative’ excludes cousins and other close 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.

55
  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.

he had to leave. Bhansali then established 'CRB Consultants,' a private

limited company in New Delhi in 1985. In 1992, the name of the

56
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.

57
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

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

58
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,

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

59
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.

60
  Dinesh Dalmia - Fake shares scam

Year of scam: 2001

Amount of scam: Rs. 595 crores

Period of the scam: 2000 - 01

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

61
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

complete blind faith on the brokers of such markets, who made them

invest in the companies not listed at all on the stock exchange.

62
  Dinesh 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

63
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

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.

64
  Vanishing Companies Scandal

Year of scam: 1996

Amount of scam: Not known

Period of the scam:1992 -1996

Brief description of the scam:

In the case of the ‘vanishing companies’ scandal that surfaced between

1992 and 1996, around 3,911 companies raised Rs 25,000 crore in the

primary capital markets and then simply disappeared. They just did not

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.

65
  Lapses which led to the scam:

Lack of vigilance by the Regulators: This scam went on for

couple of years extracting money from the investors to the tune of few

crores and yet our regulators being the DCA or SEBI could not identify

the motive of such companies at the first stance. This shows the

lackadaisical approach of the regulators.

Absence of clarity regarding the 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.

 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

66
stock market is a small group of evil players being primarily responsible

for the events on the market. The easiest case is a stock which is liquid. A

manipulative cartel develops which rigs the liquidity and price. They

actively trade it amongst themselves, to a point where "innocent

bystanders" feel the stock is liquid and valuable. This tempts innocent

bystanders to step in and buy shares. At this point, the manipulative cartel

has made profits because the innocent bystander has been persuaded to

part with his money at a falsely elevated price. There are many variations

on this theme. Such efforts often involve collusion with journalists and

the senior management of the company, so that glowing stories about the

company appear on the front page of the pink papers. Some variations

of the price rigging are as follows:

 Circular Trading :

A fraudulent trading scheme where sell orders are entered by a broker

who knows that offsetting buy orders, the same number of shares at the

same time and at the same price, either have been or will be entered.

These trades do not represent a real change in the beneficial ownership of

the security. This happens most 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.

67
  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 :

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

68
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.

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  Pump and Dump :

A scheme attempting to boost the price of a stock through

recommendations based on false, misleading, or greatly exaggerated

statements. The perpetrators of this scheme, who already have an

established position in the company's stock, sell their position after the

hype has led to a higher share price. The victims of this scheme will

often lose a considerable amount of their investment as the stock often

falls back down after the process is complete Traditionally, this type of

scheme 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

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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

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 shortsell

a stock and then spread unsubstantiated rumors and other kinds of

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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

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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

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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