financial scams in india
TRANSCRIPT
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Project Report on:
Financial Scams in India
Submitted By:
NAME: ANOLI .V.ADHIA
SEAT NO: __________
TYB.Com (FINANCIAL MARKETS)
Semester Vth
Submitted To:
University Of Mumbai
Project Guide:
Dr. Richa Jain
Academic Year
2013-2014
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CERTIFICATE
This is to certify that the project entitled
FINANCIAL SCAMS IN INDIA is successfully done
by ANOLI.V.ADHIA During the Third Year, Fifth
Semester of B.com [Financial Markets] under
University Of Mumbai through the Thakur College of
Science & Commerce, Kandivali (East) , Mumbai
400101.
_______________ _______________ ______________
Co-coordinator Project Guide Principal
Date: _________ Place: ____________
____________________________
External Examiner
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DECLARATION
I ANOLI .V. ADHIA from Thakur College of Science &
Commerce, student of T.Y.B.Com (Financial Markets),
semester V, Examination Seat no:-_________, here by
submit my project report on FINANCIAL SCAMS IN
INDIA.
I also declare that this project which is the partial
fulfillment of the requirement for the degree of T.Y.B.Com
(Financial Markets) of University of Mumbai, is the result of
my own efforts with the help of experts.
Date: __________
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ACKNOWLEDGEMENT
It gives me immense pleasure in presenting the project report on
Capital Markets.
Firstly, I take the opportunity in thanking almightily and my parents
without whose continuous blessings, I would not have been able to
complete this project.
I would like to thank my project guide Dr. Richa Jain for her great
help, valuable opinions, advice and suggestions in fulfillment of this
project.
I am also grateful to my co-coordinator Mrs. Rashmi.V. Shetty for
always encouraging and given me new hope to do this project.
I am also grateful to my brother for supporting me for providing me
material and knowledge to make this project a success. I convey my
deep appreciation to them for sparing their valuable time and efforts,
so as to make me capable of presenting this project.
I am thankful to our college for all the possible assistance and
support, by making available the required books and the internet
room which have proved useful to me in successfully completing my
project.
I hope that I have succeeded in presenting this project to the best of
my abilities.
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EXECUTIVE SUMMARY:
The findings are based on a comprehensive survey, cutting across several
industrial sectors, both public and private. 'Strikes, Closures and Unrest'
emerged as the number one risk in the survey report. In the year 2012, it
did not surface among the top five risks in the 'Overall Risk Rating'. The
risk of 'Political and Governance Instability' has significantly changed
position from number eight last year to number two this year.
'Information and Cyber Insecurity', 'Fire' and 'Crime' have been rated at
number three, five and six respectively. They have maintained their
position among the top six risks from the India Risk Survey 2012
onwards. The risk of 'Corruption, Bribery and Corporate Frauds' has
been acknowledged as risk number four. In 2012, India was ranked 94
among 176 countries on the Corruption Perception Index and the
Financial Stability Report of the Reserve Bank of India revealed that
losses of INR 4,448 crores (approx. USD 8.2 billion) to Indian banks
from financial frauds in 2012 were the highest ever.
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RESEARCH OBJECTIVE:
An attempt is made to examine and analyze in-depth the creative-
accounting scandals, which brings the limelight to the importance of
ethics and corporate governance. The fraud committed is a testament
to the fact that the science of conduct is swayed in large by human
greed, ambition, and hunger for power, money, fame and glory.
Scandals from India have, time and again proved, that there is an urgent
need for good conduct based on strong corporate governance, ethics and
accounting & auditing standards. Unlike Enron, which sank due to
agency problem, Satyam was brought to its knee due to tunneling
effect. The Satyam scandal highlights the importance of securities laws
and CG in emerging markets. Indeed, Satyam fraud spurred the
government of India to tighten the CG norms to prevent recurrence of
similar frauds in future. Thus, major financial reporting frauds need to
be studied for lessons-learned and strategies-to-follow to reduce the
incidents of such frauds in the future.
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CONTENTS:
SR.NO PARTICULARS PG.NO
1. Brief introduction on financial markets
2. Introduction on financial scams
3. CASE STUDY-I ( Satyam Scam)
4. CASE STUDY-II ( Securities Scam)
5. CASE STUDY-III (CRB Scam )
6. Corporate Governance
7. Conclusion
8. Bibliography
9.
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BRIEF INTRODUCTION ON FINANCIAL MARKETS:
Financial markets describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and
derivatives. Financial markets are typically defined by having transparent
pricing, basic regulations on trading, costs and fees and market forces
determining the prices of securities that trade.
Some financial markets only allow participants that meet certain criteria,
which can be based on factors like the amount of money held, the
investors geographical location, knowledge of the markets or the
profession of the participant.
Financial markets provide channels for allocation of savings to
investment. These provide a variety of assets to savers as well as various
forms in which the investors can raise funds and thereby decouple the
acts of saving and investment. The savers and investors are constrained
not by their individual abilities, but by the economys ability, to invest
and save respectively. The financial markets, thus, contribute to economic
development to the extent that the latter depends on the rates of savings
and investment.
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The financial markets have two major components:
Money market
Capital market.
Money marketis a segment of the financial market in which financial
instruments with high liquidity and very short maturities are traded. The
money market is used by participants as a means for borrowing and
lending in the short term, from several days to just under a year. Money
market securities consist of negotiable certificate of deposists (CDs),
bankers acceptances, U.S. Treasury bills, commercial paper, municipal
notes, Eurodollars, federal funds and repurchase agreements
(repos). Money market investments are also called cash investments
because of their short maturities. The money market is used by a wide
array of participants, from a company raising money by selling
commercial paper into the market to an investor purchasing CDs as a safe
place to park money in the short term. The money market is typically
seen as a safe place to put money due the highly liquid nature of the
securities and short maturities. Because they are extremely conservative,
money market securities offer significantly lower returns than most other
securities. However, there are risks in themoney market that anyinvestor
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needs to be aware of, including the risk of default on securities such as
commercial paper.
Capital Market is one in which individuals and institutions trade
financial securities. Organizations and institutions in the public and
private sectors also often sell securities on the capital markets in order to
raise funds. Thus, this type of market is composed of both the primary
and secondary markets. Any government or corporation requires capital
(funds) to finance its operations and to engage in its own long-term
investments. To do this, a company raises money through the sale of
securities - stocks and bonds in the company's name. These are bought
and sold in the capital markets.
The capital markets have two major components:
Primary market
Secondary market
Primary Market issues new securities on an exchange. Companies,
governments and other groups obtain financing through debt or equity
based securities. Primary markets, also known as "new issue markets,"
are facilitated by underwriting groups, which consist of investment banks
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that will set a beginning price range for a given security and then oversee
its sale directly to investors. The primary markets are where investors
have their first chance to participate in a new security issuance. Theissuing company or group receives cash proceeds from the sale, which is
then used to fund operations or expand the business.
The primary market consists of:
Public and rights issue
Euro issues
Private placements
Public and rights issue:
An issue of rights to a company's existing shareholders that entitles them
to buy additional shares directly from the company in proportion to their
existing holdings, within a fixed time period. In a rights offering, the
subscription price at which each share may be purchased in generally at a
discount to the current market price. Rights are often transferable,
allowing the holder to sell them on the open market.
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Euro issues:
Newly public companies that want to raise more money tend to issue this
type of stock. Euro equity is a term used to describe an initial public offer
occurring simultaneously in two different countries. The company'sshares are listed in various countries rather than where the company is
based. This method differs from cross-listing where company shares are
listed in the home market and then listed in a different country. Euro
equities are sometimes European securities sold on several national
markets. Also referred to as Euro equity Issue.
Private placement:
The sale of securities to a relatively small number of select investors as a
way of raising capital. Investors involved in private placements are
usually large banks, mutual funds, insurance companies and pension
funds. Private placement is the opposite of a public issue, in which
securities are made available for sale on the open market.
Secondary Market is where investors purchase securities or assets
from other investors, rather than from issuing companies themselves. The
Securities and Exchange Commission (SEC) registers securities prior to
their primary issuance, then they start trading in the secondary marketon
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the New York Stock Exchange, Nasdaq or other venue where the
securities have been accepted for listing and trading.
The secondary market consists of:
OTC MARKET
Securities exchanges
OTC MARKET:
Theover-the-counter(OTC) market is a type of secondary market also
referred to as a dealer market. The term "over-the-counter" refers to
stocks that are not trading on a stock exchange such as the NASDAQ,
NYSE orAmerican Stock Exchange(AMEX). This generally means that
the stock trades either on theover-the-counter bulletin board(OTCBB) or
thepink sheets. Neither of these networks is an exchange; in fact, they
describe themselves as providers of pricing information for securities.
OTCBB and pink sheet companies have far fewer regulations to comply
with than those that trade shares on a stock exchange. Most securities that
trade this way arepenny stocksor are from verysmall companies.
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SECURITIES EXCHANGES:
Regulated financial market where securities (bonds notes, shares)
are bought and sold at prices governed by theforces of demand and
supply. Stock exchanges basically serve as
(1) Primary markets where corporations, governments, municipalities,
and other incorporated bodies can raise capital by channeling savings of
the investors into productive ventures
(2) Secondary markets where investors can sell their securities to other
investors for cash, thus reducing the risk of investment and
maintaining liquidity in the system. Stock exchanges impose
stringent rules, listing requirements, and statutory requirements that
are binding on all listed and trading parties.
http://www.businessdictionary.com/definition/bond.htmlhttp://www.businessdictionary.com/definition/force.htmlhttp://www.businessdictionary.com/definition/force.htmlhttp://www.businessdictionary.com/definition/bond.html -
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INTRODUCTION ON FINANCIAL SCAMS:
What are scams?
A fraudulent scheme performed by a dishonest individual, group,
or company in an attempt obtain money or something else of value.
Scams traditionally resided in confidence tricks, where an individual
would misrepresent themselves as someone with skill or authority, i.e. a
doctor, lawyer, investor. After the internet became widely used,
new forms of scams emerged such as lottery scams; scam
baiting, email spoofing, phishing, or request for helps. These are
considered to be email fraud. Also see phishing, scheme.
A scam is a dishonest attempt to trap you into parting with your money.
A 'scammer' may make a personal approach, with an offer too good to be
true. Someone may email you, phone, text-message or post an offer that
they press you to take up. Scams can reach their target audience in many
ways, ranging from a one-person door-stepping operation, through to
multinational highly sophisticated telemarketing scams. Advertisements,
direct mail, text messaging, phone calls and e-mail are all widely used.
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However SCAM means when a person tries to deceptively cheat you by
first giving you a very good offer about something but later on you would
be shocked to know that the person was simply bluffing and you have lost
your money. An example of this can be the lottery scam. For example a
person calls or emails you and tells you that you have won a lottery prize
but to get the money there is a small processing fee, you have to pay that
fee and then the money would be sent to you.
The top ten financial scams in India:
1) 2G Spectrum Scam
2) Commonwealth Games Scam
3) Satyam Scam
4) Telgi Scam
5) Bofors Scam
6) The Fodder Scam
7) The Hawala Scandal
l8) IPL Scam
9 )Harshad Mehta Stock Market Scam
10 )Ketan Parekh Stock Market Scam.
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CASE STUDY-I: (SATYAM SCAM)
Introduction on satyam computer services .ltd:
Satyam Computer Services Ltd.
Is a consulting and information technology services company based in
Hyderabad, India .It was found in 1987 by B.Ramalinga Raju.
The company offers information technology (IT) services spanning
various sectors, and is listed on the New York Stock Exchange and Euro
next. It is considered as an icon among the IT companies and at one point
had over billion dollar revenue. Sat yams network covers 67 countries
across six continents. The company employs 40,000 IT professionals
across development centers in India, the United States, the United
Kingdom, the UAE, Canada, Hungary, Singapore, Malaysia,
China, Japan, Egypt and Australia. It serves over 654 global companies,
185 of which are Fortune 500 corporations.
Satyam has strategic technology and marketing alliances with over 50
companies .Apart from Hyderabad; it has development centers in India
at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata,
Bhubaneswar, and Visakhapatnam.
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Satyam Maytas Fiasco:
Satyam Computers had on December 16, 2008, announced that it will
acquire two group firms - Maytas properties and Maytas Infra. The BOD
of Satyam had approved the foundersproposal to buy 51 per cent stake
in Maytas Infrastructure and 100 % in Maytas Properties. The total
outflow for both the acquisitions was expected to t be US$ 1.6 bn
comprising of US$1.3 bn for the 100% stake in Maytas Properties and
US$ 0.3 bn for the 51% stake in Maytas Infra.This is the move that
sparked a row over alleged violation of corporate governance laws. This
deal is not profitable for investors .So after this announcement they
started to raise their voices against the deal.
Maytas infrastructure:
The company is run by the sons of Ramalinga Raju .It was started in the
late 1980s by Ramalinga Raju. The main reason for the debacle of
Maytas Infra is due to the debacle of Satyam.
Maytas properties:
One of the reasons for the debacle of Maytas properties is the ongoing
economic slowdown. The company has huge land banks and the prices
have dropped down in the real estate significantly.
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ANALYSIS:
The truth is as old as the hills" opined Mahatma Gandhi, So a company
named "Satyam" (Truth, in Sanskrit) inspired trust,
Satyam Computers is a multinational company established in 1987 by
B.Ramlinga Raju in Hyderabad, India. Company offered information
technology (IT) services spanning various sectors all over the world &
was very well known in Stock Exchange with an increasing price of the
shares of company. Satyam network covered around 67 countries across
six continents with 40,000 IT Professionals working in India, US, UK,
UAE, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and
Australia. It even serves 654 global companies. Within no time, business
was booming. Andhra Pradesh, of which Hyderabad is the capital, has
one of the largest pools of skilled manpower in India. Satyam would
prove a doughty competitor to its rivals, pricing its services so
aggressively that some thought it was prepared to go with minimum
profits in order to gain customers. And it expanded aggressively overseas.
When he opened his Sydney office a few years ago, he occupied premises
vacated by a top global IT firm. In China , provincial leaders vied to
invite Satyam to set up operations in their areas. But once Mr. Raju sold
shares to the Indian public in 1992 and later, went for a New York listing
in 2001, pressure grew on him to improve the companys performance.
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Ever competitive, he was also in rush to catch the market leaders, Tata
Consultancy Services, Infosys Technologies and Wipro. Raju was
obsessed with getting past the billion-dollar sales mark. When he got
there, he wanted to post US$2 billion .Satyam posted US$2.1 billion
(S$3.1 billion) sales in the year to March 31; 2008.With the ever-rising
pressure to perform, Satyam began doctoring the books to show bigger
profits by manipulating the balance sheet, process that began several
years back. For Satyam, the recent developments are a direct leftover of
the past. In fact, the story is about a decade old. In late 1999, India World
a largely unknown internet firm was acquired by Satyam group
company, Satyam Info way, for an eye-popping Rs 500 crore. The
consternation that accompanied this deal was not hard to comprehend.
India World had a top line of just Rs 1 crore and a net profit of an
insignificant Rs 25 lakh. At Rs 500crore, Satyam Info way, later renamed
Sify, was paying this astronomical sum not just for India World but for a
number of sites that came with it among them weresamachar.com,
khel.com and khoj.com. The argument dished out was based on the
potential of the internet business and the logic of eyeballs was driving this
valuation story. One was not sure about the source of funds and how
much money went back to RamalingaRaju.A few months later in 2000,
shareholders of Satyam were an irate lot. At the annual general meeting
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(AGM) of thecompany in Hyderabad in May 2000, shareholders accused
Satyam of withholding facts and claimed they were defrauded. This was
after the merger of three subsidiaries Satyam Enterprise Solutions
(SESL), Satyam Renaissance Consulting and Satyam Spark Solutions
with Satyam Computer Services. Post merger, 8 lakh shares of Satyam
Computers were allotted to C Srinivasa Raju, who was then Satyam
Computers executive director. Shareholders contended that SESL had
made a rights issue of 12 lakh shares at par just before this merger. A
third of this was bought by Satyam Computer while the remaining 8 lakh
shares went Srinivasa Rajus way after they were renounced. Once
shareholders of SESL were given shares in Satyam Computers in a 1:1
proportion, Mr. Raju got 8 lakh shares at just Rs 10 each, when the shares
were trading at a whopping Rs 1,600. The management of Satyam
Computers, however, maintained that things were above board, though
shareholders thought otherwise. The seeds of accounting manipulation in
Satyam were sown several quarters before Ramalinga Rajus
communiqu to the board on Wednesday, 7th Jan-09. In 2002, the
department of company affairs (DCA) was in receipt of a slew of
complaints from Satyams shareholders that there were accounting
irregularities in the company. Here, it was stated that Satyams directors
invested unwisely in subsidiaries that were underperformers. This merely
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facilitated the process of tax evasion and employing methods such as
writing off large amounts on depreciation. At first blush, Rajus statement
to the board (Rajas letter to the board Appended as Annexure I) in which
he confesses to inflating profits appears a act of contrition by a man who
was willing to stand up and face the music for his transgressions. If Raju
was dressing up the bottom-line, it was only to boost the companys
valuation and ensure that it stayed in the big league of IT services. A
higher valuation also enabled Raju to borrow more money against his
shareholding.
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QUERIES:
Why Mr. Raju Ramalinga manipulated the balance sheet?
Mr. Raju started doctoring the sheet simply to show superior performance
and to be in competition with the market leaders.
Why satyam announced that it will acquire maytas infra and maytas
properties?
Company announced Acquisition of 51% stake in Maytas Infra and 100%
stake in Maytas Properties on 16thDec 2008 to hide the irregularities in
the accounts which were lasting from last few years.
What management could do?
A) Restore the Management of the company & appoint some reputed
people as BOD.
B) Try building confidence in clients to get back the lost projects.
C) It could also be merged with any other software company.
How much was the actual fraud recorded?
His sheets recorded the following:
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Sundry Debtors 2651.6 CR Actual Debt was 2161;
Over stated 490 CR .
Cash & Bank Balance 5312.62 CR
Actual cash in bank was 321C.
Interest on fixed deposits 376 CR.
No accured interest exists.
L i a b i l i t y : Mr. Raju arranged Liability himself 1230 CR
A t o t a l o f 7 1 3 6 C R .
.
If satyam was fudging funds, where were the funds for all cash
acquisition coming from?
Sr. No Year Acquired Firm Profession Funding(Amount in $)1) Apr-05
UK based Citisoft PLC Business Consulting Firm 38Mn(Paid in
tranches)2) July-05 Singapore based Knowledge Dynamics Consulting
Solution Provider 3.3 Mn (All cash deal)3) Oct-07 UK based Nikor
Global Solutions Infrastructure based management services and
consultancy group 5.5 Mn (All cash deal)4) Jan-08 Chicago based Bridge
Strategy Group Management consulting firm 35.00 Mn (All cash deal)5)
Apr-08 Caterpillar Inc Market research and customer analytics operations
95.5 Mn for both deals (all cash purchase)S& V Management Consultants
Supply chain management firm.
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Satyam Scam who is to blame?
Who is guilty in this sordid state of events? MR. Raju is by far the father
of this fraud. But there were others who are also culpable.
1. The auditors:
What were the auditing company, Price waterhouse Coopers, doing?
PwC has written a letter to the BOD of Satyam that its audit may be
rendered "inaccurate and unreliable" due to the disclosures made by
Satyam's (ex) Chairman. Since the Auditors do bank reconciliation to
check whether the money has indeed come or not. They check
bank statements and certificates. So was this a total lapse in supervision
or were the bank statements forged? No one knows yet. The company
officials said they relied on data from the reputed auditors.
2. The promoters:
Since the promoters, in this case, held only about 8 percent shares, their
idea to push through the Maytas acquisition deal was defeated by an
angry lot of shareholders.
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3. The Sebi:
The Sebi had in December given a clean chit to Satyam in the probe on
violation of corporate governance law.
4. The bankers:
If the auditors were conned, it means that either the bank statement or
certificates were forged Satyams banks ICICI Bank, HDFC Bank,
Bank of Baroda, etc.
5. The directors and independent directors:
Despite the shareholders not being taken into confidence, the directors
went ahead with the managementsdecision.
6. The government:
The government too is equally guilty in not having managed to save the
shareholders, the employees and some clients of the company from
losing heavily.
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CASE STUDYII (SECURITIES SCAM):
PART 1:
Introduction on securities scam by Harshad Mehta :
History of Harshad Mehta:
Harshad Mehta was born n 29thy 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 brokers 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 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.
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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
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TABLE: 1
The graph shows the rise in the Sensex during the period when Harshad
Mehta was operational and putting in loads of money in the stock
exchange increasing the liquidity and thus arbitrary increase in the prices
of some shares.:
R E A D Y F O R W A R D ( R F )
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Disappearance of money:
It is becoming increasingly clear that despite the intensive efforts by
several investigating agencies, it would be impossible to trace all the
money swindled from the banks. At this stage we can only conjecture
about where the money has gone and what part of the misappropriated
amount would be recovered. Based on the result of investigations and
reporting so far, the following appear to be the possibilities.
A large amount of the money was perhaps invested in shares.
However, since the share prices have dropped steeply from the
peak they reached towards end of March 1992, the important
question is what are the shares worth today? Till February 1992,
the Bombay Sensitive Index was below 2000; thereafter, it rose
sharply to peak at 4500 by end of March 1992. In the aftermath of
the scam it fell to about 2500 before recovering to around 3000 by
August 1992.Going by newspaper reports, it appears likely that the
bulk of Harshad Mehta's purchases were made at low prices, so
that the average cost of his portfolio corresponds to an index well
below 2500 or perhaps even below 2000. Therefore, Mehta's claim
that he can clear all his dues if he were allowed to do so cannot be
dismissed without a serious consideration. Whether these shares
are in fact traceable is another question.
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It is well known that while Harshad Mehta was the "big bull" in
the stock market, there was an equally powerful "bear cartel",
represented by Hiten Dalal, A.D. Narottam and others, operating
in the market with money cheated out of the banks. Since the stock
prices rose steeply during the period of the scam, it is likely that a
considerable part of the money swindled by this group would have
been spent on financing the losses in the stock markets.
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.
A part of the money must have been spent as bribes and kickbacks
to the various accomplices in the banks and possibly in the
bureaucracy and in the political system.
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A part of the money might have been used to finance the losses
taken by the brokers to window-dress various banks' balance
sheets. In other words, part of the money that went out of the
banking system came back to it. In sum, it appears that only a
small fraction of the funds swindled is recoverable.
After the scandal:
Immediate impact :
After the Harshad Mehta scandal was exposed, April, 1992, the situation
in share market was that of utter chaos. The first impact of the scam was a
steep fall in the share prices. The index fell from 4500to 2500
representing a loss of Rs. 100,000 crores in market capitalization.
However, the major damage to the stock market did not stop here. Since
the accused were active brokers in the stock markets, they had traded a
large number of shares during the previous year. All these shares became
tainted and worthless and could not be used in the market. This was a
great loss to the innocent investor who had bought these shares much
before the scandal was exposed.
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Impact on Indian economy :
There was a lot of media coverage on the scam and the political parties
left no opportunity in criticizing the government for it. The government
was under immense pressure and its liberalization policies were severely
criticized. It was also believed that Harshad Mehta and his accomplices
were behind framing of these policies. In the end the government had to
put the liberalization plans on hold. SEBI had to postpone the sanctioning
of private sector mutual funds. Implementation of some aspects of the
Narasimham Committee recommendations on the banking system had to
be delayed. The much talked about entry of foreign pension funds and
mutual funds became more remote than ever. The Euro-issues planned by
several Indian companies were delayed since the ability of Indian
companies to raise equity capital in world markets was severely
compromised.
Impact on the banks:
Fake bank receipts (BR) which were an integral part of the execution of
the whole scam landed the banks involved in a tight spot. These BR were
declared void and public money was at stake. At least ten prominent
banks were involved in this; some of them being SBI, Standard Chartered
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and a subsidiary of RBI. The scam could have been checked in time with
proper policies and verifications. The government, the RBI and the
commercial banks are as much accountable as the brokers for the scam.
The brokers were encouraged by the banks to divert funds from the
banking system to the stock market. The RBI too stood indicted because
despite knowledge about banks over-stepping the boundaries demarcating
their arena of operations, it failed to check them. Some of the prominent
individuals who were penalized were K. M. Margabandhu, CMD of the
UCO Bank (Arrested and sacked) and V. Mahadevan, one of the MD the
State Bank of India (Suspended).
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CASE STUDY-II (SECURITIES SCAM)
PART-2
Introduction on securities scam by Ketan Parekh:
History of Ketan Parikh:
Ketan Parikh is a former stock broker from Mumbai, India. He was
convicted in 2008, for involvement in the Indian stock market
manipulation scam in late 1999-2001. Currently he has been debarred
from trading in the Indian stock exchanges till 2017. He was trainee of
Harshad Mehta. Ketan Parikh can be best described as the pied piper of
Dalal Street. Parekh came from a family of brokers which helped him to
create a trading ring of his own. A Mumbai based stock broker chartered
accountant by profession. Ketan Parikh took advantage in certain stocks
which later came to be known as K-10 STOCKS. He held significant
stakes in the K-10 companies the buoyant stock markets from January
1999 helped the K-10 stocks increase in value substantially, as a result
other brokers and fund managers started investing heavily in these stocks.
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The K-10 Stocks:
Aftek Infosys
DSQ Software
Global Telesystems
Himachal Futuristic communications
Pentamedia Graphics
Satyam computers
Silver line technology
SSI
ZEE Telefilms
Pritish Nandy communications
Development leading to Ketan Parekh scam:
On March 1st, 2001 a fall about 176 points was seen in the sensex. Prior
day union budget tabled prompted 177 sensex points increase. SEBI
launched immediate investigation on the notice of the current situations in
the market. SEBI inspected the books of several brokers suspected of
triggering the crash. RBI ordered some banks to furnish data of capital
market exposure. BSE President Anand Rathis resignation added to
continued downfall of sensex. The situations opened debate over banks
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financial capital markets operations, lending f funds against collateral
security, dual control of co-operative banks. Ketan parekh was arrested
by CBI on 30thmarch 2001. He was charged defrauding Bank of India by
almost 20$ million. Then there was another sensex fall of 147 points.
Factors that helped Ketan Parekh:
Though Ketan Parekh was a successful broker, he did not have money to
buy large stakes as he held the stakes of more than RS.750 million in
july1999, according to a report. Analyst claimed that he had borrowed
from various companies and banks for this purpose. His financing
method was fairly simple. He bought shares when they were trading at
low prices and saw the rise in the bull market while continuously trading.
When the prices were high enough he pledged the shares with banks as
collateral for funds, and also borrowed from the companies like HFCL.
It could not have been possible without the involvement of banks. A
small Ahmadabad based bank, Madhavapura Mercantile Cooperative
Bank (MMCB) Was KPs main ally in the scam. KP and his associates
started tapping the MMCB for funds in early 2000. In December 2000,
when Ketan Parikh faced liquidity problem in settlement he used MMCB
in two different ways:
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First was the pay order route, where Ketan Parikh issued cheques
drawn on bank of India (BOI) TO MMCB, again which MMCB issued
pay orders, the pay order discounted at BOI.
The second route was borrowing from MMCB branch at Mandvi
(Mumbai) where different companies owned by Ketan Parikh and his
associates had accounts. Ketan Parikh used 16 such accounts, either
directly or indirectly through other broker firms and obtains funds.
Impact on Calcutta Stock Exchange:
Lack of regulations and surveillance on the bourse allowed a highly
illegal and volatile Badla business. Calcutta Stock Exchange had the third
largest volumes in the country after NSE & BSE. Calcutta stock exchange
helped Ketan Parikh to cover his operations from his rivals in Mumbai.
Brokers at CSE used to buy shares at Ketan Parikh behest. These brokers
had to keep shares in their name and they were paid 2.5% weekly interest.
By February 2001, CSE were reduced to estimated Rs. 6-7 billion from
their initial worth of Rs.12 billion. Ketan Parikhs Badla payments were
not honored on time for the settlement and about 70 CSE brokers
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defaulted on their payments. By mid-march, the value of stocks went
down further to around rs.2.5 -3 billion.
Impact of the scam on financial institutions:
Ketan Parikh was threatening to sue the bank of India for defamation
because it complained of bouncing of 1.3 billion pay orders issued to the
broker by Madhavpura mercantile cooperative bank. Investigations by
SEBI & CBI reveal that sheer magnitude of money by Parikh was a
staggering 64 billion.
Working of Badla System:
The stock exchange acts as an intermediary between you and the actual
lender. You will be changed on interest rate for borrowing, which will be
determined by the demand for that stock under badla trading. Thus,
higher the demand for Wipro under badla trading higher will be the
interest rate. You can keep your borrowing unpaid for a maximum of 70
days, after which you will have to repay the badla financer through the
exchange.
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SEBIs role after scam:
An additional 10% deposit margin was imposed on outstanding net sales
in the stock markets. The limit of application of the additional volatility
margins was lowered from 80% to 60%. To revive the markets SEBI
imposed restriction on short sales and ordered. It suspended all the broker
member directors of BSEs governing board. SEBI also banned trading
by all stock exchange presidents, vice presidents and treasures. SEBI
allowed banks for collateralized lending only through BSE & NSE.
Conclusion:
RS.2000 billion lost.
Ketan Parikh was released on bail on May 2001.
the retail investors were the worst hit
SBI, BOI & PNB had to suffer huge losses
MMCB also suffered huge losses around 400 crores.
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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. The A+ rating given by
CARE and upfront cash incentives of 7-10% attracted investors in hordes
to Bhansali's schemes.
Table: 2
CRB CAPITAL MARKETSKEY FINANCIALS:
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Overview of the scam:
Bhansali was reported to have specialized in setting up dummy
investment companies. He used to sell these dummy companies to buyers.
He capitalized on the 1985 boom in leasing companies to become cash
rich.
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.
Defrauding the SBI:
In May 1996, CRB Caps opened a current account in SBI's main Mumbai
branch, for payment of interest, dividend and redemption cheques. The
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payment warrants could be presented at any of the 4,000 SBI branches for
payment.However, Bhansali was granted only a current account facilityand 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 honored. 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 honoring 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. Bhansali was
called to the SBI office and asked to remit the difference immediately,
which he promptly did.
The systemic rot:
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
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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. The bank further claimed that the powers were
granted only in March 1997, when the RBI Act of 1934 was amended to
include specific provisions for the purpose. The bank also stated that it
had begun to examine the liabilities and not the assets. However, media
reports were quick to refute RBI's claims.
The Doomed Depositors:
May 18, 1997 - hundreds of angry, frustrated and scared people stood
outside the Reserve Bank of India's (RBI) Mumbai headquarters under
the scorching sun. They were waiting for Chain Roop Bhansali
(Bhansali), the head of the CRB Group of companies to arrive.
Three days earlier the 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 CentralBureau of Investigation (CBI) locked and sealed the offices of the CRB
Group and arrested six persons, including four directors (two from
Bikaner and two from Mumbai) of the satellite companies of the group, a
financial controller in Mumbai and a relative and close associate of
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Bhansali in Delhi. The CBI also conducted simultaneous searches at 16
places in Mumbai, three in New Delhi, one each in Chennai and
Ahmadabad and two places each in Calcutta, Jhunjunu, Sujangarh and
Bikaner. The CBI froze the bank accounts of the group companies and
seized incriminating files and other documents from the residence of the
vice-president of the CRB group in Mumbai. Following rumors that
Bhansali had fled India and was hiding in Hong Kong or Canada, the CBI
sought Interpol's assistance to trace his whereabouts. RBI filed a winding-
up petition claiming that the continuance of the CRB Group was not in
the interest of the public and depositors. The order prohibited CRB from
selling, transferring, mortgaging or dealing in any manner with its assets
and from accepting public deposits. In response, Bhansali sent a letter to
the RBI. Though it was not signed by him, the letter said that the RBI
order had led to the deterioration of the company's financial position. It
added that the company was facing tremendous problems with payments
to fixed depositors. The letter further said that 'we have, also expressed
that in view of the precarious situation which is fast going out of our
control, before it becomes unmanageable, our case should be considered
sympathetically.' This letter led the investors to believe that Bhansali
would come out of hiding and work out a way to get out of the mess.
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Impact of the scam:
The CRB scam took the whole nation by storm. At one point, the Union
finance ministry held a meeting everyday to get to the bras stacks of the
CRB fiasco. In a meeting with SEBI, the finance minister criticized the
regulator severely.The government asked the RBI to prepare a panel ofauditors asking to explore the possibility of making auditing of NBFCs a
prerequisite to registration. In October 1998, the SEBI appointed an
administrator for CRB's Arihant scheme finalized a scheme for payment
to the unit holders under the scheme; the investors were prematurely paid
Rs 4.95 per unit, which was its NAV 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.
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CORPORATE GOVERNANCE:
meaning of corporate governance:
The system of rules, practices and processes by which a company is
directed and controlled. Corporate governance essentially involves
balancing the interests of the many stakeholders in a company - these
include its shareholders, management, customers, suppliers, financiers,
government and the community. Since corporate governance also
provides the framework for attaining a company's objectives, it
encompasses practically every sphere of management, from action plans
and internal controls to performance measurement and corporate
disclosure. Most companies strive to have a high level of corporate
governance. These days, it is not enough for a company to merely be
profitable; it also needs to demonstrate good corporate citizenship
through environmental awareness, ethical behavior and sound corporate
governance practices.
Corporate governance has also been defined as "a system of law and
sound approaches by which corporations are directed and controlled
focusing on the internal and external corporate structures with the
intention of monitoring the actions of management and directors and
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thereby mitigating agency risks which may stem from the misdeeds of
corporate officers."
Good corporate governance ensures that the business environment is fair
and transparent and that companies can be held accountable for their
actions. Conversely, weak corporate governance leads to waste,
mismanagement, and corruption. It is also important to remember that
although corporate governance has emerged as a way to manage modern
joint stock corporations it is equally significant in state-owned
enterprises, cooperatives, and family businesses. Regardless of the type of
venture, only good governance can deliver sustainable good business
performance. The presence of strong governance standards provides
better access to capital and aids economic growth. Corporate governance
also has broader social and institutional dimensions. Properly designed
rules of governance should focus on implementing the values of fairness,
transparency, accountability, and responsibility to both shareholders and
stakeholders. In order to be effectively and ethically governed, businesses
need not only good internal governance, but also must operate in a sound
institutional environment. Therefore, elements such as secure private
property rights, functioning judiciary, and free press are necessary to
translate corporate governance laws and regulations into on-the-ground
practice.
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Principals of corporate governance:
Rights and equitable treatment of shareholders:
Organizations should respect the rights of shareholders and help
shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating
information and by encouraging shareholders to participate in general
meetings.
Interests of other stakeholders:
Organizations should recognize that they have legal, contractual,
social, and market driven obligations to non-shareholder stakeholders,
including employees, investors, creditors, suppliers, local
communities, customers, and policy makers.
Role and responsibilities of the board:
The board needs sufficient relevant skills and understanding to review
and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
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Integrity and ethical behavior:
Integrity should be a fundamental requirement in choosing corporate
officers and board members. Organizations should develop a code of
conduct for their directors and executives that promotes ethical and
responsible decision making.
Disclosure and transparency:
Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a
level of accountability. They should also implement procedures to
independently verify and safeguard the integrity of the company's
financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors
have access to clear, factual information.
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Corporate governance in India:
India's SEBI Committee on Corporate Governance defines corporate
governance as the "acceptance by management of the inalienable rights of
shareholders as the true owners of thecorporation and of their own role
as trustees on behalf of the shareholders. It is about commitment to
values, about ethical business conduct and about making a distinction
between personal & corporate funds in the management of a company. It
has been suggested that the Indian approach is drawn from the Gandhi
and principle of trusteeship and the Directive Principles of the Indian
Constitution, but this conceptualization of corporate objectives is also
prevalent in Anglo-American and most other jurisdictions.
Unlike south east and east Asia , the corporate governance initiative in
India and was not triggered by any serious nationwide financial, banking
and economic collapse. The initiative in india was initially driven by an
industry association, the confederation of Indian industry. In December
1995, CII was set up a task force to design a voluntary code of corporate
governance. The final draft of this code was widely circulated in 1997.
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In April 1998, the code was released. It was called Desirable Corporate
governance. Between 1998 and 2000, over 25 leading companies
voluntarily followed the code:
Bajaj Auto
Hindalco
Infosys
Dr. Reddys Laboratories
Nicholas Piramal
Bharat Forge
HDFC
BSES
ICICI & many more
Following CII & SEBI, the department of company affairs (DCA)
modified to further improve financial disclosures. These were:
Disclosure of related party transactions.
Disclosure of segment income :revenues, profits and capital
employed
Deferred tax liabilities or assets.
Consolidation of accounts.
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Mandated Corporate Governance Guidelines:
Board of directors : Frequency of meetings and
composition:
1. Board must meet at least four times a year, with a maximum time
gap of four months between two successive meetings.
2. If the chairman of the Company is a non-executive then one-third
of the board should consist of independent directors and
50%otherwise.
3. Independent defined as those directors who, apart from receiving
directors remuneration do not have any other monetary relationship
or transactions with the company, its promoters, management or
subsidiaries, which in the view of the board may affect
independence of judgment
4. The frequency of board meetings and board committee meetings,
with their dates, must be fully disclosed to shareholders in the
annual report of the company.
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5. The attendance record of all directors in board meetings and board
committee meetings must be fully disclosed to shareholders in the
annual report of the company.
6. Full and detailed remuneration of each director (salary, sitting fees,
commissions, stock options and perquisites) must be fully
disclosed to shareholders in the annual report of the company.
7. Loans given to executive directors are capped (no loans permitted
to non-executives), and must be fully disclosed to shareholders in
the annual report of the company.
Board of Directors : Information that must be
supplied:
1. Annual, quarter, half year operating plans, budgets and updates.
2. Quarterly results of company and its business segments.
3. Minutes of the audit committee and other board committees.
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4. Recruitment and remuneration of senior officers.
5. Materially important legal notices and claims, as well as any
accidents, hazards, pollution issues and labor problems
6. Any actual or expected default in financial obligations.
7. Details of joint ventures and collaborations.
8. Transactions involving payment towards goodwill, brand equity
and intellectual property.
9. Any materially significant sale of business and investments.
10.Foreign currency and other risks and risk management.
11.Any regulatory non-compliance
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Board of directors: audit committee:
1.Must have minimum of three members, all non-executivedirectors, the majority of whom are independent.
2.Chairman must be an independent director, and must be presentat the annual shareholders meeting to answer audit or finance
related questions.
3.At least one member must be an expert in finance/accounts.
4. .Must have at least three meetings per year, including onebefore finalization of annual accounts
5.Must meet with statutory auditors and internal auditors; havethe powers to seek any financial, legal or operational
information from the management; obtain outside legal or
professional advice.
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Disclosures to shareholders in addition to balance
sheet, P&L a/c & cash flow statement:
1. Board composition (executive, non-exec, independent).
2. Qualifications and experience of directors.
3.Number of outside directorships held by each director (capped at
director not being a member of more than 10 board-level
committees, and Chairman of not more than 5).
4. Attendance record of directors.
5. Remuneration of directors.
6. Relationship (familial or pecuniary) with other directors.
7. Warning against insider trading, with procedures to prevent such
acts.
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8. Details of grievances of shareholders, and how quickly these were
addressed. Date, time and venue of annual general meeting of
shareholders.
9. Dates of book closure and dividend payment.
10.Details of shareholding pattern.
11.Name, address and contact details of registrars and/orshare transfer
agents.
12.Details about the share transfer system. Stock price data over the
reporting year, and how the company stock measured up to the
index.
13.Financial effects of stock options.
14.Financial effects of any share buyback.
15.Financial effects of any warrants that are to be exercised.
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TABLE: 3
Shows the corporate mis-governance of certain companies for the
period (2002-2003 & 2003-2004)
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CONCLUSION:
While the corporate governance framework in the country is seen at par
with other developed markets, the same has to be implemented in 'letter
as well as spirit.
The fact that white collar crime continues to occur, and seemingly at an
increasing rate, suggests that the expected costs do not outweigh the
expected benefits from cheating. Stronger penalties are needed.
So this concludes the list of Indian scams of all times. According to the
compilation, the total amount of money involved in various scams over
the last 12 years alone, since 1992, is estimated to be over Rs 80 lakh
crore (Rs 80 trillion) or $1.80 trillion! To many people abroad, Ind ia is
seen sentimentally as Mahatma Gandhis country of khadi cloth, good
ethics, and care for the poor. To some it is an economic miracle and a
future super power, while to others it is an unkind cruel place of caste,
ethnic and rich-poor divisions and violence. Above all however, and not
far below the surface, India is a maze of unethical, unlawful and illegal
swindles that link most politicians, many bureaucrats, and a large number
of businessmen and others.
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BIBLIOGRAPHY:
1.www.caseplace.org
2.www.icmrindia.org
3. Articles.timesofindia.indiatimes.com
4.Business ethics: concepts and cases- Velasquez.
5. Dagar, S.S. (2009). How Satyam was sold the untold story.
http://www.caseplace.org/http://www.caseplace.org/http://www.caseplace.org/http://www.caseplace.org/http://www.caseplace.org/http://www.icmrindia.org/http://www.icmrindia.org/http://www.icmrindia.org/http://www.icmrindia.org/http://www.caseplace.org/ -
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