REPORT

JOINT COMMITTEEON

STOCK MARKET SCAMAND

MATTERS RELATING THERETO

(THIRTEENTH LOK SABHA)

(VOLUME I REPORT)

Presented to Lok Sabha on 19 December, 2002Laid on the Table of Rajya Sabha on 19 December, 2002

LOK SABHA SECRETARIATNEW DELHI

December 2002/Agrahayana 1924 (Saka)

C.B. No. 462

Price of Volume I : Rs. 230.00Price of Volume II : Rs. 45.00

2002 BY LOK SABHA SECRETARIAT

Published under Rule 382 of the Rules of Procedure and Conduct of Business in Lok Sabha (Tenth Edition)and printed by Jainco Art India, 13/10, W.E.A., Kargol Bagh, New Delhi.

CONTENTS

Page

COMPOSITION OF THE JOINT COMMITTEE ............................................................................... (iii)

LIST OF ABBREVIATIONS USED IN THE REPORT ......................................................................... (v)

INTRODUCTION................................................................................................................................ (xi)

PART I

I. The Constitution of JPC . ................................................................................................ 1

II. Overview . .......................................................................................................................... 6

III. Implementation. ................................................................................................................ 12

IV. Irregularities by Brokers including SHCIL. .................................................................... 19

1. Ketan Parekh Entities .................................................................................................. 20

2. Defaulted Brokers of Calcutta Stock Exchange .................................................. 29

3. Other Brokers ................................................................................................................ 35

4. Stock Holding Corporation of India Ltd. ............................................................... 45

V. Banks. .................................................................................................................................. 50

1. Overview ....................................................................................................................... 50

2. Cooperative Banks ...................................................................................................... 54

3. Commercial Banks ...................................................................................................... 80

VI. Stock Exchanges. ............................................................................................................. 114

1. Calcutta Stock Exchange ......................................................................................... 114

2. Matters regarding other Stock Exchanges ............................................................ 136

VII. Role of Promoters and Corporate Entities. ................................................................. 146

VIII. OCBs and Sub-Accounts of FIIs. .................................................................................. 165

IX. Securities and Exchange Board of India. .................................................................. 187

1. Regulation of business in Stock Exchanges .......................................................... 189

2. Surveillance and Investigation .................................................................................. 194

3. Powers of SEBI .............................................................................................................. 203

Page

4. Demutualisation ............................................................................................................ 210

5. Systemic reforms .......................................................................................................... 215

X. Reserve Bank of India. ................................................................................................... 222

XI. Department of Company Affairs. .................................................................................. 252

XII. Action by Investigative Agencies . ............................................................................. 264

1. Central Bureau of Investigation. .............................................................................. 264

2. Directorate of Enforcement ...................................................................................... 280

3. Central Board of Direct Taxes.................................................................................. 291

XIII. Ministry of Finance. .......................................................................................................... 309

XIV. Investors Protection. ......................................................................................................... 323

PART II

UNIT TRUST OF INDIA

XV. Overview. ............................................................................................................................ 339

XVI. Investment Policy and Decisions. ................................................................................. 343

XVII. Unit Scheme-64 ................................................................................................................. 372

XVIII. Role in the Calcutta Stock Exchange Payout Crisis. .............................................. 389

XIX. Role of Trustees. ................................................................................................................ 403

XX. Ministry of Finance and UTI ........................................................................................... 410

XXI. Future Role ......................................................................................................................... 427

Observations/Conclusions/Recommendations. ......................................................................... 437

PART III

Appendices*

Minutes of Sittings of the Committee**

Evidence before the Committee**

*Printed separately-Volume II.**Not printed. Five copies placed in Parliamentary Library.

(ii)

COMPOSITION OF THE JOINT COMMITTEE ON STOCK MARKET SCAMAND MATTERS RELATING THERETO

Shri Prakash Mani Tripathi Chairman

MEMBERS

Lok Sabha

2. Shri Mani Shankar Aiyar3. Smt. Margaret Alva4. Shri Vijayendra Pal Singh Badnore

*5. Shri Raashid Alvi6. Shri C. Kuppusami7. Shri Jagannath Mallik8. Shri Rupchand Pal9. Shri P.H. Pandian

10. Shri Pravin Rashtrapal11. Shri S. Jaipal Reddy12. Kunwar Akhilesh Singh13. Shri Maheshwar Singh14. Shri Prabhunath Singh15. Shri Kirit Somaiya16. Shri Kharabela Swain17. Shri K. Yerrannaidu

**18. Shri C.P. Radhakrishnan**19. Shri Srichand Kriplani

***20. Shri Anant Gudhe

Rajya Sabha

21. Shri S.S. Ahluwalia22. Shri Nilotpal Basu23. Shri K. Rahman Khan24. Shri Praful Patel25. Shri Kapil Sibal26. Shri C. Ramachandraiah27. Shri C.P. Thirunavukkarasu28. Shri Prem Chand Gupta29. Shri Amar Singh

@30. Shri Lalitbhai Mehta

SECRETARIAT

1. Shri John Joseph Additional Secretary2. Smt. Paramjit Kaur Sandhu Joint Secretary3. Shri A. Louis Martin Deputy Secretary

* Nominated w.e.f. 22.8.2001 vice Dr. Baliram resigned.** Nominated w.e.f. 26.2.2002 vice S/Shri Vijay Goel and Harin Pathak resigned.*** Nominated w.e.f. 28.11.2002 vice Shri Anandrao Vithoba Adsul resigned. Shri Anandrao Vithoba Adsul had been nominated

w.e.f. 9.8.2002 vice Shri Anant Gangaram Geete resigned.@ Nominated w.e.f. 9.12.2002 vice Shri Vikram Verma resigned. Shri Vikram Verma had been nominated w.e.f. 7.5.2002

vice Shri Ramdas Aggarwal retired from Rajya Sabha.

(iii)

LIST OF ABBREVIATION USED IN THE REPORT

AACS As Applicable to Cooperative Societies

ACB Audit Committee of Board

ALM Assets Liability Management

ACMM Additional Chief Metropolitan Magistrate

ADs Authorised Dealers

ADB Asian Development Bank

ADRs American Depository Receipts

AFI Annual Financial Inspection

AGM Annual General Body Meeting

AIFI All India Financial Institutions

AIL Annual Investment Ltd.

ALBM Automated Lending and Borrowing Mechanism

AMCs Asset Management Committees

AMC Asset Management Company

AOPs Association of Persons

ARSs Assured Return Schemes

ATL Asia Today Ltd.

ATR Action Taken Report

BFS Board of Financial Supervision

BHL Brentfield Holdings Ltd.

BLESS Borrowing and Lending of Securities Scheme

BOI Bank of India

BoT Board of Trusties

BR Bank Receipt

BR Act. Banking Regulation Act

BSE The Stock Exchange, Mumbai

BSPL Biyani Securities Private Ltd.

CAMELS Capital Adequacy, Asset Quality, Management Earnings Liquidity System& Controls

CBI Central Bureau of Investigation

CBDT Central Board of Direct Taxes

CCBL City Cooperative Bank Ltd.

CCL Century Consultants Ltd.

CD Certificate of Deposit

(v)

CDSL Central Depository Securities Ltd.

CEO Chief Executive Officer

CIS Collective Investment Scheme

CLB Company Law Board

CMD Chairman and Managing Director

CM Capital Market

CMM Chief Metropolitan Magistrate

COB Committee of Board

COP Cash on Payout

CRC Credit Rating Cell

CRCS Central Registrar of Cooperative Societies

CRAR Capital to Risk Assets Ratio

CRR Cash Reserve Ratio

CRS Compulsory R