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1
UNIVERSITY OF MUMBAI
Project Report On
Submitted by:
Sharel Kishan
330.
Semester 5th.
Bachelor in Management Studies.
Project Guide:
Mr. Saleeem Khan
Khar Education Society’s
College of Commerce and Economics
Khar (West).
2010-11
2
Declaration
I, Sharel Kishan Student of Khar Education Society’s College of
Commerce and Economics, T.Y.B.M.S. here by declare that I have
completed this project report on “Lightening the financial scams in
India- Top 10.” in the academic year of 2010-11. This information
submitted is true to the best of my knowledge.
Date: Signature:
3
Certificate
I, Sharel Kishan Student of Khar Education Society’s College of
Commerce and Economics, T.Y.B.M.S., here by certify that I have
completed this project report on “Lightening the financial scams in
India- Top 10.” in the academic year of 2010-11. This information
submitted is true to the best of my knowledge.
Signature of Signature of
Project Guide Coordinator
Signature of Principle
4
Acknowledgement
During the perseverance of this project I was supported by different
people, whose name if not mentioned would be inconsiderate on my
part.
I would like to extend my sincere gratitude and appreciation to my
Project Guide, Mr. Saleem Khan, who initiated me into this study.
I also owe my sincere gratitude to everyone, who, through their
experience has enlightened me on the practical aspects of this subject,
without whom the study would not have been carried out successfully.
Lastly I shall thank my family and friends, who have directly or
indirectly supported me in the completion of this project.
5
Executive Summary
Financial scams have a habit of cropping up with an alarming regularity
in the Indian financial system. We have reconciled to financial
irregularities to such an extent that we simply do not pay heed to
smaller scams that take place around us on a daily basis. Despite a
plethora of scams that surround us on a daily basis, frequently scams of
large proportions come to light, and manage to stun even our jaded
sensibilities. Then, there is the usual round of allegations, counter-
allegations, enquiries and legislation. Some of our most notable
regulations and financial institutions are the results of such scams.
It terms of reform and development, the Indian capital market and
financial sector have been the fastest to grab every opportunity
presented by the paradigm shift in India’s economic policy. Their
furious developmental activities have put the two top Indian bourses
almost on par with the best in the world, in terms of their structure,
systems and regulation. But for all the development efforts, the capital
market remains seriously flawed because three key ingredients are still
missing. They are adequate supervision, strict accountability, and
appropriate punishment.
As a result, the markets have remained shallow and stunted and have
lurched from one financial scandal to another over the last decade.
Every policy change in the liberalisation process was pounced upon by
unscrupulous companies, who aided by a retinue of investment bankers
and consultants diverted thousands of crores of rupees to themselves. A
6
simple roll-call of the scams of the last decade tells the story of why
Indian investors are so frustrated.
I have compiled a list of ten leading financial scams in India, which have
affected a large population of investors, and involved huge sums of
money. They managed to shake the very foundations of our financial
system, and were driven by that most basest of human instincts –
GREED. In most cases, it was the greed of just one individual, or a very
small group of individuals, who managed to pull of such huge scandals.
They are as follows:
Fodder scam Adarsh scam
Satyam scam 2G and Spectrum scam
Urea scam Foodgrain scam
LIC scam CRB scam
CWG scam Security scam
An analysis of the scams reveals a common script – greed, corruption,
unscrupulous brokers, colluding bankers, irresponsible authorities and
hapless investors, who refuse to learn their lessons. But then, these are
the essential ingredients of a worthy financial scam!
7
Contents
Sr. No. TOPICS Page No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Financial Market
Major scams in India
Top scams
Fodder scam
Newspaper article
Satyam scam
Impact
Urea scam
LIC scam
Adarsh scam
2G and spectrum scam
Foodgrain scam
CRB scam
Security scam
Guidelines issued by SEBI for regulation of
Securities market
Penalty
Conclusion
Bibliography
9
10
14
30
37
38
58
64
70
74
82
97
103
109
117
131
143
144
147
8
Financial Market
Introduction
The financial system consists of specialized and non-specialized
financial institutions, of organized and unorganized financial markets, of
financial instruments and services, which facilitate transfer of funds.
Procedures and practices adopted in the markets, and financial
interrelationships are also parts of this system. In product or other
service markets, purchasers part with their money in exchange for
something now.
In finance, money “now” is exchanged for a “promise to pay in the
future”.
However, in product or service markets, if the object sold – from a car to
a haircut – is defective, the buyers often find out relatively soon. On the
other hand, loan quality is not readily observable for quite some time
and can be hidden for extensive periods. Moreover, banks and non-bank
financial intermediaries can also alter the risk composition of their
assets more quickly than most non-financial industries, and banks can
readily hide problems by extending loans to clients that cannot service
previous debt obligations. Theoretically, the financial market facilitates
allocation of resources efficiently, which involves quick dissemination of
information and reaction to it.
The financial markets are susceptible to manipulation as some
participants have information that others do not that is information
asymmetry is ubiquitous in financial markets. To overcome this
problem corporate governance is required to ensure that suppliers of
finance to corporations are assured that they get their return on their
9
investment. Despite the existence of institutional and legal framework
numerous financial scams continue to be perpetuated both in developed
and developing countries.
Major Economic Scams in India
India, the ancient seat of learning, the breeding-ground of people with
morals as lofty as the sky itself, the nation which was once a proud
claimant vis-à-vis truth and follower of the paths of sages like Mahavira
and Gautam Buddha, has perhaps forgotten its ethical roots. Now, all
our country is left with is a bagful of scams.
We have a total of twenty-five major and minor scams that saw daylight.
There might be some other as well, which we never came face to face
with. We have the following list, naming a few major ones, perhaps the
biggest scams in the world as well: Jeep, Serajuddin, Mundhra, Kairon,
Bofors, Securities, Hawala, Telecom, Big Bull's Stock Scam, Fodder,
Jayalalitha, Urea, ISRO, Tehelka.
According to one estimate, if this money is spent on infrastructure, then
Indian infrastructure will be equivalent to the one in developed
countries. Your efforts will be appreciated to make public aware of
effects of such scams on their life.....
10
No. Project Name Amount (in Rs)
1 Share scam 1000 crores
2 Sugar scam 650 crores
3 Bofors scam 65 crores
4 Hawala case 65 crores
5 Housing scam 18 crores
6 M.P. trading 32 crores
7 Fertilizer scam 133 crores
8 Medicine Equipment scam 5000 crores
9 Telecom case 1200 crores
10 Newsprint case 20 crores
11 Indian bank scam 1336 crores
12 Fodder scam (Bihar) 1000 crores
13 Land scam (Bihar) 400 crores
14 Bitumen scam (Bihar) 100 crores
15 Medicine scam (Bihar) 100 crores
16 Forest case (Meghalaya) 300 crores
17 Ayurveda scam (UP) 32 crores
18 Dhoti-Saree scam (Tamil) 11 crores
19 Coal scam (Tamilnadu) 750 crores
20 Forest reserve scam (Meghalaya) 75 crores
21 Wakof Scam (West Bengal) 1600 crores
22 Dental College Case (Karnataka) 50 lakhs
11
Total of Rs. 13,93,70,00,00,000/- Can you read out this figure?. I
CANNOT! Its even than India's Annual Budget.
This is just the tip of the iceberg of an immense range of possibilities,
which we can take advantage of. For example, there have been scams like Treasury
scams, Panchayat Scam, Fishery Scam, Cooperative scam, Dairy scam,Food Ministry
scam, Lottery scam, and hospital scams. Now see how many jewels this system has
produced:
No. Name of person Amount (in
Rs)
1 Motilal Vohra 11.0 lakhs
2 P. Shivshankar 26.0 lakhs
3 Ajit Panja 3.5 lakhs
4 Balaram Jhakar 61.0 lakhs
5 N.D. Tiwari 25.0 lakhs
6 B.D.Thakne 10.0 lakhs
7 Kalpnath Rai 54.0 lakhs
8 C.K. Jaffar Sharif 10.0 lakhs
9 Buta Singh 7.0 lakhs
10 V.C. Shukla 65.0 lakhs
11 P.L.Shahi 11.3 lakhs
12 R.K.Dhawan 50.0 lakhs
13 Madhav rao Scindia 75.0 lakhs
14 Kamal Nath 17.0 lakhs
12
15 Arjun Singh 10.0 lakhs
16 S.L. Khurana 3.0 lakhs
17 Arif Mohd. Khan 756.0 lakhs
18 Asoke Sen 20.0 lakhs
19 Yashwant Sinha 21.0 lakhs
20 Devilal 50.0 lakhs
21 K. Natwar Singh 21.0 lakhs
22 Arjun Singh 10.0 lakhs
23 Chandram 1.0 lakhs
(Figures are according to CBI charge sheet) And of course, we have not
mentioned the greats like Jayalalitha and Laloo Prasad Yadav who have
attained pinnacles of performance in this Venture. And all these great
men and women have emerged in the past 5 or 6 years and is only
a miniscule fraction of the amount of wealth that has been generated
by these exceptional strategies and their predecessors over the past 50
years.
In one estimate, the total amount of wealth in foreign bank accounts of
Politicians only are $110 billion US dollars. The Indian national budget
is $65billion and the total industrial infrastructure development needs
for India to be at par with some of the developed countries is at $150
billion. Also, note that this amount is the cost of 366 nuclear reactors at
the cost of $300 million dollar each.
13
The Top Scams in India
1) 2G Spectrum Scam
We have had a number of scams in India; but none bigger than the scam
involving the process of allocating unified access service licenses. At the
heart of this Rs.1.76-lakh crore worth of scam is the former Telecom
minister A Raja – who according to the CAG, has evaded norms at every
level as he carried out the dubious 2G license awards in 2008 at a
throw-away price which were pegged at 2001 prices.
The Telecom Scandal—‘Dial M for Money’
Introduction:
Popularly known as the ‘Sukhram Scam’, this was a product of the
gradual liberalization of the Indian economy. Every sector during this
period was being thrown open to privatization. However, the country
was not fully prepared for the onslaught of the market. It had no
infrastructure, no guiding strategies and no crisis management regime.
In such a situation, there is a normal tendency in powerful persons, who
know the whole scene, to manipulate-- using their stature, post/s,
power etc.-- things to their own benefit. It is precisely this that
happened in the Department of Telecommunications in the early 90s.
The Chronology:
1. TEC floats a tender for 3000 MARR sets.
2. March ‘92– May ’93: TEC evaluates 35 bids for MARR systems given
14
part order to ARM @ Rs 3.54 lac per system. Sets up Price Negotiation
Team.
3. Sept. 1993: ARM asks Sukhram to restore price cut and orders 450
crystal sets instead of 300. Committee members object but are
overruled.
4. Jan. 1994: New orders are placed on ARMS terms. DOT losses around
1.68 cr.
5. Jan. 16, 1995: Tender floated for basic telecom services.
6. March 1995: Bids to be closed, but postponed for unknown reasons.
Bids finally submitted on June 7, 1995.
7. Aug. 31, 1995: HFCL bids highest in 9 circles at 85,000 crore rupees.
Their bid is Rs. 50,000 crore more than their nearest rival. HFCL’s
ability to raise funds in doubt.
Sukhram’s Modus Operandi:
1. Get pliable bureaucrats. 2. Overrule officials. 3. Transfer officials who
object. 4. Wait until the right moment in order to strike.
The Government was stunned by the scandal. Doubts were raised in the
minds of government officials and ministers regarding the entire
liberalization process. However, the government could not stop it as it
was too far ahead in its course to stop it. The GOI would have to return
over Rs 1900 crores which had been collected as license fees, if the
agreement was to be stopped or abrogated or renegotiated. Also, the
impact on foreign investment would have been extremely bad and
India’s credibility broken to pieces.
15
2) Commonwealth Games Scam
Another feather in the cap of Indian scandal list is Commonwealth
Games loot. Yes, literally a loot! Even before the long awaited sporting
bonanza could see the day of light, the grand event was soaked in the
allegations of corruption. It is estimated that out of Rs. 70000 crore
spent on the Games, only half the said amount was spent on Indian
sportspersons.
The Central Vigilance Commission, involved in probing the alleged
corruption in various Commonwealth Games-related projects, has found
discrepancies in tenders – like payment to non-existent parties, will-ful
delays in execution of contracts, over-inflated price and bungling in
purchase of equipment through tendering – and misappropriation of
funds.
16
3) Telgi Scam
As they say, every scam must have something unique in it to make
money out of it in an unscrupulous manner- and Telgi scam had all the
suspense and drama that the scandal needed to thrive and be busted.
Abdul Karim Telgi had mastered the art of forgery in printing duplicate
stamp papers and sold them to banks and other institutions. The
tentacles of the fake stamp and stamp paper case had penetrated 12
states and was estimated at a whooping Rs. 20000 crore plus. The Telgi
clearly had a lot of support from government departments that were
responsible for the production and sale of high security stamps.
4) Satyam Scam
The scam at Satyam Computer Services is something that will shatter
the peace and tranquillity of Indian investors and shareholder
community beyond repair. Satyam is the biggest fraud in the corporate
history to the tune of Rs. 14000 crore.
The company’s disgraced former chairman Ramalinga Raju kept
everyone in the dark for a decade by fudging the books of accounts for
several years and inflating revenues and profit figures of Satyam.
17
Finally, the company was taken over by the Tech Mahindra which has
done wonderfully well to revive the brand Satyam.
5) Bofors Scam
The Bofors scandal is known as the hallmark of Indian corruption. The
Bofors scam was a major corruption scandal in India in the 1980s; when
the then PM Rajiv Gandhi and several others including a powerful NRI
family named the Hindujas, were accused of receiving kickbacks from
Bofors AB for winning a bid to supply India’s 155 mm field howitzer.
The Swedish State Radio had broadcast a startling report about an
undercover operation carried out by Bofors, Sweden’s biggest arms
manufacturer, whereby $16 million were allegedly paid to members of
PM Rajiv Gandhi’s Congress.
Most of all, the Bofors scam had a strong emotional appeal because it
was a scam related to the defense services and India’s security interests.
Bofors—‘the Smoking Gun’
Introduction:
The Bofors scandal is a hallmark of Indian corruption. The list of
accused included not only some central ministers but also people at the
very top, including the former P.M. Mr Rajiv Gandhi. It also involved
eminent personalities from Indian politics and also a powerful NRI
family named the Hindujas.
The Chronology:
As the Bofors scandal has been dogging the Indian political scene
18
intermittently, people have either lost interest or got lost following the
lengthy proceedings. So let’s take a look at the chronology of events.
1. Jan. 20, 1984: CCPA clears the purchase of 155mm guns. Army
submits preferences-- TR of Sofma, FH77B of Bofors and FH70 of IMS
(OR)
2. May 3, 1985: S.K. Bhatnagar (Defence Secretary) informs
manufacturers that the Government had not approved of appointment
of Indian agents, acting foreign suppliers, Bofors having agents for the
deal in India.
3. Aug.-Nov. 1985: Quattrochi contacts AE services which becomes
Bofors Consultant and is promised 3% cut if the Indian deal is clinched
before 1st April, 1986.
4. Sept. 3, 1986: AE services opens account in Nordfinanz Bank, Zurich.
5. Bofors remits $ 7.3 million to above account.
6. Sept. 16, 1986: AE services transfer money ($7.12 million) to the
account of Colbar Investments in Geneva, controlled by Quattrochi.
7. April 16, 1987: Swedish radio claims that bribes were paid by Bofors
to secure contract.
8. June 1, 1987: Swedish national audit bureau confirms money was
paid by Bofors as "winding up" costs.
9. June 10, 1987: Minister of State for Defence Mr Arun Singh asks for
cancellation of the contract unless Bofors gives the names of those who
received money.
10. Jan. 22, 1990: CBI files FIR asking the Swiss to freeze bank accounts
in which any commission was paid. Consequently, some Swiss accounts
19
were frozen. The first set of documents arrives from Switzerland in Dec.
1990.
11. 1990 – ‘92: Swiss inquires are stalled by litigation in India. The mess
compounded by External Affairs Minister M. S. Solanki, who passed an
unsigned note to the Swiss on Feb. 1, 1992, saying that no further steps
should be taken in Switzerland unless a final decision is taken in Indian
courts.
12.June 23, 1993: Interpol informs the CBI of Quattrochi’s appeal in
Switzerland against the release of bank documents to India. Quattrochi
flies from India to settle in Malaysia.
13. Oct. 22, 1999: CBI files charge sheet: Q is accused.
The Duty of the CBI:
Having pursued the matter so long and having caused much controversy
over the matter it is the CBI’s duty now to see to it that the real accused
come to justice. It is its duty to see the evidence collected by it is
analyzed carefully (without prejudices and desire for vengeance) and
the facts are established solidly. It could not have asked for a more
favourable time than now, the Vajpayee Govt with a majority on its
hands backing up the CBI to fully investigate the case without any fear
or favour whatsoever.
20
6) The Fodder Scam
If you haven’t heard of Bihar’s fodder scam of 1996, you might still be
able to recognize it by the name of “Chara Ghotala ,” as it is popularly
known in the vernacular language.
In this corruption scandal worth Rs.900 crore, an unholy nexus was
traced involved in fabrication of “vast herds of fictitious livestock” for
which fodder, medicine and animal husbandry equipment was
supposedly procured.
‘The Gawala Saga’
Introduction:
A clique of graft and irregular politico-administrative patronage was
exposed when the CBI unraveled the Rs-700-crore fodder scam in Bihar
in July ’96. The accused included top officials in the Animal Husbandry
21
Department (AHD) and their political patrons/bosses. The AHD was
being milked dry—almost literally—by their unholy nexus!
Fodder for the Netas and Babus:
The racket was traced to have begun in 1983-4, when the AHD
unwittingly overstepped their budgetary allocation while carrying out a
project. As always Govt had their eyes shut. The officials smelt money
and around 1985-6 the loot began. Local politicians sensed the swindle,
but shamelessly plunged into the action. With their involvement, the
daring of the AHD’s officials sore high, and another racket under the
patronage of our politicians was initiated.
It was well coordinated between bureaucrats in various departments
and officials of the AHD, in connivance with district collectors and
commissioners, made fake allotments and withdrawal orders. Then with
help from collaborators in the State Secretariat, these were presented to
the treasury along with forged supporting bills to show supply of fodder
and medicine from a network of dubious suppliers. The treasury passed
the bills and the banks, equally unsuspectingly, credited the amounts to
the suppliers’ account. The money was thus shared between some
officials and their political protectors. This loot of the treasury
continued for a decade and totaled to an amount around Rs 750 crore.
7) The Hawala Scandal
The Hawala case to the tune of $18 million bribery scandal, which came
in the open in 1996, involved payments allegedly received by country’s
leading politicians through hawala brokers. From the list of those
22
accused also included Lal Krishna Advani who was then the Leader of
Opposition.
Thus, for the first time in Indian politics, it gave a feeling of open loot all
around the public, involving all the major political players being accused
of having accepted bribes and also alleged connections about payments
being channelled to Hizbul Mujahideen militants in Kashmir.
‘The All-ensnaring One’
Introduction:
The Hawala case, which came in the open in 1996 exploded in the face
of Indian politics, unsettling all the major political players. For the first
time in Indian politics, so many politicians were accused of having
accepted bribes and misused their power. The Hawala case presents a
crystal clear picture of the inefficient IT department. The Hawala web
was woven in the autarkic period in the Indian economy during the
1950’s and 1960’s.
Explanation:
The scandal, which came into light as a result of sporadic raids by the
Directorate of Investigations, income tax, on hawala operators in 1991.
These resulted in the seizure of certain diaries and files from S. K. Jain’s
premises. S. K. Jain, the managing director of Bhilai Engineering
Corporation (BEC) possessed certain documents that listed certain cash
transactions made by him during 1988– 91. It showed a receipt of
nearly Rs 53.5 crores from secret sources and subsequent disbursement
of Rs 65 crs to bureaucrats, politicians, political parties and companies.
23
This was the 2nd time that the BEC group was under scrutiny. The first
time was when it was among those business houses suspected of
engineering the assassination of the social activist and Chattisgarh
Mukti Morcha leader Shanker Guha-Niyogi. Although details about the
size of its partner in money terms was not available, BEC has an
aggregate capacity for fabrication and assembly of 25,000 tones per
annum of core equipment in the core sectors of steel, cement etc. It had
executed major turnkey projects for several public and private sector
companies with areas of 36 acres. No wonder then, such a company
should be a prime target for seekers of political funding. Consequently,
the hawala diaries named almost every prominent leader then who had
in some or the other way accepted large amounts of cash, which they
termed ‘gifts’.
What is Hawala?
Hawala or the parallel markets for foreign exchange originated back in
the virtually autarkic period in the Indian economy in the 1950s and
1960s. Companies who made payments abroad and had to pay for
acquired land used the hawala route, which investors also used to pelt
their money in foreign assets. The converse was also true. Indians
received remittances from abroad through the hawala market.
Hawala transfers were also used routinely by corporates to avoid both
direct and indirect taxes. Companies book notional losses against which
they transfer money abroad through hawala. With duties on imports
remaining high, importers often under-invoiced imports and paid the
duty on the forged amount while the balance in the period through the
24
hawala route. Anticipations feared decline in the value of the Rupee.
This meant that those who could convert rupees to dollars and transfer
them abroad, with no convertibility on the capital account, the only
route left was the hawala one. On the inflow side, a lot of illegal money
comes in through illegal ways like drug trafficking, stock market and
real estate.
The Scam:
The amount involved in the scam totaled Rs 65 crores. The lynchpin of
S. K. Jain’s hawala network, ‘Amir Bhai’ had four a/cs in Geneva, Dubai,
London and Antwerp from where he provided S. K. Jain, the prime
accused, among others, with the required amount. He further
distributed it to 32 bureaucrats, 30 politicians and NTPC officials.
Among the top politicians implicated in the case were M/s L. K. Advani,
V.C. Shukla, Madhavrao Scindia, Arjun Singh, Sharad Yadav, Yashwant
Sinha and Balram Jakhad. However, excepting Sharad Yadav, all of them
were later acquitted of all charges due to the lack of sustainable
evidence, for which the CBI has attracted some amount of flak.
The Results:
When the Hawala scandal surfaced 55 initials mentioned in the diary fill
in the political category. Of these 6 have died and of the held 115 names
and initials which appear at various places in the dairy only 20 have
been linked up. Way back in 1996 when it was disclosed it provided a
severe blow to the politicians and all most every political party namely
also congress and BJP.
25
The scandal, attracted the attention of the whole nation to the degree of
corruption our political and economic structure has plunged in. The
involvement of almost all party hands, politicians and business men of
all color show that inspite of our rich moral and ethical patronage, all
we are left with is the knowledge of a, ‘corrupt way to be’.
8) IPL Scam
Well, I am running out of time and space over here. The list of scandals
in India is just not ending and becoming grave by every decade. Most of
us are aware about the recent scam in IPL and embezzlement with
respect to bidding for various franchisees. The scandal already claimed
the portfolios of two big-wigs in the form of Shashi Tharoor and former
IPL chief Lalit Modi.
9, 10) Harshad Mehta & Ketan Parekh Stock Market Scam
Although not corruption scams, these have affected many people. There
is no way that the investor community could forget the unfortunate Rs.
4000 crore Harshad Mehta scam and over Rs. 1000 crore Ketan Parekh
scam which eroded the shareholders wealth in form of big market jolt.
11) The Urea Scam—‘Nitrogen Fixation’
Introduction:
The Urea scam has its genesis in the P. V. Narsimha Rao regime. It is not
only important because of the amount involved which was Rs 133 crore
but also because of the negatives it generated. At the centre of
controversy lay a dubious deal signed by the NFL with a little known
26
Turkish firm called Karsan Danismanlik Turigam Samayi Ticarct Ltd for
the supply of 200,000 tons of urea in Oct. ‘95. The CBI, which was
probing the scam, charged the NFL management with making a full
advance payment of $ 37.62 million to Karsan in complete violation of
accepted business norms. The agreement was made without any bank
guarantee/s, a complete insurance cover and even a letter of intent.
Also, it would be naive to assume that the NFL M.D. could authorize
payment of $ 38 million to the Turkish firm without the consent of
scores of officials, going right upto the then Minister of Fertilizer.
Possibly, even higher powers were involved because the system of
fertilizer procurement does not permit such rash payments to be made.
The CBI found that a part of the payment amounting to $ 200,000 found
its way back into India via an ANZ Grindlays Bank account in
Hyderabad. The account belonged to Saikrishna Impex, agents for
Karsan in India. The CBI believed that the sum was brought into India
via Rea Brothers Ltd, a company with which Prakash Yadav was
supposed to be closely involved. Thus, a clear political angle could be
established.
All about Karsan:
Karsan is listed as a tourism firm in Turkey and is little known. The
officials of the team sent to Ankara by the Ministry found that it was a
very small firm even in Turkey and quite incapable of fulfilling the
commitment it had made. Not only had NFL failed to check Karson’s
credentials, it also had not taken insurance cover against the possibility
of Karson not fulfilling its contractual obligations.
27
The Fallout:
NFL had planned to expand the capacity of its Nangal plant by 215,000
tonnes and that of its Panipat plant by 726,000 tonnes. Doubling the
capacity of the Vijapin plant, involving an outlay of Rs 1000 crore, is also
pending clearance. It was planned to get the money from the capital
markets. An Euro-issue was also on the anvil. While the public issue was
stalled owing to tight monetary conditions, the Euro-issue plan was
scratched. The Ministry also instructed NFL to put a joint venture
project in Syria with Zuari Agro Ltd-- for constructing a urea plant-- on
hold. Politically, the scandal brought a number of Congress leaders,
including Narsimha Rao, again into negative focus.
A Disgusted Conclusion
The details of the above-mentioned scams show how entrenched
corruption is in our economic and political structures. These scams,
some of which date back to the infancy of the Republic, show that
prevention is the need of the hour. What we need is a complete rethink
on our socio-political ethos and the creation of a new administrative
paradigm that is in tune with the changing times. We should not patch
up the loopholes but try to rebuild the whole structure.
The Political Dimensions:
Taking a decision at the highest executive level of the govt to tackle the
problem of corruption is the sine qua non of effective action. Legislation
should endorse decision and commitment-- it will help to sustain
political resolve. Our leaders must set a personal example of prudence
and insist on the same from their colleagues. The political leadership
28
must allow the anti–corruption agencies full independence and
autonomy of action. The executive should insist on the cooperative
participation of all government departments. It must be ensured that
means of mass communication are accessible to the anti–corruption
agencies so that they can convey their message to the larger community.
More positively, the active involvement of businessmen is needed to
fight corruption and encourage higher ethical standards and the
adoption of codes of conduct to demonstrate that clean business does
generate profits. In a market economy the cooperation between
business and govt is the achievement of shared goals by regulated limits
of interest and the requirements of both parties. The crux of the matter
is to have proper guidelines and sufficiently strict vigilance while
implementing them properly.
29
Fodder Scam
The Fodder Scam involved hundreds of millions of dollars in alleged
fraudulent reimbursements from the treasury of Bihar state for fodder,
medicines and husbandry supplies for non-existent livestock.
The Fodder Scam (Devanagari: chārā ghoṭālā) was a corruption scandal
that involved the alleged embezzlement of about 950 crore (US$ 215.65
million) from the government treasury of the eastern Indian state of
Bihar. The alleged theft spanned many years, was engaged in by many
Bihar state government administrative and elected officials across
multiple administrations (run by opposing political parties), and
involved the fabrication of "vast herds of fictitious livestock" for which
fodder, medicines and animal husbandry equipment was supposedly
procured. Although the scandal broke in 1996, the theft had been in
progress, and increasing in size, for over two decades. Besides its
magnitude and the duration for which it was said to have existed, the
scam was and continues to be covered in Indian media due to the
extensive nexus between tenured bureaucrats, elected politicians and
businesspeople that it revealed, and as an example of the mafia raj that
has penetrated several state-run economic sectors in the country.
30
The scam
The scam was said to have its origins in small-scale embezzlement by
some government employees submitting false expense reports, which
grew in magnitude and drew additional elements, such as politicians
and businesses, over time, until a full-fledged mafia had formed.
Jagannath Mishra, who served his first stint as the chief minister of
Bihar in the mid-1970s, was the earliest chief minister to be accused of
knowing involvement in the scam.
In February 1985, the then Comptroller and Auditor General of India,
T.N. Chaturvedi, took notice of delayed monthly account submissions by
the Bihar state treasury and departments and wrote to the then Bihar
chief minister, Chandrashekhar Singh, warning him that this could be
indicative of temporary embezzlement. This initiated a continuous chain
of closer scrutiny and warnings by Principal Accountant Generals
(PAGs) and CAGs to the Bihar government across the tenures of multiple
chief ministers (cutting across party affiliations), but the warnings were
ignored in a manner that was suggestive of a pattern by extremely
senior political and bureaucratic officials in the Bihar government. In
1992, Bidhu Bhushan Dvivedi, a police inspector with the state's anti-
corruption vigilance unit submitted a report outlining the fodder scam
and likely involvement at the chief ministerial level to the director
general of the same vigilance unit, G. Narayan. In alleged reprisal,
Dvivedi was transferred out of the vigilance unit to a different branch of
31
the administration, and then suspended from his position. He was later
to be a witness as corruption cases relating to the scam went to trial,
and reinstated by order of the Jharkhand High Court.
Exposure and investigation
Laloo Prasad Yadav, then chief minister of Bihar, was a prime accused in
the fodder scam investigation.
On January 27, 1996, the deputy commissioner of West Singhbhum
district, Amit Khare, acted on information to conduct a raid on the
offices of the animal husbandry department in the town of Chaibasa in
the district under his authority. The documents his team seized, and
went public with, conclusively indicated large-scale embezzlement by
an organized mafia of officials and businesspeople. Laloo ordered the
constitution of a committee to probe the irregularities. There were fears
that state police, which is accountable to the state administration, and
the probe committee would not investigate the case vigorously, and
demands were raised to transfer the case to the Central Bureau of
Investigation (CBI), which is under federal rather than state jurisdiction.
Allegations were also made that several of the probe committee
members were themselves complicit in the scam. A public interest
litigation was filed with the Supreme Court of India, which led to the
court's involvement, and based on the ultimate directions issued by the
supreme court, on March 1996, the Bihar High Court ordered that the
case be handed over to the CBI.
32
An inquiry by the CBI began and, within days, the CBI filed a submission
to the High Court that Bihar officials and legislators were blocking
access to documents that could reveal the existence of a politician-
official-business mafia nexus at work. Some legislators of the Bihar
Legislative Council responded by claiming the court had been
misinformed by the CBI and initiating a privilege motion to discuss
possible action against senior figures in the regional headquarters of the
CBI, which could proceed similar to a contempt of court proceeding and
result in stalling the investigation or even prosecution of the named CBI
officials. However, U N Biswas, the regional CBI director, and the other
officials tendered an unqualified apology to the Legislative Council, the
privilege motion was dropped, and the CBI probe continued. As the
investigation proceeded, the CBI unearthed linkages to the serving chief
minister of Bihar, Laloo Prasad Yadav and, on May 10, 1997, made a
formal request to the federally-appointed governor of Bihar to
prosecute Laloo (who is often referred by his first name in Indian
media). On the same day, a businessman, Harish Khandelwal, who was
one of the accused was found dead on train tracks with a note that
stated that he was being coerced by the CBI to turn witness for the
prosecution. The CBI rejected the charge and its local director, U N
Biswas, kept the appeal to the governor in place.
Path to prosecution
A few days of uncertainty followed the CBI's request to the state
governor to prosecute the chief minister. The governor, A. R. Kidwai,
was accountable to the federal government, and had already stated that
33
he would need to be satisfied that strong evidence against Laloo existed
before he would permit a formal indictment to proceed. The federal
government, led by newly appointed prime minister Inder Kumar Gujral
who had just succeeded the short-lived government of the previous
prime minister HD Deve Gowda, consisted of a coalition that depended
on support from federal legislators affiliated with Laloo for its survival.
It was also unclear why the CBI had sought the governor's consent in
the first place and, when the High Court demanded to know why it was
being sought, the CBI stated that it was a "precautionary measure." The
High Court, questioning the tactic, warned that it would allow some time
for the permission to transpire, but if it sensed a delay, it would force a
prosecution on its own authority.
On June 17, the governor gave permission for Laloo and others to be
prosecuted. Five senior Bihar government officials (Mahesh Prasad,
science and technology secretary; K. Arumugam, labour secretary; Beck
Julius, animal husbandry department secretary; Phoolchand Singh,
former finance secretary; Ramraj Ram, former AHD director), the first 4
of whom were IAS officers, were taken into judicial custody on the same
day. The CBI also began preparing a chargesheet against Laloo to be
filed in a special court. Expecting to be accused and imprisoned, Laloo
filed an anticipatory bail petition, which the CBI opposed in a deposition
to the court, listing the evidence against Laloo. Also, on June 21, fearing
that evidence and documentation that might prove essential in further
exposing the scam were being destroyed, the CBI conducted raids on
Laloo's residence and those of some relatives suspected of complicity.
34
On June 23, the CBI filed chargesheets against Laloo and 55 other co-
accused, including Chandradeo Prasad Verma (a former union minister),
Jagannath Mishra (former Bihar chief minister), two members of Laloo's
cabinet (Bhola Ram Toofani and Vidya Sagar Nishad), three Bihar state
assembly legislators (RK Rana of the Janata Dal, Jagdish Sharma of the
Congress party, and Dhruv Bhagat of the Bharatiya Janata Party) and
some current and former IAS officers (including the 4 who were already
in custody). Mishra was granted anticipatory bail by the Bihar state
High Court. Laloo's anticipatory bail petition, however, was rejected by
the same court, and he appealed to the Supreme Court, which resulted
in a final denial of bail on July 29. On the same day, Bihar state police
were ordered to arrest him.[24] The next day, he was jailed. Later, the
Bihar Director General of Police, SK Saxena, justified the one-delay delay
in arresting Laloo by stating in court that "any precipitate action would
have led to police firing and killing of a large number of people."
Prosecution
As the CBI discovered further evidence over the following years, it filed
additional cases related to fraud and criminal conspiracy based on
specific criminal acts of illegal withdrawals from the Bihar treasury.
Most new cases filed after the division of Bihar state (into the new Bihar
and Jharkhand states) in November 2000 were filed in the new
Jharkhand High Court located in Ranchi, and several cases previously
filed in the Bihar High Court in Patna were also transferred to Ranchi. Of
the 63 cases that the agency had filed by May 2007, the majority were
being litigated in the Ranchi High Court.
35
Impact
Since it broke into public light, the fodder scam has become symbolic of
bureaucratic corruption and the criminalization of politics in India
generally, and in Bihar in particular. It has been called a symptom of the
"deep and chronic malady afflicting the Bihar government and quite a
few other state governments as well." In the Indian parliament, it was
cited as an important indicator of the deep inroads made by mafia raj in
the politics and economics of the country. Reference has also been made
to the anarchic nature of governance (the "withering away of the state")
that occurs when a mafia develops in a state-controlled sector of the
economy.
Laloo Prasad Yadav is the only person on whom the Lok Sabha debated
for a complete session as the official agenda
36
Newspaper Article
Nine sentenced in fodder scam case
Ranchi, Nov 30 (IANS) A special Central Bureau of Investigation (CBI)
court here Tuesday sentenced nine more men convicted for the
fraudulent withdrawal of Rs.20 crore from the state treasury to
purchase fodder for public distribution, a CBI statement said Tuesday.
The sentences range from three to six years in jail and fines of Rs.10,000
to Rs.10 lakh. With Tuesday's judgment the total number of convicts
sentenced in the case reached 17. Special CBI Judge A.H. Ansari Monday
convicted 52 people in the case related to illegal withdrawal of Rs.20
crore from the Doranda treasury in Ranchi. The court sentenced eight
convicts on the same day.
The multi-million rupee scam, popularly known as the fodder scam,
surfaced in 1996 at the time of undivided Bihar. As many as 61 cases
related to the scam were transferred to Jharkhand after it was carved
out of Bihar in November 2000. Special CBI courts have passed
judgments in 32 cases.
Rashtriya Janata Dal (RJD) chief Lalu Prasad and former Bihar chief
minister Jagannath Mishra have been named as accused in five cases.
37
SATYAM SCAM
The inside story of how Satyam scam unfolded
The Serious Fraud Investigation Office will probe also Maytas
infrastructure as part of the Satyam financial scam probe. Corporate
affairs minister P C Gupta said on Monday evening that initial
investigations suggest a clear nexus between Satyam, Maytas properties
and Maytas infrastructure. Earlier, the Andhra High Court dismissed
Ramalinga Raju's revision petition against his police custody. But SEBI
still did not get to question Raju on Monday as a court order on the
body's petition to question him was postponed till January 22.
Meanwhile the CID is questioning the Raju brothers and former Satyam
CFO Vadlamani Srinivas . They are also looking into their e-mails and
phone records over the last one month. Meanwhile, Andhra chief
minister Y S R Reddy reiterated his government did not flout any rule in
awarding the Hyderabad metro rail project to Maytas.
38
But how deep and how wide is the rot inside India's fourth largest
software company?
Sources tell CNN-IBN the company is facing serious money crunch, and
needs Rs 1,110 crore to tide over the crisis and Rs 500 crore to pay the
January salary to employees. Meanwhile a search is also on for a new
CEO for the embattled IT firm. Network-18 learns that the board is
looking at a 10-day time period to pick someone to head the company.
Over 40 applications have come in so far.
There is now also a question mark on the number of employees Satyam
has. It is reported that Satyam has 53,000 employees.
How they did it
Investigators are now reportedly coming across evidence of insider
trading by the promoters even before the scandal broke. The big
takeaway from the Registrar of Companies report is that the top
management of Satyam - the directors and senior officials - sold shares
ahead of the Big Bang revelation by Raju. The reports say Satyam books
have been overstated by Rs 5,000 to Rs 6,000 crore, leading to an
inflated stock price that helped the top management make money.
Who sold what?
Raju has claimed that no one else in the company was privy to the
fudging of accounts. But exclusive information with CNN-IBN suggests
insider trading. BSE figures show a number of senior people in the
39
company, including Raju and CFO Vadlamani were reportedly selling
Satyam's shares over the last 22 quarters.
In June 2001, Raju had nearly 23 per cent shares. By December that
year, his share was down to 22.4 per cent. In September 2002, it fell to
21.6 per cent which fell a year later to just over 19 per cent. In 2004,
Raju's holding was 16 per cent which fell to 14 per cent in 2005, 11 per
cent in 2006. In 2007 it was in single digit. By September 2008 Raju's
share was just 8.27 per cent.
BSE figure also show Vadlamani sold 92,538 shares while the then CEO
Ram Mynampati sold 700,000 shares plus 2,50,000 ADRs. Apart from
these, other senior officials also reportedly sold large number of shares.
Sources say they include one Kiran Cavale who reportedly sold 400,000
shares and 10,000 ADRs and one Rajan Nagarajan who reportedly sold
430,000 shares and 70,000 ADRs.
TIME TO FACE FACTS
Satyam scam is not something that will shatter the peace and tranquility
of Indian public beyond repair. The robbery may be big in terms of
western standards but for us it’s just another brick in the wall- the wall
of resilience and apathy. Both these conditions are thrust upon us as
prerequisite for being a patriotic Indian. How else do you explain Police
promptly swinging into action and arresting that investor at Hyderabad
demanding an explanation of the scam from Satyam’s Board Members?
Just sample the cheek of our Administration !! Criminals, who have
swindled billions of Rupees and proudly proclaimed the same to the
40
world at large, are not even considered worthy to be detained for
questioning by the Police at that point in time. But the investor whose
hard earned money has been swindled by these criminals, is rounded up
by the Police for showing disrespect to them outside their den. As a true
Indian he was expected to show resilience and lick his wounds in the
shattered corner of his hearth. How dare he!!! And he also deserves the
wrath and ire of public. Experts in various TV channels were totally
apathetic to the plight of the investor. They questioned the very motive
of the investor entering into a risky trade…you blighter of an investor…
you wanted to make a quick buck…now you pay for your sins…words to
that effect. So what if just 24 hours back the same channels were blaring
away to high heavens that Satyam shares must be accumulated at all
cost at current levels (Rs. 170/180) as medium/long term investment.
And Mr. Expert, you also advised all and sundry to fill one’s gunny bags
with Satyam shares in case it plunges to level of Rs. 110. Apathy,
apathy. That’s true Indian colours. In any catastrophe there is apathy
from public not affected by the tragedy. Just another brick in the wall of
resilience and apathy.
We are being consoled that Satyam scam is just a one off case…an
exception to the otherwise honest and trustworthy system of
governance of Indian companies with myriads of foolproof checks and
balances. Believe all these official statements at your own peril.
Otherwise seek answers to the following shortcomings :-
(a) After someone admits to a financial crime of horrendous proportion
in public, does any nation accept its law-keepers to take more than 72
hours to even talk to the perpetrator, and that too after the fraudster
41
himself walks into Police Headquarters to surrender. Under these
circumstances what is left to say for our legally romantic words like Suo
moto and Prima facie. Who will explain as to how the entire executive
and the judiciary system of this Shining Nation got paralyzed till the
perpetrator of the crime got tired and said enough is enough- let me
now cool my heels in police protection before some desperado acts
irrationally against me. It is now believed that the Law-Loving-Raju did
a Charles Sobhraj act in order to escape the long hands of the firm and
draconian Law of United States of America which could put him away
for 25 years for cheating its citizens. He therefore directed Indian
administration to stop squabbling over who-will-bell-the-cat and
initiate legal proceedings against him. In this fashion the US Law-
Keepers will have to wait for the proceedings to be over in India before
they can get hold of his neck, which by conservative estimate should not
be before 15 years. Here on home ground Mr. R Raju can enjoy the
luxury of being on bail and rub shoulders with the rich and famous,
which correctly interpreted means Indian Politicians. Are we as blind as
to not see the power of money calling all the shots? If that is the case
then take your call to the assurance that it’s a one off case.
(b) Why did Raju ostensibly come clean while submitting his
resignation? Did anyone ask him any discomforting questions? Not a
single eyebrow was raised on the economic viability and vibrancy of
Satyam before he sang. Even the Goliaths of the Financial World were
rudely taken by surprise prompting them to jettison shares of Satyam
from their Portfolios at fire-sale prices. The question that still begs an
answer is this – what propelled Raju to tell the world that look here I
42
am, a fraud. The extents of my fraud are Rs 70 billions and now come
and catch me if you can. Something is amiss- something escapes logic. If
we take his initial statement to be true that books were inflated then to
find that out after his resignation would have been extremely difficult
considering Board members like Mr. Ram Mynampati could not even
smell it even after being in the company for a decade- what a
nincompoop!! How could a fresher in the Board even dream of cooked
books when there is a seal of guaranteed correctness from an
international audit firm, PwC. Then why did Raju do a kamikaze on
Indian Economy in general and India Inc in particular? And if what he
now supposedly confesses that books were not inflated but money was
siphoned into land deals is true, then why didn’t he correct the situation
before he resigned. I guess putting money back into the company would
any day be a better option, than be crucified as a cheat and a criminal,
for a man who commanded such high respect as a globally recognized
Indian celebrity entrepreneur and a demigod for many Indians,
especially Andhrites. Then why did he not take the logical path. Does he
also have a handler? Like it or not, this is another terrorist attack on the
Indian Economy like the 26/11 Mumbai attack. We can pooh-pooh it as
a conspiracy theorists’ bad imagination, but the circumstances demand
that we investigate the possibility of confession at a gunpoint. And this
theory will pass the Litmus Test the day another Behemoth of Indian
Industry sinks without a trace, euphemistically speaking. This has to
happen in immediate future in a bizarre manner since many companies
have plenty of skeletons in their cupboards which can act both as
catalyst and ammunition for a conflagration in any giant corporate
43
house – a la Satyam. What happens then to faith in India Inc and its
checks and balances. We as Indians cannot afford to let Satyam drift
away into oblivion.
So before lightening strikes again we have to strengthen our house to
ward it off. We cannot afford to let Satyam be quoted in history as a
failed company. As things unfold, the unshaken belief of investors and
stake holders of Satyam in Satyam will be vindicated. The company
never failed- there has been a robbery in the company. Some robbers
have been nabbed and rest of the accomplices will also be ferreted out
by the investigators. But what surprises most is the fact that Govt. is
juggling with the idea of a bail out package to revive Satyam. For crying
out loud, why isn’t the Govt simply confiscating the cache of loot from
the Robber-in Chief and restoring it back to Satyam. The first reaction to
the public announcement of acceptance of fraud by Raju should have
prompted the Indian administration to freeze all bank accounts and
confiscate all assets of Raju and his family members, even before
initiating any investigative proceedings. That would have been the
proper impartial approach of any nation, except Banana Republics. After
all someone is crying hoarse that he has committed mayhem like
murders and our administration is found questioning the veracity of the
confession of the killer!!!
Throwing red herrings like the confession letter is not signed by Raju!!!
Shouldn’t such officials be also taken for interrogation for complicity in
the crime. It would have happened just like that in any other civilised
part of the world- but not here in India. No one questioned the self
confessed villain and he was not disturbed for more than 72 hours. The
44
authorities had various kinds of doubts…to dispel them at least get hold
of the supremo for questioning. Oh what absolute power does this self
confessed criminal enjoy!!! That brings us again to the fact that even
after clear confession; many a times we have expressed our inability to
nail him. Think of what would have happened if he had not squealed.
Generations would have passed away singing praises for Raju and
Satyam. At least some Raju temples would have sprung up in Andhra
Pradesh, if they do not exist already.
Now can we fathom the extent of damage that India is doing by not
acting in accordance with accepted norms? The global investor is
gauging India and its ability to contain such individual acts of looting
and daylight robbery. After all to make it a one off case there should be
elaborate exhibition of swift and exemplary punitive action coupled
with financial resuscitation programmes for the company . Even now its
not too late to show the world our sense of purpose to deliver justice
and restore the stolen booty to its rightful owner, i.e. Satyam. In case we
are unable to deliver properly on this issue of Satyam, then rest assured
there will be many more Satyams that we have to deal with. And do you
for even a second believe that we can ever restore faith of the global
investor in Brand India? This branding exercise has taken painstaking
15 years or so, all to be blown away by our inaction. Can you not see the
domino effect it will have on our industry, starting with IT industry?
You need no crystal ball gazing to arrive at the conclusion. Indian
economy is at a threshold of either leapfrogging ten years ahead or
retracing ten years backwards, after the global economic slow down
cycle gets completed. Lets acknowledge that we are witnessing a
45
Watershed Moment in the history of Indian Economy. Let us all pray
that we play our cards properly, starting with Satyam.
A quick comment on SEBI- rather it’s a point for us to ponder upon. Why
do we need SEBI? It is helpless in preventing crimes targeted at
investors in the market. AFTER IT COMES TO KNOW OF A CRIME, IT
STILL SITS ON ITS HAUNCHES TOTALLY PARALYSED, INSTEAD OF
SAFEGUARDING THE INTEREST OF THE INVESTORS. Who is SEBI
actually meant for? At the end of it, if investors have to fend for
themselves in terms of own safety, then why have the facade of a
regulator. Did it safeguard the interest of the investor by freezing trade
in Satyam scrip after receiving Raju’s letter of resignation? Such a
catastrophic letter and you still feel like putting it up in public domain
without freezing trade in the scrip. All this after SEBI itself commented
that it doubts the veracity of the contents of the letter as also the
genuineness of the letter. If SEBI felt initially that the letter being
unsigned may be a prank , then why did it allow the letter to become
public. SEBI is harping about Insider Trading in Satyam…well some
investigating team should look for such clues in the corridors of SEBI to
begin with.
Satyam Scam – Separating truth from lies
The scam at Satyam Computer Services, the fourth largest company in
India’s much showcased and fiscally pampered information technology
(IT) industry, has had an unusual trajectory. It began with a successful
effort on the part of investors to thwart an attempt by the minority-
46
shareholding promoters to use the firm’s cash reserves to buy out two
companies owned by them — Maytas Properties and Maytas Infra. That
aborted attempt at expansion precipitated a collapse in the price of the
company’s stock and a shocking confession of financial manipulation
and fraud from its chairman, B. Ramalinga Raju.
What is ‘known’ as of now is that over an extended period of time, the
promoters decided to inflate the revenue and profit figures of Satyam. In
the event, the company has a huge hole in its balance sheet, consisting of
non-existent assets and cash reserves that have been recorded and
liabilities that are unrecorded. According to the ‘confessional’ statement
of Mr. Raju, the balance sheet shortfall is more than Rs.7000 crore.
Why did a leading company in one of India’s most successful industries
of recent years need to inflate profits? After all, the revenues of India’s
IT industry have grown at a scorching compound annual rate of almost
30 per cent in the past eight years, driven by exports. This is
remarkable, assuming that revenue and profit inflation have not
excessively overstated performance. With cheap skilled labor having
shored up profits that were lightly taxed when compared with the norm,
net profits must have been substantial and rising too. Why then did the
fourth largest IT Company choose to take the criminal route of falsifying
accounts and indulging in fraud?
One possible cause could be the desire to drive up stock values. The
benefits derived by promoters from high stock values are obvious,
allowing them to buy into real wealth outside the company and giving
them the ‘invasion money’ to acquire large stakes in other firms. This
tendency was epitomized by the benefits derived by America Online
47
when it merged with Time Warner. Although the latter had more assets,
revenues, and customers, AOL’s higher market capitalization led to that
company and its chairman, Steve Case, getting more out of the deal than
did long-time giant Time Warner.
There is some suspicion that Mr. Raju and his family may have sought
similar benefits. The family chose to build its shareholding in Satyam
Computer Services and shed it when required. For example, in year
2000 Satyam Computer merged with a related company, Satyam
Enterprises. Raju’s cousin, C. Srinivasa Raju, who held 800,000 shares,
or 19 per cent, in Satyam Enterprises, was reportedly allotted an
equivalent number in Satyam Computer, leading to criticism that
relative prices did not justify the 1:1 swap.
But the original promoter’s share held by the Raju family and their
subsequent acquisitions were not for keeping. Though the precise
numbers quoted vary, according to observers the stake of the promoters
fell sharply after 2001 when they held 25.60 per cent of equity in the
company. This fell to 22.26 per cent by the end of March, 2002, 20.74
per cent in 2003, 17.35 per cent in 2004, 15.67 per cent in 2005, 14.02
per cent in 2006, 8.79 in 2007, 8.65 at the end of September 2008, and
5.13 per cent in January 2009 (Business Line, January 3, 2009). The
most recent decline is attributed to the decision of lenders from whom
the family had borrowed to sell the shares that were pledged with them.
But the earlier declines must have been the result either of sale of
shares by promoters or of sale of new shares to investors. According to
audited balance sheet figures (if they are to be trusted) available from
the CMIE’s database, the paid-up equity in Satyam Computer Services
48
rose from Rs. 56.24 crore in March 2000 to just Rs. 64.89 crore by
March 2006 and further to Rs. 133.44 crore in March 2007. Overall, the
number of shares held by the promoter group fell from 7.16 crore (22.8
per cent) to 5.8 crore (8.6 per cent) between September 2001 and
September 2008.
This point to a conscious decision by the promoters to sell shares, which
may have been used to acquire assets elsewhere. The more inflated the
share values, the more of such assets could be acquired. It is quite
possible that the assets built up by the eight other Raju family
companies under scrutiny, including Maytas Properties and Maytas
Infra, partly came from the resources generated through these sales. If
true, this makes Raju’s confession suspect, since he stated that “neither
myself, nor the Managing Director (including our spouses) sold any
shares in the last eight years — excepting for a small proportion
declared and sold for philanthropic purposes.”
This may not have been the only way in which resources were
transferred out of Satyam Computer Services into other arms of the
expanding Raju family empire. Money could have been siphoned out
through opaque transactions with beneficiaries who were paid sums not
warranted by their business profile. Satyam’s business strategy did
involve unusual transactions. One example was the acquisition in 1999
by group company Satyam Infoway, which was the largest private
Internet Services Provider in the country at that time, of IndiaWorld
Communications, for a sum of $115 million. The acquired company
operated popular portals such as samachar.com and khel.com that had
no clear revenue model, and was the principal beneficiary just as in the
49
AOL deal. According to reports, the owner of IndiaWorld was himself
charged with intellectual property violations by his erstwhile employer
IndiaWorld.com, an Internet services company managed by U.S.-based
ASAP Solutions Inc. Satyam Infoway’s position was that it was aware of
the claim being made by ASAP Solutions, but that its interest was not in
IndiaWorld.com but was “limited to the URL indiaworld.co.in and the
other portals under its banner,” for which it had of course paid a huge
sum. There is reason to suspect that this acquisition delivered little to
the company, raising questions about the motivation.
Mr. Raju’s confession is also suspect for another reason, which has been
widely discussed in the media. Even if he and his colleagues were
inflating revenues and profits, the actual revenue earning capacity of the
company, as confessed by him, seems to be extremely low. He claims
that the huge difference between actual and reported profits in the
second quarter of 2008-09 was because the ratio of operating margins
to revenues was just 3 per cent rather than the reported 24 per cent.
But even if Satyam Computer Services was cooking its books, it was
engaged in activities similar to that undertaken by other similarly
placed IT or ITeS companies and it too had a fair share of Fortune 500
companies on its client list. It is known that many of these companies
have been showing operating margins that are closer to the 24 per cent
reported by Satyam than the 3 per cent revealed in Mr. Raju’s
confession. Thus in financial year ending March 2008, the ratio of
profits before tax of Infosys was 32.3 per cent of its total income, that of
TCS 23.1 per cent, of Satyam 27.8 per cent, and that of Wipro 19.2 per
cent.
50
This suggests that either Mr. Raju is exaggerating the hole in his balance
sheet or there is some other, more complex, and more disturbing
explanation. But whatever it is, the difference between 24 per cent and
3 per cent seems too large to be the industry standard.
Despite indicators of these kinds, which could raise suspicion, Satyam
Computer Services remained a leading player with substantial investor
support for many years. The promoters continued to hold control over
the company despite the small share in equity they held and built an
empire with land assets and contracts for executing prestigious
infrastructural projects. And despite its award-winning reputation for
corporate governance, its impeccable board with high-profile
independent directors, and its appointment of big-four member PwC as
its auditor, this still mysterious accounting fraud occurred. The full
truth, it appears, is not yet out.
The Satyam fraud may have come into the limelight after Ramalinga
Raju’s disclosure of alarming facts regarding the cooking up of
accounting books to an upward inflated amount of Rs. 7000 crore. The
Satyam scam has become transparent in public domain now itself, but it
would come to your surprise, that an analyst had figured it out way back
in October 2008.
At the analyst conference call, Kawaljeet Saluja from Kotak Securities
had enquired the rationale for the $550 million lying idle in a current
account. A deposit in a current account doesn’t attract any interest.
51
The analyst interaction, organized after Satyam’s second quarter
earnings of 2008-09, was addressed by chairman Ramalinga Raju, CFO
Srinivas Vadlamani and Ram Mynampati, member of the board, who is
now the acting CEO.
Citing no specific reason for parking the funds in the current account,
Vadlamani said that the money was restricted to the second quarter
only and thereafter the amount goes to the deposit account.
Unconvinced by the answer, Saluja probed further.
“But Srinivas if I look at your deposit account for the last four quarters
that number has remained absolutely flat and most of the incremental
cash flows have been parked in current accounts. Would you highlight
the reasons for it,” the analyst wanted to know. He also pointed out that
this trend had been continuing for the past few quarters.
To this Vadlamani replied: “No, basically what will happen is this
amount will be basically in different countries and then we would bring
them to India, based on the needs. Some of them are in overnight
deposits and we have kind of placed them into normal term deposits. So
from the next quarter onwards, we will see that as part of the deposits.”
Over a dozen analysts from both global and local brokerages-Bank of
America, Goldman Sachs, Susquehanna, Gilford Securities, ICICI
Securities and Edelweiss participated in the October 17 conference call.
On asked about the low yield earned by Satyam on its excess funds,
which was 5.3% against the industry rate of 9-10 %, Vadlamani replied
that the yield is roughly around 8% or so.
52
Text of the letter written to the Satyam Board by Satyam’s Chairman B
Ramalinga Raju’s who resigned from the company after admitting to the
scandal at Satyam.
To the Board of Directors,
Satyam Computer Services Ltd. Dear Board Members, It is with deep
regret, at tremendous burden that I am carrying on my conscience, that
I would like to bring the following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008
- Inflated (non-existent) cash and bank balances of Rs.5, 040 crore (as
against Rs. 5361 crore reflected in the books)
- An accrued interest of Rs. 376 crore which is non-existent
- An understated liability of Rs. 1,230 crore on account of funds
arranged by me
- An over stated debtors position of Rs. 490 crore (as against Rs. 2651
[cr.] reflected in the books)
2. For the September quarter (02) we reported a revenue of Rs.2,700
crore and an operating margin of Rs. 649 crore (24% Of revenues) as
against the actual revenues of Rs. 2,112 crore and an actual operating
margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial,
cash and bank balances going up by Rs. 588 crore in Q2 alone.
The gap in the Balance Sheet has arisen purely on account of inflated
profits over a period of last several years (limited only to Satyam
standalone, books of subsidiaries reflecting true performance). What
53
started as a marginal gap between actual operating profit and the one
reflected in the books of accounts continued to grow over the years. It
has attained unmanageable proportions as the size of company
operations grew significantly (annualized revenue run rate of Rs.
11,276 crore in the September quarter, 2008 and official reserves of Rs.
8,392 crore). The differential in the real profits and the one reflected in
the books was further accentuated by the fact that the company had to
carry additional resources and assets to justify higher level of
operations — thereby significantly increasing the costs.
Every attempt made to eliminate the gap failed. As the promoters held a
small percentage of equity, the concern was that poor performance
would result in a take-over; thereby exposing the gap. It was like riding
a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the
fictitious assets with real ones. Maytas’ investors were convinced that
this is a good divestment opportunity and a strategic fit. Once Satyam’s
problem was solved, it was hoped that Maytas’ payments can be
delayed. But that was not to be. What followed in the last several days is
common knowledge.
I would like the Board to know:
1. That neither myself, nor the Managing Director (including our
spouses) sold any shares in the last eight years — excepting for a small
proportion declared and sold for philanthropic purposes.
54
2. That in the last two years a net amount of Rs. 1,230 crore was
arranged to Satyam (not reflected in the books of Satyam) to keep the
operations going by resorting to pledging all the promoter shares and
raising funds from known sources by giving all kinds of assurances
(Statement enclosed, only to the members of the board). Significant
dividend payments, acquisitions, capital expenditure to provide for
growth did not help matters. Every attempt was made to keep the wheel
moving and to ensure prompt payment of salaries to the associates. The
last straw was the selling of most of the pledged share[s] by the lenders
on account of margin triggers.
3. That neither me, nor the Managing Director took even one
rupee/dollar from the company and have not benefited in financial
terms on account of the inflated results.
4. None of the board members, past or present, had any knowledge of
the situation in which the company is placed. Even business leaders and
senior executives in the company, such as, Ram Mynampati, Subu D, T.R.
Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Han T, SV
Krishnan, Vijay Prasad, Manish Mehta, Murali V. Sriram Papani, Kavale,
Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are
unaware of the real situation as against the books of accounts. None of
my or Managing Director’s immediate or extended family members has
any idea about these issues.
55
Having put these facts before you, I leave it to the wisdom of the board
to take the matters forward. However, I am also taking the liberty to
recommend the following steps:
1. A Task Force has been formed in the last few days to address the
situation arising but of the failed Maytas acquisition attempt. This
consists of some of the most accomplished leaders of Satyam; Subu D,
T.R. Anand, Keshab Panda and Virender Agarwal , representing business
functions; and A.S. Murthy, Han T and Murali V representing support
functions. I suggest that Ram Mynampàti be made the Chairman of this
Task Force to immediately address some of the operational matters on
hand. Ram can also act as an interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring
some Merger opportunities.
3. You may have a restatement of accounts’ prepared by the auditors in
light of the facts that.I have placed before you.
I have promoted and have been associated with Satyam for well over
twenty years now I have seen it grow from few people to 53,000 people,
with 185 Fortune 500 companies as customers and operations in 66
countries. Satyam has established an excellent leadership and
competency base at all levels. I sincerely apologize to all Satyamites and
stakeholders, who have made Satyam a special organization, for the
current situation. I am confident they will stand by the company in this
hour of crisis.
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In light of the above, I fervently appeal to the board to hold together to
take some important steps Mr. T R Prasad is well placed to mobilize
support from the government at this crucial time. With the hope that
members of the Task Force arid the financial advisor, Merrill Lynch
(now Bank of America) will stand by the company at this crucial hour, I
am marking copies of this statement to them as well.
Under the circumstances, I am tendering my resignation as the
chairman of Satyam and shall continue in this position only till such
time the current board is expanded. My continuance is just to ensure
enhancement of the board over the next several days or as early as
possible.
I am now prepared to subject myself to the laws of the land and face
consequences thereof.
(B. Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges
57
Impact of Satyam
The Satyam Effect: US Listed Indian Stocks Take A Beating
The Satyam scam effect has started its infectious presence. U.S. listed
stocks of other Indian companies have started taken a severe beating.
Indian stocks listed on the American bourses suffered a loss of close to $
2 billion in a week; following unfolding of India’s biggest. Despite, a halt
in trading in Satyam Computer from Wednesday, the rest of the 15
Indian stocks on US bourses bore the brunt of the negative market
sentiment and witnessed a fall of $1.94 billion in their combined market
capitalization in the week ending January 9.
Meanwhile, the Hyderabad-based company, which traded on the first
two day of the week, added $ 2.66 billion on the speculations that some
rival IT firm might acquire it. The combined market-cap of all firms
excludes Satyam’s valuations for the two days.
The NYSE had halted trading in Satyam Computer from January 7 after
the company’s founder Ramalinga Raju disclosed financial bungling at
the Indian IT firm and resigned from the company. The trading was
halted as the Satyam ADS had tumbled over 90 per cent in the pre-
market trading on the US bourse on January 7, after the new broke.
Indian Firms Reviewing Fraud Control Mechanism:
In the face of the Satyam scam and its deadly repercussions, Indian
firms are looking into methods to avoid scenarios of such scams within
their companies.
58
Indian companies have started to review and document their risk
management policies and practices to check corporate fraud in the wake
of the Rs.70 bn Satyam Computer Services scam, a survey by an industry
lobby says. A quick analysis by the Associated Chambers of Commerce
and Industry of India (Assocham) with feedback of over 400 leading
corporate, said that to deter possible corporate frauds, companies have
commenced re-codifying their risk management policies.
However, about 85 percent of the respondents said although Clause 49
of the market regulator’s Listing Agreement clearly states that the
management and the board of directors must accept responsibility for
not issuing accurate financial statements, most officials at this level
managed to get off the hook even if found guilty. On the other hand,
about 80 percent of respondents argued that putting these programmes
and controls in place will help organizations to set the tone of zero-
tolerance to fraud and create a mechanism for employees to report
wrongdoing to the appropriate authorities.
About 50 percent of corporate said the control systems in vogue are
presently geared to detect errors but not fraud and, therefore, there is
need for stringent internal control systems to completely plug the scope
for corporate frauds.
59
The Satyam Scam Has Dented India Inc.’s Image Abroad:
Huge losses to investors aside, the Satyam scandal has caused “serious
damage” to India Inc’s reputation as well as the country’s regulatory
authorities outside, the government has said. Seeking to dismantle the
existing board and to nominate ten new directors at the beleaguered IT
firm, the Centre has said in its petition before the Company Law Board
that the “interests of the company will not be safe in the hands of the
present board of directors.”
“The admission of fraudulent manipulation of the financial affairs has
created an adverse impression in the minds of the trade, business and
industry across the world.”
“This has also resulted in serious damage to the reputation of Indian
Corporate sector and the regulatory mechanism in the eyes of the
world,” the government said. Allowing the government to nominate 10
new directors, the CLB said in its order that the “present board of
directors stands suspended with immediate effect” and the new board
should meet within seven days of its constitution and “take necessary
action to put the company back on the road.”
It also asked the new board to submit periodical reports to the Centre
and the CLB on the company’s state of affairs. The CLB also observed
that the residual board members at the company after a string of
resignations are those “who were also party to the impugned decision to
invest substantial funds in the companies related to Raju, the decision of
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which was the starting point of the downward trend in the fortunes of
the company.”
Besides Satyam, Ramalinga Raju and brother Rama Raju, the
government in its petition has also named the company’s CA and
auditor Price Waterhouse, Company Secretary as well as all the
directors. This includes also those independent directors who have
resigned — Vinod Dham, Rammohan Rao, K G Palepu and Mangalam
Srinivasan, as well as former Cabinet Secretary T R Prasad, V S Raju and
interim CEO Ram Mynampati.
The CLB has also asked all the respondents to submit their replies to the
petition by February 20. The CLB had ordered the Central Government
to immediately constitute a fresh board of the company with not more
than ten “persons of eminence as directors.”
“The Central Government may also designate one of them as the
Chairman of the Board… The said Board will continue till further
orders.”
The government said in its petition that Satyam has about three lakh
shareholders, over 53,000 employees and has clients in over 60
countries, besides India. It has received a number of awards for best
corporate governance.
“But the reputation and credibility of the company suffered drastically
in the recent past when the Board of Directors of the company approved
a proposal to acquire stakes in two companies… Its share price crashed
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and four of the independent directors who were parties to the above
proposal tendered their resignation from the Board,” the petitioner said.
The impact of the manipulation of accounts, as disclosed by Raju on
January 7, runs into hundreds of crores of rupees. The reputation of the
company is at the lowest ebb and continuation of such a state would
affect the confidence in the concept of corporate governance practiced
in India.
Post Satyam Scam, Indian Students Shun IT Companies:
The Satyam effect has starting spreading its tentacles, and has proved to
have a negative impact on the Engineering students. IT (Information
Technology) which used to be the Mecca of all jobs is now the outcaste.
Students are preferring to take jobs in their core branches rather than
move to the dwindling IT sector.
“I was offered a job as trainee employee at Satyam last year. But after
the fiasco has happened at Satyam, I have changed my mind to get
suitable job in other firm,” said Divyadeep Goyal, a student Mechanical
Engineering student of University Institute of Engineering and
Technology (UEIT), who was offered an annual package of Rs 3.25 lakhs
in Satyam. Echoing similar views, Sumant, another final-year student of
the same college, said, “The impact of Satyam fraud has been so
damaging that we now do not have any intention to join the IT company.
Rather we will look for job in other sectors.”
The total number of engineering students placed by Satyam from this
region was not available but some colleges have shared their placement
62
figures. Almost 80 students from the Institute of Engineering and
Technology were selected by Satyam last year, while 13 students were
placed from Punjab Engineering College (PEC) and seven were from
UIET. Students were offered an annual package between Rs 3 lakh and
3.5 lakh.
According to placement officers of various colleges, engineering
students are now looking at the core sector, comprising manufacturing
and telecom sectors. “This time we are witnessing a change in trend of
students’ preference towards job placements. They are now finding the
core sector an appropriate one as far as employment is concerned,” PEC
Chief Placement Officer Saurabh Dhiman said.
But there are some job seekers who have kept Satyam as last option for
employment. “I intend to move into the core sector. But if I do not get
job in any other sector then my last option will be to join Satyam as I am
hearing from my friends that situation there will improve,” said Harshal,
a mechanical engineering student at PEC, who was offered a Rs 3.5-lakh
package by Satyam.
63
UREA SCAM
Netting the Big Fish:
Prabhakar Rao's arrest comes almost three years too late as vital
evidence to nail him might be lost for good.
At a time when sons of political fathers are on the rise, this was an
ignominious fall. Last week, P.V. Prabhakar Rao, the youngest son of
former Prime Minister P.V. Narasimha Rao, was finally arrested by the
Enforcement Directorate (ED) in a surprise raid at his Mehboobnagar
hideout near Hyderabad.
For almost three years, the ED had been chasing Prabhakar for his
alleged involvement in the Rs 133 crore urea scam. But he evaded arrest
despite the ED getting non-bailable warrants issued against him. It was
a comic situation: investigating agencies "struggled" to trace him though
Prabhakar was provided Special Protection Group (SPG) cover. The SPG
argued that its job was to protect the VVIP and disclosing his
whereabouts would be a violation of the Blue Book.
This charade would have continued had a Special Court in Delhi not
rapped the CBI on November 17 for failing to prosecute him. In
September, the CBI had filed charge-sheets against nine persons: C.K.
Ramakrishnan, CMD of National Fertilisers Limited (NFL), D.S. Kanwar,
NFL's executive director, M. Sambashiva Rao, Indian agent of the
Turkish company Karsan, B. Sanjeeva Rao, nephew of Narasimha Rao,
Prakash Yadav, son of former fertilisers minister Ram Lakhan Singh
Yadav, businessman Mallesham Gaud and three Karsan officials.
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Curiously, the CBI had found nothing against Prabhakar. It was only
when an incensed court directed the CBI to file a status report that the
ED traced Prabhakar. He was sent to 14-day judicial custody by the
magistrate.
The scam originated in September 1995 when NFL floated a global
tender for the supply of 2 lakh tonnes of urea. In March 1996, the NFL
under Ramakrishnan, who was appointed CMD by the Rao government
bypassing established procedures, advanced the entire amount of Rs
133 crore to Karsan without any bank guarantee. It is still a mystery as
to how the RBI/SBI waived stiff conditions attached to such deals. In
fact, the Swiss bank which received an invoice for making payment to
Karsan, raised certain objections and sent it back. But there was no
response either from NFL or the RBI and the SBI.
The company took the money but did not deliver the goods. When the
matter was referred to the CBI in May 1996, it did not even touch
Prabhakar though he had been identified as the "hidden hand" in the
deal. Despite several leads and testimonies of prosecution witnesses,
the CBI says there was no evidence against Prabhakar. ED officials,
however, say that vital evidence may have been lost due to the
inordinate delay in arresting him.
The investigating agencies now have the arduous task of bringing the
money back from Switzerland. Prime Minister Atal Bihari Vajpayee
raised the subject of remitting the frozen $7 million back to India with
the visiting Swiss President recently and got a positive reply. But a
65
major part of the Rs 133 crore is untraceable as it was transferred to
Turkey by Karsan executives. Though they are being prosecuted in
India, it is doubtful that the entire amount will ever be recovered.
Hidden Hand Triumphs:
Despite 18 months of arduous investigation, the CBI charge-sheet in the
case fails to answer all questions.
The charge-sheet has been filed. Nine persons have been
indicted. Most of the missing money has been traced to
accounts in five overseas banks. The CBI seems to have tied
up all loose ends in the well-conceived scam, in which the
National Fertilisers Ltd (NFL) was defrauded of Rs 133 crore
in 1995. But have they really? Despite a rather convincing
case made out by the investigating agency in its charge-sheet
filed in the court of Chief Metropolitan Magistrate Prem Kumar in Delhi
on December 26, one thing is missing: a face to the hidden hand behind
the scandal.
It is the CBI's case that a clutch of businessmen, in connivance with top
NFL officials C.K. Ramakrishnan and D.S. Kanwar, had conspired to cheat
the fertiliser company of $38 million (Rs 133 crore at the rate prevailing
then). According to its investigation, prime accused B. Sanjeeva Rao,
nephew of then Prime Minister P.V. Narasimha Rao, and Sambasiva Rao,
the Indian agent of Turkish firm Karsan Ltd, brokered a contract
between NFL and Karsan for the supply of two lakh tonnes of urea in
1995. Karsan failed to execute the contract but the money was still
66
remitted to its account in Turkey in November of that year, from where
it was distributed among various persons by company executives
Tuncay Alankus and Cihan Karanci.
The others named in the charge-sheet are Prakash Chandra Yadav, son
of the then Union chemicals and fertilisers minister Ram Lakhan Singh
Yadav, London-based A.E. Pinto of the Brazil Trading Company, and D.
Mallesham Goud, a director in one of Sambasiva Rao's companies.
These findings, which were uncovered during 18 months of
"painstaking" investigation, seem to have exonerated Narasimha Rao's
son, P.V. Prabhakar Rao, who was named as the kingpin in the deal by
Sambasiva Rao during his interrogation by the CBI. Anand Mohan
Krishnamurthy, son of the officer on special duty in the Prime Minister's
Office (PMO) at the time, P.V.R. Krishnamurthy, has also not been named
in the charge-sheet.
Prabhakar Rao was twice interrogated by the CBI in June 1996. But, say
sources in the CBI, no raids were ordered on the residential premises of
either Prabhakar Rao or Sanjeeva Rao by the then CBI director K. Vijaya
Rama Rao, even though Sanjeeva Rao had confessed during his
interrogation in Hyderabad that he knew where the money received as
kickbacks was stashed. Apparently, Rama Rao pleaded that due to the
political uncertainty in the country that July, when Narasimha Rao could
have made a comeback after the fall of the BJP government, he could not
risk ordering raids on any person connected to the former prime
minister. Rama Rao was informed of the scam in early 1996 but delayed
67
the arrest of the key suspects. Sanjeeva Rao and Prakash Yadav were
arrested only in June.
The PMO's questionable role in the scandal goes further than just
influencing the probe against the prime minister's son and
Krishnamurthy. It is no secret that Ramakrishnan was made the
chairman cum managing director of the NFL despite his name being
absent from the panel considered for the post by the Public Enterprises
Selection Board in 1995. It is now believed that he was appointed to the
post at the PMO's behest. It is in this context that the names of
Prabhakar Rao, Sanjeeva Rao and Krishnamurthy have arisen.
Presumably, Ramakrishnan's first assignment in the NFL was to clear
the dubious deal with Karsan as a favour to those who had got him the
plum posting. Due to the influence exerted by his supporters,
Ramakrishnan faced no difficulty in the PMO and files relating to NFL
were never held up.
The PMO is also supposed to have played a crucial role in making
certain that the contract amount left Indian shores. After the contract
was signed on November 9, 1995 -- without the mandatory bank
guarantees or the first class Lloyd's insurance cover -- the total amount
under the contract was remitted to Karsan's bankers, the Banque Indo-
Suez in Geneva, in two installments. Not surprisingly, the bank returned
the money to India on November 24, saying it was not certain about the
"genuineness" of the deal. Top officials in the Finance Ministry and the
PMO ensured that the money was sent back to Switzerland. While
ignoring Banque Indo-Suez's objections, they asked the Turkish
68
company to open a new account in which the money could be deposited.
Subsequently, Karsan opened an account with Pictet Bank in Geneva
and Ramakrishnan and Kanwar ensured that the money was deposited
there five days later.
Surprisingly, the officials of NFL's bank -- the State Bank of India branch
at South Extension, Delhi -- involved in clearing the remittances have
not been found guilty. They included K. Vikram, deputy general
manager, S.D. Malhotra, the assistant general manager, Sunil Sachdeva,
manager (international operations) and K.L. Batra, chief manager. Their
suspension has now been revoked.
Alankus is believed to have pocketed $28.1 million (Rs 98.35 crore),
Karanci $1.1 million (Rs 3.9 crore), and about $3.54 million (Rs 12.4
crore) was doled out as the share of three foreigners also involved in the
scam. While Sambasiva Rao was directly paid $0.2 million (Rs 70 lakh),
$4 million (Rs 14 crore) was given to Edible Foodstuffs Trading Ltd of
Dubai for forwarding to Sambasiva Rao through the hawala route. The
Karsan agent paid Sanjeeva Rao a total of Rs 1.02 crore as well as Rs 60
lakh to Mallesham Goud. Prakash Yadav is reported to have received Rs
69 lakh as his share of the booty.
It is now pretty obvious that the PMO as an entity seems to have been
involved in the scandal. But the mastermind behind the whole affair
hasn't been identified, nor does it look likely that he will ever be. While
credit is due to the CBI for unraveling much of the mystery, the hidden
hand, it seems, will continue to remain hidden.
69
LIC SCAM
The LIC Housing Finance scam: bigger than Satyam?
The scale of the LIC Housing Finance scam is possibly bigger than the
Satyam scam. The amount involved hasn’t been revealed yet. But the
simultaneous raids in several cities by the CBI and arrest of senior
officials of PSU banks and financial institutions point to a significantly
larger operation.
A few months back, when the Sensex was consolidating in a sideways
channel, a stockbroker friend had made a surprising comment: “Bull
markets require a nice scam to shoot up to new highs.”
A reader commented: “The markets have NEVER peaked out on scams.”
My counter argument was: “The Sensex hit recent bull market tops
because of the excess liquidity created by the scams. The scams were
detected much later - after the scamsters sold out and made huge
profits.”
No doubt that FII inflows have provided the major fuel for the bull
market rise. But what caused the sudden jump out of the year-long
trading channel to an all-time high close above the 21000 level? Could it
be that the ill-gotten loans were channeled into the stock market? Only a
detailed investigation by SEBI may reveal that. I won’t be a bit surprised
if the real estate sharks were dabbling in the stock market to quickly
recover the bribes they paid to the PSU officials to get the loans.
70
http://investmentsfordummieslikeme.blogspot.com/2010/08/where-is-sensex-headed-candid-view-from.html
As with all such scams in India, the big fish will probably get away and
most of the money will vanish into thin air (or into Swiss bank vaults).
And who will bear the brunt of the fall in stock prices? Small investors
like us.
A reader who wrote the following email:
‘I had been investing in LIC housing finance for some time now and
sitting on decent returns. And just when all looked rosy, here comes a
housing scam involving it and as a result the share tanks 20% :(
No respite for us poor retailers. Wonder whether there is any sense in
becoming a long term investor at all ... its like waiting for some scam to
happen n wipe off your money!’
The only advice? Sell tomorrow or switch to HDFC. Small investors are
better off regularly investing in index funds or index ETFs, rather than
in individual stocks.
71
Now a quick look at the one year bar chart pattern of LIC Housing
Finance:
After touching an all-time high of 1496 on Sep 29 ‘10, the stock has been
making a bearish pattern of lower tops and bottoms and had fallen
below both its 20 day and 50 day EMAs. It bounced off the 100 day EMA
yesterday, only to find resistance from the falling 50 day EMA.
As of yesterday (Nov 23 ‘10), the technical indicators were all bearish.
The MACD was negative and below the signal line. The ROC was also
negative and below its 10 day MA. The RSI was below the 50% level.
The slow stochastic was in the oversold zone.
72
While the news of the scam caused a high volume drop below the 200
day EMA today, the stock was already on a down trend. Higher volumes
on down days had given ample indications to investors to book profits.
Was it insider selling? Only SEBI can answer that. Buying and holding
fundamentally strong stocks for the long term is an excellent investment
idea, but one makes money only by selling. Partial profit booking near
all-time highs can save some pain if sudden calamity hits.
Bottom-line? Unforeseen situations do happen in the stock market. No
one rings a bell to warn investors. Partially eliminate blows to your
portfolio by following disciplined investment strategies: Partial profit
booking is one; buying only the best is another (HDFC instead of LIC
Housing Finance, or TCS instead of Satyam); basic knowledge of
technical analysis often provides clues.
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ADARSH SCAM
What the Adarsh scam is about...
Despite repeated statements by outgoing Chief Minister Ashok Chavan
that the land which houses the controversial 31-storey Adarsh
Cooperative Housing Society belongs to the Maharashtra government,
RTI activists have revealed that the Army had been in “de facto”
possession of the 6,490-sq mt prime land for over 60 years before the
Adarsh Society high-rise came up there in 2003.
The society, originally meant to be a six-storey structure to house Kargil
war heroes and war widows, was converted into a 100-metre-tall
building. Retired brigadier M W Wanchu, the president of the society,
argued that it was not a defense land The high-rise was built subject to
the condition that it would house war veterans, but now has 103
members, which include relatives of Chavan. However, the outgoing
chief minister clarified that for him ‘family’ is restricted to his wife and
two daughters. Chavan’s late mother-in-law Bhagwati Manoharlal
Sharma, relatives Seema Sharma and Madanlal Sharma also figured in
the list. Bhagwati Manoharlal Sharma, 77, died at ‘Varsha’, the chief
minister’s official residence, in July. The two relatives have submitted
letters of withdrawal of their membership.
Former Army chiefs Generals Deepak Kapoor and N C Vij and former
Navy chief Admiral Madhavendra Singh and Vice-Chief Gen Shantanu
Choudhary also got flats in the society. They have offered to surrender
their flats on the grounds that they did not know the land was meant for
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the widows of Kargil war heroes. Former chief secretary D K Sankaran’s
son, Sanjoy, is also among the allottees. The list also includes the names
of former Union environment minister Suresh Prabhu, Nationalist
Congress Party MLC Jitendra Avhad, Congress leader Kanhaiyalal
Gidwani and his two sons, a close aide of a senior Maharashtra minister,
the children of some bureaucrats, serving bureaucrats, Seema Vyas and
Idzes Kundan, and an individual by the name of S B Chavan. Ashok
Chavan’s late father and former home and defence minister was also S B
Chavan.
According to the present market rate in the Colaba area, an average
two-to three-bedroom-hall-kitchen (BHK) flat in Adarsh society could
cost between Rs 6 crore and Rs 8.5 crore. However, members of the
society paid Rs 60-85 lakh for each flat. The Western Naval Command
had objected to the construction of the society as it also violates the
stringent Mumbai Coastal Regulation Zone norms.
The CBI is already investigating how the prime land in Mumbai, which
was marked for Kargil war widows and war veterans, was given to VIPs
instead. The CBI enquiry was sought by the present Army chief to clear
the names of defence service officers allegedly implicated in it. Defence
Minister A K Antony had to agree to the CBI enquiry. Most of the files
pertaining to the scam are now in CBI’s possession. The Union
environment ministry has also raised a red flag, saying it did not grant
clearance to the society.
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The Mumbai Metropolitan Region Development Authority has scrapped
the occupation certificate in the wake of the controversy. Subsequently,
BrihanMumbai Electric Supply & Undertaking has disconnected power
supply to the society. Members plan to approach the court of law against
these actions.
Army chief General V K Singh told The Times of India on Thursday that
the Adarsh scam, which was exposed by this paper, has "caused
embarrassment to the whole army, not just to me, especially since so
many officers have been named in it."
"I am concerned and deeply hurt. Some individuals have brought a bad
name (to the army) for personal gain. We are sensitizing the rank and
file that the army goes by certain norms and codes that must be upheld,"
Singh said in an interview to TOI.
"I am extremely saddened by the Adarsh revelations. There's a sense of
shame within the Army. The Army as an institution has taken a beating,
its image has been damaged. It is painful to say the least," Singh told
CNN-IBN in a separate interview. He vowed that no one would be
spared and that the guilty would be brought to book, however senior.
TOI first reported on October 25 that two former army chiefs Deepak
Kapoor and N C Vij, along with a number of other generals, admirals,
politicians and bureaucrats, had bagged apartments now worth many
crores at Adarsh, a 31-storey building in Colaba in Mumbai. The
ministry of defence has already begun investigating what it sees, prima
facie, as a "criminal conspiracy".
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"At the same time, in a 1.3 million army, some black sheep are not going
to affect the remainder of the lot who are straightforward and honest.
These are just a few people and they cannot sully the image of the rest
of us," Singh added. He said he had instructed his commanders across
the country to take stock of all army land. "They have been told to audit
what they hold".
Asked if the force was shamed that Army chiefs were involved in the
scam, Singh said, "I think so. Here is a man whom we trusted, here is a
person in whom we had faith, here is a person on whose order we were
ready to go to battle..I think it will hurt deeply. I think it will have a great
amount of psychological impact."
How IBN7 exposed the Adarsh Society scam:
IBN7 was the first to expose the Adarsh Society scam. The channel
broke the story as early as April 2 of this year. Here is what came out in
that report.
Mumbai's posh Colaba area land (about 3800 square meters) with the
complicity of military officers was given to a private housing society.
But army took no action in this regard because several army officials,
including former army Chief Deepak Kapoor himself, had flats in this
society. IBN7 did the special investigation on this. This 27-storey
building has been built in Mumbai's Colaba Navy Nagar area. But no one
knows how army gave the permission to build a housing society on this
land.
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The building was constructed at a place where there used to be Khukri
park, inaugurated by Field Marshal Cariappa. Since 2000 the army used
to maintain the park but after that some army officers attempted to grab
this land. Maharashtra Government Revenue Department issued an
order in 2003, in which it was written that the government has decided
to hand over this land occupied by the army to the housing society at a
fixed government rate. However, it was not stated anywhere that the
army-occupied land has been handed over to the housing society.
However, when IBN 7 tried to learn the details, the then Revenue
Minister Shivaji Rao Patil Neanalngre said it is normal for the army to
lend any piece of land to a housing society. Former Revenue Minister
said in that particular respect where army gave the land to the housing
society, no one raised any objection on the matter.
Chief Minister Ashok Chavan’s kith and kin are not the only beneficiaries
of the scam involving allotment of flats in the Adarsh Co-operative
Housing Society in Colaba. Three former CMs — Vilasrao Deshmukh,
Sushilkumar Shinde and Narayan Rane — all of whom have been,
ironically enough, potential contenders for Chavan’s post and at some
point served as the sanctioning authority for the project, also stand
accused of owning flats under ‘benami’ names in Adarsh.
Deshmukh, who is currently the union minister for heavy industries,
reportedly owns three apartments — each one a 3-BHK of 1,076 sq ft
carpet area — on the 15th floor. The flats (1502, 1503 and 1504) are in
the names of Uttam Ghakare, Kiran Bhadange and Amol Kharbari — real
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or fictitious individuals whose relationship with Deshmukh is not clear.
Union power minister Sushil Kumar Shinde is said to own a 3-BHK flat
in the name of Major NW Khankhoje, while former state revenue
minister Shivajirao Patil Nilengakar allegedly owns two flats in the
name of Dr Arun V Dawle and Sampat R Khidse (flat no 2602).
The Adarsh gravy train has more members on board: Maharashtra
revenue minister Narayan Rane too is accused of owning two 3-BHK
flats on the 17th floor, in the name of Girish Pravinchandra Mehta and
Rupali Harishchandra Raorane. Also, Archana Tiwari, a doctor with
Bombay Hospital, reportedly got a flat in Adarsh by virtue of being a
good friend of Ratnakar Gaikwad, commissioner of Mumbai
Metropolitan Regional Development Authority (MMRDA). The project
had been approved by Chavan himself in 2002 when he was the revenue
minister. Deshmukh, as the then CM, had given the initial permissions
for the construction of Adarsh Society, while Shinde, when he was the
CM in 2004, gave the final sanction for the project.
When contacted, Deshmukh denied the allegations. “None of my
relatives or party workers or friends own a flat in the society,” he said.
Rane told DNA, “I only facilitated the treatment of two defense officials
as ‘special cases’, as they did not have domicile of 15 years in
Maharashtra. Their cases were taken up before the cabinet for
approval.” Nilangekar and Shinde were unavailable for comment. Set up
supposedly with the aim of “accommodating and rewarding the heroes
of the Kargil operation and those who had laid down their lives for the
protection of the motherland,” if one looks at the initial list of society
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members of the Adarsh Co-operative Housing Society, it comprised 40
members and included mostly defence personnel. Now the list stands at
103, out of which only 37 members belong to the army and just three
members have anything to do with the Kargil war.
Meanwhile, two of Chavan’s relatives who had been allotted flats in
Adarsh, his sister-in-law Seema Sharma and brother-in-law Madanlal
Sharma, resigned from the society on Friday. Chavan’s mother-in-law
Bhagwati Sharma was also a member of the society, but she passed
away earlier this year.
The Adarsh hall of shame:
Some of the bureaucrats and politicians who are accused of fraudulently
obtaining flats for themselves or their relatives:
Ashok Chavan, chief minister, Maharashtra Jairaj Phatak, ex-municipal
commissioner (flat in the name of his son Kanishka J Phatak) Ramanand
Tiwari, state information commissioner (in the name of son, Onkar
Tiwari) Suresh Prabhu, Shiv Sena (own name) Pradeep Vyas, ex-
collector, Mumbai ( in the name of his wife and fellow IAS officer Seema
Vyas) Jitender Awhad, NCP (own name) Indris Kundan, ex-ollector,
Mumbai (own name)
Kanhaiyalal Gidwani, Congress (along with 2 sons, Kailash and Amit)
Uttam Khobragade, BEST GM (in the name of daughter, Devyani, an
Indian Foreign Service official) Babasaheb Kupekar, Congress (own
name) DK Sankaran, Ex-chief secretary (in the name of daughter,
Devyani) Shriniwas Patil, NCP (own name)
CS Sangitrao, ex-collector, suburban (in the name of son, Ranjit
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Krishnarao Patil, Congress SC Deshmukh, Collector, Pune (own name)
Arun Pawar, ex-income tax commissioner (own name)
PV Deshmukh, secretary, urban development (own name).
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2G and spectrum scam
What is 2G and spectrum scam all about?
Today there is much talk about 2G as India's IT and Telecom minister A.
Raja putting his papers over the alleged scam in the 2G spectrum
allocation.
Here is a flash back on what 2G is all about and the scam involving it:
The second generation 2G cellular telecom networks were commercially
launched on the GSM standard in Finland in 1991.2G has been
superseded by newer technologies such as 2.5G, 2.75G, 3G, and 4G;
however, 2G networks are still used in many parts of the world.
2G spectrum:
It is a spectrum which support 2G technology. High bandwidth is
required for this purpose. 2G means second-generation wireless
telephone technology. Three primary benefits of 2G networks over their
predecessors were that phone conversations were digitally encrypted;
2G systems were significantly more efficient on the spectrum allowing
for far greater mobile phone penetration levels; and 2G introduced data
services for mobile, starting with SMS text messages.
What is the 2G spectrum scam about?
Here is a background on the 2G spectrum controversy that resulted in
Communications and IT Minister A. Raja of DMK resigning on Sunday:
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The issue dates to 2008 when nine telecom companies were issued
scarce airwaves and licences for second generation (2G) mobile phone
services at Rs.1,658 crore (less that $350 million) for a pan-India
operation. As many as 122 circle-wise licences were issued. The
opposition said that by giving the airwaves cheap, that too in the
controversial manner of first-cum-first-served basis, the exchequer had
lost billions of dollars. The cut-off date for applications was also
arbitrarily advanced.
Later, based on the auction of airwaves for third generation (3G)
services, which got nearly $15 billion to the exchequer, and that for
broadband access, which fetched over $8.5 billion, the notional loss was
estimated at $38 billion to the exchequer. But Prime Minister
Manmohan Singh himself defended Raja's decision and said May 24 that
all that his communications minister had done was to implement a
policy already in place and none of the norms were flouted.
The opposition further stepped up its attack with two examples on 2G
auction:
- A new player, Swan Telecom, bought licences for 13 circles with the
necessary spectrum for $340 million but managed to sell a 45-percent
stake in the company to UAE's Etisalat for $900 million. This swelled its
valuation to $2 billion without a single subscriber.
- Another new player, Unitech, paid $365 million as licence fee but sold
a 60-percent stake to Norway's Talenor for $1.36 billion, taking its
valuation to nearly $2 billion, again without a single subscriber.
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Similarly, another licensor, Datacom, later became Videocon Mobile and
Stel now has large stake by Baharian Telecom. The other companies are
Tata Tele, Idea Cellular, Loop Telecom, Shyam Telelink and Spice.
As recently as last month, the Supreme Court asked the solicitor general
why the prime minister had not responded to the representation by the
opposition to sanction proceedings against Raja. The final blow came
after the Comptroller and Auditor General of India said the entire
process of spectrum allocation was undertaken in an arbitrary manner
and that the advice of the industry watchdog was ignored and misused.
What is the spectrum scam?
2G licenses issued to private telecom players at 'throwaway'
prices in 2008
122 Circle wise licenses issued
CAG: Spectrum scam has cost the government Rs. 1.76 lakh crore
CAG: Rules and procedures flouted while issuing licenses
'2G scam: Only SC can ensure fair probe':
The Supreme Court had recently admitted a public interest litigation
(PIL) petition demanding a court-monitored investigation into Union
Telecommunications Minister A Raja's role in the Rs 70,000 crore 2G
spectrum scam and issued notices to the minister and different agencies
of the Government of India asking them to respond within ten days to
the petition.
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Paranjoy Guha Thakurta, one of the petitioners, insists that the
monitoring of the investigations by the Supreme Court is essential given
the magnitude of the alleged scam that reportedly caused a loss of Rs.
70,000 crore to the national exchequer, and also the 'slow going' CBI
investigations into the scam.
Terming the alleged scam as the biggest in the history of India he says,
“How can we expect that the investigative agency is not being
pressurized as the Telecommunications Ministry is headed by A.Raja,
who is part of DMK, a part of the Congress-led UPA Government at the
Centre?” Thakurta further added that the modus operandi of the scam is
an open secret and the role played by the Department of
Telecommunication under Raja have been indicted by the Central
Vigilance Commission (CVC), Central Bureau of Investigation (CBI),
Comptroller & Auditor General of India (CAG), Directorate General of
Income Tax (DGIT) and the High Court of Delhi on different occasions.
The petitioners have reasoned before the SC that the “CBI is
investigating the case, more or less, as a department of the Central
Government”.
“This is a case against the corrupt policies and actions of the Central
Government. The CBI has a very bad record in politically sensitive cases
as is clear from the adverse comments of this honourable court itself on
different occasions. This is a case which is extremely politically sensitive
and has caused huge embarrassment to the Central Government,” they
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added. Thakurta further added that the bailout package proposed by the
DoT for a few selected companies is also highly controversial.
“Even the Comptroller and Auditor General of India has objected the
proposed bailout package which is a rare instance. It is interesting to
note that the previous Chief Vigilance Commissioner has referred the
case to CBI asking for a comprehensive probe. However, the process
adopted by the government in choosing P J Thomas as the new Chief
Vigilance Commissioner has led to apprehensions about the 2G scam
investigations.” he said. The petitioners have also contended that the
investigations into the entire criminal conspiracy have virtually been
aborted. They have cited the recent transfer of Vineet Agarwal, DIG of
CBI (Anti-corruption branch), who was investigating and closely
pursuing the investigation, to Maharashtra on April 2, 2010 and also the
transfer of Milap Jain, DG of Income Tax (Investigations), to
International Taxation.
Among the grounds for interim relief claimed by the petitioners is that
the entire investigation has been effectively scuttled. They said that Nira
Radia, whose conversation tapes with the Telecom Minister have been
available with CBI for about nine months, has not even been called for
questioning. Unless the honourable court intervenes in this huge
scandal, it is likely to be swept under the carpet by the Central
Government. The balance of convenience is in their favour, the
petitioners said. The synopsis of the petition accepted by the Supreme
Court, in part, reads: “The petitioners... filed a petition seeking a
thorough court monitored investigation into the 2G spectrum allocation
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scam that has caused the national exchequer an estimated Rs 70,000
crore (Rs 700 billion) and huge national outrage. Simply in terms of the
scale of money that has been swindled, it is easily the biggest scam that
this country has ever seen.
“A sitting Union Cabinet minister has been found to be directly involved
and tapes of his conversations with corporate middlemen are available.
The entire investigation being carried out by the CBI has been scuttled
to protect vested political interests, corporate and other middlemen
involved. That is why to ensure people's right to life in a corruption-free
environment and to enforce the rule of law, the petitioners had moved
the Delhi High Court.” The other petitioners before the SC are The
Centre for Public Interest Litigation, a registered society, through its
general secretary Prashant Bhushan and another registered society,
Telecom Watchdog, through its secretary Anil Kumar.
Spectrum Scam: India's Mother of All Scams:
The 2G Spectrum allocation scam, considered as the mother of all scam
in India, caused more than Rs. 60,000 crores loss to public exchequer
exposes the vulnerability of prevailing laws of the Nation, at the whims
and fancies of political-middlemen nexus. The word Spectrum simply
means the allotment of Electro Magnetic Waves, the property of a
Nation to the mobile telephone operators as well as to the others in the
communication industry.
The entire scam broke out during the dubious decisions taken by the
Telecom Minister A.Raja, by allotting 2G (second generation) spectrum
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to new entrants in the telecom sector at damn cheap price. The whole
procedure lacks cabinet approval, while such a huge deal seeks
mandatory approval of Cabinet Committee on Economic Affairs. The
Spectrum was allotted in 2008 beginning at price fixed in 2001,
violating the Telecom Regulatory Authority of India’s vehement
objection. More over there was no auction, the license were gifted on a
shabby ‘first come first serve method’.
The license fee fixed in 2001, where India had only four million
subscribers, were simply applied to when spectrum licenses were
granted in 2008 also, ignoring the fact that the subscribers number had
crossed 300 million. Nothing prevented Minister Raja to ‘gift’ licenses to
the mobile companies at a throw away prices, though TRAI Chairman
Nripendra Mishra and Finance Ministry made objections.
There is joke in the Telecom sector on the basic root of the spectrum
controversy. When Dayanidhi Maran was thrown out of the Telecom
Ministry on May 2007, the then Minister for Environment and Forests
Raja entered the Sanchar Bhavan, the head quarters of the Telecom
Ministry along with the real-estate brokers of Parayavaran Bhavan(head
quarters of Environment Ministry). According to telecom officials, this
spectrum scam is the entry of real estate brokers in the telecom sector
or tussle in sharing of the scarce electro magnetic waves (spectrum)
between the existing telecom brokers and new real estate brokers.
The joke became a fact, when real estate companies Swan and Unitech
bagged the spectrum license at a throw away price and they off-loaded
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their shares at a whopping price to multi-national telecom giants. The
Swan Telecom bagged the license for Rs.1537 crore for operating in 13
circles. Within months (September) it sold its 45 per cent of shares to
Etisalat, the telecom giant in UAE for 900 million US dollars
(Approximately Rs.4500 crore).
Similarly, the Unitech, another real estate company too entered into a
bumper deal, without investing anything in telecom infrastructure. The
company got license to operate in 22 circles for Rs.1651 crore. Within
weeks, it sold 60 per cent shares for Rs.6120 to the Norwegian company
Telenor, who is currently a major telecom player in Pakistan and
Bangladesh.
The way on which these two controversial real estate companies
bagged the telecom licenses can be compares to the DDA flat allotments
or other real estate allotments in fictitious names. In a crucial strategic
sector like telecom the Unitech gave application for licenses in several
names. They had applied in the names of Unitech Infrastructure, Unitech
Builders and Estates, Aska Projects, Nahan Properties, Hudson
properties, Volga Properties, Adonis Projects and Azare properties. But
they were able to merge all their licenses, when Raja notified another
dubious notification.
Swan Telecom, floated just two years ago, earlier known, Swan Capital.
Anil Ambani earlier owned this company. Ambani had submitted for
GSM license in January 2007, when his Reliance Mobile was permitted
to operate only CDMA system. When dual policy was declared, Ambani
lost interest in Swan, as he can operate both technologies through
Reliance. This company was taken over by Maharashtra based real
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estate entrepreneurs Shahid Balwa and Vinod Goenka of Dynamix
Balwa group. There are rumours in the telecom sector that the take over
real estate businessmen was felicitated by Raja. Shareholding pattern of
Swan coincides with zoology, where the ownership goes to Tiger
Trustees, which controls Parrot Investments in Mauritius, which owned
by Zebra Investments in off-shore money parking islands in the Indian
Ocean.
When all allegations broke out, Raja kept saying he was keeping the
rulebook, what his predecessors had followed from 1994. He justified
his acts for breaking the cartelization in the telecom sector and claimed
‘aam admi’ would be benefited by his decisions. Even his mentor
Karunanidhi rubbished the allegations that the ‘leaders of certain
political parties can’t tolerate the rise of a humble Dalit’.
The Pioneer’s series of investigative reports became a blow to Raja’s
pretending of innocence and corruption free. His money parking
methods by floating companies in the name of close relatives is now
open. After becoming the Union Minister in 2004, Raja’s close relatives
started real estate companies. The real estate companies Green House
Promoters, Equaas Estates, Kovai Shelters Promoters are filled with his
brothers, nephews and nieces as Directors of the Board. He even put his
wife M.A.Parameswari in the board of Green House and Equaas Estates,
by violating the service rules and code of conduct of ministers. As a
Cabinet Minister, Raja has to inform the Prime Minister on wife’s
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business and file a mandatory affidavit that there is no clash of interest
in the discharge of his duties.
Raja’s now prefers to say that all the entries in the Registrar of
Companies are wrong and he and his wife was not aware that, she was a
director. The Equaas Estates’ domestic turn over in the very first years
shows more than Rs.755 crore, which they now prefers to say a wrong
entry like Satyam Computer Raju’s confession. Green House has even
opened a Singapore office, violating the foreign exchange norms. In
Kovai Shelters, one director Dr.R.Sridhar, nephew of Raja is holding 15
per cent shares, while holding a Class-1 officer post in the Ministry of
Environment.
The Pioneer reported on December 15, quoting highly placed sources in
the Telecom Ministry on the plan of Swan Telecom to acquire 49 shares
in Raja’s relative’s Green House. But this move was aborted and the
money parking took a different route. The documents filed with
Registrar of Companies, Mumbai reveal the mysterious allotment of
shares to Tamil Nadu based businessmen in Swan. On December 17,
2008 the Swan has allotted Rs.380 Cr worth shares to Chennai based
Genex Exim Ventures. This company was floated four months ago with
just Rs.1 Lakh capital. Earlier, when the spectrum controversy broke
out, Raja used to defend that the Swan and Unitech belong to
Maharashtra and Delhi and no person from Tamil Nadu was associated
with these companies.
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According to documents filed with the Registrar of Companies in
Chennai, Genex was incorporated in September 17, 2008 with two
directors, Mohammed Hassan (58) and Ahamed Shakir (41). The
company was represented by Ahmed Syed Salahuddin (32) on the board
of Swan. All three of them belong to Kilukarai, a small coastal village in
Ramanathapuram district in Tamil Nadu. The Tamil Nadu link now gets
further strengthened. Ahmed Syed Salahuddin is the younger son of
Syed Mohammed Salahuddin, the NRI business tycoon heading the
Dubai based real estate conglomerate ETA Ascon Star Group, which in
turn began its Indian operations in 2006 by floating several real estate
firms across the state. Raja was then Union Environment Minister and
his party the DMK assumed power in Tamil Nadu.
The ETA Group entered into a MoU with the Tamil Nadu government for
setting up an IT Economic Special Zone worth Rs 3750 crore, when A
Raja became the Union Telecom Minister in May 2007. Tamil Nadu Chief
Minister M Karunanidhi was present at the much-hyped MoU signing
ceremony for the project proposed at Kancheepuram, near Chennai on a
nearly 500 acre plot. It is mysterious that a large business group should
enter Swan’s board through a company with a meager one lakh paid up
capital. Incidentally, Genex Exim, having acquired more than Rs.380 Cr
of Swan Telecom shares, has not filed any document with the
authorities to show their source of income.
Raja’s favoritsm towards the Swan was exposed in the unprecedented
deal with the state owned BSNL. On September 13, 2008 the BSNL had
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entered an unprecedented deal with Swan. The Intra Circle Roaming
deal signed with the Swan is literally silent on the finance part. When
controversies broke out the BSNL Chairman and Managing Director
Kuldeep Goyal prefers to coin a new terminology for the deal. ‘The
Limited MoU’ described by him is a day light robbery of public assets.
Raja shunted out all the senior officials in the BSNL and Wireless
Planning Co-ordination (WPC) wing of Telecom Department who
objected the favoritism to the Swan. BSNL has never entered into Intra
Circle Roaming deal with any operator till date. With this deal, the Swan
can use the spectrum, communication towers and the entire network of
BSNL, without any cost. Though the BSNL management suggested
charging 52 paise per call, it was mysteriously absent in the MoU.
The BSNL was forced to sign this deal, just 10 days before the sale of
Swan’s shares to Etisalt for 900 million US dollars. The deal literally
helped the Swan to pocket huge money, without investing anything.
Nothing happened, though the top telecom officials alerted the Prime
Minister. Even a Congress MP Dharam Pal Sabharwal wrote to Prime
Minister on this controversial incident on November 2008, no action
was taken. According to the letter wrote to Prime Minister by the CPI
(M) politburo member Sitaram Yechury in February 2008, clearly warns
the ‘scam in the offing’, when more than 575 real estate companies and
stock broking firms approached the telecom ministry for spectrum
license. Even after misleading the Parliament, Raja kept saying he had
the concurrence of Prime Minister.
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Raja blatantly lied to the Parliament that his action on 2G-spectrum
allocation was never objected by TRAI or Finance Ministry. At present
Raja is eager to allot 3G (Third Generation) spectrum before his tenure.
But his attempts were foiled after the Government had decided to refer
the 3G auction to Group of Ministers (GoM).
The auction was earlier scheduled on January 16, and shifted to January
30 and now deferred indefinitely, after the intervention of Cabinet
Secretary, who suggested ‘thorough study’. But the current
developments show that the auction may not take place during the
tenure of this government. Now the question hangs fire is who
authorized Raja to announce the auction dates in advance, before
getting Cabinet clearance.
Though aware of Raja’s daylight robbery in every stage, the
compulsions of coalition politics, kept the Prime Minister Manmohan
Singh to sit in the gallery as a mute spectator. As and when he summons
Raja, his political patriarch Tamil Nadu Chief Minister M.Karunanidhi
lands in Delhi and kept Singh silent by dashing into Madam Sonia’s 10
Janpath. On December 4, Karuanidhi landed in Delhi with a multi-party
delegation to raise the issue of the ‘plight’ of Sri Lankan Tamils. The
delegation met the Prime Minister at 10 am. After an hour, leaving all
the party leaders, Karunanidhi met Sonia Gandhi along with his
daughter Kanimozhi. Even his close confident and Union Minister
T.R.Baalu was asked to leave after the photo session. After the meeting
Karunanidhi held a press conference and claimed that he had discussed
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the Sri Lankan issue with Prime Minister and Sonia Gandhi.
Skeptic Tamil leaders ask, then why are they not allowed to participate
in the talks with Sonia Gandhi, while they were all in the meeting with
Prime Minister. According to them Karunanidhi asked Congress ‘help’ in
sharing the burden of spectrum scam.
2G scam India: How it impacts national security?
This is a rather detailed and longish post on Rajeev’s blog. I can only
agree to the systematic loot.
Ignore Pranajoy Guha Thakurta’s tripe about “not being much a party to
the 2G scam. He is some sort of a journalist and for all practical
purposes a permanent fixture on NDTV. He is not expected to “rise up to
the situation” barkhagate seems to be become a popular trending topic
on Twitter. It can mean only one thing. Lots of anonymous idiots love to
hate Barkha Dutt. At best, they can only vent their “anger” online. When
it comes to standing up for the rights or out in voting, they would all
scatter away.
For all practical purposes, Greatbong has a good write up on this loot.
And all the more I agree with what he writes:
And so my friends it will continue, one wave of corruption followed by
yet another larger wave, raising the shock threshold every time. Fire up
your rage within 140 characters. Try make it funny and pray for re-
tweets. Cause, honestly, that’s really all you can do.
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This by and large explains the current state of Indian populace. It does
not matter whether it trends on Twitter or gets a mention in the
mainstream media. Most of have become so callous with such oddities,
that public memory is really short. Another day, another year, another
scam and this too shall pass.
Which means that in this current fiasco, it would not be instructive to
preach or lecture on the pathetic reach of broadband. This has also laid
bare TRAI’s role as an ineffectual regulator. Easy isn’t it? Staff it with
pathetic run of the mill assholes, feed them with public money and let
them occasionally bark (for regulations). The real power stays in
Department of Telecom and the whims and fancies of chosen few while
they swindle the public money. The companies make hay while the sun
shines and you as idiotic customers pay (or rather) subsidize for their
“expenditure”. With media in the pocket , nothing gets mentioned or
‘intelligent submissions’ are ignored.
While we re-elect the same jewels of scams back in power, Why on earth
don’t we even feel outraged at all this?
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FOODGRAIN
Multi-crore foodgrain scam rocks UP:
Thousands of tonnes of foodgrains meant for the poor in Uttar Pradesh
have been siphoned off and exported to neighbouring countries. The
foodgrains were meant for BPL card-holders and were to be distributed
through the Food for Work scheme. But the grains were clandestinely
sold off to traders in Nepal and Bangladesh, allegedly in collusion with
bureaucrats and politicians.
The scam, worth over Rs 3,000 crore, happened between 2003 and
2007. After a PIL, the Allahabad High Court had last week ordered a CBI
inquiry into the scam. The scam has sparked off blame game between
the Centre and Uttar Pradesh.
While Union Agriculture Minister Sharad Pawar said the Centre had no
role to play, former Uttar Pradesh chief minister Mulayam Singh Yadav
too said he was not to blame. Mulayam on Tuesday claimed that he, as
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chief minister, had initiated action in the scam. "I initiated action against
63 persons for their involvement," he said in Delhi.
UP foodgrain scam to come under ED scanner:
The Enforcement Directorate has decided to probe money laundering
charges and foreign exchange violations in the multi-crore Uttar
Pradesh foodgrain scam. Food grains worth 35,000 crore rupees, meant
for distribution for the poor, were smuggled out to countries like
Bangladesh and Nepal. Mulayam Singh and Mayawati are now blaming
each other for the multi-crore scam.
The Lucknow bench of the Allahabad High Court has ordered the CBI to
complete its inquiry and submit its report within 3 to 4 months.
Mulayam claims he ordered the CBI probe. "I was the one to expose the
scam and i ordered an inquiry into the scam." UP food scam came to
light in 2004 for the first time when Mulayam Singh was the Chief
Minister. And he himself forced to withdraw the enquiry because of
pressure from his own party members.
Mayawatyi Government assumed office and recommended a CBI probe
into the food grain scam in 2007. However, the CBI has now been
directed by the Court to proceed with further enquiry not only with
regard to Ballia, Lakhimpur and Sitapur but also with regard to
Varanasi, Gonda and Lucknow districts.
Food and Agriculture Minister Sharad Pawar ays, "Our job here is to
procure food and send to state, it is up to the state after that to ensure it
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reaches people. I have heard that UP government has said it will take
action, that's a positive step." ED will also look into possible
contraventions of Foreign Exchange Management Act (FEMA).
Foodgrains scam: Mother of all scams in India-
The latest in an unending list, the 'foodgrain scam' titled so because of
the misuse of the public distribution system, is so widespread that it will
require approximately 5000 FIRs to cover it in totality. It involves over
450 class-I government officials and another 800 middle and lower rung
subordinates apart from some 10,000 private entities and has cost the
exchequer a staggering 35000 crores so far.
It spreads across five countries including Nepal, Bangladesh, Pakistan,
South Africa and Bhutan, apart from a total of 34 of the 71 districts in
Uttar Pradesh. It involves over 450 Class-I government officials and
another 800 middle and lower rung subordinates apart from some
10,000 private entities and may require 5,000 FIRs to cover the scam in
totality.
The foodgrain scam of Uttar Pradesh has emerged as a strong contender
for the dubious title of "the mother of all scams" unearthed in India,
ever. If not the amount of money involved, estimated to be around Rs
35,000 crore as of now, but the petitioner sees it to be over Rs 2 lakh
crore, at least by the headcount involved.
This probably explains why the high court also directed the CBI to seek
help from the enforcement directorate (ED) as well to pin the accused
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who may be scattered across the country and abroad. A spokesperson of
the ED on Tuesday confirmed that the department has been roped in to
participate in the probe.
If you think the figures are exaggerated, then sample this: the food cell
of Uttar Pradesh Police while probing the anomalies related with the
foodgrain scam in Sitapur alone, lodged as many as 63 FIRs against over
6,000 accused when the case was transferred to the special
investigation team (SIT) on the orders of chief minister Mayawati on
August 11, 2007. This included 21 government officials of the post of
sub-divisional magistrates (SDMs), district supply officers (DSOs) and
the likes.
On November 3, 2008, when the CBI took up the nine FIRs lodged in
Ballia and Lakhimpur Kheri, it found a total of 175 persons listed as
accused including 18 officers of the state civil services cadre. The net
worth of foodgrain siphoned off between 2001 and 2005 in Gonda alone
was estimated to be over Rs 457 crore. The scam has been already
detected in at least 34 districts and another twenty were in focus.
The scam comprised sale of foodgrain meant for the public distribution
system and other special schemes for those below poverty line (BPL) —
Sampoorna Gramin Rozgar Yojana (now integrated with NERGS),
Antyodaya Yojana and Mid-day Meal Scheme — being sold off to private
entities while in the government records, the stocks were shown as
"distributed" among the target populace. The scam also included
procurement of the same wheat in the name of stocks under the special
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schemes and again selling it off in the black market to be sold even
abroad.
The entire scandal was so blatantly executed that the numbers of trucks
shown to have picked up the stocks from railway dumps to move them
to the state food corporation (SFC) godowns were found to be those of
scooters and motorcycles. Though the scam came to light in 2005 itself,
those behind the crime were so confident of their connections that they
did not stop draining the state exchequer even thereafter.
What brings out this brazenness the best is the mysterious
disappearance of 17 trucks of wheat weighing around 3,200 quintals in
all while being transported from the SFC godown in Shahjahanpur to its
second store in Jammaur area of the same district on July 07, 2006.
Later a probe by the then sub-divisional magistrate (SDM) revealed that
out of the 18 trucks of wheat transported, only one reached the second
store while the rest went missing. Similar pilferage was detected in Rae
Bareli and Balrampur districts as well.
It was this scam that led to the collapse of the public distribution system
in as many as 23 districts of the state by 2005 as not a single grain of
wheat was lifted from Food Corporation of India godowns of these
districts for distribution under the BPL and Antyodya schemes for
December 2004.
The railways in Uttar Pradesh too pointed towards some glaring
anomalies in transportation of grain to Bangladesh during 2004-2005
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after it came across improper export indents and cancelled bookings for
a total of 135 rail rakes to transport wheat to Bangladesh.
Records available with the railways show that a total of 122 rail rakes
were booked from Sultanpur and 16 from Akbarpur railway station by a
Kolkata-based company for export of foodgrain to Bangladesh. Out of
the 122 rakes booked from Sultanpur railway station, four piled high
with foodgrain had already reached its destination, Darshna in
Bangladesh and the rest were to follow when the railway authorities
detected use of improper export indents in registration of rail rakes.
These anomalies comprised unsigned forwarding notes, demand being
registered for "self" and the likes. Each rake comprises 40 wagons with
each wagon having a carrying capacity of 220 tonnes of foodgrain.
"Things are so bad that the state government will require a separate
prison or two to house the foodgrain scandal accused if the
investigators decided to carry out all the arrests," said a senior officer,
associated with the investigations into the case, while talking to TOI on
Tuesday.
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Chain Roop Bhansali
Abstract:
The case 'The CRB Scam' is intended to give a detailed insight into the
frauds committed by the CRB group of companies. The case examines
how the CRB group was able to defraud the investors and the regulatory
authorities with ease. The role of RBI and SBI is also explored. The case
is so structured as to enable students to understand the way the CRB
group of companies defrauded the investors. The case is designed to
expose students to the nature and extent of scams in the financial sector
and the modus operandi to study the role and responsibilities of the
regulatory authorities in the Indian financial sector and a critical
evaluation of their performance to study the consequences of the scam.
Issues:
» C R B Group, C. R. Bhansali, SEBI, financial scams in India
"Every single drop of my blood is for the depositors."
- Chain Roop Bhansali in 1997.
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
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untraceable from the second week of May itself. The Central Bureau 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 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
vicepresident 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
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hiding and work out a way to get out of the mess. 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.
The Man and the Mess:
Born 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., MIIA (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
shortcharging 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 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
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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...
Excerpts The Modus Operandi:
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
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 honored. Claming 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 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
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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 Aftermath:
The CRB scam took the whole nation by storm. At one point, the Union
finance ministry held a meeting everyday to get to the brasstacks 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 of
auditors 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 unitholders. 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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CWG scam
CWG scam of Rs. 2,100 crore gift
EMAAR MGF contract with GoI/DDA for CWG village
• Total construction 20,91,525 sq.ft.
• Total construction cost
@ Rs,2000/sq.ft. (maximum) Rs.400 crores
• Constructed area/flat available for sale to
• DDA 13.44 lac sq.ft.
• EMAAR MGF 6.97 lac sq.ft.
• DDA’s contribution/payment to EMAAR MGF –
• Cash paid Rs.766.89 crores
• Gift of constructed area/flat 6.97 lac sq.ft.
• Sale price/market value of constructed area/
Flat (EMAAR’s share) – 6.97 lac sq.ft.
@Rs.25,000/sq.ft. Rs.1,750 crores
• Net gift/benefit from Govt. of India/DDA to EMAAR MGF –
Sale price/market value of constructed Flats Rs.1,750 crores
Less: Total construction cost Rs. 400 crores
Rs.1,350 crores
Add: Cash payment by DDA Rs. 767 crores
Net benefit to EMAAR MGF Rs.2,117 crores
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Commonwealth Games 2010, Delhi: National Shame, Or Scam?
With the 2010 Commonwealth Games in Delhi just 70 days away, the
abysmal state of preparedness is nothing less than shocking. Consider
this:
Most sporting venues, including the Jawaharlal Nehru Stadium
(track and field) and the swimming complex will not be ready by
the August 1 deadline.
At the table tennis facility, a false ceiling collapsed.
At the weightlifting site, new vinyl flooring is already peeling.
The brand new shooting range was inaugurated in May, but
embankments have collapsed.
Trial weightlifting and swimming events had to be canceled,
because the sites were not ready.
The swimming stadium was inaugurated a few days back, but got
flooded.
There are reports of water seepage in the boxing stadium.
The bidding process for catering was canceled, and will now be
hurried through (read higher costs and less choice!).
At Khan Market, brand new granite pavements were too slippery
and have been dug up again!
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Subways at Connaught Place cannot be finished on time, and will
be boarded up.
Not even a third of the 34 towers ITDC had to furnish in the
Games Village are complete. Incidentally, their excuse is
“inadequate labour force”.
To top it all, Mr. Lalit Bhanot, the Secretary General of the organizing
committee is quoted in the Wall Street Journal as saying, “some false
ceiling has fallen down, which means nothing,” and “these things
happen even at your house.”
Maybe, Mr. Bhanot – but not within days of being built!!
The shoddy execution is accompanied by huge cost overruns. Reports
suggest that the cost of sports infrastructure has gone up by a factor of
more than 20x. City infrastructure costs have also ballooned. The
original estimate was around Rs 1,900 crores, later revised to Rs 10,000
crores. Recent independent estimates now suggest it will exceed Rs
30,000 crores! Isn’t that a mind-boggling sum?
So who will foot the bill?
Government officials claim that sponsorships will help ensure record
revenues, and at least recover the money spent on the Games (excluding
public infrastructure).
Many sponsors are shying away, given the risk of bad publicity and the
recent withdrawal of big-name athletes like Chris Hoy, Victoria
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Pendleton and Usain Bolt. So far only a handful of large consumer
brands have signed up, including Coca-Cola, Reebok and Hero Honda.
Given this bleak situation, recently, the government has “urged” public
sector units to shell out, and said that they might classify these expenses
under their CSR investments! Reportedly, the Indian Railways, NTPC
and Air India are among the large sponsors that have made
commitments so far.
Obviously then, the government and its various arms will foot the bill.
Money that could have been spent on more deserving schemes are being
diverted. An RTI application found that about Rs 265 crores from the
‘Scheduled Caste Sub Plan’ for Delhi, has been used to pay for the CWG.
More than 100,000 poor slum-dwellers have been evicted (with more
likely).
Directly and indirectly, citizens of Delhi and the rest of India (you and
me) will end up footing the bill. An independent report, The 2010
Commonwealth Games: Whose Wealth? Whose Commons? is an eye-
opener.
Why are we doing this?
Ostensibly, to showcase our great economy and management skills. But
all we have done is to make ourselves a laughing stock. There’s little
chance that we can come anywhere near China’s 2008 Olympics or
South Africa’s 2010 FIFA World Cup.
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Very few such sporting events make money, and most end up
bankrupting host cities or nations – even when costs are better
controlled. So then why? The answer lies in the whopping Rs 30,000
crore expenditure.
While nobody will officially say this, we all know why costs have bloated
and stadiums are collapsing. Officials and political patrons make money
on bribes from contractors, who win bids at the “lowest” price and then
earn super profits by compromising on quality. Then they make more
money citing over-runs and repairs. Material suppliers hoard
construction materials and make a killing as we desperately race to the
deadline.
When one-third of our population lives below the poverty line, and a
majority of kids are malnourished, uneducated and lack access to
healthcare – this is not just shameful, but criminal.
But nobody will be indicted or arrested or tried. That is the way it works
– too many important people are making too much money.
Top bosses of the Commonwealth Games Federation (CGF) and the
Organizing Committee have come under the government's scanner with
the Enforcement Directorate (ED) sending notices to the Royal Bank of
Scotland in London and to its Indian representative for providing all
transaction details of payments made by the OC.
The ED investigation is now focused on trailing the ultimate
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beneficiaries of the payments made to four major CWG consultants -
Event Knowledge Services, Fast Track Sales Ltd, Sports Marketing And
Management (SMAM) and AM Films.
Preliminary findings of the probe carried out by the Comptroller and
Auditor General (CAG) had revealed that undue favour had been shown
to London-based Fast Track Sales Ltd "solely on the recommendation"
of CGF president Mike Fennell and OC chairman Suresh Kalmadi.
ED officials, who questioned sacked Kalmadi aide T S Darbari a few days
ago on the payments made to little-known London firm AM Films, may
also call suspended OC finance committee head M Jeychandren for
questioning in the next few days.
They are expected to seek details on payments made to all foreign
consultants.
Sources said Kalmadi may not be called for questioning till October 13,
the day the Games conclude. But efforts will be made to investigate all
leads based on payments made so far to all foreign consultants by the
OC.
Besides Darbari, ED has already questioned former OC deputy DG
Sanjay Mohindroo for transactions related to AM Films.
The OC had approved the international broadcasting sales consultancy
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to Fast Track Sales Ltd "only on the basis of suggestions made by the
president and CEO of the Commonwealth Games Federation (CGF) and
chairman of the OC," according to documentary evidence gathered by
CAG officials during the initial inspection of CWG books.
The OC had signed agreements to the tune of Rs 208 crore ($46 million)
with different agencies, including agreement in process amounting to
over $3 million with British Broadcasting Corporation (BBC) for the
broadcasting rights in UK. The commission to Fast Track on these
broadcast rights was 15%.
The OC secretary general, Lalit Bhanot, has defended the award of the
contract to Fast Track saying it was a well thought out decision as they
did not want all works to go to SMAM.
In a statement issued on Thursday, Commonwealth Games Federation
CEO Mike Hooper also defended the decision of the CGF president in
recommending Fast Track saying that though the federation did make
this suggestion, but it was ultimately for the OC to select consultants for
the New Delhi CWG.
"Although the CGF supported the appointment of Fast Track, it strongly
refutes any inference that it interfered in the selection process," Hooper
said adding that having awarded the Games to Delhi, it is for the OC to
decide who it wants to appoint for any outsourced role.
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ED is probing linkages of SMAM with the Mauritius-based World Sports
Group (WSG). The latter had received Rs 380 crore "facilitation fee" in
the IPL-Gate and is still under scanner of multiple agencies in India.
SMAM was also the agency that was hired by the Kalmadi-led OC for the
Youth Games in Pune in 2008.
The other consultancy firm to whom payments have been made is the
Swiss headquartered EKS that was hired by the CWG organisers to
provide knowhow on the conduct of the Games.
CWG 2010 scam of 100,000 crores enters the parliament discussions:
The commonwealth games scam was the topic of the heated arguments
between the opposition and the government this Friday which had
many eminent parliamentarians commenting on the sorry state of
affairs and demanding the prime minister’s instant explanation for the
sheer loot of the budget decided in favor of the games tarnishing the
nation image internationally.
The MPs of the opposition party demanded a debate to be organized
keeping in mind the adjournment motion along with an investigation
led by the joint parliamentary committee to probe the truth of the
accusations regarding corruption in the CWG 2010.
The state of affairs took a drastic turn when the sports minister S Jaipal
Reddy tried to speak and answer the allegations but was instantly
stopped by the constant disturbance from the opposition ministers who
left no stone unturned to intervene in his speech.
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The member of janata dal and BJP party solemnly united to accuse the
present government of silently watching and encouraging the
corruption proceedings of the CWG for which they demanded to seek
the reply from the prime minister of the nation.
As the situation was out of control, the speaker was forced to adjourn
the house proceedings till 2p
Financial Market Regulation-Security
Scams in India with historical evidence and the role of corporate
governance
The objectives of this study are:
a) To examine some of the major misdemeanors which perpetuated in
the financial system in 1991 and 2001 in India.
b) Understand the financial regulatory measures which have been
adopted after the 1991 share scam in India and why despite such
measures adopted security scam has recurred in 2001.
It also contains a summary of the events that occurred leading to the
share scams and financial frauds in India and abroad during the recent
decade that shook the financial markets. The section surveys the
rationale for regulation of securities markets and the functional
procedures adopted in India in the aftermath of the scams.
Security Scam: Introduction-
A security scam has the following features:
a)manipulation in share prices.
b) monopoly in dealing with a huge number of shares of a company.
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c)money laundering-borrowing money to trade in securities but using
the funds for unconnected purposes.5 According to the Securities
Exchange Act(1934)SEA-"It shall be unlawful for any person to engage
in any act, practice or course of action which operates or would operate
as a fraud or deceit upon nay person in connection with the purchase or
sale of a security." While understanding the causes or possible
mechanisms by which a security scam takes places we can on a parallel
plane understand the motives for financial market regulation otherwise
called the economics of financial market regulation. There is a certain
systemic risk involved if brokers or banks get into settlement problems
during the process of transacting in securities. If so, it results in a
domino effect, which could create problems for other banks and brokers
in the system. A systemic risk also can occur when there is not enough
liquidity in the system due to very few brokers, monopolizing in the
transaction of a security. Also insider trading is another problem when
traders who are insiders to an organization trade when they have
superior knowledge which is considered unfair and an extension of
asymmetric information. Also concentration tendencies of traders
towards dealing in one security only should be avoided. There is also a
consumer protection to ensure that the price formation process is
efficient as possible and also to ensure sufficient competition among
traders, brokers and other market participants.
Security Scam In India-1991
In April 1992, press reports indicated that there was a shortfall in the
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Government Securities held by the State Bank of India. Investigations
uncovered the tip of an iceberg, later called the securities scam,
involving misappropriation of funds to the tune of over Rs. 3500
Crores8. The scam engulfed top executives of large nationalized banks,
foreign banks and financial institutions, brokers, bureaucrats and
politicians: The functioning of the money market and the stock market
was thrown in disarray. The tainted shares were worthless as they
could not be sold. This created a panic among investors and brokers and
led to a prolonged closure of the stock exchanges along with a
precipitous drop in the price of shares. Soon after the discovery of the
scam, the stock prices dropped by over 40%, wiping out market value to
the tune of Rs. 100,000 crores. The normal settlement process in
government securities was that the transacting banks made payments
and delivered the securities directly to each other. The broker's only
function was to bring the buyer and seller together. During the scam,
however, the banks or at least some banks adopted an alternative
settlement process similar to settlement of stock market transactions.
The deliveries of securities and payments were made through the
broker.
There were two important reasons why the broker intermediated
settlement began to be used in the government securities markets:
• The brokers instead of merely bringing buyers and sellers together
started taking positions in the market. They in a sense imparted greater
liquidity to the markets.
• When a bank wanted to conceal the fact that it was doing an Ready
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Forward deal, the broker came in handy. The broker provided contract
notes for this purpose with fictitious counterparties, but arranged for
the actual settlement to take place with the correct counterparty. This
allowed the broker to lay his hands on the cheque as it went from one
bank to another through him. What was necessary now was to find a
way of eliminating the security itself.
Three routes adopted for this purpose were:
• Some banks (or rather their officials) were persuaded to part with
cheques without actually receiving securities in return. A simple
explanation of this is that the officials concerned were bribed and/or
negligent. Alternatively, as long as the scam lasted, the banks benefited
from such an arrangement. The management of banks might have been
sorely tempted to adopt this route to higher profitability.
• The second route was to replace the actual securities by a worthless
piece of paper – a fake 10Bank Receipt (BR). A BR like an IOU has only
the borrower's assurance that the borrower has the securities which
can/will be delivered if/when the need arises.
• The third method was simply to forge the securities themselves. In
many cases, PSU bonds were represented only by allotment letters
rather than certificates on security paper.
Security Scam in India-2001
In Spite of the recommendations made by the Janakiraman Committee
Report in 1992 to prevent security scams from happening in the future
another security market took place in 2001. This involved the actions of
one major player by the name of Ketan Parekh. He manipulated a large
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amount of funds in the capital market though a number of his own
companies whichis probably why the scam remained a mystery for
quite some time the RBI, SEBI and DCA(Department Of Company affairs)
had gone slack in their regulatory operations.During 1999 and 2000 the
SENSEX reached a high and after than the stock market crashed in
2001.Some of the major companies he invested in were 11Nirma, Adani
Group, Essel Group,DSQ and Zee Cadila.Ketan Parekh manipulated the
stock market through FII's (Foreign Institutional Investors), OCB's
(Overseas Commercial Borrowings),Banks and Mutual Funds(Unit Trust
Of India). In fact an important extension of this scam remains the Unit
Trust Of India Scam.
Security Market Scam of 2001:Joint Parliamentary Committee
(JPC) Report:
The terms of reference of the Committee were as follows:—
1. To go into the irregularities and manipulations in all their
ramifications in all transactions, including insiders trading, relating to
shares and other financial instruments and the role of banks, brokers
and promoters, stock exchanges, financial institutions, corporate
entities and regulatory authorities.
2. To fix the responsibility of the persons, institutions or authorities in
respect of such transactions.
3. To identify the misuse, if any, of and failures/inadequacies in the
control and the supervisory mechanisms.
4. To make recommendations for safeguards and improvements in the
system to prevent reoccurrence of such failures.
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5. To suggest measures to protect small investors.
6. To suggest deterrent measures against those found guilty of violating
the regulations.
Table 6:Amount payable by Ketan Parekh's Entities to banks and
Companies during security scam of 2001 in India:
Name of the entity Amount (Rs. in crore) approx
Madhavpura Mercantile Co-
operative bank
888.00
HFCL 550.00
Essel Group 450.00
Adani Group 132.00
DSQ Group 75.00
Shonkh Technologies 37.00
Kopran 28.00
Global Trust Bank 267.00
ICICI Bank/Centurion/Bank of
Punjab, etc
66.00
OCBS (delivery of shares not given
and
480.00
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sale proceeds not paid)
Total 3323
UTI Scam
Of all the recent encounters of the Indian public with the much-
celebrated forces of the market, the Unit Trust’s US-64 debacle is the
worst12. Its gravity far exceeds the stock market downswing of the mid-
1990s, which wiped out Rs. 20,000 crores in savings. 13The debacle is
part of the recent economic slowdown which has eliminated one million
jobs and also burst the information technology (IT) bubble. This has
tragically led to suicides by investors. And then suspension of trading in
US-64made the hapless investors more dejected at the sinking of this
"super-safe" public sector instrument that had delivered a regular
return since 1964. There is a larger lesson in the US-64 debacle for
policies towards public savings and public sector undertakings (PSUs).
The US-64 crisis is rooted in plain mismanagement. US-64 was launched
as a steady income fund. Logically, it should have invested in debt,
especially low-risk fixed-income government bonds. Instead, its
managers increasingly invested in equities, with high-riskspeculative
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returns.In the late 1980s UTI was "politicised" with other financial
institutions (FIs) such as LIC and GIC, and made to invest in certain
favoured scrips. By the mid-1990s, equities exceeded debt in its
portfolio. The FIs were also used to "boost the market" artificially as an
"endorsement" of controversial economic policies. In the past couple of
years, UTI made downright imprudent but heavy investments in stocks
from Ketan Parekh’s favourite K-10 portfolio, such as Himachal
Futuristic, Global Tele and DSQ. These "technology" investments took
place despite indications that the "technology boom" had ended. US-64
lost half its Rs. 30,000 crore portfolio value within a year. UTI sank Rs.
3,400 crores in just six out of a portfolio of 44 scrips. This eroded by 60
percent. Early this year, US-64’s net asset value plunged below par
(Rs.10). But it was re-purchasing US-64 above Rs. 14! Today, its NAV
stands at Rs. 8.30 - a massive loss for 13 million unit-holders.It is
inconceivable that UTI made these fateful investment decisions on its
own. According to insiders, the Finance Ministry substantially
influenced them: all major decisions need high-level political approval.
Indeed, collusion between the FIs, and shady operators like Harshad
Mehta, was central to the Securities Scam of 1992. The Joint
Parliamentary Committee’s report documents this. In recent months,
the Finance Ministry became desperate to reverse the post-Budget
market downturn. UTI’s misinvestment now coincided with the global
technology "meltdown." US-64 crashed. UTI chairman resigned.
Although culpable, he was probably a scapegoat too. The Ministry has
kept a close watch on UTI, especially since 1999.The US-64 debacle,
then, is not just a UTI scam. It is a governance scam involving
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mismanagement by a government frustrated at the failure of its
macroeconomic calculations. This should have ensured the Finance
Minister’s exit in any democracy which respects parliamentary norms.
There are larger lessons in the UTI debacle. If a well-established, and
until recently well-managed, institution like UTI cannot safeguard
public savings, then we should not allow the most precious of such
savings - pensions - to be put at risk. Such risky investment is banned in
many self avowedly capitalist European economies. In India, the
argument acquires greater force given the poorly regulated, extremely
volatile, stock market— where a dozen brokers control 90 percent of
trade. Yet, there is a proposal by the Finance Ministry to privatize
pensions and provident funds. Basically, the government, deplorably,
wants to get rid of its annual pension obligation of Rs. 22,000 crores.
Financial Market Regulation (Rationale):
The nature of securities markets is such that they are inherently
susceptible to failures due to the existence of information asymmetries
and existence of high transaction costs Sanyal (1997). It needs to be
emphasized that when securities markets come into existence, the
interest of the member brokers are taken care of through margin
requirements, barriers to entry of membership, listing agreements.
However the investors/clients who buy and sell via their brokers are
not able to form an organization to safeguard their interests due to the
cost of creation of such organizations and free rider problems. The
distinctive nature of the market can be observed with reference to the
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commodity, its quality, the system of transactions and the participants
in the market, as follows:
(a) the commodity(the security)has a life to perpetuity.
(b) while the outcome of the contract say the redemption of debt is
certain, in the case of the government, it is not always so in the case of a
private debt instrument, hence uncertainty comes into focus.
(c) the quality of private debt instrument is unobservable and hence, it
is the trust reposed on the trader or the issuer that is the decisive factor,
here the problem of information comes into focus.
(d) in any securities market in any transaction or deal there are at least
four participants, two clients and two brokers. The brokers negotiate
deals with each other on behalf of their clients and thus the problem of
transaction cost comes into focus. When there is so much scope for
failure and opportunism, there appears to be substantial ground for
prescribing an institution that oversees the market at different stages to
ensure its reliability, efficiency and it's very existence.
India RBI(Reserve Bank Of India),SEBI(Securities Exchange Board of
India) A security scam involves the manipulation of funds in the capital
market which could involve the usage of funds for highly speculative
purposes resulting in the monopolization of capital market, trading in
shares with money not used for their actual purpose etc.
Financial Market Regulation in India:
3.2 (a) Guidelines Issued by Reserve Bank of India for the Regulation of
Financial Markets
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1) Management oversight, policy/operational guidelines18 – The
management of a Primary Dealer should bear primary responsibility for
ensuring maintenance of appropriate standards of conduct and
adherence to proper procedures by the entity. Primary Dealers (PD)
should frame and implement suitable policy guidelines on securities
transactions. Operational procedures and controls in relation to the day-
to-day business operations should also be worked out and put in place
to ensure that operations in securities are conducted in accordance with
sound and acceptable business practices. With the approval of
respective Boards, the PDs should clearly lay down the broad objectives
to be followed while undertaking transactions in securities on their own
account and on behalf of clients, clearly define the authority to put
through deals, procedure to be followed while putting through deals,
and adhere to prudential exposure limits, policy regarding dealings with
brokers, systems for management of various risks, guidelines for
valuation of the portfolio and the reporting systems etc. While laying
down such policy guidelines, the Primary Dealers should strictly
observe Reserve Bank’s instructions on the following:
1) Ready Forward deals
2) Transactions through SGL Account
3) Internal Controls/Risk Management System
4) Dealings through Brokers
5) Accounting Standards
6) Audit, Review and Reporting
Any other instructions issued from time to time The internal policy
guidelines on securities transactions framed by the PD, duly certified by
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its management to the effect that they are in accordance with the RBI
guidelines and that they have been put in place, may be perused by the
Statutory Auditors and commented upon as to the conformity of the
guidelines with the instructions/guidelines issued by RBI. The
effectiveness of the policy and operational guidelines should be
periodically evaluated.
2) Prohibition of short selling of securities - The Primary Dealers should
not put through any sale transaction without actually holding the
security in its portfolio i.e. under no circumstances, a PD should hold a
oversold position in any security.
3) Concurrent audit of securities transactions - Securities transactions
should be separately subjected to a concurrent audit by
internal/external auditors to the extent of 100% and the results of the
audit should be placed before the CEO(Chief Operating Officer)/
CMD(Chief Managing Director) of the PD once every month. The
compliance wing should monitor the compliance on ongoing basis, with
the laid down policies and prescribed procedures, the applicable legal
and regulatory requirements, the deficiencies pointed out in the audits
and report directly to the management.
4) All problem exposures where security of doubtful value, diminution
of value to be provided for - All problem exposures, if any, which are not
backed by any security or backed by security of doubtful value should
be fully provided for.
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5) Provision also for suits under litigation - Even in cases where a PD
has filed suit against another party for recovery, such exposures should
be evaluated and provisions should be made to the satisfaction of
auditors.
6) Claims against the PD to be taken note of and provisions made – Any
claim against the PD should also be taken note of and provisions made
to the satisfaction of auditors.
7) Problem exposures to be reflected clearly in Profit and Loss Account -
The profit and loss account should, reflect the problem exposures, if any,
as also the effect of valuation of portfolio, as per the instructions issued
by the Reserve Bank, if any, from time to time. The report of the
statutory auditors should contain a certification to this effect.
8) Business through brokers and contract limits for approved brokers –
A disproportionate part of the business should not be transacted
through only one or a few brokers. PDs should fix aggregate contract
limits for each of the approved brokers. A limit of 5%, of total
transactions (both purchase and sales) entered into by a PD during a
year should be treated as the aggregate upper contract limit for each of
the approved brokers. This limit should cover both the business
initiated by a PD and the business offered/brought to the PD by a
broker. PDs should ensure that the transactions entered into through
individual brokers during a year normally does not exceed this limit.
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However, the norm would not be applicable to PD’s dealings through
other Primary Dealers.
9) Investments in and Underwriting of Shares, Debentures and PSU
Bonds and Investments in Units of Mutual Funds-Guidelines. PDs should
formulate, within the above parameters, their own internal guidelines,
as approved by their Board of Directors, on securities transactions
either by directly subscribing or through secondary market with
counter-party or counter-party group, including norms to ensure that
excessive exposureagainst any single counter-party or group or product
is avoided and that due attention is given to the maturity structure and
the quality of such transactions. The PDs will also need to take into
account the fact that such securities are subject to risk weight and
necessary depreciation has to be fully provided for.
10) Material changes in circumstances - The PDs should report any
material changes in circumstances such as change in the ownership
structure, business profile, organization etc. affecting the conditions of
licensing as PD to RBI immediately.
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Guidelines Issued by Securities and Exchange Board of India for the
Regulation of Securities Markets:
1) Prohibition of certain dealings in securities
a) No person shall buy, sell or otherwise deal in securities in a
fraudulent manner.
2) Prohibition against Market Manipulation
No person shall -
(a) Effect, take part in, or enter into, either directly or indirectly,
transactions in securities, with the intention of artificially raising or
depressing the prices of securities and thereby inducing the sale or
purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading
appearance of trading on the securities market; (c) indulge in any act
which results in reflection of prices of securities based on transactions
that are not genuine trade transactions;
(d) enter into a purchase or sale of any securities, not intended to effect
transfer of beneficial ownership but intended to operate only as a
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device to inflate, depress, or cause fluctuations in the market price of
securities;
(e) pay, offer or agree to pay or offer, directly or indirectly, to any
person any money or money's worth for inducing another person to
purchase or sell any security with the sole object of inflating,
depressing, or causing fluctuations in the market price of securities19.
3) Prohibition of misleading statements to induce sale or purchase of
securities
No person shall make any statement, or disseminate any information
which -
(a) is misleading in a material particular; and
(b) is likely to induce the sale or purchase of securities by any other
person or is likely to have the effect of increasing or depressing the
market price of securities, if when he makes the statement or
disseminates the information-
(i) he does not care whether the statement or information is true or
false; or
(ii) he knows, or ought reasonably to have known that the statement or
information is misleading in any material particular.
Nothing in this sub-regulation shall apply to any general comments
made in good faith in regard to -
(a) the economic policy of the Government,
(b) the economic situation in the country,
(c) trends in the securities markets, or
(d) any other matter of a similar nature, whether such comments be
made in public or in private.
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4) Prohibition on unfair trade practice relating to securities
No person shall -
(a) in the course of his business, knowingly engage in any act, or
practice which would operate as a fraud upon any person in connection
with the purchase or sale of, or any other dealing in, any securities;
(b) on his own behalf or on behalf of any person, knowingly buy, sell or
otherwise deal in securities, pending the execution of any order of his
client relating to the same security for purchase, sale or other dealings
in respect of securities.
Nothing contained in this clause shall apply where according to the
clients instruction, the transaction for the client is to be effected only
under specified conditions or in specified circumstances;
(c) intentionally and in contravention of any law for the time being in
force delays the transfer of securities in the name of the transferee or
the dispatch of securities or connected documents to any transferee;
(d) Indulge in falsification of the books, accounts and records (whether
maintained manually or in computer or in any other form);
(e) When acting as an agent, execute a transaction with a client at a
price other than the price at which the transaction was executed by him,
whether on a stock exchange or otherwise, or at a price other than the
price at which it was offset against the transaction of another client
Economics of Financial Market Regulation:
This section includes the motives behind financial market regulation.
There are several factors which motivate financial market regulation.
One if them is the systemic risk .Individual agents take into
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consideration only the private cost and often forget the social cost
involved in their transactions.If one trader finds difficulty in delivering
the proposed security under consideration it could set a chain or
reactions which could affect several other traders in the system.So will
be the case if banks get into settlement problems or failures.It could
affect several other banks and traders in the system
a) The Systemic Risk Motive
The prime objective of most existing financial regulation and
supervision is to ensure that no systemic risks will threaten the
financial system. In principle, there are two assumptions underlying the
concept of systemic risk. The first assumption is the existence of a
market failure, often in terms of an externality. The individual agents
only take the private costs into account and any “potential social cost
[or benefit] is not incorporated in the decision making” of the agents.
For instance, if one trader encounters problems in delivering the
securities after a trade, problems may easily spread to other agents
through the settlement system.
The second assumption is based on the notion that if problems occur,
they “would damage the financial system to such an extent that
economic activity in the wider economy would suffer.” The traditional
example of systemic risks is when financial problems in one bank lead
to a bank run which in turn undermines the confidence in the whole
banking system, makes the payment system collapse, the money supply
contract and potentially results in a recession or even depression. In
this case, the effects on other banks and economic agents, let alone the
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social costs of a general depression, are not taken into account in the
risk analysis of the bank or the agent. In this paper, the focus is not on
banking issues but on the problems related to the securities markets. In
terms of systemic risks resulting from activities in financial markets,
there are two main concerns , a) the settlement systems and b) the
liquidity of the markets. Even though the focus of the paper is not on
banking issues, in practice the banks play such an important role in the
payment and therefore in the settlement of financial securities that
banks and other financial intermediaries cannot be completely ignored
in a discussion of securities regulation.
b)Clearing and Settlement
The clearing and settlement of financial securities entails several
problems. First, if a seller of a financial security is not able to deliver, it
may cause delivery problems in other transactions, i.e. have domino
effects on many other traders. If one trader is unable to fulfill her
obligations, all her counterparts could run into problems, thus
spreading the financial instability. The netting, used in most settlement
systems, makes many transactions dependent on each other and
therefore amplifies this problem. Second, a dominating and increasing
part of the daily flows in the payment system emanates form the
securities markets and the payment system is a vital part of the financial
infrastructure. Most other activities rely on a well functioning payment
system. If the payment system would collapse all other economic
activity would run into serious problems. It is difficult to imaging any
economic activity, which does not involve payments. Therefore, a
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disruption in the settlement of financial securities may have far
reaching consequences for the entire economy. Furthermore, clearing
and settlement organizations have features similar to natural
monopolies. There are substantial economies of scale. As a consequence,
most countries only have one settlement organization, at least for the
same type of financial securities.
If such an organization would default due to technical problems or
fraud, settlement may be difficult and the risk of major macroeconomic
disturbances is not negligible. There are however not only operational
reasons for systemic risks. Such risks are also present if financial
problems for one agent involved in the system spread to other agents.
The typical way to deal with this systemic problem is to set up different
forms of prudential regulation, including stringent supervision
standards. Normally the central bank assumes responsibility of the
payment system, while the clearing and settlement organizations often
fall under the jurisdiction of the general financial supervision. Given the
special status and importance of the clearing and settlement
organizations, it has even been argued that they should be governed
more like public utilities than as privately held companies. In any case,
by imposing regulations on the clearing and settlement as well as the
payment systems, there is clearly a risk of inducing moral hazard, by
increasing the agents’ propensity to take risks, and thus raising the
probability of systemic problems.
c)Market Liquidity
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Another type of systemic risks emanates from the fact that liquidity in
the securities markets has externality features. “Investors want three
things from markets: liquidity, liquidity and liquidity.” As a
consequence, most investors will prefer to trade when liquidity is as
high as possible, i.e. when and where most other investors trade. Also, if
one agent supplies more liquidity, everybody gains, since the service
provided by the liquidity supplier is available to everybody in the
market. Thus, as more traders access a certain trading system, the
benefits for everybody in the trading system will rise. If liquidity falls it
may also disappear fast. Thus, there is a substantial risk that liquidity
will dry up if a crisis occurs, in ways similar to what happened at the
stock market crash of 1987. In a crisis the cost of supplying liquidity is
likely to increase. Thus, when liquidity is most needed, it may become
increasingly scarce. In this sense the first requirement for a systemic
risk is fulfilled, i.e. there is a potential market failure. As a consequence,
many agents, especially financial intermediaries, are increasingly
dependent on the securities markets for funding and risk management.
Liquidity problems in the securities markets could easily spread to the
banking sector. Also, “sale of assets to cover funding needs may itself
depress the value of other holdings, or be impossible due to the market-
liquidity crisis”, with contagious effects for the entire banking sector. If
these banks run into problems, it may jeopardize the payment system
with severe effects on the entire economy. Thus, the funding of and the
risk management systems in banks have become so dependent on the
securities markets that systemic risks may follow if liquidity falls. As
banks are becoming increasingly active in securities business, including
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issuing, trading, underwriting and providing back-up facilities the
potential problems are increasing.
d)Insider trading
Prohibiting insiders from trading when they have superior knowledge,
and forcing them to disclose all their trades are measures aimed at
reducing the asymmetric information and restoring market confidence
among market participants and the general public. There are four
means through which insider trading could potentially harm the
company. First, insider trading may reduce the efficiency of corporate
decisions by delaying the transmission of information within the
company. However, if a manager wants to trade on price sensitive
information before transmitting it to her superior – a phone call to her
broker would suffice and this would not take more than a fewminutes.
Thus, the delay story is not convincing. Second, insider trading may
increase the individual manager’s incentives to choose high-risk
projects, where the benefits from insider trading are larger. However,
this may attenuate the conflict that managers are more risk averse than
shareholders. Third, managers may manipulate share prices, by
disclosure policies etc, in order to maximize their insider trading profits
and at considerable social costs. However, prohibiting insider trading is
also costly.
Fourth, insider trading may harm the company’s reputation. The main
problem is that the insider information is the property of the
corporation. Therefore the insider trading is primarily a contractual
dilemma and could be resolved through contracts between the
138
corporation and the user of any insider information. In practice, insider
trading rules and regulations could entail establishing and verifying
standards of information, supervising disclosure requirements and
enforcing obligations to include audit reports in the annual statements
of companies, etc.
Reasons for the Reoccurrence of Security Scam in 2001 Inspite of
Guidelines Issued by RBI in 1992:
The Committee did not have the benefit of a report on the lines of the
Janakiraman Committee Report which was made available to the
previous JPC on the scam in securities and banking transactions.
Reliable evidence was difficult to find and took much time to cull. The
Committee had to rely on a number of reports that dealt with specific
and limited subjects. The enquiry reports of the regulators also
displayed many gaps which had to be filled by securing answers to a
very large number of questions asked by the Committee. The Special
Cell constituted by the Ministry of Finance in June, 1994 to investigate
the nexus between brokers and industrial houses in pursuance of the
recommendation of the earlierJPC having gone defunct since May 22,
1995, without coming out with any tangible findings or
recommendations for remedial action, is one of the examples of apathy
on the part of different agencies and departments concerned. The
Committee were informed by the Central Board of Direct Taxes that on
May 19, 1995 the DGIT (Investigation), Bombay, who headed the Special
Cell, had sought from CBDT adequate empowerment and administrative
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support for the Cell in the absence of which the Cell was unlikely to
reach to any firm conclusions about the role of any one or more
industrial houses in comprehensive manner but the Chairman, CBDT, in
his response thereto had suggested that due to limited scope of task of
the Special Cell no additional manpower was required. Also in the
minutes of the last meeting of the Special Cell held on May 22, 1995, the
members recorded that principal obstacle in unearthing the exact role
of the industrial houses in the scam was due to the scope of the Cell was
limited only to Bombay region due to which investigation into the
activities of the suspects outside Bombay was not within the
jurisdictional authority. Thus, the Special Cell was virtually rendered a
still-born baby. The lack of concern of Government demonstrated in this
casual approach to such an important issue is regrettable. This Scam is
basically the manipulation of the capital market to benefit market
operators, brokers, corporate entities and their promoters and
managements.
Certain banks, notably private and co-operative banks, stock exchanges,
overseas corporate bodies and financial institutions were willing
facilitators in this exercise. The scam lies not in the rise and fall of prices
in the stock market, but in large scale manipulations like the diversion
of funds, fraudulent use of banks funds, use of public funds by
institutions like the
Unit Trust of India (UTI), violation of risk norms on the stock exchanges
and banks, and use of funds coming through overseas corporate bodies
to transfer stock holdings and stock market profits out of the country.
These activities went largely unnoticed. While the stock market was
140
rising, there was inadequate attempt to ensure that this was not due to
manipulations and malpractices. In contrast, during the precipitous fall
in March 2001 the regulators showed greater concern. Another aspect
of concern has been the emergence of a practice of non-accountability in
our financial system. The effectiveness of regulations and their
implementation, the role of the regulatory bodies and the continuing
decline in the banking systems have been critically examined, for which
the regulators, financial institutions, banks, Registrars of Co-operative
Societies, perhaps corporate entities and their promoters and
managements, brokers, auditors and stock exchanges are responsible in
varying degrees. The parameters of governmental responsibility have
also been taken into account.
It is the considered view of the Committee that the lack of progress in
implementing the recommendations of the last Joint Parliamentary
Committee set up in 1992 to enquire into Irregularities in Securities and
Banking Transactions emboldened wrong-doers and unscrupulous
elements to indulge in financial misconduct. The Special Cell constituted
by the Ministry of Finance in June 1994 to investigate the nexus
between brokers and industrial houses in pursuance of the
recommendation of the previous Committee having gone defunct since
22 May 1995, without coming out with any tangible findings or
recommendations for remedial action, is one of the examples of apathy
on the part of different agencies and departments concerned. The
Committee express their concern at the way the supervisory authorities
have been performing their role and the regulators have been exercising
their regulatory responsibilities. That the regulatory bodies failed in
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exercising prudent supervision on the activities of the stock market and
banking transactions, became evident during the course of evidence
taken by the Committee and this has been detailed in the succeeding
chapters. In the Committee’s view no financial system can work
efficiently even if innumerable regulations are put in place, unless there
is a system of accountability, cohesion and close cooperation in the
working of different agencies of the government and the regulators. In
August 2001, after the freeze by UTI in US-64 unit repurchases, the
Committee were additionally mandated by Parliament to enquire into
UTI matters. The Committee find that weaknesses in management and
regulations of stock exchanges was compounded by serious
management deficiencies in the UTI and financial institutions.
Mr R Janakiraman’s (Ex Deputy Governor of RBI) views on the
Reoccurrence of a Security Scam in India and Corporate Governance in
this regard.
"New brains are out to circumvent rules in the system. Politicians and
politics have a major role to play. They is a pressure in PSUs to hire
every X, Y and Z and hence overstaffing and inefficiency. They have
become more commercial in operations. These workers are also
inefficient and have no incentive to work hard. As much as how good
work is not rewarded so are mistakes not found out and corrected.
While people in major banks are paid less they have no initiative to
work hard. In order to prevent another scam from happening a more
comprehensive set of guidelines have to be prepared. Master Circulars
have to be made available to bankers so that they work honestly and
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efficiently. In India justice is so much delayed and people often fall into
old ways without following guidelines."
PENALTY
Here is the interesting part – Due you know what a major penalty
means?
A small cut in pay (from 5% to 25%), a small cut in pension or gratuity
(5% to 30%) or probably temporary suspension from duty (3 to 6
months). Out of all these cases only 3-4 of them will face dismissal from
service.
Also, the surprising part is that all of them who are caught are just the
smaller pawn – who is looking at Politicians and senior officers in the
Government – They are the biggest culprits, not a single case will be
ever registered against them.
Is our government doing this enough to curb corruption? isn’t it a no
brainier that far more stricter penalties should be handed to these
corrupt officers.
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Conclusion
Findings and Recommendations
The scams and financial scandals discussed here involved the
manipulation of huge amounts of money. The purpose of the so called
“traders” or “investors” was not genuine. The perpetrators had such a
comprehensive knowledge of how the system worked that they
manipulated it. It is clearly evident that the occurrence and
reoccurrence of such scams and financial scandals at some point in time
be attributed to a failure of corporate governance in finance and that of
financial regulation.
Financial Regulation is more a personal thing which involves the
adherence to rules regulations and ethics by officials (management).It is
more self enforced as a ethical behavior or a matter of pursuing codes of
conduct without an outside agent monitoring , but financial market
regulation is exercised more by an external organization either a
regulatory body authorized to monitor and impose a surveillance
mechanism to ensure frauds or misdemeanors are not perpetuated and
so that the market functions efficiently to oversee the functions of the
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market participants and impose fines and other penalty for non-
compliance.
Though standard organizational theory states and includes the role that
equity and debt holders have to play in influencing managers to act in
the best interests of suppliers of capital it should not be forgotten that it
also includes the role that creditors, owners and government in the
same capacity. While these mechanisms are decided by economic and
legal institutions and are influenced by politics its success depends a
great deal on the principles, diligence and sincerity of management
when it comes to the adherence to rules and regulation. Also they must
have a concern for the welfare of shareholders (investors) and other
suppliers of capital to ensure that they get a fair and regular return for
their investments. While this ensures a regular supply of capital and fair
share of profit to investors its role does not end there. Shareholders and
other parties find difficulty in exercising these regulations because of
poor legal systems, corruption and bankruptcy. Also managers have the
incentive to act in their own interests rather than the interests of equity
and debt holders which could definitely affect the organization. Also
informational asymmetries in the system make it difficult for equity and
debt holders to monitor mangers. It also induces bank mangers to act
according to their own incentives and not according to value
maximization. Also heavy regulation induces bankers to invest in high
risk ventures rather than borrowing from uninsured borrowers who
have a greater incentive monitor .Also regulations and prohibitions of
entry of foreign banks reduces competition and market pressures on
managers to earn profits. These problems can be improved by
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increasing private monitoring and reducing government ownership
when it interferes with private monitoring.
The opacity of banking processes should be removed and a proper
information flow should ensue. A lack of this can be attributed to the
Asian Crisis and collapse of Enron. Entry of foreign banks should induce
competition and make mangers do their job well without relying on
family conglomerates and politicians. Also managers in banks should be
given strong incentives to do their jobs well and their good efforts
should be rewarded and mistakes corrected. They should be
remunerated well. In India organization revolves around ethical
behavior on part of management, knowing to make right decisions and
also knowing to choose between right and wrong.. It also calls for the
managers to behave in the interests of economics efficiency of the firm
and shareholders. Management should be made more accountable for
their actions in terms of deployment of funds, making decisions and also
transmitting information. Further, recent scandals disturbed the
otherwise placid and complacent corporate landscape in the US. These
scandals, in a sense, proved to be serendipitous. They spawned a new
set of initiatives in corporate governance in the US and triggered fresh
debate in the European Union as well as in Asia. One cannot forget the
security scams in India. The many instances of corporate misdemeanors
have also shifted the emphasis on compliance with substance, rather
than form, and brought to sharper focus the need for intellectual
honesty and integrity. This is because financial and non-financial
disclosures made by any firm are only as good and honest as the people
behind them. By this very principle, only those industrialists whose
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corporations are governed properly should be allowed to be a part of
committees. This includes the Prime Minister and Finance Minister’s
advisory councils, committees set up by the Confederation of Indian
Industry (“CII”), the Securities and Exchange Board of India (“SEBI”), the
Department of Company Affairs, ministries, and the boards of large
banks and financial institutions.
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