Ketan Parekh Scam

Ketan Parekh Scam

BY:

SADDAM KHAN (08)RINCHU CHACKO (01)

SHAIKH SAIF( )IRFAN SHAIKH ( )

MITALI ( )

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Ketan Parekh Scam

INTRODUCTION

Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do share-brokerage based family. He was involved in the shares scam of the year 2000/01. The study by SEBI found that the flow of funds originating from Ketan, when paired with securities market transactions of connected clients leads to the possibility that these trades were executed to confuse the funds trail and to integrate the money originating from the banned stock broker into the system of banking.

Ketan's possible involvement was found by SEBI during its investigation into professed manipulative trading in the scripts of Cals Refineries Limited, Confidence Petroleum India Limited, Bang Overseas Limited, Shree Precoated Steels Limited and Temptation Foods Limited.Earlier, SEBI had Ketan and 17 other entities from participating in the market following a study into purchase sale and dealing in the shares of companies like HFCL, Zee Telefilms, Adani Exports, Ranbaxy and Aftek Infosys between October 1999 and March 2001.In its time order, SEBI banned 26 entities and persons, including Maruti Securities Limited and asked them to reply in 15 day's time. The government had set up the Joint Parliamentary Committee (JPC) to study the securities scam that hit the stock market during the year 1999-2001.

According to SEBI, the starting point was ‘routine market surveillance’ that revealed set trades in five scripts. It also had information from the IT department on Ketan Parekh’s source of funds which trailed back to certain entities. SEBI’s investigation showed that these entities built up large volumes in the five scripts chosen for investigation; strangely enough, they often made losses on their transactions, but continued to trade. SEBI has opinion that these independently incurred losses have a secondary motive that needs to be separately investigated by the appropriate agency. It seems to have specific concerns relating to money laundering to the enforcement and IT investigators.

SEBI also found that the ‘connected entities’ or fronts used by Ketan for his transactions often sold shares without having them in their possession. They subsequently obtained the shares in time for delivery through off-market transactions through other ‘connected entities’ within the circle of operators.

Evidence of Ketan Parekh’s massive market activities was his ability to pay back well over Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which had collapsed and caused thousands of depositors to lose money when he pump off Rs880 crore to fund his market misbehavior in the year 1999-2000.

SEBI’s team led by Mr. S.Raman (chief general manager) must be congratulated for breaking this seemingly impenetrable system; but let us recognise that this is only the tip of the market manipulation. Ketan Parekh is not the only manipulator to use this system; there are plenty of others doing it too. Also, the number of scrips in which Ketan has traded is substantially higher than the five that were investigated by SEBI.One of the best kept secrets is the action taken against those involved in the scam of 2000, which led to large-scale losses, the drop of two banks, Madhavpura Merc-antile Cooperative Bank (MMCB) and Global Trust Bank

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(GTB) and split the giant Unit Trust of India (UTI) into two, after pushing it to the brink of a collapse. Whether the BSE directors had used their recourse to price sensitive information or not for transactions in the market, having had direct access to the data was in direct violation of SEBI rules, observes Oommen A. Ninan. WHEN THE Sensex crossed the dizzy 5000 mark in October 1999, Bombay Stock Exchange (BSE) brokers literally took to the terrace of Jeejebhoy Towers and released balloons. The celebration also marked their ``bullish sentimentalism'' and showed lack of market prudence - that what goes up has to come down; that the market is driven by its own dynamics.

The built up position of Mr. Parekh in certain equities known as `K 10', in the normal circumstances, would not have had any major impact on the market. With the elected directors, including the BSE president, having had recourse to the price sensitive information relating to outstanding positions, purchases and sales by leading operators it is to be seen whether they have used this advantage to depress the prices. The Securities and Exchange Board of India (SEBI) investigation will reveal it in the next few days. The excitement indicated on Budget day by a sharp rise in the Sensex was rather on the high side. There is actually nothing much in the Budget to promote savings. On the contrary, savings have been discouraged by a drop in interest rates.

It is now very doubtful whether demutualization or corporatisation of broker-driven exchanges is the answer. The experience of some of the stock exchanges like the London Stock Exchange, the Australian Stock Exchange, the Nasdaq, etc. is to be fully ascertained. Assuming that the brokers are kept away from the management of stock exchanges, restarting their role only to their trading rights, what is the guarantee that a new management will act in an objective manner.

There has been a flow of money from banks to capital market in recent months. Private sector banks are prominent among them, including the Global Trust Bank (GTB). However, a reversal of banks' exposure to capital market recommended by the RBI-SEBI committee in September last year is not a solution. What is essential is that the banks should have expertise in judging the risk of the business as well as the organisational ability to administer such schemes.

Moreover, the prima facie evidence in price rigging of GTB shares raises doubts over the regulators' surveillance mechanism. The RBI was aware of some unusual price movements in GTB share prices in November last year itself and the SEBI took another three months to inform the RBI that it had found evidence of price rigging in GTB share prices. The true measure of regulatory competence is the ability of the regulators to take quick corrective action. Further, the GTB's loan to Mr. Parekh without collateral is another issue that raises questions on the RBI's role as a regulator. Regulation and supervision and the quality of on and off-site supervision of the RBI and the SEBI should be strengthened and they should be delinked from the Finance Ministry with more autonomy and powers.

The regulator should continuously monitor the investment pattern so that any undue change in a particular stream, like the broker position, could be identified and immediate investigation conducted. The Government also should strengthen the investment institutions to facilitate long-term investments. Flow of money to the capital market from the lending

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institutions should be more transparent so that undue concentration of lending on particular scrip is avoided.

The financial crisis in Asia in 1997 has led to a fundamental re- think about the way in which financial markets should be governed. While other Asian countries are converging towards an international set of governance best practices, India is still lagging behind in terms of quality and speed of implementation. In a globalize economy, countries which fail to base the financial liberalization on strengthened economic policies and institutional structures are bound to suffer financial crisis.

Asset And Liabilities

Ketan Parekh was threatening to sue the Bank of India for defamation, because it complained about the bouncing of Rs 1.3-billion pay orders issued to the broker by the Madhavpura Mercantile Cooperative Bank. He seemed to suggest there is nothing more that the authorities would be able to pin against him.

At last investigations by the Central Bureau of Investigation and the Securities and Exchange Board of India reveal that the sheer magnitude of money moved around by Parekh or available to him for his market manipulation was a staggering Rs 64 billion.

Money Abroad

The CBI called a press conference to announce it had unearthed a Swiss bank account in which Parekh was listed as the beneficiary. The Bureau claimed there was $ 80 million (Rs 3.4 billion) in the account, which has since been frozen. In the past, CBI announcements were usually followed up with a quick arrest, this time it has gone silent.

New Overseas Corporate Bodies

The Securities and Exchange Board of India's preliminary investigation in May revealed that Rs 29 billion was transferred out of the country through five Overseas Corporate Bodies between March 1999 to March 2001. These OCBs had together invested just Rs 7.77 billion in the Indian market but remitted a whopping Rs 36.77 billion out of the country. This direct flight of capital occurred through European Investments, Far East Investments, Wakefield Holding, Brentfield Holdings and Kensington Investment. Three of these companies have a paid up capital of just $ 10.

SEBI says the pattern of investments and transactions through these accounts shows a clear misuse of the OCB/Foreign Institutional Investor route. They seem to be used as a channel to repatriate profits earned through stock price manipulation. Many of these OCBs were sub-accounts of Credit Suisse First Boston whose brokerage operations have been suspended. But there were other FIIs too. Strangely, SEBI has not yet placed any restrictions on them so far.

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All it has done is to request the Mauritius Offshore Business Activities Authority to give details in respect of actual beneficiaries, source and utilisation of funds of OCBs and sub-accounts mentioned in its preliminary report.

In answer to a Joint Parliamentary Committee query, Sebi now admits to have unearthed six more OCBs, where there is evidence that Parekh's companies may have used them for 'cornering and parking of stocks.' Dossier Stock Inc, Greenfield Investments Ltd, AOM Investments Ltd, Symphony Holdings Ltd, Almel Investments (Mauritius) Ltd, and Delgrada Ltd.

However, since there was no other specific query about further repatriation of funds, SEBI is silent about other flight of capital through the OCB window. However, it does admit there are clear inter-linkages between the OCBs and that some of them have issued participatory notes abroad to route funds to India. It also says Parekh's entities have conducted many of their trading transactions.

In its preliminary investigation report, SEBI unearthed a transfer of nearly Rs 11 billion to Calcutta brokers, most of whom have had their businesses suspended because of payment defaults. In an answer to a JPC query, SEBI now says Parekh had sent over Rs 27 billion to Calcutta brokers between January 2000 to March 2001. This suggests that as soon as the infotech, communication and entertainment stock-led boom began to lose momentum, Parekh shrewdly began to move his speculative activities to the unofficial market in Calcutta in order to avoid detection. SEBI says it is investigating the source of these funds and how they were utilised.

Ketan Parekh's Stock Holding

The process of ferreting out information on his portfolio is slow and tedious because SEBI has to depend on 'third party sources' such as banks, depositories and stock exchanges and because 'Ketan Parekh is not co-operating with the investigation.' Yet, three of the companies identified by SEBI where he held over five per cent are Aftek Infosys, Shonkh Technologies and Global Trust Bank. According to SEBI, these companies had omitted to inform stock exchanges about his holding having crossed five per cent. It is not quite clear if the broker continues to hold these shares and what would be the value of this holding.

If one were to simply add up the amounts mentioned in SEBI's various reports, the size of Parekh's manipulations is far bigger than the Rs 50-odd billion securities scam of 1992. Yet, unlike the previous scam, this one is absurdly simple and brazen in its execution. Sebi says that Rs 27 billion was sent by Ketan to Calcutta brokers; Rs 29 billion vanished overseas, Rs 3.4 billion ($ 80 million) was in a Swiss bank account; Rs 7 billion went to him from Himachal Futuristic; Rs 5.15 billion from the Zee Group and Rs 2.56 billion directly from the Global Trust Bank.

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Nedungadi Bank:

After the Ketan Parekh bubble burst in 2001, the RBI suddenly swung into action and began to go through Nedungadi’s books with a toothcomb. Punjab National Bank took over the bank that was up for sale after RBI initiated the move to weed out the broker promoter Rajendra Bhantia from the bank.

Global Trust Bank

Ramesh Gelli’s search for high returns took the new generation private bank to the stock market, where its involvement in the speculative activities associated with the Ketan Parekh scam and its high exposure soon resulted in substantial losses. The bank’s promoters attempted to merge the entity with the UTI Bank, and in the process the share price was rigged so that the promoters could make a profit despite the mess in the the bank. It was clear that unless some drastic measures were taken, the bank was heading for closure. This led to the exit of Ramesh Gelli in 2001. Eventually, Oriental Bank of Commerce (OBC) took over the troubled bank.

Co-Op Banks

The saga of failed co-operative banks is continuing. The collapse of Madhavpura Mercantile Co-operative Bank after Ketan Parekh used the bank to fund his stock market rigging was the high point. As per the RBI data, the accumulated losses of cooperative banking sector has touched Rs 1598 crore — an alarming rise of 241 per cent. The gross non-performing assets were Rs 5053 crore — enough to fund a world-class airport.

While the latest fraud may not be on the scale of the scams involving Harshad Mehta (around Rs.5,000 crores) or Ketan Parekh (Rs.800 crores), what is alarming is that this time the scammers' tentacles have spread to the Public Provident Fund (PPF) - the repository of the savings of millions of ordinary Indians. More than Rs.92 crores is missing from the Seamen's Provident Fund, which has 26,500 members. Worse still, the regulatory authorities admitted that they were aware of the mess and gave various excuses for not having taken timely action.

Global Trust Bank

Global Trust Bank was on the verge of getting merged with UTI Bank to become one formidable entity in the Indian banking sector, when the Great Crash of March 2001 occurred, and along with stock prices, the marriage too came unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs 6,198.85 crore as on 31 March 2000.)

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The report was believed to have noted that there was evidence that Parekh was involved in manipulating the stock prices of GTB prior to the merger announcement on 20 January 2001, and a swap ratio of 2.5 shares of UTI Bank for 1 share of GTB, two days later.

State Bank of India

However, this time, SBI’s losses are restricted to about Rs 40 crore, lent against pay orders issued by Ahmadabad based Classic Co-operative Bank. According to bank analysts polled by Capital Market, this is "loose change" for the bank of its size.

Bank of India

The five banks hit by pay order defaults, Bank of India has unfortunately been the worst hit. It cashed Rs 137-crore fictitious pay orders issued by the Ahmadabad based Madhavpura Bank to arrested broker Ketan Parekh. The banking sector is estimated to have taken a hit of more than Rs 1,000 crore due to the pay order scam indulged in by many Gujarat co-operative banks. It was Bank of India’s complaint to Central Bureau of Investigation that resulted in Parekh’s arrest on 30 March 2001.

Bombay Stock Exchange

The Bombay Stock Exchange witnessed one of the worst bear runs leading to a 177-point crash on 2 March 2001. On 23 May, the BSE announced the launch of trading in index options in the first week of June,  based on the Europian style.  For this purpose, the exchange has joined hands with the Chicago Mercantile Exchange to adopt its system of calculating margin requirements  and managing risk, known as Standard Portfolio Analysis of Risk (SPAN).

Calcutta Stock Exchange

In fact the 177-point crash on 2 March 2001 was triggered by the payment crisis at Lyons Range (CSE) and Dalal Street (BSE). While investors were still trying to digest the shortfall of Rs 100 crore for the settlement ended 1 March on the CSE, the market was gripped with rumours of a fresh payment crisis on CSE for the following settlement ended 8 March. Although the CSE authorities denied the payment crisis initially, Sebi went ahead and suspended 40 brokers on CSE.

Co-operative banks

It is now estimated that exposure to co-operative banks is going to cost the banking sector above Rs 1,000 crore.

To stem the losses, nationalized banks and money market intermediaries have reportedly stopped dealing with co-operative banks. The National Stock Exchange, too, has decided not to accept

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fresh bank guarantees and renewals from 5 private banks as a precautionary measure in the wake of the pay order scam.

Unit Trust of India

As on June 2000, UTI was believed to have a total investment of Rs 5,000 crore in K-10 stocks (10 New Economy stocks backed by arrested broker Ketan Parekh), which today stands at less than one-fifth of its value. Another fallout of the crash was that UTI-promoted UTI Bank’s merger with Global Trust Bank was called off by the latter, stung by allegations of price manipulation to get a better swap ratio with UTI Bank (2.25 shares of UTI Bank for 1 share of GTB) .

WAYS HE FUNDED HIS SCAM

THE PAY ORDER ROUTE

KP issued cheques drawn on BoI (Bank of India) to MMCB (Madhavapura Mercantile Cooperative Bank), against which MMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits.

KP reportedly used his BoI accounts to discount 248 pay orders worth about Rs 24 billion between January and March 2001. BoI's losses eventually amounted to well above Rs 1.2 billion.

BORROWING FROM MMCB

The second route was borrowing from a MMCB branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts. KP used around 16 such accounts, either directly or through other broker firms, to obtain funds

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan along with his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank.

According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

Developments Leading To KP Scam

176 Point Sensex fall on 01 Mar 2001

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o Prior day Union Budget tabled prompted 177 Point Sensex increase SEBI

o Launched immediate investigationso Inspect Books of several brokers suspected of triggering crash

RBIo Media Reports : Public Sector Banko Ordered some banks to furnish data of Capital Market exposure

BSE President Anand Rathi resigned Added to continued downfall of Sensex Opened debate over banks

o Funding Capital Market Operationso Lending funds against Collateral Securityo Dual control of Co-operative Banks

KP’s arrest by CBI : 30 Mar 2001o Charged defrauding BoI of about 30 Million USD amongst other charges

Another Sensex fall of 147 Points

The effect of the Ketan Parekh scam on the stock markets:

The panic run on the bourses continued and the Bombay Stock Exchange (BSE) President Anand Rathi's (Rathi) resignation added to the downfall. Rathi had to resign

. By the end of March 2001, at least eight people were reported to have committed suicide.

Hundreds of investors were driven to the brink of bankruptcy.

A change of Re. 1 in the price of a share when one speaks of a share rising or falling by so many points. In stock market indices, however, a point is one unit of the composite weighted average on market capitalization of rupee values.

A stock market index indicating weighted average of 30 scrips, also known as the BSE Sensitive Index. The daily closing figure of this index broadly reflects the performance of the capital markets.

It was alleged that Global Trust Bank exceeded its Capital market exposure.

An investor who expects share prices to go up and hence buys them. But during this period it was the reverse. People got panicked.

Many took back there investments.

it affected the fdi’s and the FII’s

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the Sensex lost over 700 points and more than 500 of the 1364 actively traded shares touched 52-week lows. In the entire month of March 2001, a total wealth of nearly Rs.1460000 million (approximately US$32 billion) was wiped out in market capitalization, more than Rs.45000 million a day.

The immediate fallout of market crash in Bombay was so widespread that shock waves were also felt in Calcutta and other financial centers.

The payment crisis broke out in the Calcutta Stock Exchange (CSE) with nearly 100 brokers unable to meet payment obligations. Later, all broker-directors of the CSE governing board resigned.

Although Ketan Parekh came to public notice only in early 1999, his overarching influence on the financial markets could be gauged from the fact that his favorite stocks were known as “KP Stocks” and market players had more faith in the “KP Index” rather than the Sensex.

Global, Himachal and DSQ Software will not fit in the universe of an institutional investor, but for Parekh's presence. The country's largest mutual fund, UTI's Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and

Sebi has launched a series of measures to halt the decline in the financial markets

All brokers acting as directors and other office bearers of the Bombay Stock Exchange have been suspended for alleged insider trading. In order to prevent misuse of sensitive information by broker-directors, stock markets will be corporatized soon.

To contain volatility, SEBI has imposed an additional 10 per cent volatility margins on all the A Group shares and additional margins on stocks in Automated Lending and Borrowing Mechanism (ALBM) and Borrowing and Lending of Securities Scheme (BLESS).

The SEBI has also imposed volatility margins on net outstanding sale positions of FIIs, financial institutions, banks and mutual funds.

On March 8, 2001, the SEBI banned naked short sales. In simple words, it means that all short sales have to be covered by an equal amount of long purchases.

5. Cutting gross exposure limit for brokers to 10 times the base capital in the case of National Stock Exchange (NSE) and to 15 times in case of other stock exchanges.

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6. Rolling settlements (which ensures that the settlement takes place five days after trading) will now be compulsory.

7. In order to increase liquidity, SEBI has allowed banks to offer collateralized lending only through BSE and NSE.

8. Launching of trade guarantee fund to guarantee all transactions.

Indian scenario of FII’s since then and its effect on India as an investment destination for FIIs

FOREIGN INSTITUTIONAL INVESTORS (FII)

Institutional Investor is any investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. The growing Indian market had attracted the foreign investors, which are called Foreign Institutional Investors (FII) to Indian equity market, and this study present try to explain the impact and extent of foreign institutional investors in Indian stock market and examining whether market movement can be explained by these investors. It is often hear that whenever there is a rise in market, it is explained that it is due to foreign investors' money and a decline in market is termed as withdrawal of money from FIIs. This study tries to examine the

Influence of FII on movement of Indian stock exchange during the post liberalization period that is 1991 to 2007.

Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. Foreign investment provides a channel through which countries can gain access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional investment (FII). Foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991.

India is the second largest country in the world, with a population of over 1 billion people. As a developing country, until recently, however, India has attracted only a small share of global

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Foreign Direct Investment (FDI) and foreign institutional investment (FII) primarily due to government restrictions on foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment, a sharp reversal from decades of discouraging economic integration with the global economy. Foreign Institutional Investment (FII) is defined as “an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor”.

The policy framework for permitting FII investment was provided under the Government of India guidelines vide Press Note date September 14, 1992. The guidelines formulated in this Regard were as follows:

Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual Funds, Investment Trusts, Asset Management Companies, Nominee Companies and Incorporated/Institutional Portfolio Managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) would be welcome to make investments under these guidelines.

FIIs would be welcome to invest in all the securities traded on the Primary and Secondary markets, including the equity and other securities/instruments of companies which are listed/to be listed on the Stock Exchanges in India including the OTC Exchange of India. These would include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds. Government would even like to add further categories of securities later from time to time.

FIIs would be required to obtain an initial registration with Securities and Exchange Board of India (SEBI), the nodal regulatory agency for securities markets, before any investment is made by them in the Securities of companies listed on the Stock Exchanges in India, in accordance with these guidelines. Nominee companies, affiliates and subsidiary companies of a FII would be treated as separate FIIs for registration, and may seek separate registration with SEBI.

Since there were foreign exchange controls in force, for various permissions under exchange control, along with their application for initial registration, FIIs were also supposed to file with SEBI another application addressed to RBI for seeking various permissions under FERA, in a format that would be specified by RBI for the purpose. RBI's general permission would be obtained by SEBI before granting initial registration and RBI's FERA permission together by SEBI, under a single window approach.

For granting registration to the FII, SEBI should take into account the track record of the FII, its professional competence, financial soundness, experience and such other criteria that may be considered by SEBI to be relevant. Besides, FII seeking initial registration with SEBI were be required to hold a registration from the Securities Commission, or the regulatory organization for the stock market in the country of domicile/incorporation of the FII.

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SEBI's initial registration would be valid for five years. RBI's general permission under FERA to the FII would also hold good for five years. Both would be renewable for similar five year periods later on.

RBI's general permission under FERA would enable the registered FII to buy, sell and realize capital gains on investments made through initial corpus remitted to India, subscribe/renounce rights offerings of shares, invest on all recognized stock exchanges through a designated bank branch, and to appoint a domestic Custodian for custody of investments held.

This General Permission from RBI would also enable the FII to:

o Open foreign currency denominated accounts in a designated bank. (There could even be more than one account in the same bank branch each designated in different foreign currencies, if it is so required by FII for its operational purposes);

o Open a special non-resident rupee account to which could be credited all receipts from the capital inflows, sale proceeds of shares, dividends and interests;

o Transfer sums from the foreign currency accounts to the rupee account and vice versa, at the market rate of exchange;

o Make investments in the securities in India out of the balances in the rupee account;

o Transfer repairable (after tax) proceeds from the rupee account to the foreign currency account(s);

o Repatriate the capital, capital gains, dividends, incomes received by way of interest, etc.and any compensation received towards sale/renouncement of rights offerings of shares subject to the designated branch of a bank/the custodian being authorized to deduct withholding tax on capital gains and arranging to pay such tax and remitting the net proceeds at market rates of exchange;

o Register FII's holdings without any further clearance under FERA.

There would be no restriction on the volume of investment minimum or maximum-for the purpose of entry of FIIs, in the primary/secondary market. Also, there would be no lock-in period prescribed for the purposes of such investments made by FIIs. It was expected that the differential in the rates of taxation of the long term capital gains and short term capital gains would automatically induce the FIIs to retain their investments as long term investments.

Portfolio investments in primary or secondary markets were subject to a ceiling of 30% of issued share capital for the total holdings of all registered FIIs, in any one company. The ceiling was made applicable to all holdings taking into account the conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII in any company would also be subject to a ceiling of 10% of total issued

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capital. For this purpose, the holdings of an FII group would be counted as holdings of a single FII.

The maximum holdings of 24% for all non-resident portfolio investments, including those of the registered FIIs, were to include NRI corporate and non-corporate investments, but did not include the following:

o Foreign investments under financial collaborations (direct foreign investments), which are permitted up to 51% in all priority areas.

o Investments by FIIs through the following alternative routes: Offshore single/regional funds; Global Depository Receipts; Euro convertibles.

Disinvestment would be allowed only through stock exchange in India, including the OTC Exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges, provided the sale price is not significantly different from the stock market quotations, where available.

These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These regulations continue to maintain the link with the government guidelines through an inserted clause that the investment by FIIs should also be subject to Government guidelines. This linkage has allowed the Government to indicate various investment limits including in specific sectors.

These features of the market have a number of implications. To start with, Foreign Institutional Investors (FIIs), whose exposure in Indian markets is an extremely small share of their international portfolio, making India almost irrelevant to their international strategies, have an undue influence on the performance of the markets. The sums they invest or withdraw can move markets in the upward and downward direction, as recent experience has amply demonstrated. This forces governments that are keen to have them constantly making net purchases and driving markets upwards to bend over backwards in appeasing them. A corollary of this influence of the FIIs is that any market player who is able to mobilize a significant sum of capital and is willing to risk it in investments in the market can be a major influence on market performance. This explains the importance of operators like Harshad Mehta and Ketan Parekh, the Big Bulls of the 1990s, who rose from being small traders to become correlates and were lionized for their resource mobilization and risk-taking abilities, which made them movers of markets. Ketan Parekh is reported to have risked his investments on a few sectors (the so-called technology stocks) and few firms, and till the recent debacle always seemed to come out right in terms of his judgment. He had, it now appears, a major role to play in rigging share prices, as he allegedly did in the case of Global Trust Bank (GTB) shares prior to the aborted merger of UTI Bank and GTB.

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. Consolidated Summary of FII Investment TrendsGross Purchases Rs. Cr

Gross Sales Rs. Cr

Net Investment Rs. Cr

Net Investment US$ m at monthly ex rate

Cumulative Net Investment US$ m at monthly ex rate

GT for 1993 2,661.9 66.8 2,595.1 827.2 827.2GT for 1994 9,267.2 2,476.1 6,791.2 2,164.8 2,991.9GT for 1995 6,665.9 2,812.2 3,853.8 1,191.4 4,183.4GT for 1996 15,739.2 4,935.6 10,803.6 3,058.2 7,241.6GT for 1997 18,926.5 12,719.2 6,207.3 1,746.7 8,988.2GT for 1998 13,899.8 15,379.7 (1,479.9) (338.0) 8,650.0GT for 1999 37,211.5 30,514.7 6,696.8 1,559.9 10,209.9J2000 6,129.7 5,933.2 196.6 45.1 10,255.0F2000 9,761.6 6,677.5 3,084.1 707.2 10,962.2M2000 9,890.1 8,691.2 1,198.8 275.0 11,237.3A2000 8,354.5 5,767.8 2,586.7 593.4 11,830.7M2000 6,307.4 6,054.7 252.7 57.5 11,887.5J2000 5,398.8 6,333.6 (934.8) (212.6) 11,674.9J2000 5,857.6 7,259.4 (1,401.8) (313.7) 11,361.2A2000 5,134.0 3,875.2 1,258.9 281.1 11,642.4S2000 7,149.6 6,931.3 218.3 47.8 11,690.1O2000 4,440.7 4,659.3 (218.5) (47.6) 11,642.5N2000 4,791.1 3,885.7 905.4 195.3 11,837.8D2000 4,451.5 5,086.6 (635.1) (135.8) 11,702.1GT for 2000 77,666.6 71,155.4 6,511.2 1,492.2 11,702.1J2001 8,601.0 4,327.7 4,273.3 914.1 12,616.2F2001 6,586.4 4,722.7 1,863.8 400.4 13,016.6M2001 6,978.0 5,212.4 1,765.6 379.5 13,396.1A2001 5,079.9 3,101.1 1,978.8 424.5 13,820.6

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Ketan Parekh Scam

M2001 3,976.0 3,300.0 676.1 144.5 13,965.1J2001 4,118.9 2,939.2 1,179.7 251.4 14,216.5J2001 3,665.0 3,187.3 477.7 101.6 14,318.1A2001 3,248.5 2,746.3 502.3 106.5 14,424.7S 2001 3370.1 3903.4 (533.4) (113.2) 14,311.5O 2001 3,895.7 3,011.3 884.4 185.6 14,491.7N2001 3,974.2 3,970.5 3.8 0.8 14,497.9Grand Total for 2001

53,343.8 40,279.0 13,064.8 2,795.8 .

Grand Total till 28/11

235,382.4 180,338.7 55,043.8

Investment by FIIs has seen a steady growth since the opening of the equity markets in September 1992. The share of FIIs in total FPI has increased from 47% in 1993-94 to around 74% in 2001-2002. FIIs have also acquired a significant presence in the Indian stock market. The share of their trading in total turnover attained a high of almost 30% in October 2001. In total

market capitalization FIIs account for about 13% and they make about 50-60% of average daily

deliveries on the stock market.

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