Q1.

Study the developments that led to the Ketan Parekh scam and
comment on SEBI’s actions and role before and after the scam were
unearthed. The Ketan Parekh scam was an example of the
inherently weak financial, regulatory and legal set up in India.
Discuss the above statement, giving reasons to justify your stand.
Ans.

By well known as leading Bombay bull Ketan Parekh was CA. From start to
manage a family business to enter in the stock market he uses so many people.
Including a leading film star to entrepreneur. KP creates a company called KPV. KP
got fund from the various source and use it for the stock market. KP took advantage of
built a network of companies, mainly in Mumbai, involved in stock market
operations. After that he meets with the bank name as Madhupura mercantile
cooperative bank [MMCB]. When KP faced liquidity problems in settlements he used
MMCB in two different ways. First was the pay order route, wherein KP issued
cheques drawn on BoI to MMCB, 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. By
when many bank are also coming on the scam. KP use total 16 ac of such kind. Now
day by day KP stock is rising. When market was booming it become difficult for the
KP to manage the situation but whether he find situation with liquidity he gone to the
MMCB to get the money. And the whole scam is come on the way. He did not have
the money to buy large stakes. According to a report 12 lakh shares of Global in July
1999 would have cost KP around Rs 200 million. The stake in Aftek Infosys would
have cost him Rs 50 million, while the Zee and HFCL stakes would have cost Rs 250
million each. Analysts claimed that KP borrowed from various companies and banks
for this purpose.
SEBI’s action and role after the scam:

• An additional 10% deposit margin was imposed on outstanding net sales in the
stock markets. Also, the limit for application of the additional volatility
margins was lowered from 80% to 60%. To revive the markets, SEBI imposed
restriction on short sales and ordered that the sale of shares had to be followed
by deliveries.
• 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.
• 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.
• Rolling settlements (which ensures that the settlement takes place five days
after trading) will now be compulsory.
• In order to increase liquidity, SEBI has allowed banks to offer collateralized
lending only through BSE and NSE.
• Launching of trade guarantee fund to guarantee all transactions.
• SEBI also banned trading by all stock exchange presidents, vice-presidents and
treasurers. A historical decision to ban the badla system in the country was taken,
 effective from July 2001, and a rolling settlement system for 200 Group a shares
was introduced on the BSE.

The Ketan Parekh scam was an example of the inherently weak

financial, regulatory and legal set up in India.
SEBI had not been able to ensure compliance of its recommendations within a time
frame. As a result, the numerous violations/deficiencies brought out in the inspection
report of the year 1998 found repeated mention in the inspection reports of 1999 and
2000 and still remained unrectified. Ultimately, these very factors are found to have
contributed to the payment crisis of CSE.

The KP scam was an example of the inherently weak financial, regulatory and legal
set up in India. As India always have deficit in finance due to weak finance the
problem was occur and KP have borrowed higher amount from the banks and Market
he was not able to run and handle the business. In India the insufficiency in liquid
occurs and business like KP’s not running well there was lack of finance and weak
finance sources which could not financing the business.

Regulatory was being lax in handling the issue of unusual price movement and
tremendous volatility in certain shares over an 18-month period prior to February
2001. Analysts also opined that SEBI's market intelligence was very poor. SEBI had
to investigate these things, not as a regulatory body, but as deep-probing agency that
could coordinate with other agencies. SEBI was lax to handle the issue of KP.

The payments crisis on CSE arose because the SEBI with the consultation of the
Ministry of Finance had permitted the resumption of badla without arranging for
curbing or regulating rampant off-market “internal badla”.
Q-2 Comment on management of asset and liabilities and also risk, profit
planning for commercial banks including their working, with specific
reference to the KP Scam.

Ans:
Asset-liability management basically refers to the process by which an institution
manages its balance sheet in order to allow for alternative interest rate and liquidity
scenarios. Banks and other financial institutions provide services which expose them
to various kinds of risks like credit risk, interest risk, and liquidity risk. Asset liability
management is an approach that provides institutions with protection that makes such
risk acceptable. Asset-liability management models enable institutions to measure and
monitor risk, and provide suitable strategies for their management. Bank need to
manage asset and liability according to the rules and regulation managed by the RBI.
Madhupura bank should be follow the rule. Ketan parekh has 17 bank a/c which is not
legal as per rules. Other side, bank directors are involve in the scam without any
mortgage give the loan and pay order in name of various government bank. Bank
should manage its CRR, SLR, REPO RATE with the RBI and Madhupura will not be
able to manage these rules because of liquidity problem. Bank has asset in term Asset-
liability management basically refers to the process by which an institution manages
its balance sheet in order to allow for alternative interest rate and liquidity scenarios.
Banks and other financial institutions provide services which expose them to various
kinds of risks like credit risk, interest risk, and liquidity risk. Asset liability
management is an approach that provides institutions with protection that makes such
risk acceptable. Asset-liability management model enable institutions to measure and
monitor risk, and provide suitable strategies for their management. Banks face
several risks such as the liquidity risk, interest rate risk, credit risk and operational
risk. Asset Liability management (ALM) is a strategic management tool to manage
interest rate risk and liquidity risk faced by banks, other financial services companies
and corporations.
The scam opened up the debate over banks funding capital market operations and
lending funds against collateral security. It also raised questions about the validity of
dual control of co-operative bank Analysts pointed out that RBI was inspecting Banks
face several risks such as the liquidity risk, interest rate risk, credit risk and
operational risk. Asset Liability management (ALM) is a strategic management tool to
manage interest rate risk and liquidity risk faced by banks, other financial services
companies and corporations.

Meanwhile, the Reserve Bank of India (RBI) ordered some banks to furnish data
related to their capital market exposure. This was after media reports appeared
regarding a private sector bank3 having exceeded its prudential norms of capital
exposure, thereby contributing to the stock market volatility.
The scam opened up the debate over banks funding capital market operations and
lending funds against collateral security. It also raised questions about the validity of
dual control of co-operative bank Analysts pointed out that RBI was inspecting.
Q 3. What effect did this scam have on the stock markets? Carry out a risk
return analysis of the portfolio held by KP. What would this portfolio be
like in today’s stock market if an individual investor had invested 100
shares in the same companies and had kept it as an investment?

ANS:
Market are running on various base. From political to Prime Minister Speech. India
stock market is more deepened on trading rather than running base on actually
company position. Scam is something effect on the market when all the money collect
together and create a bubble a situation. Capital flow on coming on various ways from
MF to FII. But even there are some case become like Ketan parekh scam. When bank
illegally help to the person to doing wrong task. Kp-10 has small stock at the
beginning of the stage but when all the major inventor are investing their money. So
automatically market capitalization are increase but when the problem of liquidity or
global clue affect the whole stock market then stock like k-10 crash like bubble.
Because there is no way that the situation can be make in control and then stock go
down and in market liquidity and money problem is created. One cannot blame the
political instability or weakening of economic fundamentals for this.

US-64 now finds itself saddled with huge positions in KP stocks. Given its holding in
these stocks as on December 31, 2001 (the latest available, as UTI declares the
portfolio of US-64, but only 75 per cent of its top holdings, on a quarterly basis), the
erosion on account of these six stocks is to the tune of Rs 1,068 crore. That’s nearly 60
per cent of its reserves position of Rs 1,742 crore in December 2000.

KAYOED BY K-10
 Holding (as on 31 Share price (in Rs)
Fall in value
Dec 2000) on...
% of In Dec 31 March 31
Company In Rs crore In %
portfolio Rs crore 2000 2001
HFCL 3.29 677.1 1,277.0 158.6 -593.0 -87.6
Zee Telefilms 1.10 226.4 277.0 121.6 -127.0 -56.1
SSI 1.07 220.2 1,431.3 671.8 -116.9 -53.1
Global
0.75 154.4 802.0 161.5 -123.3 -79.9
TeleSystems
Visual Soft 0.41 84.4 720.7 223.3 -58.2 -69.0
Pentamedia
0.35 72.0 294.9 89.2 -50.2 -69.8
Graphics
Total 6.97 1,434.4 -1,068.6 -74.5

Even if one assumes it sold part of its K-10 holdings in January and February, the loss
is huge. On an average, UTI’s equity schemes have lost 11 per cent this calendar. By
the same peg, the loss to US-64 works out to Rs 1,679 crore (11 per cent of Rs
15,261crore). Assuming the fund’s debt portfolio yields 12 per cent in the current
quarter, or Rs 160crore, its total reserves add up to only Rs 223 crore.

Q-4 KPV venture was formed for funding. Explain the legal
procedures and accounting procedures in this kind of mergers, for
floating a new company.

Ans:
Merger means when two companies joined together and make new company. And
venture capital fund is when any person want to start a new venture capital fund or
firm then he should make register with the government.

KP was known as the 'Bombay Bull' and had connections with movie stars, politicians
and even leading international entrepreneurs like Australian media tycoon Kerry
Packer, who merged with KP to create new company called KPV Ventures, a $250
million venture capital fund that invested mainly in new economy companies. Over
the years, KP The rise of ICE (Information, Communications, and Entertainment)
stocks all over the world in early 1999 led to a rise of the Indian stock markets as
well. The dotcom boom contributed to the Bull Run led by an upward trend in the
NASDAQ. The companies in which KP held stakes included Amitabh Bachchan
Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications.
He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest
Communications, and Penta Media Graphics KP selected these companies for
investment with help from his research team, which listed high growth companies
with a small capital base. According to media reports, KP took advantage of built a
network of companies, mainly in Mumbai, involved in stock market operations.

Legal and accounting procedure of mergers.

The conditions to be fulfilled for an amalgamation to be treated as an "amalgamation

in the merger” is as follows:
1. All assets and liabilities of the "Transferor Company" before amalgamation should
become
assets and liabilities of the "Transferee Company".
2. Shareholders holding not less than 90% of shares (in value terms) of the
"Transferor Company" should become the shareholders of the "Transferee Company".
3. The consideration payable to the shareholders of the "Transferor Company" should
be in the
form of shares of the "Transferee Company" only; cash can however, be paid in
respect of
fractional shares.
4. Business of the "Transferor Company" is intended to be carried on by the
"Transferee Company."

5. The "Transferee Company" incorporates, in its balance sheet, the book values of
assets and
liabilities of the "Transferor Company" without any adjustment except to the extent
needed to
ensure uniformity of accounting policies. An amalgamation which does not satisfy all
the conditions stated above will be regarded as an "Acquisition"

6. The accounting treatment of an amalgamation in the books of the "Transferee

Company" is dependent on the nature of amalgamation. For a merger, the 'pooling of
interest' method is to be used and for an Acquisition the 'purchase' method is to be
used. Under 'the pooling of interest' method, the balance sheet of the combined entity
is arrived at by a line by line addition of the corresponding items in the balance sheets
of the combining entities. Hence, there is no asset write-up or write-down or even
goodwill. Under the 'purchase' method,
however, the "acquiring company" treats the "acquired company" as an acquisition
investment and, hence, reports its tangible assets at fair market value. So, there is
often an asset write-up.

Further, if the consideration exceeds the fair market value of tangible assets, the
difference is reflected as goodwill, which has to be amortized over a period of five
years. Since there is often an asset write-up as well as some goodwill, the reported
profit under the purchase method is lower because of higher depreciation as well as
amortization of goodwill.
Q-5 Analyze the Indian scenario of FII’s since then and its effect on
India as an investment destination for FIIs. Please explain with
relevant figures.
A major factor which led to continuous outflow of funds during the middle and end of
the year 1998 was the worsening outlook on the emerging markets. Credit worthiness
of almost all the South-east Asian nations was severely damaged by the crises which
started in July 1997. As a result, the FIIs were facing heavy redemption pressures
from the Emerging Markets Funds. The stock markets in all these countries fell
continuously from March 1998 till about September 1998. The integration of the
Indian capital markets with the international markets thus spilled over to Indian
markets as well. However, the net outflow from the Indian markets was much lower
than the other Asian countries. A further indication of the integration of the Indian
markets can be seen from the upsurge in the valuations and funds inflows during the
first quarter of 1999, when all the other Asian countries have also seen rising trend in
stocks indices.

The sluggishness in investment in the emerging markets was exacerbated by the fact
that throughout 1998-99, US and European markets showed historically high
valuations, and the expectations of further rise because of the strong economic
indicators there which led to reduced allocations elsewhere.

FII Impact in the domestic markets

The FIIs are major institutional investors in Indian capital markets. In the year 1998-
99, the gross purchases and sales by the FIIs stood at Rs. 16,115 crores and Rs.
17,699 crores, respectively. The gross turnover on BSE and NSE for the same period
is Rs. 3.11 lakh crores and Rs. 4.14 lakh crores. Thus as a proportion of total turnover
on the exchanges, the FII figures do not appear to be substantial. However, since the
FII trades are delivery based, the actual impact on the market is much higher.