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 Societys College of Commerce and Economics Khar (West). 2010-11

Declaration I, Sharel Kishan Student of Khar Education Societys 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:

Certificate I, Sharel Kishan Student of Khar Education Societys 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 of Project Guide

Signature Coordinator

Signature of Principle

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.

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, counterallegations, 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 Indias 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 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 Satyam scam Urea scam LIC scam CWG scam Adarsh scam 2G and Spectrum scam Foodgrain scam CRB 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!

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

Financial Market Introduction

The financial system consists of specialized and nonspecialized 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

10

ensure that suppliers of finance to corporations are assured that they get their return on their 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--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.....

11

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Total

Project Name Amount (in Rs) Share scam 1000 crores Sugar scam 650 crores Bofors scam 65 crores Hawala case 65 crores Housing scam 18 crores M.P. trading 32 crores Fertilizer scam 133 crores Medicine Equipment scam 5000 crores Telecom case 1200 crores Newsprint case 20 crores Indian bank scam 1336 crores Fodder scam (Bihar) 1000 crores Land scam (Bihar) 400 crores Bitumen scam (Bihar) 100 crores Medicine scam (Bihar) 100 crores Forest case (Meghalaya) 300 crores Ayurveda scam (UP) 32 crores Dhoti-Saree scam (Tamil) 11 crores Coal scam (Tamilnadu) 750 crores Forest reserve scam (Meghalaya) 75 crores Wakof Scam (West Bengal) 1600 crores Dental College Case (Karnataka) 50 lakhs of Rs. 13,93,70,00,00,000/- Can you read out this

figure?. I CANNOT! Its even than India's Annual Budget.

12

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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Motilal Vohra P. Shivshankar Ajit Panja Balaram Jhakar N.D. Tiwari B.D.Thakne Kalpnath Rai C.K. Jaffar Sharif Buta Singh V.C. Shukla P.L.Shahi R.K.Dhawan Madhav rao Scindia Kamal Nath Arjun Singh S.L. Khurana Arif Mohd. Khan Asoke Sen Yashwant Sinha Devilal K. Natwar Singh Arjun Singh Chandram
13

Amount (in Rs) 11.0 lakhs 26.0 lakhs 3.5 lakhs 61.0 lakhs 25.0 lakhs 10.0 lakhs 54.0 lakhs 10.0 lakhs 7.0 lakhs 65.0 lakhs 11.3 lakhs 50.0 lakhs 75.0 lakhs 17.0 lakhs 10.0 lakhs 3.0 lakhs 756.0 lakhs 20.0 lakhs 21.0 lakhs 50.0 lakhs 21.0 lakhs 10.0 lakhs 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.

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
14

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 ScandalDial 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 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
15

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. HFCLs ability to raise funds in doubt. Sukhrams 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 Indias credibility broken to pieces.

16

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. 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
17

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 companys 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. Finally, the company was taken
18

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 Indias 155 mm field howitzer. The Swedish State Radio had broadcast a startling report about an undercover operation carried out by Bofors, Swedens biggest arms manufacturer, whereby $16 million were allegedly paid to members of PM Rajiv Gandhis Congress. Most of all, the Bofors scam had a strong emotional appeal because it was a scam related to the defense services and Indias security interests. Boforsthe 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

19

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 intermittently, people have either lost interest or got lost following the lengthy proceedings. So lets 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.
20

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 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 Quattrochis 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 CBIs 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
21

on its hands backing up the CBI to fully investigate the case without any fear or favour whatsoever.

6) The Fodder Scam

If you havent heard of Bihars 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.

22

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-700crore fodder scam in Bihar in July 96. The accused included top officials in the Animal Husbandry Department (AHD) and their political patrons/bosses. The AHD was being milked dry almost literallyby 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 AHDs 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
23

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 countrys leading politicians through hawala brokers. From the list of those 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

24

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 1950s and 1960s. 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. Jains 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. 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
25

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 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.

26

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. Jains 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.

27

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 ScamNitrogen Fixation

Introduction: The Urea scam has its genesis in the P. V. Narsimha

28

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 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

29

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 Karsons credentials, it also had not taken insurance cover against the possibility of Karson not fulfilling its contractual obligations. 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 Euroissue 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
30

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 sociopolitical 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 must allow the anticorruption 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 anticorruption 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
31

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.

Fodder Scam

The Fodder Scam involved hundreds of millions of dollars in alleged fraudulent reimbursements from the treasury of
32

Bihar state for fodder, medicines and husbandry supplies for non-existent livestock. The Fodder Scam (Devanagari: chr ghol) 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.

The scam

33

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
34

different branch of 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
35

the supreme court, on March 1996, the Bihar High Court ordered that the case be handed over to the CBI. 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

36

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 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
37

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. 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
38

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.

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

39

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

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
40

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.

SATYAM SCAM

41

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.

42

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?

43

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 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 its just

44

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 Satyams Board Members? Just sample the cheek of our Administration !! Criminals, who have swindled billions of Rupees and proudly proclaimed the same to the 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 tradeyou blighter of an investoryou wanted to make a quick bucknow you pay for your sinswords 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 ones gunny bags with Satyam shares in case it plunges to level of Rs. 110. Apathy, apathy.

45

Thats 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 casean 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 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 whowill-bell-the-cat and initiate legal proceedings against him. In

46

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 its 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 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

47

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 didnt 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 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

48

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 isnt the Govt simply confiscating the cache of loot from the Robberin 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!!! Shouldnt 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

49

hours. The authorities had various kinds of doubtsto 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

50

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 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 its 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 Rajus 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

51

Satyamwell 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 Indias 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-shareholding promoters to use the firms 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 companys 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 Indias most successful industries of recent years need to inflate profits? After all, the revenues of Indias IT industry have grown at a scorching

52

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 when it merged with Time Warner. Although the latter had more assets, revenues, and customers, AOLs 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. Rajus cousin, C. Srinivasa Raju, who held 800,000 shares, or 19 per

53

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 promoters 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 CMIEs database, the paid-up equity in Satyam Computer Services 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

54

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 Rajus 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. Satyams 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 AOL deal. According to reports, the owner of IndiaWorld was himself charged with intellectual property violations by

55

his erstwhile employer IndiaWorld.com, an Internet services company managed by U.S.-based ASAP Solutions Inc. Satyam Infoways 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. Rajus 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. Rajus confession. Thus in financial year ending March 2008, the ratio of profits before tax of Infosys

56

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. 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 awardwinning 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 Rajus 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

57

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 doesnt attract any interest. The analyst interaction, organized after Satyams 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.

58

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. Text of the letter written to the Satyam Board by Satyams Chairman B Ramalinga Rajus 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)

59

- 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 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

60

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 Satyams 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. 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

61

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 Directors immediate or extended family members has any idea about these issues. 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:
62

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 Mynampti 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.

63

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

64

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 Indias 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 Satyams valuations for the two days. The NYSE had halted trading in Satyam Computer from January 7 after the companys 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.

65

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. 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 regulators 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.

66

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.

The Satyam Scam Has Dented India Inc.s Image Abroad: Huge losses to investors aside, the Satyam scandal has caused serious damage to India Incs reputation as well as the countrys 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

67

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 companys 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 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 companys 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

68

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 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:

69

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 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.

70

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.

UREA SCAM Netting the Big Fish:

71

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 chargesheets 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
72

Gaud and three Karsan officials. 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.

73

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 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 chargesheet 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 wellconceived 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.
74

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 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.

75

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 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
76

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 IndoSuez 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 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

77

(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. 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 hasnt been

78

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 wont 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. 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

79

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.

Now a quick look at the one year bar chart pattern of LIC Housing Finance:

80

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.

81

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.

82

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. Chavans 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 ministers official residence, in

83

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 ViceChief 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 the widows of Kargil war heroes. Former chief secretary D K Sankarans 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 Chavans 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.

84

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 CBIs possession. The Union environment ministry has also raised a red flag, saying it did not grant clearance to the society. 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

85

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 31storey building in Colaba in Mumbai. The ministry of defence has already begun investigating what it sees, prima facie, as a "criminal conspiracy". "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,

86

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. 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

87

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 Chavans 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 Chavans 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 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
88

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

89

motherland, if one looks at the initial list of society 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 Chavans relatives who had been allotted flats in Adarsh, his sister-in-law Seema Sharma and brotherin-law Madanlal Sharma, resigned from the society on Friday. Chavans 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, exmunicipal 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

90

daughter, Devyani, an Indian Foreign Service official) Babasaheb Kupekar, Congress (own name) DK Sankaran, Exchief secretary (in the name of daughter, Devyani) Shriniwas Patil, NCP (own name) CS Sangitrao, ex-collector, suburban (in the name of son, Ranjit Krishnarao Patil, Congress SC Deshmukh, Collector, Pune (own name) Arun Pawar, ex-income tax commissioner (own name) PV Deshmukh, secretary, urban development (own name).

91

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 secondgeneration wireless telephone technology. Three primary

92

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: 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 firstcum-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

93

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. 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

94

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. 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

95

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 added. Thakurta further added

96

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

97

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 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

98

laws of the Nation, at the whims and fancies of politicalmiddlemen 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 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 Indias 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.

99

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 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.

100

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 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.

101

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 cant tolerate the rise of a humble Dalit. The Pioneers series of investigative reports became a blow to Rajas 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, Rajas 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 wifes business and file a mandatory affidavit that there is no clash of interest in the discharge of his duties. Rajas 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

102

over in the very first years shows more than Rs.755 crore, which they now prefers to say a wrong entry like Satyam Computer Rajus 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 Rajas relatives 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. According to documents filed with the Registrar of Companies in Chennai, Genex was incorporated in September 17, 2008 with two directors, Mohammed Hassan

103

(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 Swans 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.

104

Rajas favoritsm towards the Swan was exposed in the unprecedented deal with the state owned BSNL. On September 13, 2008 the BSNL had 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 Swans 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

105

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. Raja blatantly lied to the Parliament that his action on 2Gspectrum 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 Rajas daylight robbery in every stage, the

106

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 Sonias 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 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 Rajeevs blog. I can only agree to the systematic loot. Ignore Pranajoy Guha Thakurtas 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.
107

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, thats really all you can do. 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 TRAIs role as an ineffectual regulator. Easy isnt it? Staff it with pathetic run of the mill assholes, feed them with public money and let

108

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 dont we even feel outraged at all this?

FOODGRAIN

109

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 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

110

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 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).
111

Foodgrains scam: Mother of all scams in IndiaThe 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 who may be scattered across the country and abroad. A spokesperson of the ED on Tuesday

112

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
113

included procurement of the same wheat in the name of stocks under the special 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

114

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 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.

115

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."

116

- 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 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

117

filed a winding-up petition claiming that the continuance of the CRB Group was not in the interest of the public and depositors. The order prohibited CRB from selling, transferring, mortgaging or dealing in any manner with its assets and from accepting public deposits. In response, Bhansali sent a letter to the RBI. Though it was not signed by him, the letter said that the RBI order had led to the deterioration of the company's financial position. It added that the company was facing tremendous problems with payments to fixed depositors. The letter further said that 'we have, also expressed that in view of the precarious situation which is fast going out of our control, before it becomes unmanageable, our case should be considered sympathetically.' This letter led the investors to believe that Bhansali would come out of hiding and work out a way to get out of the mess. 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

118

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 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:

119

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 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

120

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

121

in March 1997, when the RBI Act of 1934 was amended to include specific provisions for the purpose. The bank also stated that it had begun to examine the liabilities and not the assets. However, media reports were quick to refute RBI's claims... The 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...

122

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. DDAs 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 (EMAARs 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

123

Net benefit to EMAAR MGF Rs.2,117 crores

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.

124

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! 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! Isnt that a mind-boggling sum? So who will foot the bill?

125

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 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

126

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. Theres little chance that we can come anywhere near Chinas 2008 Olympics or South Africas 2010 FIFA World Cup. 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

127

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 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
128

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 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

129

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. 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

130

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 ministers 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

131

allegations but was instantly stopped by the constant disturbance from the opposition ministers who left no stone unturned to intervene in his speech. 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

132

securities markets and the functional procedures adopted in India in the aftermath of the scams. Security Scam: IntroductionA security scam has the following features: a)manipulation in share prices. b) monopoly in dealing with a huge number of shares of a company. 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

133

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 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

134

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 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

135

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 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

136

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.

137

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 Madhavpura Mercantile Cooperative bank HFCL Essel Group Adani Group DSQ Group Shonkh Technologies Kopran Global Trust Bank ICICI Bank/Centurion/Bank of Punjab, etc OCBS (delivery of shares not given and sale proceeds not paid) Total 3323 Amount (Rs. in crore) approx 888.00 550.00 450.00 132.00 75.00 37.00 28.00 267.00 66.00 480.00

138

UTI Scam Of all the recent encounters of the Indian public with the much-celebrated forces of the market, the Unit Trusts 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-

139

riskspeculative 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 Parekhs 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-64s net asset value plunged below par (Rs.10). But it was repurchasing 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 Committees report documents this. In recent months, the Finance Ministry became desperate to reverse the post-Budget market downturn. UTIs misinvestment now

140

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 mismanagement by a government frustrated at the failure of its macroeconomic calculations. This should have ensured the Finance Ministers exit in any democracy which respects parliamentary norms. There are larger lessons in the UTI debacle. If a well-established, and until recently wellmanaged, 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

141

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 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

142

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 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

143

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 Banks 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 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.

144

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. 5) Provision also for suits under litigation - Even in cases where a PD has filed suit against another party for recovery,

145

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.

146

However, the norm would not be applicable to PDs dealings through other Primary Dealers. 9) Investments in and Underwriting of Shares, Debentures and PSU Bonds and Investments in Units of Mutual FundsGuidelines. 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 counterparty 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.

147

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;

148

(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 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.

149

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. 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;

150

(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 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

151

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 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

152

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 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.

153

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

154

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 marketliquidity crisis, with contagious effects for the entire banking sector. If these banks run into problems, it may

155

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 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 managers 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

156

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 companys 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 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

157

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 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.

158

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 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

159

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 exercising prudent supervision on the activities of the stock market and banking transactions,

160

became evident during the course of evidence taken by the Committee and this has been detailed in the succeeding chapters. In the Committees 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 Janakiramans (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

161

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 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.

162

Is our government doing this enough to curb corruption? isnt it a no brainier that far more stricter penalties should be handed to these corrupt officers.

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
163

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 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

164

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 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

165

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 corporations are governed properly should be allowed to be a part of committees. This includes the Prime Minister and Finance Ministers 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.

166

Bibliography http://www.hyd-masti.com/2009/02/top-scams-of-india.html http://mpra.ub.uni-muenchen.de/4438/ http://ideas.repec.org/p/wpa/wuwpfi/0506012.html http://www.icmr.icfai.org/casestudies/catalogue/Finance/FINC 021.htm http://www.indiadaily.com/editorial/16814.asp http://www.icmr.icfai.org/casestudies/catalogue/Finance/FINC 008.htm http://trak.in/tags/business/2009/09/29/is-this-enough-tocurb-corruption-in-india/ Food grain scam: Mayawati under pressure to act - The Times of India http://timesofindia.indiatimes.com/india/Foodgrain-scam-Mayawati-under-pressure-toact/articleshow/7057817.cms#ixzz18LbpoqIT The Times of India http://southasia.oneworld.net/todaysheadlines/foodgrainsscam-mother-of-all-scams-in-india CWG scam: Kalmadi, Fennell under ED scanner - The Times of India http://timesofindia.indiatimes.com/india/CWG-scamKalmadi-Fennell-under-EDscanner/articleshow/6302176.cms#ixzz18LczjBTB

167

http://www.commonwealthdelhi.com/?tag=commonwealthgames-scam http://ibnlive.in.com/news/how-ibn7-exposed-the-adarshsociety-scam/134082-37-64.html

168