FRAUDS IN THE BANKING SECTOR

&
LEARNINGS
RETAIL BANKING AND WEALTH MANAGEMENT
MBA 2013-15
SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES
SUBMITTED BYSAMIKSHA SINGH

A-58

SHEETAL YADAV

A-59

SHIKHA SHINDE

A-60

SHIKHA UPADHYAY

A-61

SHIVANI SHARAN

A-62

SHRI KRISHAN SHARMA

A-63

SHWETA RANA

A-64

IPO SCAM 2003-05

SAMIKSHA SINGH

A-58

The settlement system on Indian stock exchanges before the depositaries were established, was
inefficient and embedded with high risk, due to the time that elapsed before trades were settled. The
transfer was mainly governed by physical movement of papers. The physical delivery of securities
was a process having fraught with delays and resultant risks. The system of transfer of ownership
was grossly inefficient as every transfer involves physical movement of paper securities to the issuer
for registration, with the change of ownership being evidenced by an endorsement on the security
certificate. In many cases the process of transfer would take much longer than the two months
stipulated in the Companies Act, and a significant proportion of transactions would end up as bad
delivery due to faulty compliance of paper work. This brings theft, forgery, mutilation of certificates
and other irregularities. All this added to costs and delays in settlement. This also restricted liquidity
and
made
investor
grievance
redressed
time
consuming.
Thus the Depositories Act, 1996 was passed to provide for the establishment of depositories in
securities with the objective of ensuring free transferability of securities with speed, accuracy and
security. Two depositories, viz., NSDL and CDSL, have come up to provide instantaneous electronic
transfer
of
securities.
The
process
was
known
as
dematerialization.
The IPO Scam in the year 2005-2006 made us aware of the abuse and misuse of the IPO allotment
process. The buying and sharing process in the shares allotted through IPOs to nearly 21 companies
in the year 2003, 2004 and 2005. It involved manipulation of the initial public offers (IPOs) by
financiers and market players by using fictitious or benaami DEMAT Accounts. In the year 2005, the
IPO scam came to light when the private Yes Bank launched its initial public offering. Roopalben
Panchal, a resident of Ahmedabad, had allegedly opened several fake DEMAT accounts and
subsequently she raised finances on the shares allotted to her through Bharat Overseas Bank
branches. After detecting the irregularities in the buying of shares of YES BANKs IPO, the SEBI
started a broad investigation. SEBI decided to release the orders of a sub-committee looking into
NSDLs role in the IPO scam and case of irregularities in dematerialisation of the shares of a
company. Thus the case comes up as NSDL v. SEBI case appealed to Securities Appellate
Tribunal.

National Securities Depository Limited (NSDL): An Overview

The Companies Act, 1956 deals with issue, allotment and transfer of securities and various aspects
relating to company management. Also, with the objectives of improving market efficiency,
enhancing transparency, checking unfair trade practices and bringing the Indian market upto
international standards, a package of reforms consisting of measures to liberalize, regulate and
develop the securities market; the Security Exchange Board of India was introduced during the
1990s.
NSDL was established with the sole aim of extending a paper-free security market in the country.
The Depositories Act, 1996, defines a depository to mean "a company formed and registered under
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the Companies Act, 1956 and which has been granted a certificate of registration under sub-section
(IA) of section 12 of the Securities and Exchange Board of India Act, 1992. The operations of the
depositories are primarily governed by the Depositories Act, 1996, Securities and Exchange Board of
India (Depositories & Participants) Regulations, 1996, Bye- Laws approved by SEBI, and Business
Rules framed in accordance with the Regulations and Bye-Laws.
If either the issuer or the investor opts to hold his securities in a DEMAT form, the issuer enters into
an agreement with the depository to enable the investors to dematerialise their securities. There are
some intermediaries between depository and investors which acts as an agent of the depositories.
They are known as a Depository Participants (as per sec. 4 of the Depositories Act). However, it is
the DP which gets charged by the NSDL, but the clients dont get charged. The DPs may in turn
charge the clients.
National Securities Depository Limited is the first depository to be set-up in India on December 12,
1995, however came to operation on November 8, 1996. It is a public limited company incorporated
under the Companies Act, 1956 which gets managed by Board of Directors. It gets sponsored by the
Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and the National Stock
Exchange (NSE).
Working of NSDL Depository System:
The investors at first open their account with the Depository Participants. The Account system gets
maintained by the computer and it is called DM.
Companies use a computer system called DPM to connect to the NSDL Central system. Through
this system, the company can electronically receive DEMAT requests, confirm to that requests and
can receive beneficial owners data from the depository itself.
Stock exchanges also get the securities made by the brokers using a computer system which is
connected to NSDL through DPM.
Therefore, the computer system of NSDL gets installed by depository intermediaries through DPM,
companies through DPM-SHRs and Stock Exchanges through DPM-CC. These are connected
through leased lines. Every transactions first passes through and gets recorded in DM. This central
system maintains account of all the account holders in the depository system. The computer system
used by all the entities is having their common software to regulate the account.
Role of SEBI in regulating NSDL
It was the SEBIs policy to start up a system of paperless trading where everything became
digitalized and the physical securities got removed with the introduction of dematerialization
process. In order to get the feedback of the dematerialization process, SEBI established some
depository units like NSDL and CSDL.
NSDL gets governed by the Depositories Act-1996, which provided for the Dematerialization Rules
to book entry-based transfer of securities in settlement of securities trade. NSDL is a Public Limited
Company under the Companies Act, 1956 and performs its functions for the profit of its
shareholders. The depositories in India are regulated under:
- The Depositories Act, 1996.
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- SEBI (Depositories and Participants) Regulations, 1996.

- Companies Act, 1956.
- Securities and Exchange Board of India Act, 1992.
- Prevention of Money Laundering Act, 2002.
SEBI Regulations has a far bearing impact on the depositories. Chapter II of the Securities And
Exchange Board of India (Depositories and Participants) Regulations 1996 deals with regulations in
terms of registration of Depositories. Within a year of registration, the depositories are required to
apply for certificates. Chapter III deals with the certificate for commencement of business.
If the issuer or the investors wants to go for holding the securities in a DEMAT format then there is
an agreement between the issuer and the depository. However, such agreement is not necessary if the
depository is the issuer of the security or if the central or state government is the issuer of the
securities.
IPO Scam: 2003-2006
The Scam came to the limelight when the primary market got manipulated by financers and market
players with the use of benaami DEMAT accounts. Certain entities obtained the IPO shares which
was reserved for retail applicants through thousand of benaami DEMAT account. Then the shares got
transferred to the financers on the first day of listing. This brings them a huge profit by the price
difference between IPO price and Listing price.
In the year 2005, YES BANK, a private entity launched its initial public offering. One of the
scammers Roopalben Panchal opened the fake DEMAT account and then raised finances on the
shares allotted to her through Bharat Overseas Bank branch. On October, 2012 it was found that
Purushottam Budhwani, was controlling over 5,000 demat accounts.
Himani Patel, funded 61 benami applicant and had 635 different DEMAT Account and they made
645 multiple application for 96 shares amounting Rs. 48960/-. The money for the same was routed
through 22 different bank accounts in which Himani Patel was the first holder. Thus, on the basis of
the allotment each application got 16 shares total numbering 10160 shares of Suzlon. These shares
were off market transferred to Himani Patels DEMAT a/c prior to listing. The shares were sold for
more than Rs.839/- compared to the IPO price of Rs.510/-. Therefore, Rs. 33,52,636/- amount was
illegally earned by her.
Similarly there was fraud in Jet Airways IPO, NTPC IPO and Tata Consultancy IPO, where more
than 10,000 fake DEMAT Account was found by the SEBI and thus there was a complete scam.
On 12th January, 2006 SEBI issued an ad-interim order wherein it stated that NSDL, and Depository
participants being in an agent-principal relationship in terms of the Depositories Act, 1996 are liable
for the conduct of their Depository Participants. Also the Depositories are the intermediaries of SEBI
so they have the responsibility of protecting the interest of the investors. Thus, SEBI had indicted
NSDL as far back as in 2006 for being responsible for not properly monitoring the Depository
Participants and thus being responsible for this huge scam. With this the SEBI issued ex-parte adinterim order under Section 19 of the Depositories Act, 1996 read with Section 11,11B of the
Securities and Exchange Board of India Act, for completing the inquiry. The SEBI initiated
adjudication proceedings against NSDL under section 15 H of the SEBI Act, 1992 and section 19 H
of the Depositories Act, 1996. Thus the SEBI levied a monitory penalty of Rs. 5 Crores on NSDL.
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The irregularities by NSDL during the Scam

Role of DPs:
Numerous DEMAT accounts were opened by the DPs on a single day with all the account holders
having the same address. Even the addresses of the BO account holders were that of the sub-brokers
of the DPs who procured DEMAT clients for the DPs. The genuineness of such DEMAT clients
were not get ascertained by the DPs. Some of the DPs were found to have not only opened DEMAT
accounts in fictitious / benami names but had also provided IPO financing to such fictitious / benami
account holders thereby facilitating the cornering of retail portion of IPOs. There was also violation
of KYC (Know Your Customer) norms applicable for opening of bank accounts and there was
violation of guidelines relating to the IPO financing schemes of the banks.
SEBI found in case of Karvy Stock Broking Ltd. (Karvey DP), that Karvy had an arrangement with
BhOB and through that Karvy opened several DEMAT accounts in the name of people introduced by
sub-brokers. However, in reality none of the DEMAT accounts were actually introduced through
sub-brokers. While moving through investigation procedures, it was found that actually Karvy DP
played a dubious role by forging the bank letters and opening the forged DEMAT account.
Role of Depositories:
There existed a principal-agent relationship between depositories and depository participants. This
means that the depositories are liable for the acts of their participants. It was said by the SEBI that
there existed error in the part of the depository. For example, the DEMAT account was opened
without obtaining adequate proof of identity or address. Even though the audit reports showed that
there existed some problems for inspection of depository participants, but no steps were taken. The
laws of NSDL say that there should a Disciplinary Action Committee to have a control over these
depositories participants. However, there were no such steps taken by the NSDL.
While inspecting the procedures taken by NSDL while punishing DPs, it was found that NSDL does
not impose penalties for violations which got rectified immediately after inspection. Also the
penalties were mainly based on monetary terms and also waive the penalties imposed, if the DP
reports rectification of deficiencies. This shows that in reality no penalty was imposed on the DPs by
the NSDL.
The investigation suggests that the DPs had failed to comply with the provisions of the SEBI
regulations and it was repeated several times. There was continuous infringement of the provisions of
the depositories act but there was no one to cross-check the same. This shows that there was
contributory negligence of NSDL on its part. The entire scheme for cornering the retail portion of
IPOs has succeeded because of the active involvement of both the Depository Participants and the
Depositories.
Controversies Related
The controversy basically started with the appointment of CB Bhave as the Chairperson of the SEBI
at a time when SEBI was investigating the propriety of the actions of the NSDL. CB Bhave had been
the CMD of NSDL prior to his appointment as Chairman of SEBI. This led to an obvious conflict of
interests. Thus, in order to avoid this conflict it was decided that the investigation be carried out by
an independent Committee. The committee was mainly formed to dispose of quasi judicial
proceedings pending against the NSDL. However, the committee held that the SEBI has failed to
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regulate the matters of IPO irregularities.

Thus basically two issues arise in the case, whether SEBI has power to declare the order of special
committee as ultra vires? And whether the order is required to be declared as void? The SEBI
declared the orders of the Special Committee ultra vires because instead of focusing on NSDL, it was
largely concentrating on the role of SEBI. On 22.6.2010, The Securities Appellate Tribunal,
Mumbai, disposed of Appeal No. 21 of 2010 filed by NSDL challenging the order pass by the
committee under Section 15T of the SEBI Act, 1992. The Tribunal held that all the observations
against NSDL in the said order will be expunged. Thus, as a result of the orders dated 9.11.2009,
2.2.2010 and 22.6.2010 all the culprits of this major scam have managed to go scot free and escaped
all accountability.
Orders and Analysis
Special committees report found that National Securities Depository (NSDL) was at fault for the
alleged irregularities related to the IPO scam during 2003-06. Under the chairmanship of C B Bhave,
the board on 2010 set aside the special committee report and had cleared NSDL with
mismanagement charges on the IPO scam. A committee consisting of then Sebi board members G
Mohan Gopal, and V Leeladhar on December 2008 had passed three orders and found that NSDL
had failed in its duty of supervising, investigating, monitoring data and directed it to conduct an
independent inquiry to establish individual responsibility.
The committee was not satisfied over the manner in which SEBI was functioning and looking into
the entire scam. The committee held that SEBI had failed to carry out its' regulatory role adequately
and recommended it to make a Code of Conduct for depositories. However, SEBI held that the
findings of the committee were outside the confines of delegation and were without the authority
of law. Thus the orders were held to be null, void and so decided to look into the matter afresh.
However, on 2009, the NDSL won an appeal before the Securities Appellate Tribunal, a court
designated to hear appeals against SEBIs rulings.
The order of SEBI states that Pravin Ratilal Shares and Stock Brockers Ltd., Depository Participant
of National Services Depository Limited prima facie appeared to have grossly failed in adhering to
the Know Your Client (KYC) norms laid down by SEBI, thereby facilitating opening of
DEMAT accounts in fictitious /benami names and cornering the retail portion of shares in Initial
Public Offerings. Also, orders were passed by the SEBI to Karvy Stock Broking Ltd. , Depository
Participants was prohibited from opening fresh DEMAT account till 2007.
In the issue of Yes Bank, SEBI directed NSDL to ensure that the 6315 demate a/c of Roopalben and
1315 demate a/c of Sugandh must not be utilized for manipulation of IPO in future. The Securities &
Exchange Board of India barred 13 investors from trading in the shares of Yes Bank Ltd and
participating in future public issues.
Conclusion
Thus, it can be concluded that the IPO Scams held in the market during 2003-2006 was one of the
biggest scam which Indian market received. The market analysts believe that retail allotments were
not only fixed to the Yes Bank and IDFC cases but it was more than that. This obviously has brought
the role of Depository System mainly NSDL in question. Many provisions which were required to be
followed by the depository were not followed according to the SEBI guidelines. Fake DEMAT
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accounts in such a huge number have put us to a need of revisiting the applicable laws governing the
depositories and the depository participants.
Even if clean chit has been given by the SEBI to the NSDL in terms of its involvement in the scam,
the Supreme Court has still asked the SEBI to keep a stand on either of the side of NSDL. The need
of the hour is to have a check and balance on the scheme of both NSDL and SEBI. The special
committee which was appointed to find out the liability of the NSDL in the scam also put on some
liability to the SEBI. So, there is some sort of amendment which is required to be led down in the
provisions governing the SEBI and NSDL. The need of the hour is to impose a criminal penalty
against the scamsters. Section 68A of the Companies Act says that public issue in the name of a
fictious title is a crime and so an imprisonment upto 5 years can be imposed on them. Small investors
have incurred a heavy loss so their share prices are required to get recovered by these scamsters.

HARSHAD MEHTA: THE 1992 SECURITY SCAM

SHIKHA UPADHYAY

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Harshad Shantilal Mehta (1954-2002) was an Indian stockbroker who grabbed headlines for the
notorious BSE security scam of 1992.
Mehta, along with his associates, was accused of manipulating the rise in the Bombay Stock
Exchange (BSE) in 1992. They took advantage of the many loopholes in the banking system and
drained off funds from inter-bank transactions. Subsequently, they bought huge amounts of shares at
a premium across many industry verticals causing the Sensex to rise dramatically. However, this was
not to continue. The exposure of Mehta's modus operandi led banks to start demanding their money
back, causing the Sensex to plunge almost dramatically as it had risen. Mehta was later charged with
72 criminal offences while over 600 civil action suits were filed against him.
In the early 1990s, the banks in India had to maintain a particular amount of their deposits in government
bonds. This ratio was called SLR (Statutory Liquidity Ratio). Each bank had to submit a detailed sheet of its
balance at the end of the day and also show that there was a sufficient amount invested in government bonds.
Now, the government decided that the banks need not show their details on each day, they need to do it only
on Fridays. Also, there was an extra clause that said that the average %age of bond holdings over the week
needs to be above the SLR but the daily %age needing not be so. That meant that banks would sell bonds in
the earlier part of the week and then buy bonds back at the end of the week. The capital freed in the starting of
the week could then be invested.

Now, at the end of the week many banks would be desperate to buy bonds back. This is where the
broker comes in. The broker knew which bank had more bonds (called plus) and which has less
than the required amount (called short). He then acts as the middleman between the two banks.
Harshad Mehta was one such broker. He worked as a middle man between many banks for a long
time and gained the trust of the banks senior management. Lets say that there are two banks A
(short) and B (plus). Now what Harshad Mehta did was that he told the banker at A that he was
dealing with many banks and hence did not know who he would deal in the end with. So he said that
the bank should write the cheque in his name rather than the other bank (which was forbidden by
law), so that he could make the payment to whichever bank was required. Since he was a trusted
broker, the banks agreed.
Now since Harshad Mehta was dealing with many banks at the same time he could then keep some
capital with him at all times. For eg. He takes money from A on Monday,and tells B that hell pay on
Tuesday, then he takes money from C on Tuesday and tells D that hell pay on Wednesday and the
money he gets from C is paid to B and as a result he has some working capital with him at all times if
this goes on with other banks throughout the week. The banks at that time were not allowed to invest
in the equity markets. Harshad Mehta had very cleverly squeezed some capital out of the banking
system. This capital he invested in the stock market and managed to stoke a massive boom.
He took the price of ACC from 200 to 9000.Thats an increase of 4400%!!!The market went up like
crazy and the bulls were on a mad run. Since he had to book profits in the end, the day he sold was
the day when the market crashed. The same day Vijaya Bank chairman committed suicide by
jumping from the top of the banks office. The chairman knew that when it would become public that
he had written cheques in the name of Mehta, he would be dead meat. One rather unknown fact
about this scam is that there was a very important player in this scam who managed to keep a very
low profile. That man was Nimesh Shah. He was just as involved as Harshad Mehta but he knew
how keep out of the hands of the law. Nimesh Shah still deals in the stock market and is known to be
a heavy player. Harshad Mehta is now dead. It is rumored that when he died, he still had 10% of
ACC shares with him.

Complicit lenders
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Armed with these schemes, all Mehta needed now were banks which would readily issue fake BRs,
or ones without the guarantee of any government securities. His search ended when he found that the
Bank of Karad (BOK), Mumbai and the Metropolitan Co-operative Bank (MCB) two small and little
known lenders, were willing to comply. The two banks agreed to issue BRs as and when required.
Once they issued the fake BRs, Mehta passed them on to other banks who in turn lent him money,
under the false assumption that they were lending against government securities. Mehta used the
money thus secured to enhance share prices in the stock market. The shares were then sold for
significant profits and the BR retired when it was time to return the money to the bank.

Outcome
Mehta continued with his manipulative tactics, triggering a massive rise in the prices of stock and
thereby creating a feel-good market trajectory. However, upon the exposure of the scam, several
banks found they were holding BRs of no value at all. Mehta had by then swindled the banks of a
staggering Rs 4,000 crore. The scam came under scathing criticism in the Indian Parliament, leading
to Mehta's eventual imprisonment. The scams exposure led to the death of the Chairman of the
Vijaya Bank who reportedly committed suicide over the exposure. He was guilty of having issued
checks to Mehta and knew the backlash of accusations he would have to face from the public.
A few years later, Mehta made a brief comeback as a stock market expert and started providing
investment tips on his website and in a weekly newspaper column. He worked with the owners of a
few companies and recommended the shares of those companies only. When he died in 2002, Mehta
had been convicted in only one of the 27 cases filed against him. What attracted the taxmans
attention was Mehta's advance tax payment of Rs 28-crore for the financial year 1991-92. Another
eye-catcher was his extravagant lifestyle.
Nine years after Harsad Mehta died, the I-T department and public sector banks (PSBs) have
successfully recovered a significant portion of their claims emerging out of the securities scam from
his liquidated assets. The Supreme Court directed the Custodian of the attached properties and assets
of the Harshad Mehta Group (HMG) in March 2011 to make payments of Rs1,995.66-crore to the IT department and Rs 199.25-crore to the State Bank of India (SBI), making the two institutions two
of the earliest claimants to recover their dues.
While the SBIs total principal amount claim of Rs 1,000-crore have been largely settled, financial
institutions have also received some money. However, Standard Chartered Bank, which had claimed
Rs 500-crore, has yet to recover its dues it was one of the late claimants. Although the total claim
over the HMG is of more than Rs 20,000-crore, the apex court has said that for the present, it would
only consider claims towards the principal amount.

Who is Ketan Parekh

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Ketan Parekh is a former stockbroker based in Mumbai who was convicted in 2008 for being
involved in engineering the technology stocks scam in Indias stock market in 1999-2001. A
chartered accountant by training, Parekh comes from a family of brokers and is currently serving a
period of disqualification from trading in the Indian bourses till 2017.
Ketan Parekh has been accorded with sobriquets such as the Pentafour Bull and the One Man Army
by the countrys national business newspapers, while the market simply refers to him as KP or
associates him with his firm NH Securities. Parekh is known to have no reluctance in meeting the
press. He is also known to have razor-sharp forecasts on market developments.

What distinguishes Ketan Parekh from the 'Big Bull' late Harshad Mehta
The two have been compared by people to have operated their scams using similar means and that
their backgrounds were similar as well. But the differences are very conspicuous.
At the outset, Mehta came from a lower middle-class and modest background, while KPs family has
been engaged as stockbrokers for a significant time. He is also related to many prominent brokers.
Secondly, when Mehta was operating, the market was still a closed one and was just beginning to
liberalize. It was revealed later that Mehta operated using the money of other people as his last
recourse. Further, Mehta is known to have resorted to aggressive publicity campaigns whereas KP
operates almost clandestinely. The latter has also been successful at creating stories and selling them
aggressively to institutional investors.

The Midas touch

Parekh attracted the attention of market players and they kept track of every move of Parekh as
everything he was laying his hands on was virtually turning into gold. But the Pentafour Bull still
kept a low profile, except when he hosted a millennium party that was attended by politicians,
business magnates and film stars. And by 1999-2000, as the technology industry began embracing
the entire world, Indias stock markets started showing signs of hyper-activity as well and this was
when KP struck.
Almost everyone, from investment firms which were mostly controlled by promoters of listed
companies to foreign corporate bodies and cooperative banks were eager to entrust their money with
Parekh, which, he in turn used to inflate stock prices by making his interest obvious. Almost
immediately, stocks of firms such as Visual soft witnessed meteoric rises, from Rs 625 to Rs 8,448
per unit, while those of Sonata Software were up from Rs 90 to Rs 2,150. However, this fraudulent
scheme did not end with price rigging. The rigged-up stocks needed dumping onto someone in the
end and KP used financial institutions such as the UTI for this.
When companies seek to raise money from the stock market, they take the help of brokers to back
them in raising share prices. KP formed a network of brokers from smaller bourses such as the
Allahabad Stock Exchange and the Calcutta Stock Exchange. He also used BENAMI or share
purchase in the names of poor people living in Mumbais shanties. KP also had large borrowings
from Global Trust Bank and he rigged up its shares in order to profit significantly at the time of its
merger with UTI Bank. While the actual amount that came into Parekh's kitty as loan from Global
Trust Bank was reportedly Rs 250 crore, its chairman Ramesh Gelli is known to have repeatedly
asserted that Parekh had received less than Rs 100 crore in keeping with RBI norms.

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Parekh and his associates also secured Rs 1,000-crore as loan from the Madhavpura Mercantile Cooperative Bank despite RBI regulations that the maximum amount a broker could get as a loan was
Rs15-crore. Hence, it was clear that KPs mode of operation was to inflate shares of select
companies in collusion with their promoters.

Lady luck disfavors Parekh!

Notably, a day after the presentation of the Union Budget in February 2001, Parekh appeared to have
run out of luck. A team of traders, Shankar Sharma, Anand Rathi and Nirmal Bang, known as the
bear cartel, placed sell orders on KPs favorite stocks, the so called K-10 stocks, and crushed their
inflated prices. Even the borrowings of KP put together could not rescue his scrimps. The Global
Trust Bank and the Madhavpura Cooperative were driven to bankruptcy as the money they had lent
Parekh went into an abyss with his reportedly favorite K-10 stocks.

The exposure of the dupe

As with the Harshad Mehta scam, Ketan Parekh's fraudulent practices were first exposed by veteran
columnist Sucheta Dalal.
When the prices of select shares started constantly rising, innocent investors who had bought such
shares believing that the market was genuine were about to stare at huge losses. Soon after the scam
was exposed, the prices of these stocks came down to the fraction of the values at which they had
been bought. When the scam did actually burst, the rigged shares lost their values so heavily that
quite a few people lost their savings. Some banks including Bank of India also lost significant
amounts of money.
Dalal goes on to state that Parekh's scheme was not visible to a layman given the positive deflection
that media had made him a hero while some of the biggest national dailies had even quoted him
profusely on that years Union Budget. Dalal added that KPs arrest and the uncanny similarity of his
operations to the Harshad Mehta securities scam of 1992 vindicated the miserable inadequacy of the
countrys regulatory system. The Securities Exchange Board of India (SEBI) and the Reserve Bank
of India (RBI) had remained complacent when the stock bubble was created during the latter half of
1999 and through 2000 while it had not bothered to take any action through 2001 when it was ready
to burst.

SEBIs damage control measures

SEBI investigations into Parekh's money laundering affairs revealed that KP had used bank and
promoter funds to manipulate the markets. It then proceeded with plugging the many loopholes in the
market. The trading cycle was cut short from a week to a day. The carry-forward system in stock
trading called BADLA was banned and operators could trade using this method. SEBI formally
introduced forward trading in the form of exchange-traded derivatives to ensure a well-regulated
futures market. It also did away with broker control over stock exchanges. In KPs case, the SEBI
found prima facie evidence that he had rigged prices in the scrips of Global Trust Bank, Zee
Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.
Furthermore, the information provided by the RBI to the Joint Parliamentary Committee (JPC)
during the investigation revealed that financial institutions such as Industrial Development Bank of
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India (IDBI Bank) and Industrial Finance Corporation of India (IFCI) had given loans of Rs 1,400
crore to companies known to be close to Parekh.

Criticism of SEBI
Some of the regulatory actions SEBI undertook came under scathing criticism from some quarters
who accused it of still being clueless about its supervisory duties. Observers said the regulator still
continued believing that its only priority was to prevent a fall in stock prices.
It was rumored that SEBI banned short sales and increased margins creating a virtual cash market in
the process and squeezed turnover to a sixth of the normal level. It also fired all broker directors from
the Bombay Stock Exchange and Calcutta Stock Exchange and declared the completion of three
controversial settlements of the Kolkata bourse by retaining a sizeable proportion of the payout of
operators who had allegedly tied-up for collusive deals. Furthermore, SEBI rounded up the bear
operators and launched an inquiry into their alleged short sales.

Stringent regulatory measures follow Parekh episode

Parekh's fraudulent operations motivated the authorities to take necessary steps that have made made
India's stock markets relatively safer in present times. He can also be credited for having forced
indolent policy-makers to bring about reforms in the financial system.

Lessons in learning
Here's a silver lining around every black cloud. For retail investors and corporates, the year 2008 was unique
in more ways than one. Not only it brought back memories of 1992 Harshad Mehta scam and dotcom bubble
when stock markets crashed, but it also taught hard lessons that "what goes up comes down". A finding by
Securities & Exchange Board of India shows that retail investors showed remarkable maturity while trading
on the bourses in 2008. While retail and domestic financial institutions bought stocks at distress valuation, the
hedge funds and foreign funds kept liquidating during the year, it disclosed.

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