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Introduction to scams

Various scams, scandals and stigmas that havesurfaced in the recent years. These may not all beattributable to the antics and bungling ofpoliticians, but they have been facilitated largelybecause of the vitiated atmosphere that thepoliticians and the political system have createdin the country.

Scams and scandals have manifested themselves inlarge numbers over the past few years. The latest,the Petrol Pump Scam concerning 3,158 allotments ofpetrol pumps, LPG agencies and kerosene oil depotsthat were allegedly handed out on payment rangingfrom Rs 30 -50 lakh to Rs 2,500 crore. The PrimeMinister took the bold and welcome step ofcanceling these allotments.

Most of the scams that have taken place keepfeaturing off and on in the media, but that doesn’tstop the next one from taking place sinceinvestigations and trials are excruciatinglyprolonged. The Bofors scam, in which Rajiv Gandhiwas also named, involved the purchase of importantdefence equipment from foreign markets causingembezzlement of Rs 65 crore. That was 15 years ago.Gandhi was assassinated, former Bofors agent WinChaddha and former defence secretary S K Bhatnagarhave died and we still haven’t managed to extraditethe main accused, Ottavio Quattarocchi and MartinAbdo.

Likewise, the Rs 1,200-crore fodder scam, relatingto the procurement of non-existent fodder onpayments from the state exchequer, has been in thenews for years. Investigations revealed that theformer chief minister Laloo Prasad Yadav wasalleged to have drawn Rs 1,000 crore from differentgovernment treasuries through Animal HusbandryOfficers. The CBI filed 50 regular cases in courtsconnected with this scam, but a final decision isstill awaited.

In Uttar Pradesh purchases, the purchase ofayurvedic medicines worth Rs 63 crore was found tobe bogus. Then, there was the securities scaminvolving crores of rupees in broker Harshad Mehtasecured huge amounts of loans from banks againstfraudulent securities. Nothing is yet evident as towhat is happening to this case. And, the telecomscam, involving the perpetrations of former UnionCommunications minister Sukh Ram from whose housewads of currency notes were recovered fromsuitcases and bags. The minister was eventuallysentenced by the court to imprisonment but thesentence has been kept in abeyance on the plea thatthe Minister wishes to appeal against the sentence.

Some of the recent scams have involved huge fraudsand a large number of people. Take the scam inprinting and selling stamp paper, which is used forrecording documents for registration purposes. Thisscam is of about Rs 2,200 crore and involvesfraudulent printing and sale of stamp papers invarious parts of the country. Another scam is ofthe fraudulent withdrawal of money, estimated to be

about Rs 20 crore, for giving scholarships toscheduled caste students under false names.

The list is never ending & the additions have notyet been completed there are continuous additionsto it. This was a brief introduction of the variousscams in India now.

Introduction of the securities scam morefamously known as the harshad mehta scam.

Abstract :

The term "securities scam" refers to a diversion offunds to the tune of over Rs. 3500 crores from thebanking system to various stockbrokers in a seriesof transactions (primarily in Governmentsecurities) during the period April 1991 to May1992. The scam has for several months become apermanent feature of the front pages of thenewspapers.

IntroductionIn April 1992, the first press report appearedindicating that there was a shortfall in theGovernment Securities held by the State Bank ofIndia. In a little over a month, investigationsrevealed that this was just the tip of an icebergwhich came to be called the securities scam, involvingmisappropriation of funds to the tune of over Rs.3500 crores ( about $ 1.2 billion). In an everexpanding ambit, the scam has engulfed topexecutives of large nationalized banks, foreignbanks and financial institutions, brokers,bureaucrats and politicians. The functioning of themoney market and the stock market has been thrownin disarray. The scam has generated such immensepublic interest that it has become a permanentfeature on the front pages of newspapers. A largenumber of agencies, namely, the Reserve Bank ofIndia (RBI), the Central Bureau of Investigation(CBI), the Income Tax Department, the Directorateof Enforcement and the Joint ParliamentaryCommittee (JPC) are currently investigating variousaspects of the scam.

The Two Securities MarketsThe scam was in essence a diversion of funds fromthe banking system (in particular the inter-bankmarket in government securities) to brokers forfinancing their operations in the stock market. Aclear understanding of the government securitiesmarket and the stock (corporate securities) marketsis a prerequisite for understanding the scam.

Liberalization of the EconomyAfter assuming office in June 1991, the newgovernment accelerated the process of economicliberalization under the auspices of theInternational Monetary Fund (IMF). The opening upof the Indian economy as a result of these measurespromised an unprecedented growth and prosperity forthe private corporate sector as new sectors of theeconomy were being allowed private participationand various administrative impediments were beingremoved. Anticipating the good tidings for theprivate sector, the stock market started booming -the Bombay Stock Exchange Sensitive Index (Sensex)rose from around 1000 in February 1991 to a peak of4500 in March 1992 just before the scam came tolight. This meant an enormous increase in the scaleof finance required by operators in the stockmarket. Heavy margins imposed by the Bombay StockExchange on settlement trading added to the fundsrequirement. Even the PSUs were under pressure toperform including the nationalized banks. Thi wasthe time harshad mehta and his associates decidedto strike.

The Ready Forward DealThe crucial mechanism through which the scam waseffected was the ready forward (RF) deal. The RF isin essence a secured short term (typically 15 day)loan from one bank to another bank. The lending isdone against government securities, exactly the waya pawnbroker lends against jewellery or othervaluables. In form, however, the RF is not a loanat all. The borrowing bank (Bank 2) actually sellsthe securities to the lending bank (Bank 1) and

buys them back at the end of the period of the loanat (typically) a slightly higher price. The pricedifference represents the interest on the loan. TheRF is what in other countries is known as repo orrepurchase agreement. It is a very safe and secureform of lending and is very common throughout theworld.

The Mechanics of the ScamAs explained above, a ready forward deal is, insubstance, a secured loan from one bank to another.To make the scam possible, the RF had to undergo acomplete metamorphosis: it had to become anunsecured loan to a broker. How was thistransformation brought about?The three crucial steps to effect the metamorphosiswere:The settlement process in the governmentsecurities market became brokerintermediated, that is, delivery and paymentsstarted getting routed through a broker instead ofbeing made directly between the transacting banks.The broker through whom the payment passed on itsway from one bank to another found a way ofcrediting the money into his account though theaccount payee cheque was drawn in favour of a bank.While the above two steps transformed an RF dealfrom a loan to a bank into a loan to a broker, itwould still be a secured loan. However, the brokerssoon found a way of persuading the lending bank todispense with security for the loan or to acceptworthless security.

We shall now elaborate on each of these steps, inorder to clearly understand the modus operandi usedin the scam.

Settlement ProcessThe normal settlement process in governmentsecurities is that the transacting banks makepayments and deliver the securities directly toeach other. The broker's only function is to bringthe buyer and seller together and help themnegotiate the terms, for which he earns acommission from both the parties. He does nothandle either the cash or the securities. Duringthe scam, however, the banks or at least some banksadopted an alternativesettlement process which was similar to the processused for settling transactions in the stock market.In this settlement process, deliveries ofsecurities and payments are made through thebroker. That is, the seller hands over thesecurities to the broker who passes them on to thebuyer, while the buyer gives the cheque to thebroker who then makes the payment to the seller. Inthis settlement process, the buyer and the sellermay not evenknow whom they have traded with, both being knownonly to the broker.There were two important reasons why the brokerintermediated settlement began to be used in thegovernment securities markets:The brokers instead of merely bringing buyers andsellers together started taking positions in themarket. In other words, they started trading ontheir own account, and in a sense became market

makers in some securities thereby imparting greaterliquidity to the markets.When a bank wanted to conceal the fact that itwas doing an RF deal, the broker came in handy. Thebroker provided contract notes for this purposewith fictitious counter parties, but arranged forthe actual settlement to take place with thecorrect counter party.Account Payee ChequesA broker intermediated settlement allowed thebroker to lay his hands on the cheque as it wentfrom one bank to another through him. The hurdlenow was to find a way of crediting the cheque tohis account though it was drawn in favour of a bankand was crossed account payee. As it happens, it ispurely a matter of banking custom, that an accountpayee cheque is paid only to the payee mentioned onthe cheque. In fact, exceptions were being made tothis norm, well before the scam came to light.Privileged (corporate) customers were routinelyallowed to credit account payee cheques in favourof a bank into their own accounts to avoid clearingdelays, thereby reducing the interest lost on theamount. Normally, if a customer obtains a cheque inhis own favour and deposits it into his ownaccount, it may take a day or two for the cheque tobe cleared and for the funds to become available tothe customer. At 15% interest, the interest loss ona clearing delay of two days for a Rs. 100 crorecheque is about Rs. 8 lacs. On the other hand, whenbanks make payments to each other by writingcheques on their account with the RBI, thesecheques are cleared on the same day. The practicewhich thus emerged was that a customer would obtain

a cheque drawn on the RBI favouring not himself buthis bank. The bank would get the money and credithis account the same day. This was the practicewhich the brokers in the money market exploited totheir benefit.Dispensing with the SecurityThe brokers thus found a way of getting hold of thecheques as they went from one bank to another andcrediting the amounts to their accounts. Thiseffectively transformed an RF into a loan to abroker rather than to a bank. But this, by itself,would not have led to the scam because the RF afterall is a secured loan, and a secured loan to abroker is still secured. What was necessary now wasto find a way of eliminating the security itself!Three routes adopted for this purpose were:Some banks (or rather their officials) werepersuaded to part with cheques without actuallyreceiving securities in return. A simpleexplanation of this is that the officials concernedwere bribed and/or negligent. A more intriguingpossibility is that the banks' senior/topmanagement were aware of this and turned a Nelson'seye to it to benefit from higher returns thebrokers could offer by diverting the funds to thestock market. One must recognize that as long asthe scam lasted, the banks benefited from such anarrangement. The management of banks might havebeen sorely tempted to adopt this route to higherprofitability.The second route was to replace the actualsecurities by a worthless piece of paper – a fakeBank Receipt (BR). This is discussed in greaterdetail in the next section.

The third method was simply to forge thesecurities themselves. In many cases, PSU bondswere represented only by allotment letters ratherthan certificates on security paper. And it iseasier to forge an allotment letter for Rs. 100crores worth of securities than it is to forge a100 rupee note! Outright forgery of this kindhowever accounted for only a very small part of thetotal funds misappropriated.Bank ReceiptIn an RF deal, as we have discussed it so far, theborrowing bank delivers the actual securities tothe lender and takes them back on repayment of theloan. In practice, however, this is not usuallydone. Instead, the borrower gives a Bank Receipt(BR) which serves three functions:The BR confirms the sale of securities.It acts as a receipt for the money received bythe selling bank. Hence the name – bank receipt.It promises to deliver the securities to thebuyer. It also states that in the meantime theseller holds the securities in trust for the buyer.In short, a BR is something like an IOU (I owe yousecurities!), and the use of the BR de factoconverts an RF deal into an unsecured loan. Thelending bank no longer has the securities; it hasonly the borrower's assurance that the borrower hasthe securities which can/will be delivered if/whenthe need arises.

BRs Issued without Backing of SecuritiesAs stated earlier, a BR is supposed to imply thatthe issuer actually has the securities and holdsthem in trust for the buyer. But in reality the

issuer may not have the securities at all. Thereare two reasons why a bank may issue a BR, which isnot backed by actual securities:A bank may shortsell securities, that is, itsells securities it does not have. This would bedone if the bank thinks that the prices of thesesecurities would decrease. Since this would be anoutright sale (not an RF!), the bank issues a BR.When the securities do fall in value, the bank buysthem at lower prices and discharges the BR bydelivering the securities sold. Short selling insome form is an integral part of most bond marketsin the world. It can be argued that some amount ofshortselling subject to some degree of regulationis a desirable feature of a bond market. In ouropinion, an outright sale using a BR, which is notbacked by securities, is not harmful per se thoughit violates the RBI guidelines.The second reason is that the bank may simplywant an unsecured loan. It may then do an RF dealissuing a "fake" BR which is a BR without anysecurities to back them. The lending bank would beunder a mistaken impression that it is making asecured loan when it is actually advancing anunsecured loan. Obviously, lenders should havetaken measures to protect themselves from such apossibility. This aspect will be examined laterwhen we discuss the banks' control system ingeneral and counterparty limits inparticular. During the scam, the brokers perfectedthe art of using fake BRs to obtain unsecured loansfrom the banking system. They persuaded some smalland little known banks – the Bank of Karad (BOK)and the Metropolitan Cooperative Bank (MCB) - to

issue BRs as and when required. These BRs couldthen be used to do RF deals with other banks. Thecheques in favour of BOK were, of course, creditedinto the brokers' accounts. In effect, severallarge banks made huge unsecured loans to theBOK/MCB which in turn made the money available tothe brokers.

Control SystemsThe scam was made possible by a complete breakdownof the control system both within the commercialbanks as well as the control system of the RBIitself. We shall examine these control systems tounderstand how these failed to function effectivelyand what lessons can be learnt to prevent failureof control systems in the future. The internalcontrol system of the commercial banks involves thefollowing features:

Separation of Functions: The different aspects ofsecurities transactions of a bank, namely dealing,custody and accounting are carried out by differentpersons.Counterparty Limits: The moment an RF deal isdone on the basis of a BR rather than actualsecurities, the lending bank has to contend withthe possibility that the BR received may not bebacked by any/adequate securities. In effect,therefore, it may be making an unsecured loan, andit must do the RF only if it is prepared to make anunsecured loan. This requires assessing thecreditworthiness of the borrower and assigning hima "credit limit" up to which the bank is prepared

to lend. Technically, this is known as acounterparty limit.

Other Aspects of the ScamThere are several aspects of the scam which areclosely related to the securities markets, butwhich are different from the operational aspect ofthe markets. These pertain to information that cancause significant changes in the prices ofsecurities as well as the information supplied bythe commercial banks on their financialperformance. We need to understand these toappreciate the motivation for certain kinds oftransactions that areentered into in the market. Coupon Changes andInsider Trading During the period from September1991 to June 1992, the government raised theinterest (coupon) rate on its fresh borrowing threetimes. On each occasion the coupon rate wasincreased by 1/2%, thereby raising the coupon ratefrom 11.5% to 13% during this ten month period. Themajor implication of raising interest rate on newborrowings is that it would trigger a fall in themarket prices of the old loans which are pegged atthe old (lower) interest rates. The price of the11.5% Government Loan 2010 dropped by 3% to 5% witheach coupon rate hike. If anyone has advanceinformation about these changes in the couponrates, he could make enormous amounts of risklessprofit by shortselling the old securities justbefore the announcement of rate hike and buyingback (covering his position) after the prices havefallen. Somebody who took a short position of Rs.500 crores before the coupon hike of September 1991

could have made a profit of Rs. 15 crores,practically overnight! Since several persons in theFinance Ministry and the RBI are likely to be awareof the impending hike in the coupon rate, thechance of leakage of this all important informationis always there. There have been severalallegations in this regard. However, it willprobably be very difficult to prove with any degreeof certainty that there was insider trading basedon information about coupon rate changes, becauseof the size of the market. With a daily tradingvolume of Rs. 3000 - 4000 crores, it would havebeen very easy for anyone to take a position (basedon inside information) of Rs. 500 or even Rs. 1000crores without anyone suspecting anything untoward.

Where has all the money gone?It is becoming increasingly clear that despite theintensive efforts by several investigatingagencies, it would be impossible to trace all themoney swindled from the banks. At this stage we canonly conjecture about where the money has gone andwhat part of the misappropriated amount would berecovered. Based on the result of investigationsand reporting so far, the following appear to bethe possibilities:A large amount of the money was perhaps investedin shares. However, since the share prices havedropped steeply from the peak they reached towardsend of March 1992, the important question is whatare the shares worth today? Till February 1992, theBombay Sensitive Index was below 2000; thereafter,it rose sharply to peak at 4500 by end of March

1992. In the aftermath of the scam it fell to about2500 before recovering to around 3000 by August1992. Going by newspaper reports, it appears likelythat the bulk of Harshad Mehta's purchases weremade at low prices, so that the average cost of hisportfolio corresponds to an index well below 2500or perhaps even below 2000. Therefore, Mehta'sclaim that he can clear all his dues if he wereallowed to do so cannot be dismissed without aserious consideration. Whether these shares are infact traceable is another question.It is well known that while Harshad Mehta was the"big bull" in the stock market, there was anequally powerful "bear cartel", represented byHiten Dalal, A.D. Narottam and others, operating inthe market with money cheated out of the banks.Since the stock prices rose steeply during theperiod of the scam, it is likely that aconsiderable part of the money swindled by thisgroup would have been spent on financing the lossesin the stock markets. It is rumoured that a part of the money was sentout of India through the havala racket, convertedinto dollars/pounds, and brought back as IndiaDevelopment Bonds. These bonds are redeemable indollars/pounds and the holders cannot be asked todisclose the source of their holdings. Thus, thismoney is beyond the reach of any of theinvestigating agencies.A part of the money must have been spent asbribes and kickbacks to the various accomplices inthe banks and possibly in the bureaucracy and inthe political system.

As stated earlier, a part of the money might havebeen used to finance the losses taken by thebrokers to window-dress various banks' balancesheets. In other words, part of the money that wentout of the banking system came back to it. In sum,it appears that only a small fraction of the fundsswindled is recoverable.

Impact of the ScamThe immediate impact of the scam was a sharp fallin the share prices. The index fell from 4500 to2500 representing a loss of Rs. 100,000 crores inmarket capitalization. Though one may be tempted toblame the steep decline in prices on the scam, wethink that the reason for this fall was not scamdirectly. Purely technically speaking, scam justresulted in withdrawal of about Rs. 3,500 croresfrom the market, which for a market of the size ofRs. 250,000 crores (at an index level of 4500) is avery small amount, andtherefore should have little impact on the prices.There were however two major reasons for the fall,both related to the government's knee jerk responseto the scam. First was the phenomenon of taintedshares which created panic in the market and secondwas the perceived slow down of the reform processwhich destroyed the very foundation on which theboom was based. We now take a look at both thesefactors. The government set up a special court andpromulgated an ordinance with several draconianprovisions to deal with the scam. Sections (3) and(4) of the ordinance attached the properties of allindividuals accused in the scam and also voided alltransactions that had at any stage been routed

through them after March 31, 1991. Since theaccused were active brokers in the stock markets,the number of shares which had passed through theirhands in the last one year was colossal. All theseshares became "tainted" shares, and overnight theybecame worthless pieces of paper as they could notbe delivered in themarket. Genuine investors who had bought theseshares well before the scam came to light and evengot them registered in their names found themselvesbeing robbed by the government. This resulted in achaotic situation in the market since no one wascertain as to which shares were tainted and whichwere not. The government's liberalization policiescame under severe criticism after the scam, withHarshad Mehta and others being described as theproducts of these policies. Bowing to the politicalpressures and the bad press it received during thescam, the liberalization policies were put on holdfor a while by the government. The SecuritiesExchange Board of India (SEBI) postponedsanctioning of private sector mutual funds.implementation of some aspects of the NarasimhamCommittee recommendations on the banking systemwere also delayed. Some question marks aroseregarding privatization as the chairman of thecommittee looking into this ended up in jail oncharges of involvement in the scam.The much talked about entry of foreign pensionfunds and mutual funds became more remote thanever. The Euro-issues planned by several Indiancompanies were delayed since the ability of Indiancompanies to raise equity capital in world marketswas severely compromised.

Policy Responses RequiredIt is clear that the government, the RBI and thecommercial banks are as much accountable as thebrokers for the scam. The brokers were encouragedand abetted by the banks to divert funds from thebanking system to the stock market. The RBI toostands indicted because despite knowledge aboutbanks over-stepping the boundaries demarcatingtheir arena of operations, it failed to reign themin. The looting was done with active connivance andsometimes full knowledge of the very individualswho were supposed to guard against such apossibility. What has been the response of thegovernment so far and what needs to be done toensure that such scams do not recur in the future?The response of any government to a scam of thiskind would have three main facets:1. Discover and punish the guilty. This task hasbeen entrusted to the Central Bureau ofInvestigation (CBI) and to the Joint ParliamentaryCommittee (JPC). A special court has also been setup to facilitate speedy trial.2. Recover the money. The draconian provisions ofthe Ordinance for attachment of property andvoiding of transactions with the consequentcreation of "tainted" shares were attempts in thisdirection.3. Reform the system. The government's response sofar has consisted of measures like banning of RFdeals and going slow on liberalization.There cannot be two opinions on the need foridentifying and punishing the guilty. The principal

objective behind punishing the offenders is more todeter future offenders. However, the governmentmust ensure that not only the obviously guilty (thebrokers) but also the not so obviously guilty (thebank executives, the bureaucrats and perhaps thepoliticians) are identified and brought to book.Investigations of this kind are necessarily timeconsuming and expensive, but they have to be gonethrough so that the credibility of the system isrestored. A rule of thumb which is often quotedthroughout the world is that investigation of anyfraud will cost as much as the magnitude of thefraud itself. One can, therefore, expect the realcosts of the scam investigation to be of the orderof a couple of thousand crores at least.

MAJOR FINANCIAL SCAMS THAT SHOCKED THEMARKETS

1. Roop Bhansali scam (1995)

Chain Roop Bhansali collected money from the public through mutual funds, fixed deposits anddebentures.

He also raised funds through non-existent companies and transferred the money to shell companies or others who invested with him.The scam came to light when he could notraise more money.

Businessman Chain Roop Bhansali invited investments in hisfinancial outfits CRB capital Markets,CRB Share CustodialServices between 1992 and 1996,later transferring the money to

fictious companies.CRB Capital Markets raised Rs.176 crore,CRB Mutual Funds Rs.230 crore and fixed deposits earned himRs.180crore.He also raised around Rs.900 crore frommarkets.Bhansali would pay the interest on investments byborrowing from the market,but he went bust in the 1995 stockmarket crash and busted in turn.

 

The Bhansali scam resulted in a loss of over Rs 1,200 crore (Rs12 billion).He first launched the finance company CRB CapitalMarkets, followed by

 

CRB Mutual Fund and CRB Share Custodial Services. He ruled like financial wizard 1992 to 1996 collecting money from the publicthrough fixed deposits, bonds and debentures. The money wastransferred to companies that never existed. CRB Capital Marketsraised a whopping Rs 176 crore in three years. In 1994 CRB MutualFunds raised Rs 230 crore and Rs 180 crore came via fixeddeposits. Bhansali also succeeded to rise about Rs 900 crore fromthe markets.

 

However, his good days did not last long, after 1995 he receivedseveral jolts. Bhansali tried borrowing more money from themarket. This led to a financial crisis.  It became difficult forBhansali to sustain himself. The Reserve Bank of India (RBI)refused banking status to CRB and he was in the dock. SBI was oneof the banks to be hit by his huge defaults.

2.Securities Scam(1992):

In April 1992,a shortfall in the Governmentsecurities held by the SBI caused panic onDalal street. He was known as the 'Big Bull'.However, his bull run did not last too long. Hetriggered a rise in the Bombay Stock Exchange

in the year 1992 by trading in shares at apremium across many segments.Investmentsrevealed that Rs.4000 crore was swindled in ascam involving top officers of manynationalised and foreign banks,as well asstockbrokers,bureaucrats and politicians.Stockmarkets shut down in panic and share pricesplummeted by over 40 percent,causing a loss ofmarket value to the tune of100,000crore.Harshad Mehta used ready forwarddeals between banks to secure short –term loansagainst government securities,earningcommissions worth of crores .He bribedofficials of Bank of Karad and the metropolitanCooperative bank to issue fake bank receiptswhich were sold to other banks who lent moneyto Mehta assuming that they were lent againstgovernment securities.

 

Taking advantages of the loopholes in thebanking system, Harshad and his associatestriggered a securities scam diverting funds tothe tune of Rs 4000 crore (Rs 40 billion) fromthe banks to stockbrokers between April 1991 toMay 1992.  Harshad Mehta worked with the NewIndia Assurance Company before he moved aheadto try his luck in the stock markets. Mehtasoon mastered the tricks of the trade and setout on dangerous game plan. Mehta has siphonedoff huge sums of money from several banks andmillions of investors were conned in theprocess. His scam was exposed, the markets

crashed and he was arrested and banned for lifefrom trading in the stock markets.  He waslater charged with 72 criminal offences. ASpecial Court also sentenced Sudhir Mehta,Harshad Mehta's brother, and six others,including four bank officials, to rigorousimprisonment (RI) ranging from 1 year to 10years on the charge of duping State Bank ofIndia to the tune of Rs 600 crore (Rs 6billion) in connection with the securities scamthat rocked the financial markets in 1992. Hedied in 2002,litigations still pending againsthim.

3.Satyam scam (2009)

Ramalinga Raju confessed he had cooked up the accounts of Satyam Computers and  that the cashand bank balances were inflated by Rs 5,040 crore (Rs 50.40 billion), after a failed attempt to acquire Maytas.

He was recently released on bail. Satyam Computers has since been acquired by Tech Mahindra.

The Satyam Computer swindle is reportedly thelargest corporate scam in India,exceeding Rs.24000crore.Comapany chairman Ramalinga Raju quit afterconfessing to the board and SEBI that he cooked thebooks.In Satyam’s balance sheet of Rs.2008,Rs.5040crore as cash assets were inflated to Rs.5361crore,earning a non-existent interest ofRs.376crore.Company Debt was stated Rs.490crore asagainst Rs.2651 crore.Based on a high marketvaluation,Raju and his confederates offloaded theirshares,making crores of rupees to buy land usingthe money to set up 374 infrastructure firms andeight investment companies.

 

The biggest corporate scam in Indias come from oneof the most respected businessmen.Satyam founder By

raju Ramalinga Raju resigned as its chairman afteradmitting to cooking up the account books.

 

His efforts to fill the "fictitious assets withreal ones" through Maytas acquisition failed, afterwhich he decided to confess the crime.

 

With a fraud involving about Rs 8,000 crore (Rs 80billion), Satyam is heading for more trouble in thedays ahead.

 

On Wednesday, India's fourth largest IT companylost a staggering Rs 10,000 crore (Rs 100 billion)in market capitalisation as investors reactedsharply and dumped shares, pushing down the scripby 78 per cent to Rs 39.95 on the Bombay StockExchange.

 

The NYSE-listed firm could also face regulatoraction in the US.

 

"I am now prepared to subject myself to the laws ofthe land and face consequences thereof," Raju saidin a letter to SEBI and the Board of Directors,while giving details of how the profits were

inflated over the years and his failed attempts to"fill the fictitious assets with real ones."

 

Raju said the company's balance sheet as ofSeptember 30 carries "inflated (non-existent) cashand bank balances of Rs 5,040 crore (Rs 50.40billion) as against Rs 5,361 crore (Rs 53.61billion) reflected in the books”.

 

3) Ketan Parekh Scam (2001): After the UTI wasbailed out by the government with Rs.4800 crore oftaxpayers  money ,it purchased huge bulks ofmanipulated sharefours from “Pentafour bull” KetanParekh .The 2001 stock market crash prompted theSEBI to inspect the books of Parekh.The CBIarrested him on charges of defrauding The Bank OfIndia of about $30million.As hundreds went bankruptand eight investors committed suicide,the marketslost Rs.1,15,000 crore to the scam.

 

Ketan Parekh followed Harshad  Mehta's footsteps toswindle crores of rupees from banks. A charteredaccountant he used to run a family business, NHSecurities. Ketan however had bigger plans in mind.He  targeted  smaller exchanges like the AllahabadStock Exchange and the Calcutta Stock Exchange, and

bought shares in fictitious names. His dealingsrevolved around shares of ten companies likeHimachal Futuristic, Global Tele-Systems, SSI Ltd,DSQ Software, Zee Telefilms,  Silver line,  pent media  Graphics and Satyam Computer (K-10scripts). 

 

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

 

According to RBI regulations, a broker is allowed aloan  of only Rs 15 crore (Rs 150 million). Therewas evidence of price rigging in the  scripts  ofGlobal Trust Bank, Zee Telefilms, HFCL, LupinLaboratories, Aftek Infosys and Padmini Polymer.

 5)Telgi Scam (1991): He paid for his owneducation at  Sarvodaya Vidyalaya by sellingfruits and vegetables on trains. He is todayfamous (or infamous) for being he man behindone of  The Telgi case is another big scamthat rocked India. The fake stamp racketinvolving Abdul Karim Telgi  was exposed in2000. The loss is estimated to be Rs 171.33crore (Rs 1.71 billion), it was initially

pegged to be Rs 30,000 crore (Rs 300 billion), which was later clarified by theCBI as an exaggerated figure. In 1994, AbdulKarim Telgi acquired a stamp paper licensefrom the Indian government and began printingfake stamp  papers. Telgi  bribed to get intothe government security press in  Nasik  andbought special machines to print fake stamppapers. Telgi's networked spread across 13states involving 176 offices, 1,000 employeesand 123 bank accounts in 18cities.

 

Counterfeiter Abdul Karim Telgi printed fakestamp paper and appointed 300 agents to sellthem in bulk in banks,foreigninvestors,insurance companies and stockmarket players,earning around 200 crores amonth.The Telgi scandal had politicalimplications;a narco test allegedly revealedthe involvement of Maharashtra politicalleaders like chhagan bhujbal.On june 28,2007Telgi was awarded 13 years of Rigorousimprisonment and fined Rs.202 crore alongwith his 42 accomplices.

2G spectrum scamThe 2G spectrum scam was a scam involving politicians and government officials in India illegally undercharging mobile telephony companies for frequency allocation licenses, which they wouldthen use to create 2G spectrum subscriptions for cell phones. The shortfall between the money collected and the money that the law mandated to becollected is estimated to be 1766.45 billion (US$28 billion), as valued by the Comptroller and Auditor General of India based on 3G and BWA spectrum auction prices in 2010.[1] However, the exact loss is disputed. In a chargesheet filed on 2April 2011 by the investigating agency, Central Bureau of Investigation (CBI), the loss was pegged at 309845.5 million (US$5.0 billion)[2] whereas on 19 August 2011 in a reply to CBI, Telecom Regulatory Authority of India (TRAI) said that the government gained over 30 billion (US$480 million)by giving 2G spectrum Similarly Kapil Sibal, the Minister of Communications & IT, claimed in 2011, during a press conference, that "zero loss" was caused by distributing 2G licenses on first-come-first-served basis. It has to be pointed out, however, that "zero loss" can simply mean that frequencies were not sold for less than cost. The phrase indicates nothing about whether the sale wasa scam.

All the speculations of profit, loss and no-loss were put to rest on 2 February 2012 when the Supreme Court of India delivered judgement on a

public interest litigation (PIL) which was directlyrelated to the 2G spectrum scam. The Supreme Court declared allotment of spectrum as "unconstitutionaland arbitrary" and quashed all the 122 licenses issued in 2008 during tenure of A. Raja (then minister for communications & IT from 2007 to 2009)the main official accused in the 2G scam case. The court further said that A. Raja "wanted to favour some companies at the cost of the public exchequer"and "virtually gifted away important national asset."The "zero loss theory" was further demolishe on 3August 2012 when as per the directions of the Supreme Court, Govt of India revised the base pricefor 5 MHz 2G spectrum auction to 140 billion (US$2.2 billion), which roughly gives the value of spectrum to be around 28 billion (US$450 million) per MHz that is close to the CAG's estimate of 33.5 billion (US$540 million) per MHz.

The original plan for awarding licences was to follow a first-come-first-served policy to applicants. A. Raja manipulated the rules so that the first-come-first-served policy would kick in – not on the basis of who applied first for a licensebut who complied with the conditions.] On 10 January 2008, companies were given just a few hoursto provide their Letters of Intent and cheques. Those allegedly tipped off by Raja were waiting with their cheques and other documents. Some of their executives were sent to jail along with the minister

In 2011, Time magazine listed the scam at number two on their "Top 10 Abuses of Power" list (just behind the Watergate scandal).

Background

India is divided into 22 telecom zones, with 281 zonal licenses in the market.[13] In 2008, 122 new second generation (2G) Unified Access Service (UAS) licenses were given to telecom companies at the 2001 price and on a first-come-first-serve basis. As per the chargesheet filed by the Central Bureau of Investigation (CBI), several rules were violated and bribes were paid to favour certain firms while awarding 2G spectrum licenses. The audit report of Comptroller and Auditor General of India (CAG) says that several licenses were issued to firms with no prior experience in the telecom sector or were ineligible or had suppressed relevant facts.[14] In November 2007 Prime Minister of India Dr Manmohan Singh had written a letter to telecom minister A. Raja directing him to ensure allotment of 2G spectrum in a fair and transparent manner and to ensure license fee was properly revised. Raja wrote back to the prime minister rejecting many of his recommendations.[15]

In the same month Ministry of Finance wrote a letter to Department of Telecommunications (DOT) raising concerns overthe procedure adopted by it[15] but DOT went ahead with its plan of giving 2G licenses. It advanced the cut-off date to 25 September, from 1 October 2007.[15] Later on the same day,DoT posted an announcement on its website saying those who apply between 3:30 and 4:30 pm on that very day would be issued licences in accordance with the said policy.[15] Companies like Unitech and Swan Telecom got licenses withoutany telecom experience.[16]

Swan Telecom got the license even though it did not meet eligibility criteria.[16] Swan got license for 15.37 billion(US$250 million) and then it sold 45% stake to UAE-based company Etisalat for 42 billion (US$670 million).[16] Unitech Wireless, a subsidiary of the Unitech Group, got

license for 16.61 billion (US$270 million) and later sold 60% stake for 62 billion (US$990 million) to Norway-based company Telenor.[16]

Following is the list of companies who received 2G licenses during the tenure of A. Raja as Telecom Minister.[17][18] (The licenses were later quashed by Supreme Court)

Name ofCompany

Telecom regionsfor which

license wasgranted

Numberof

license

granted

Remarks

Adonis Projects Pvt. Ltd.

Haryana, Himachal Pradesh, Jammu &Kashmir, Punjab,Rajasthan, UttarPradesh (East)

6

Adonis Projects, NahanProperties, Aska Projects, Volga Properties, Azare Properties & Hudson Properties were acquired by Unitech. Unitech Infrastructureand Unitech Builders &Estates were already subsidiaries of Unitech Group. So in 2008 Unitech had 22 2Glicenses. Later in thesame year Norway basedcompany Telenor boughtmajority stake in the telecom company from the Unitech Group. Nowit offers services under Uninor brand holding 22 pan India

Nahan Properties Pvt. Ltd.

Assam, Bihar, North East, Orissa, Uttar Pradesh (East), West Bengal

6

Aska Projects Ltd.

Andhra Pradesh, Kerala, Karnataka

3

Volga Properties Pvt. Ltd.

Gujarat, Madhya Pradesh, Maharashtra

3

Azure Properties Ltd.

Kolkata 1

licences.

Hudson Properties Delhi 1

Unitech Builders & Estates Pvt.Ltd.

Tamil Nadu (including Chennai)

1

Unitech Infrastructures Pvt. Ltd.

Mumbai 1

Loop TelecomPvt. Ltd.

Bihar, Gujarat, Himachal, Pradesh, Kerala,Kolkata, Punjab,Rajasthan, UttarPradesh (East), Uttar Pradesh (West), West Bengal, Andhra Pradesh, Delhi, Haryana, Karnataka, Maharashtra, Odisha, Tamil Nadu (including Chennai), Assam,Jammu & Kashmir,Madhya Pradesh, North East

21

Datacom Solutions Pvt. Ltd.

Andhra Pradesh, Assam, Bihar, Gujarat, Haryana, Himachal Pradesh, Jammu &Kashmir,

21

Operates under brand name Videocon Telecommunications Limited

Karnataka, Kerala, Kolkata,Madhya Pradesh, Maharashtra, North East, Odisha, Rajasthan, TamilNadu (including Chennai), Uttar Pradesh (East), Uttar Pradesh (West), West Bengal, Delhi, Mumbai

Shyam Telelink Limited

Madhya Pradesh, Kerala, Kolkata,Punjab, Uttar Pradesh (East), Uttar Pradesh (West), West Bengal, Andhra Pradesh, Delhi, Haryana, Karnataka, Maharashtra, Odisha, Tamil Nadu (including Chennai), Assam,Jammu & Kashmir,North East

17

Shyam Telelink Limited& Shyani Telelink Limited operate together with their combined 21 licenses. During late 2008 Russia based group Sistema bought majority stake in the telecom company and now they operate underbrand name MTS India.

Shyani Telelink Limited

Mumbai, Bihar, Gujarat, Himachal Pradesh

4

Swan TelecomPvt. Ltd.

Andhra Pradesh, Gujarat, Haryana,

13In 2008, Swan Telecom merged itself with Allianz Infratech (P)

Karnataka, Kerala, Maharashtra, Punjab, Rajasthan, TamilNadu (including Chennai), Uttar Pradesh (East), Uttar Pradesh (West), Delhi, Mumbai

Ltd. During late 2008 Abu Dhabi's Etisalat bought about 45 percent of the companyand renamed it to Etisalat DB Telecom

Allianz Infratech (P) Ltd.

Bihar, Madhya Pradesh 2

Idea Cellular

Assam, Punjab, Karnataka, Jammuand Kashmir, North East, Kolkata, West Bengal, Odisha, Tamil Nadu (including Chennai)

9

Idea Cellular bought Spice Communications Ltd. in 2008 for an amount of 27 billion (US$430 million).[21] So out of 122 spectrumlicenses sold in 2008 Idea Cellular owns 13 licenses. However of the 13 licenses, only 7 of the licenses are in use by the company and the rest are overlapping licenses.[22]

Spice Communications Ltd.

Delhi, Andhra Pradesh, Haryana, Maharashtra

4

S Tel

Assam, Jammu andKashmir, Odisha,North East, Bihar, Himachal Pradesh

6

In January 2009, Bahrain Telecommunications signed a deal with S Tel to buy 49% shares in S Tel for $225 million. C

Sivasankaran owns the remaining (51%) share.[23][24] In May 2009, Sahara Group bought 11.7% stake in S Tel [25]

Tata Teleservices

Jammu and Kashmir, Assam, North East

3

In late 2008 promotersof Tata Teleservices sold 26% equity stake to a Japanese telecom giant NTT Docomo for about 130.7 billion (US$2.1 billion) or anenterprise value of 502.69 billion (US$8.0 billion).[26]

Licenses quashed

On 2 February 2012 Supreme Court of India delivered judgement on petitions filed by Subramanian Swamy and Centrefor Public Interest Litigation (CPIL) which had challenged allotment of 2G licenses granted in 2008.[211] The Supreme Court quashed all 122 spectrum licences granted during the tenure of former communications minister A Raja.[211] and described the allocation of 2G spectrum as "unconstitutionaland arbitrary".[212] The bench of Justice GS Singhvi & JusticeAK Ganguly imposed fine of 50 million (US$800,000) on Unitech Wireless, Swan telecom and Tata Teleservices and 5 million (US$80,000) fine on Loop Telecom, S Tel, Allianz Infratech and Sistema Shyam Tele Services Ltd.[4] The SupremeCourt's ruling said the current licences will remain in place for four months, in which time the government should decide fresh norms for issuing licences.[213]

The Supreme Court said in its order that then telecom minister A. Raja "wanted to favour some companies at the cost of the public exchequer" and listed seven steps he tookto ensure this happened.[4][214] According to the Supreme Courtof India the seven steps were :

1. After taking over as telecom minister, Raja directed that all applications received for UAS licences should be kept pending till receipt of the Trai's recommendations.[4][214]

2. The recommendations made by Trai on 28 August 2007, were not placed before the full Telecom Commission which would have included the finance secretary. The notice of the meeting of the Telecom Commission was notgiven to any of the non-permanent members though Trai'srecommendations for allocation of 2G spectrum had serious financial implications and it was therefore necessary for DoT to take the finance ministry's opinion under the Government of India (Transaction of Business) Rules, 1961.[4][214]

3. The DoT officers who attended the Telecom Commission meeting held on 10 October 2007, had no choice but to approve Trai's recommendations, since they would otherwise have "incurred" Raja's "wrath".[4][214]

4. Since Cabinet had approved recommendations made by the Group of Ministers, the DoT had to discuss the issue ofspectrum pricing with the finance ministry. But, since Raja knew that the finance secretary had objected to the allocation of 2G spectrum at rates fixed in 2001, he did not consult the finance minister or other officials.[4][214]

5. Raja brushed aside the law minister's suggestion that the matter should be placed before the empowered group of ministers. Also, within hours of the receipt of the suggestion made by the PM in his letter dated 2 November 2007, that keeping in view the inadequacy of spectrum, transparency and fairness should be maintained in allocation of the spectrum, Raja rejectedit saying that it would be unfair, discriminatory,

arbitrary and capricious to auction spectrum to new applicants because it would not give them a level-playing field. He also introduced a cut-off date of 25 September 2007, for considering applications though only the previous day a DoT press release had said 1 October 2007, would be the last date. This arbitrary action of Raja "though appears to be innocuous was actually intended to benefit some of the real estate firms who did not have any experience in dealing with telecom services and who had made applications only on 24 September 2007, i.e. one day before the cut-off datefixed by the C&IT minister on his own".[4][214]

6. The cut-off date of 25 September 2007, decided by Raja on 2 November 2007, was not made public till 10 January2008, and the first-come-first-served principle followed since 2003 was changed by him at the last moment through a press release dated 10 January 2008. "This enabled some of the applicants, who had access either to the minister or DoT officers, get bank draftsprepared towards performance guarantee of about Rs 16 billion".[4][214]

7. "The manner in which the exercise for grant of LoIs to the applicants was conducted on 10 January 2008 leaves no room for doubt that everything was stage managed to favour those who were able to know in advance change inthe implementation of the first-come-first-served policy." As a result, some firms which had submitted applications in 2004 or 2006 were pushed down in the priority and those who had applied between August and September 2007 succeeded.[4][214]

Telecom companies affected by cancellation of licenses

The table below shows list of companies whose license were cancelled

Name of company Parent groupNumber oflicensescancelled

UninorJoint venture between Unitech Group of India and Telenor of Norway Unitech Group

22

Sistema Shyam TeleServices Limited, now MTS India

Joint venture between Shyam group of Indian and Sistema of Russia

21

Loop Mobile formerly BPL Mobile

Owned by Khaitan Holding Group 21

Videocon Telecommunications Limited

Owned by Videocon group of India 21

Etisalat-DBJoint venture between Swan Telecom of India and Etisalat ofUAE

15

Idea Cellular

Aditya Birla Groupof India (49.05%), Axiata Group Berhad ofMalaysia (15%) & Providence Equity(10.6%)of USA

13

S Tel

Joint venture between C Sivasankaran of India and Batelco of Bahrain. After the Supreme Court's decision Batelcosold its 42.7% stake to C Sivasankaran company Sky City Foundation Ltd. for $175 million[217]

6

Tata Teleservices Owned by Tata Group of India 3Response to scam

Opposition demands Joint Parliamentary Committee (JPC) – As soon as the Indian media started citing Comptroller and Auditor General of India's report which pegged the loss at

1.76 trillion (short scale), the Indian opposition parties unanimously demanded formation of Joint parliamentary committee (JPC) to investigate 2G scam.[233][234] However theIndian government rejected the demand of opposition.[234] Later when the winter session ofparliament began on 9 November 2010, oppositionagain pressed for (JPC) but once again the demand was rejected.[234] The opposition's demandfor (JPC) gained further momentum when Comptroller and Auditor General of India's report was tabled in Parliament on 16 November 2010.[235] The opposition blocked parliament proceedings and again pressed for JPC.[236] With Govt again rejecting the demand there was logjam in parliament.[237] Speaker of the Lok Sabha, Meira Kumar tried to break the logjam but her efforts didn't bear any fruit.[238] Finally the winter session of parliament concluded on 13 December 2010 . The plan was tointroduce 22 new bills, take up 23 pending bills for consideration and passing and withdraw three bills but that didn't happen because the parliament was allowed to function for only 9 hours.[239] In February 2011, after resisting the Opposition demand for over three months, the government finally agreed to constitute a Joint Parliamentary Committee (JPC) to probe the 2G spectrum allocation issue. The government announced it formally on 22 February 2011.[240] On 24 July 2012, JPC took CBI to task for the leniency shown to PM, AG, Dayanidhi Maran and Chidambaram and reluctance to investigate their role in 2G Spectrum scam.

[241] Recently after questioning former telecom minister Dayanidhi Maran, his brother Kalanithiand the head of Maxis Communications, CBI alleged that Maran brothers have accrued illegal gratification of Rs 5.50 billion by purchase of Sun Direct TV share at highly "inflated prices".[242]

Jayalalitha accuses M. Karunanidhi – In early November 2010 Jayalalithaa accused the state chief minister M Karunanidhi of protecting A. Raja from corruption charges and called for A. Raja's resignation.[243] By mid November A. Raja resigned.[244]

CAG issues show-cause notices – In mid Novemberthe comptroller Vinod Rai issued show-cause notices to Unitech, S Tel, Loop Mobile, Datacom(Videocon), and Etisalat to respond to his assertion that all of the 85 licenses granted to these companies did not have the up-front capital required at the time of the applicationand were in other ways illegal.[245] Some media sources have speculated that these companies will receive large fines but not have their licenses revoked, as they are currently providing some consumer service.[245]

Internal appraisal after Prime Minister's criticism – In June 2011, the prime minister Manmohan Singh criticised the CAG for commenting on policy issues. He also warned CAG"to limit the office to the role defined in theconstitution."[246] After prime minister's criticism, the CAG conducted a "rigorous internal appraisal" and stood by its findings,

also citing additional crucial events to corroborate them. The CAG reiterated that therewas "an undeniable loss to the exchequer", the calculation of which was based upon 3 estimates– 3G auctions, Swan and Unitech transactions. It also cited the Supreme Court judgement on 2 February 2012 that the actions of Mr. Raja and officers of the Department of Telecom were "wholly arbitrary, capricious and contrary to the public interest, apart from being violativeof the doctrine of equality. The material produced for the quote showed that the Ministerfor C&IT wanted to favour some companies at thecost of the public exchequer." The CAG also said that its estimation of loss of 1.76-lakh crore was justified as the TRAI's collation of reserve price for 2G spectrum as of May 2012 was approximately same as the calculation in CAG report of November 2010 on 2G scam. It alsohighlights that the TRAI had recommended a reserve price of 2G spectrum of Rs. 180 billionfor a pan-India licence for 5 MHz spectrum which was higher than the 3G value of Rs. 167.50 billion for 5 MHz used by the CAG for arriving at a [loss] figure of 1,760 billion. It concluded by saying that it was only examining the "implementation of policy" and that the policy making was government's prerogative.[247]

ConclusionWhile many improvements have been made to fraud prevention tactics over the years, significant research advances are needed to understand and combat fraud.  The development of these research advancements, and the multi-disciplinary initiative that will help turn academic achievements into real-world improvements, is the goal of this center.  It is our hope that this interdisciplinary hub will facilitate theintellectual and practical connections necessary for more groundbreaking work in the study and prevention of financialfraud.