Professional Documents
Culture Documents
Submitted to :
Explore various laws governing Indian Compare and contrast different regulatory and banking
financial system laws.
Explore various banking operations on Compare and contrast how banks can avoid risk and
lending. make profits.
Explore various avenues of the foreign Compare and contrast investments in to the Indian
investment in India. economy.
Explore various means mergers and Identify legal and accounting procedures in mergers.
acquisition.
PASS
A pass grade is achieved by meeting all the requirements defined in the assessment
criteria for the unit.
MERIT
DISTINCTION
In addition, to earn this grade the assignment must be meticulously planned and students
must be able to demonstrate an ability to anticipate and solve complex tasks in relation to
the case study. Students must demonstrate considerable research over and above class
materials and synthesis information accurately.
Name of Verifier :
Ketan Parekh is a Mumbai based share and stock broker. He is from a well
to do share-brokerage based family. He was involved in the shares scam of
the year 2000/01.
The study by SEBI found that the flow of funds originating from Ketan,
when paired with securities market transactions of connected clients leads to
the possibility that these trades were executed to confuse the funds trail and
to integrate the money originating from the banned stock broker into the
system of banking.
Earlier, SEBI had Ketan and 17 other entities from participating in the
market following a study into purchase sale and dealing in the shares of
companies like HFCL, Zee Telefilms, Adani Exports, Ranbaxy and Aftek
Infosys between October 1999 and March 2001.
In its time order, SEBI banned 26 entities and persons, including Maruti
Securities Limited and asked them to reply in 15 day's time. The government
had set up the Joint Parliamentary Committee (JPC) to study the securities
scam that hit the stock market during the year 1999-2001.
According to SEBI, the starting point was ‘routine market surveillance’ that
revealed set trades in five scripts. It also had information from the IT
department on Ketan Parekh’s source of funds which trailed back to certain
entities.
SEBI’s investigation showed that these entities built up large volumes in the
five scripts chosen for investigation; strangely enough, they often made
losses on their transactions, but continued to trade. SEBI has opinion that
these independently incurred losses have a secondary motive that needs to be
separately investigated by the appropriate agency. It seems to have specific
concerns relating to money laundering to the enforcement and IT
investigators.
SEBI also found that the ‘connected entities’ or fronts used by Ketan for his
transactions often sold shares without having them in their possession. They
subsequently obtained the shares in time for delivery through off-market
transactions through other ‘connected entities’ within the circle of operators.
Evidence of Ketan Parekh’s massive market activities was his ability to pay
back well over Rs325 crore to the Gujarat-based Madhavpura Mercantile
Cooperative Bank (MCCB) which had collapsed and caused thousands of
depositors to lose money when he pump off Rs880 crore to fund his market
misbehavior in the year 1999-2000.
One of the best kept secrets is the action taken against those involved in the
scam of 2000, which led to large-scale losses, the drop of two banks,
Madhavpura Merc-antile Cooperative Bank (MMCB) and Global Trust
Bank (GTB) and split the giant Unit Trust of India (UTI) into two, after
pushing it to the brink of a collapse.
Whether the BSE directors had used their recourse to price sensitive
information or not for transactions in the market, having had direct access to
the data was in direct violation of SEBI rules, observes Oommen A. Ninan.
WHEN THE Sensex crossed the dizzy 5000 mark in October 1999, Bombay
Stock Exchange (BSE) brokers literally took to the terrace of Jeejebhoy
Towers and released balloons. The celebration also marked their ``bullish
sentimentalism'' and showed lack of market prudence - that what goes up has
to come down; that the market is driven by its own dynamics.
The excitement indicated on Budget day by a sharp rise in the Sensex was
rather on the high side. There is actually nothing much in the Budget to
promote savings. On the contrary, savings have been discouraged by a drop
in interest rates.
There has been a flow of money from banks to capital market in recent
months. Private sector banks are prominent among them, including the
Global Trust Bank (GTB). However, a reversal of banks' exposure to capital
market recommended by the RBI-SEBI committee in September last year is
not a solution. What is essential is that the banks should have expertise in
judging the risk of the business as well as the organisational ability to
administer such schemes.
Moreover, the prima facie evidence in price rigging of GTB shares raises
doubts over the regulators' surveillance mechanism. The RBI was aware of
some unusual price movements in GTB share prices in November last year
itself and the SEBI took another three months to inform the RBI that it had
found evidence of price rigging in GTB share prices. The true measure of
regulatory competence is the ability of the regulators to take quick corrective
action. Further, the GTB's loan to Mr. Parekh without collateral is another
issue that raises questions on the RBI's role as a regulator. Regulation and
supervision and the quality of on and off-site supervision of the RBI and the
SEBI should be strengthened and they should be delinked from the Finance
Ministry with more autonomy and powers.
The financial crisis in Asia in 1997 has led to a fundamental re- think about
the way in which financial markets should be governed. While other Asian
countries are converging towards an international set of governance best
practices, India is still lagging behind in terms of quality and speed of
implementation. In a globalize economy, countries which fail to base the
financial liberalization on strengthened economic policies and institutional
structures are bound to suffer financial crisis.
Ketan Parekh was threatening to sue the Bank of India for defamation,
because it complained about the bouncing of Rs 1.3-billion pay orders issued
to the broker by the Madhavpura Mercantile Cooperative Bank. He seemed
to suggest there is nothing more that the authorities would be able to pin
against him.
However, since there was no other specific query about further repatriation
of funds, SEBI is silent about other flight of capital through the OCB
window. However, it does admit there are clear inter-linkages between the
OCBs and that some of them have issued participatory notes abroad to route
funds to India. It also says Parekh's entities have conducted many of their
trading transactions.
The process of ferreting out information on his portfolio is slow and tedious
because SEBI has to depend on 'third party sources' such as banks,
depositories and stock exchanges and because 'Ketan Parekh is not co-
operating with the investigation.' Yet, three of the companies identified by
SEBI where he held over five per cent are Aftek Infosys, Shonkh
Technologies and Global Trust Bank. According to SEBI, these companies
had omitted to inform stock exchanges about his holding having crossed five
per cent. It is not quite clear if the broker continues to hold these shares and
what would be the value of this holding.
• NEDUNGADI BANK: After the Ketan Parekh bubble burst in 2001, the
RBI suddenly swung into action and began to go through Nedungadi’s
books with a toothcomb. Punjab National Bank took over the bank that was
up for sale after RBI initiated the move to weed out the broker promoter
Rajendra Bhantia from the bank.
• GLOBAL TRUST BANK: Ramesh Gelli’s search for high returns took
the new generation private bank to the stock market, where its involvement
in the speculative activities associated with the Ketan Parekh scam and its
high exposure soon resulted in substantial losses. The bank’s promoters
attempted to merge the entity with the UTI Bank, and in the process the
share price was rigged so that the promoters could make a profit despite the
mess in the the bank. It was clear that unless some drastic measures were
taken, the bank was heading for closure. This led to the exit of Ramesh Gelli
in 2001. Eventually, Oriental Bank of Commerce (OBC) took over the
troubled bank.
While the latest fraud may not be on the scale of the scams involving
Harshad Mehta (around Rs.5,000 crores) or Ketan Parekh (Rs.800 crores),
what is alarming is that this time the scammers' tentacles have spread to the
Public Provident Fund (PPF) - the repository of the savings of millions of
ordinary Indians. More than Rs.92 crores is missing from the Seamen's
Provident Fund, which has 26,500 members. Worse still, the regulatory
authorities admitted that they were aware of the mess and gave various
excuses for not having taken timely action.
Global Trust Bank was on the verge of getting merged with UTI Bank to
become one formidable entity in the Indian banking sector, when the Great
Crash of March 2001 occurred, and along with stock prices, the marriage too
came unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs 6,198.85 crore
as on 31 March 2000.)
The report was believed to have noted that there was evidence that Parekh
was involved in manipulating the stock prices of GTB prior to the merger
announcement on 20 January 2001, and a swap ratio of 2.5 shares of UTI
Bank for 1 share of GTB, two days later.
However, this time, SBI’s losses are restricted to about Rs 40 crore, lent
against pay orders issued by Ahmedabad based Classic Co-operative Bank.
According to bank analysts polled by Capital Market, this is "loose change"
for the bank of its size.
Bank of India
Of the five banks hit by pay order defaults, Bank of India has unfortunately
been the worst hit. It cashed Rs 137-crore fictitious pay orders issued by the
Ahmedabad based Madhavpura Bank to arrested broker Ketan Parekh. The
banking sector is estimated to have taken a hit of more than Rs 1,000 crore
due to the pay order scam indulged in by many Gujarat co-operative banks.
The Bombay Stock Exchange witnessed one of the worst bear runs leading
to a 177-point crash on 2 March 2001.
On 23 May, the BSE announced the launch of trading in index options in the
first week of June, based on the Europian style. For this purpose, the
exchange has joined hands with the Chicago Mercantile Exchange to adopt
its system of calculating margin requirements and managing risk, known as
Standard Portfolio Analysis of Risk (SPAN).
Co-operative banks
3. What effect did this scam have on the stock markets? Carry out
a risk return analysis of the portfolio held by KP. What would
this portfolio be like in today’s stock market if an individual
investor had invested 100 shares in the same companies and had
kept it as an investment?
Global, Himachal and DSQ Software will not fit in the universe of an
institutional investor, but for Parekh's presence. The country's largest mutual
fund, UTI's Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the
portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and
FINANCIAL PROCEDURES
To define the financial systems used by An Organisation and how they relate
to all areas of the organization (sometimes referred to as Financial Standing
Orders).
Budget holders can place orders for goods or services within their budget
areas, subject only to cash-flow restraints. All orders of £1,000 or more must
be authorized by the budget holder, except for specific areas of expenditure
where written procedures have been agreed (e.g. book printing). Under
£1,000, the budget holder may delegate all ordering as appropriate. Budget
holders will discuss with the Financial Controller appropriate parameters,
plus maximum allowed deviations before the budget holder or senior
manager is brought in, which will be documented.
While claims for small items of expenditure may be made via petty cash (see
section 4), adequate supporting documentation, preferably receipts must be
obtained. Large items requiring cash payment must be checked with Finance
before the arrangement is confirmed.
All invoices must be authorized for payment by the budget holder, although
the actual checking of details may be delegated. The authorizing department
is responsible for checking invoices for accuracy in terms of figures and
conformity with the order placed, that the services or goods have been
received, and following up any problems. Finance must be informed if there
are queries delaying authorization or if payment is to be withheld for any
reason.
Signatories will only be drawn from senior staff and Trustees, and any new
signatory must be approved by the Trustees before the bank is notified. All
cheques for £100 or over require two signatories. Cheque signatories should
check that the expenditure has been authorized by the appropriate person
before signing the cheque. Salary payments require the signature of the
Director, Company Secretary, Financial Controller or a member of the
Board of Trustees, plus one other.
Signatories will not sign cheques which are payable to themselves, or blank
cheques. Cheques should be filled in completely (with payee, amount in
words and figures, and date) before cheques are signed. The only acceptable
exception is that the amount can be blank as long as the cheque is endorsed
'Not more than £ ....'. Receipts for this type of expenditure must be returned
immediately.
4. Handling of cash
Petty cash will be topped up on the 'imp rest' system, where the amount
spent is reimbursed. It is intended for small items, up to £20. Anything over
this should be paid by cheque where possible. The imp rest has a balance
limit of £250. The petty cash balance will be reconciled when re-storing the
imp rest balance, or monthly if this is more frequent.
All cash collected from Finance will be signed for, and receipts will be
issued for all cash returned. Specific extra cash floats (for tills at events etc.)
should be arranged with the Financial Controller. The person signing for the
float is responsible for ensuring cash and receipts are returned as soon as
possible after the event etc. No further floats may be issued to that person, or
another person in the same department for a similar purpose, unless the
previous float has been accounted for.
Mixing money or receipts from different petty cash sources creates large
accounting problems. In a real emergency, where another cash float has to
be used for something, a clear record must be kept, and brought to Finance
Section's attention.
Any cash income will be banked via Finance, and not used for petty cash
expenditure. Such cash will be passed to Finance:
Payment will usually be made via the NatWest Autopay service, direct to
employees' bank account. The salary payment listings will be checked by the
Financial Controller. Salaries will be paid on the 28th of the month, or
nearest working day, apart from in December, when it will be the 23rd.
Pay scales and new posts/re-structuring are approved by the Director, and
are revised by March for implementation in April. The Board of Trustees
will set the Director's remuneration. Appointments to existing posts are the
responsibility of the appropriate Department Head (or Director for senior
positions).
Staff loans are not issued, but advances may be made against salary due, by
arrangement with Finance.
6. Income
Post opening (and control of cheques and cash in) will be subject to random
management checks. The process will be written down, so that there is a
clear standard for those doing the work regularly, and others covering or
checking.
7. Bank accounts
All income will be paid into the current accounts as soon as possible, not
less than once a week. The make up of each banking will be clearly
recorded, for later computer entry.
Proper accounting records will be kept. The accounts systems are based
around computer facilities, using Sage and Excel, but manual/paper records
will also be used if appropriate.
Petty cash and bank accounts will be reconciled at least monthly, and VAT
returns produced on the required quarterly cycle.
All vouchers entered into the computer system will be clearly initialed by
the person entering it, along with date and accounts reference. All
income/expenditure information will be recorded within three days. All
corrections and adjustments will be clearly noted in written ‘Journal’ giving
reasons for them, with supporting documentation where available.
Purchase Ledger, other cheque payments and banking sheets will be filed in
the appropriate reference order, with any supporting documentation. All
petty cash vouchers, cheque stubs etc. will be retained for audit and for
statutory purposes thereafter.
All fixed assets costing more than £250 (or such other level as may from
time to time be agreed by the trustees) will be capitalized in the accounts and
recorded in a fixed assets register. This register will record details of date of
purchase, supplier, cost, serial no. where applicable, description and in due
course details of disposal.
9. Budget setting
All budget holders will receive appropriate, regular reports of income and
expenditure against budget.
The Treasurer works in close co-operation with, and provides support and
advice to, the Financial Controller. Specific responsibilities are to:
• Guide and advise the Board in the approval of budgets, accounts and
financial statements, within a relevant policy framework.
• Keep the Board informed about its financial duties and
responsibilities.
• Advice the Board on the financial implications of An Organization’s
strategic plans and key assumptions included in management's
operational plan and annual budget.
• Confirm that the financial resources of An Organisation meet present
and future needs.
• Understand the accounting procedures and key internal controls, so as
to be able assure the Board of An Organization’s financial integrity.
• Ensure that the accounts are properly audited, that accepted
recommendations of the auditors are implemented, and meet the
auditor at least once a year.
• Formally present the accounts at the AGM, drawing attention to
important points.
• Monitor An Organization’s investment activity and ensure its
consistency with policies, aims, objectives and legal responsibilities
The Management team consists of Heads of This That and the Other,
Financial Controller, plus the Director. Each has responsibility for their
individual department's financial performance and ensuring that the
department complies with Financial Procedures. They will receive weekly
snapshots and monthly management accounts, keeping adequate records to
be in control between monthly reports. The Team will review finances
thoroughly at its monthly meetings.
The Financial Controller is the lead person for processing all changes and
exceptional items, and will assist the Treasurer in any financial matter
connected with the organization.
The Financial Controller will ensure that adequate security precautions are
taken to safeguard financial and other assets.
5. Analyze the Indian scenario of FII’s since then and its effect on
India as an investment destination for FIIs. Please explain with
relevant figures.
India is the second largest country in the world, with a population of over 1
billion people. As a developing country, until recently, however, India has
attracted only a small share of global Foreign Direct Investment (FDI) and
foreign institutional investment (FII) primarily due to government
restrictions on foreign involvement in the economy. But beginning in 1991
and accelerating rapidly since 2000, India has liberalized its investment
regulations and actively encouraged new foreign investment, a sharp
reversal from decades of discouraging economic integration with the global
economy. Foreign Institutional Investment (FII) is defined as “an investment
that is made to acquire a lasting interest in an enterprise operating in an
economy other than that of investor”.
5) For granting registration to the FII, SEBI should take into account the
track record of the FII, its professional competence, financial soundness,
experience and such other criteria that may be considered by SEBI to be
relevant. Besides, FII seeking initial registration with SEBI were be required
to hold a registration from the Securities Commission, or the regulatory
organization for the stock market in the country of domicile/incorporation of
the FII.
6) SEBI's initial registration would be valid for five years. RBI's general
permission under FERA to the FII would also hold good for five years. Both
would be renewable for similar five year periods later on.
7) RBI's general permission under FERA would enable the registered FII to
buy, sell and realize capital gains on investments made through initial corpus
remitted to India, subscribe/renounce rights offerings of shares, invest on all
recognized stock exchanges through a designated bank branch, and to
appoint a domestic Custodian for custody of investments held.
8) This General Permission from RBI would also enable the FII to:
a. Open foreign currency denominated accounts in a designated bank. (There
could even be more than one account in the same bank branch each
designated in different foreign currencies, if it is so required by FII for its
operational purposes);
b. Open a special non-resident rupee account to which could be credited all
receipts from the capital inflows, sale proceeds of shares, dividends and
interests;
c. Transfer sums from the foreign currency accounts to the rupee account
and vice versa, at the market rate of exchange;
d. Make investments in the securities in India out of the balances in the
rupee account;
e. Transfer repairable (after tax) proceeds from the rupee account to the
foreign currency account(s);
f. Repatriate the capital, capital gains, dividends, incomes received by way
of interest, etc.and any compensation received towards sale/renouncement of
rights offerings of shares subject to the designated branch of a bank/the
custodian being authorized to deduct withholding tax on capital gains and
arranging to pay such tax and remitting the net proceeds at market rates of
exchange;
g. Register FII's holdings without any further clearance under FERA.
Investment by FIIs has seen a steady growth since the opening of the
equity markets in September 1992. The share of FIIs in total FPI has
increased from 47% in 1993-94 to around 74% in 2001-2002. FIIs have also
acquired a significant presence in the Indian stock market. The share of their
trading in total turnover attained a high of almost 30% in October 2001. In
total market capitalization FIIs account for about 13% and they make about
50-60% of average daily deliveries on the stock market.