INDIA'S BIGGEST SECURITIES SCANDAL

WHAT IS CAPITAL MARKET SCAM?

CAPITAL MARKET ? The capital market is the market for securities, where companies and govt. can raise long term funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the bond market

It is basically fraud done in the Capital market with the investors by manipulating the facts in order to attain enormous profits.

ARCHITECT OF THE RS 50-BILLION SCAM HARSHAD MEHTA

Big bull of the trading floor Mehta was born on 29 July 1953 in a Gujarati Jain family

He briefly worked for New India Assurance Company, until he decided to trade in the Stock Market of BSE and [NSE].

CAREER
By 1990, Mehta rose to prominence in the stock market. He was buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid up to Rs. 10,000. When asked, he used the replacement cost theory as an explanation. He was alleged to have an expensive lifestyle. Through the second half of 1991 Mehta had earned the nickname of the Big Bull, because he was said to have started the bull run. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column.

THE GREAT INDIAN SCAM-1992 WHO IS THIS MAN? :

HARSHAD MEHTA-

Started his career with New India Assurance Co. Quit his job in 1981 to become a sub-broker. acted as sub broker for stock brokers J.L Shah and Nandalal Sheth Went on to become one the most successful broker The Rags to Riches Story, thereby earning the nick name of THE BIG BULL.
His favorite stocks included ACC Apollo Tyres Reliance Tata Iron and Steel Co. (TISCO) BPL Sterlite Videocon.

HOW HARSHAD MEHTA FINANCED HIS DEAL

ordinary broker to Big Bull Increased price of the ACC cement company from 200 to 9000 4400% rise. took advantage of the loopholes in the banking system

Bought shares for premium

Mechanisam
Ready forward deal ( RF)

bank to bank dealing Bank receipt issued fake BR without any gaurantee 1. Bank of karad (BOK) 2. Metropolitian co-operative bank (MCB )

THE END OF THE BULL STORY

Lifestyle (flashy cars & life like a celebrity) 31st December 2001 The Death Of The Bull Forever remembered as the Architect of the Rs.50 billion Scam Mehta was under judicial custody .Had heart ailment, at the age of 47

Market watchdog, SEBI had banned him for life from stock When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof. He knew that he would be accused if people came to know about his involvement in issuing cheque to Mehta. M J Pherwani of UTI also died in this scandal Other player with him was NIMESH SHAH ( STILL PLAYING )

WHERE DID THE MONEY GO

Spent on financing the stock markets losses of the Hiten Dalal/ Narottam group who were known to be bear operators and were suffering heavy losses Rumoured that part of the money was sent out of India through the havala racket, converted into dollars Some part must have been spent as bribes and kickbacks to the various accomplices in the banks and possibly in the bureaucracy and the political system.

IMPACT OF THE SCAM

sharp fall in the share prices The index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization. All the shares became tainted shares, and overnight they became worthless pieces of paper as they could not be delivered in the market. Genuine investors who had bought these shares well before the scam came to light and even got them registered in their names found themselves being robbed by the government. resulted in a chaotic situation in the market since no one was certain as to which shares were tainted and which were not.

THE FOLLOWER OF THE BIG BULL

]

Introduction : C.A by profession-comes from broking family background. Popularly known as the Pentafour Bull Known for his K10 series of stocks.

KETAN PAREKH
Sensex crash on March 1, 2001 came as a major shock for the Government of India SEBI also decided to inspect the books of several brokers who were suspected of triggering the crash

KETAN PAREKH
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. 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.

He was known as the 'Bombay Bull' Had connections with movie stars, politicians and even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered KP in KPV Ventures THE FACTORS THAT HELPED THE MAN

He did not have the money to buy large stakes Borrowed from various companies and banks He bought shares when they were trading at low prices and saw the prices go up in the bull market. When the price was high enough, he pledged the shares with banks as collateral for funds. He also borrowed from companies like HFCL.

THE K-10 STOCKS :

THE K-10 STOCKS

Amitabh Bachchan Corporation Limited (ABCL) Mukta Arts Tips Pritish Nandy Communications. HFCL Global Telesystems (Global) Zee Telefilms Crest Communications PentaMedia Graphics Ketan Parekh followed Harshad Mehta's footsteps to swindle crores of rupees from banks. A chartered accountant he used to run a family business, NH Securities. Ketan however had bigger plans in mind. He targeted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names.

WAYS HE FUNDED HIS SCAM

THE PAY ORDER ROUTE

KP issued cheques drawn on BoI (Bank of India) to MMCB (Madhavapura Mercantile Cooperative Bank), against which MMCB issued pay orders. The pay orders were discounted at BoI.
It was alleged that MMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits.

BoI's losses eventually amounted to well above Rs 1.2 billion.

BORROWING FROM MMCB

The second route was borrowing from a MMCB branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts.KP used around 16 such accounts, either directly or through other broker firms, to obtain funds.

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan along with his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank. According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million).
There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

HOW THE SCAM BROKE OUT?

His mode of raising funds by offerings shares as collateral securities worked well but.. Only till the prices of shares went up but it reversed when shares started falling from mar 2000. The crash was a result of fall at NASDAQ that saw a fall in K-10 stock as well In next 2 months, Sensex declined by 23% and K-10 stock declined by 67% In May 2000, the market picked up back and the prices of K-10 rise again The prices of stock doubled like HFCL doubled from Rs 790 to Rs 1353 by July

THE FINAL TURN AROUND

BY Dec.2000 the NASDAQ fell back again and the KP stocks went down as the prices of stock falling globally KP faced liquidity problems.

THE DOWN FALL :

Stocks held by KP and his broker were reduced to 6-7 bn from 12bn Situation worsened when KPs badla payment was not honored and 70 CSE brokers along with top 3 brokers made default By mid March the value of shares went to 2.5-3 bn

AT THE END
KPs brokers started pressuring him for payment. SEBI tricked the regulatory norms and several other rules were framed . Finally KP was arrested .

KETAN PAREKH VS THE 'BIG BULL' LATE HARSHAD MEHTA

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. 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.

SEBIS DAMAGE CONTROL MEASURES

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 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.

CIRCULAR TRADING

Circular trading is basically trade done by a group of people among themselves to rig the share price.

For e.g. A,B,C who are holding the same share Stock A can do a circular trading by A selling to B and B selling to C and C selling to A. By doing this they will be able to increase or decrease the share price since the trades are executed between themselves.
This is normally done in IPO shares during listing to create the activity in the scrip and to distribute the stocks.

Day traders and small investors get caught in this vicious circular trading and lose their money. Avoid trading in IPO listing though it goes up 30% in a day, most of the IPOs listed will come down after the initial frenzy is over. Another group of stocks which attracts circular traders are penny stocks where they will be able to rig the price constantly for couple of days and exit when the target is achieved. One way to identify this is use count of trades since most of the trades will be done in Bulk quantities.

FORWARD TRADING

An illegal activity trader takes a position in an equity in advance of an action which he/she knows his/her brokerage will take that will move the equity's price in a predictable fashion. also called front running.

Presented by

Kiran Nehil irfan Sarath .p.o Aparna .k. t Jincy . k .p Preethi snitha