Learning’s from scams in India

7/31/2019 Learnings from scams in India

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Learnings from scams in

India

By

Neeraj Kumar

2008C6PS609G


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Introduction

Just as it is impossible not to taste the honey or poison that one may findat the tip of one's tongue, so it is impossible for one dealing with

government funds not to taste, at least a little bit, of the king's wealth.

Arthashastra Kautilya, 4 B.C.

This study try to understands what are the factors thatlead to a scam, what were the remedial steps taken and

what should be done to prevent it in future ,recovering

the money .

Taking Harshad Mehta Securities ScamOne of thebiggest financial scams of Indian history.


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Significance of study

India is playing an ever larger role in the worldeconomy, the issue of corruption, in both the private

and public sectors in India is coming into sharper focus.

Studies suggest corruption hampering growth of India

to a significant extent. Indias GDP could have been 9%or above had India had a check over corruption and

scams from the start.

Some of the scams are a result of loopholes of the

Indian law system or lackluster implementation of thesame.


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Objectives

To analyze a big scam in India.

Analyze factors which led to the scam specifically.

Impact of the scam and other scams in general to the

economy.

Effectiveness of the steps taken as remedial measures.

Steps which should be taken to prevent such in future.


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Harshad Mehta Securities

ScamKnown to be Big bull of trading floor at

a time.

Engineered the rise of BSE stock

exchange in 1992.

The amount of scam was around Rs.5000 crores.

The Securities Scam referred to

diversion of funds to the tune

of overRs.3,500crores from the bankingsystem to various stock brokers in a series

of transactions(primarily in Government

securities)during the period April 1991 to

May 1992


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Factors leading to the scam

Loophole in the government banking policy.

Unethical things were also done.


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Banking policy

Borrowing and lending Bank.

Borrower Bank issues Bank receipts of govt. securitiesand give it to Lender bank to get it back at a higher price

after sometime when it repays the lender bank.

Borrower

bankLender

bank

Issue

BRBrok

er

Issue

BR

Funds Funds


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Contd.

Borrower bank were Bank of Karad and NCO co-operative bank.

Lender banks were SBI,SCB , Vijaya Bank etc.

Once these fake BRs were issued, they were passed

onto other banks and the banks in turn gave money toHarshad Mehta, assuming that they were lending

against government securities when this was not really

the case.


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Unethical things Done

Imaginary companies created

Bought the shares of own company by himself causing

Sensex up

Purchased Huge amount of shares of a targeted

company like ACC .

Created fake BRs, or BRs not backed by any government

securities

Illegally issue of BR by small bank

Without verification, banks like VijayaBank issued the

cheque.


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Government Measures

The response of any government to a scam of this kindwould have three main facets

Discover and punish the guilty

Recover the money

Reform the system


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Cont.

Harshad metha group were put under the trial and theirproperties were seized.

SEBI was upgraded to a fully autonomous body.

It had functions like

Investor protection

Orderly development of capital market.

Securing interests of investors.

Undertake periodic audits.


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Recovery of money

Is a very critical issues in these scams

The Special Court (Trial of Offences Relating to

Transaction in Securities) was set up by an Act of

Parliament in 1992 to deal with the extraordinary

situation arising out of the securities scam. The Custodian is the principal administrative officer

under the Act for the attachment, management and

liquidation of the assets of notified persons(convicts)

who functions under a system of concurrent judicialreview by a special court comprising sitting high court

judges at Mumbai.


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Contd.

So far, over Rs.4,000 crore, including the latest disbursalhave been paid on behalf of the HMG alone. Of this, the

I-T department has received Rs.3,200 crore and the

balance Rs.800 crore has gone to the SBI.

But Standard Chartered Bank, which had made a claimof Rs.500 crore is yet to get a penny as it was one of the

late claimants.

Recovering of all the money is a herculean task.


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Conclude

There was a total lack of transparency in the moneymarket.

Irregularities of all kind were so common that no

suspicion aroused even by highly irregular transactions.

This is the ideal situation for scam to germinate andgrow into alarming proportions.


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Statisitics and analysis


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Contd.


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Analysis

Corruption Perception Index(CPI)-The lower it is thehigher the corruption level is. Thusas we see India has ahigh level of corruption more than China can be

attributed to democracy here.

A large number of people and government officialsbelieve that Indias growth rate is hampered by

Corruption to a significant extent.

Real estate and construction was the hot bed for

corruption for reasons like no Land regulation in states,Land mafias and politics.

Due to 2G scam telecommunication sector also looked

vulnerable.


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Conclusion and policy

analysis Instead of waiting for any scam to happen then act

Govt. should keep on regulating policies and laws to

prevent any scam in the start itself.

Speedy trials of the guilty to punish the wrong doers as

fast as possible. It restores the faith of people in thelegal system as well.

Setting up of special courts to speed up the trial. But

they should be independent and fair in these cases

there is a lot of pressure as very high profile people areinvolved.

Proper regulation on highly vulnerable sectors like

construction,telecommunication.

Documents

Learning’s from scams in India