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Scams in a

The past and Now

Growing Economy

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Introduction:

Scams are nothing but a fraudulent scheme performed by a dishonest, group or a company with the intention of attaining money or something for a value. The word scam was derived from a British slang “scamp”, which means swindler. Scams prey on people's desire to increase their wealth or their need for health, safety, or beauty. The history of corruption in post-Independence India starts with the Jeep scandal in 1948. Scams in India have gained gigantic proportions with one after the other multi-billion Rupee scams tumbling out of the closest almost every month.

The Indian economy recovered well after the global financial crisis due to a fiscal stimulus package which created employment and demand that resulted in 9% GDP growth in 2010. However, GDP expansion for 2011 is now expected to be 7.0%, not the forecasted 8.5%.Several major factors are responsible for this slowdown, including the continuous rise of inflation, a tight monetary policy, a series of corruption scandals, policy paralysis on crucial reforms, and a lack of infrastructure development. Furthermore, a lack of investor confidence and positive business sentiment has led to declining FDI inflows over the last three quarters, adding pressure on new and ongoing investment.

However, scams have become a permanent feature of the front pages of the news papers with parallel investigations by the Reserve Bank of India (RBI), the Central Bureau of Investigation (CBI) and the Joint Parlimentary Committe (JPC) digging out some new aspects of the scam constantly. Indian government has responded to the scam with a new law by setting up a special court to try those accused in the scam. Nevertheless, understanding of the scam is a prerequisite for any meaningful analysis of policy alternatives to improve the functioning of the financial system. This report is one such initiative which presents a plausible reconstruction of how some of these Famous or rather infamous scams originated, how it was perpetrated, and what would be its aftermath.

Scams of the 90’sThe Harshad Mehta scam – 1992: INR 5,000 crore.

Harshad Shantilal Mehta (1954-2002) also known as “Big Bull” was an Indian stockbroker who made the headlines for the notorious BSE security scam of 1992. He and his associated were accused of manipulating the rise in the Bombay Stock Exchange (BSE) in 1992. They took advantage of the many loopholes in the banking system and drained off funds from inter-bank transactions. Subsequently bought huge amounts of shares at a premium across many industry verticals causing the Sensex to rise dramatically. However, upon the exposure of the scam, several banks found they were holding bank receipts of no value at all. Mehta had by then pulled a fast one on the banks to the tune of a staggering INR 4,000 crore.

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The main mechanism used by Harshad Mehta and his cronies with great success to channel money from the banking system was through “ ready-forward” (RF) deal. The RF is a secured short-term (typically 15-day) loan from one bank to another. The bank lends against government securities. The borrowing bank sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price. RF deal involved two banks who brought together by a broker on a commission. The broker will not handle neither cash nor the securities.

However, in this settlement process, the buyer and the seller will not know whom they traded with, either being known only to the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payments to the seller. It was this idea made the mind of Harshad Meheta to involve into the modus operandi. Another instrument used in a big was was the bank receipt (BR). In a RF deal, securities were not moved back and forth in actuality. That is, the seller of securities, gave the buyer of the securities a BR. As BR acts as a receipt for the money received by the selling bank. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer.

Mehta had figured this out, and needed banks, which issue fake BR, or BR s not blocked by any government securities. Two small banks came in handy for Mehta's modus operandi. The bank of Karad and the Metropolitan Co-operative Bank. These bank were willing to issue BR s and when required, for a fee. However, when these fake BR s were issued, they were passed on to other banks and the banks in turn gave money to Mehta, of-course assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned. This was practiced until the stock prices kept going up, and no one had a clue about Mehta's operation. When the scam came in to the lime light, a lot of banks were left holding BR s which did not have any value.

Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave

money to Mehta, obviously assuming that they were lending against government securities when

this was not really the case. This money was used to drive up the prices of stocks in the stock

market. When time came to return the money, the shares were sold for a profit and the BR was

retired. Mehta had by then pulled a fast one on the banks to the tune of a staggering INR 4,000

crore.

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Ketan Parek: INR 1,250 crore

Ketan Parekh [KP] was a chartered accountant by profession and used to manage a family business,NH Securities started by his father. Known for maintaining a low profile, KP's only dubious claim to fame was in 1992, when he was accused in the stock exchange scam. He was known as the 'Bombay Bull', who was convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1999-2001. The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early 1999 led to a rise of the Indian stock markets as well. The dotcom boom contributed to the Bull Run led by an upward trend in the NASDAQ. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks.

However, with improvements in the global technology stock markets, the K-10 stocks began picking up again in May 2000. HFCL nearly doubled from Rs 790 to Rs 1,353 by July 2000, while Global shot up to Rs 1,153. Aftek Infosys was also trading at above Rs 1000. By February 2001, the scrips held by KP's brokers at CSE were reduced to an estimated Rs 6-7 billion from their initial worth of Rs 12 billion.

2001-10 Decade:

2 G Spectrum scam: INR 60,000 croreThe government awarded 122 telecom licenses with 2G spectrum in January 2008 at 2001 rates

(Rs 1,685 crore) ignoring the current market value of the spectrum. In February 2007, Hutch sold

its 67% equity to Vodafone at Rs 75,000 cr signaling substantial increase in spectrum value. Even

if 15% of this is considered to be spectrum value, then it is Rs 11,250 crore per pan-India

licenses. In November 2007, S-TEL offered Rs 6,000 cr for pan-India license; in December 2007,

it increased the offer to Rs 13,752 crore. This was also ignored by Raja. After obtaining licenses at

cheap rates, the private companies sold (diluted) their equities to foreign telecom companies at a

very high price. Every company that had pan-India licenses was valued at about Rs 10,000 cr in

which it had assets of 2G spectrum (Rs 1,659 cr. Thus, the difference in these figures (Rs 10,000

cr and Rs 1,659 cr) is per pan-India license loss to the Government and gain to private

companies.

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2010 and after:

Coal Allocation Scam: INR 185,591 crore

The CoalAllocation scam, also known as Colgate scam that rocked India when it was discovered that INR 1,067,303 crore of the country's revenue has allegedly been lost in enormous proportions, according to draft auditing report (Times of India). The initial findings from the Comptroller & Auditor General's (CAG) has accused the government, providing the nation's coal deposits to private & state run firms instead auctioning it publicly, resulting in staggering, thousands of crores of rupees losses from 2004-2009.

According to the Center for Sciences and Environment, since 30 years, only 6% of proposed industrial projects were blocked on environmental grounds, whilst about a quarter of the total forest land devoted to industrial projects from 1981 was allotted during 2007 and 2011, where more than 8,000 projects were granted environmental clearance. However, in coal mining which is essential for India's power industry. India has over 575 coal mines, producing 550 million tonnes of coal per year as per CSE. Out of these only 180 projects were given clearance over the past five years.

Wakf Scam: 2,000,00 Crore

The Wakf Council as a Statutory Body was established in December, 1964 by the Government of India

under the provision of Section 8A of Wakf Act, 1954 for the purpose of advising it on matters pertaining

to working of the State Wakf Boards and proper administration of the Wakfs in the country. Wakf board,

India's richest board has properties wort INR 4,000,00 lakh crore.

The Karnataka State Wakf Board is facing loot form community itself. 50% of State Wakf property has

been gobbled up by some powerful politicians and Wakf board members. The committee, has found

gross violations committed by the board in collusion with others, wherein around 1,800 acres of its

properties was misused a report by Manipaddy. According to the survey conducted by Manipaddy, it was

revealed that the board has 33,741 registered properties, out of which 54,000 acres of land is registered

and 20,000 acres is yet to be registered. The chairman conducted a pilot report and compiled a 7,000-

plus page record of violations committed by the board members over the years.

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Before 1950’s

Jeep Scam – 1948: INR 80 Lakhs.

The history of corruption in post-Independence India starts with the Jeep scandal in 1948. VK Krishna Menon, the then High Commissioner for India in London signed a deal with a foreign firm worth Rs 80 lakh for jeeps for the Indian Army in Kashmir without observing normal procedure. The then Government announced on September 30, 1955 that the Jeep scandal case was closed, despite the demand of the opposition for judicial inquiry as suggested by the Inquiry Committee led by Ananthsayanam Ayyangar. Union Minister GB Pant said "that as far as Government was concerned it has made up its mind to close the matter.

A concise Index Scams:

1992 — Harshad Mehta Scam was worth Rs 5000 Crores.1994 — Sugar Import Scam was worth Rs 650 Crores.1995 — Preferential Allotment Scam was worth Rs 5000 Crores.1995 — Yugoslav Dinar scam was worth Rs 400 Crores.1995 — Meghalay Forest Scam was worth Rs 300 Crores.1996 — Fertilisers Import Scam was worth 1300 Crores.1996 — Bihar fodder Scam was worth 950 Crores1997 — Sukhram telecom Scam was worth Rs 400 Crores.1997 — Lavalin Power project Scam was worth Rs 374 Crores.1997 — Bihar Land Scam was worth 1200 Crores1997 — C R Bhansali stock scam was worth Rs 1200 Crores.1998 — Teak Plantation Scam was worth rs 8000 Crores.2001 — UTI Scam was Rs 4800 Crores.2001 — Dinesh Dalmia Stock Scam was worth Rs 596 Crores.2001 — Ketan Parekh security scam was worth Rs 1250 Crores.2002 — Sanjay Agarwal Home Trade Scam was worth Rs 600 Crores.2003 — Telgi Stamp paper Scam was worth Rs 172 Crores.2005 — IPO Demat Scam was worth Rs 146 Crores.2005 — Scorpene submarine Scam was worth Rs 18,978 crores.2006 — Punjab's city centre project scam2006 — Taj Corridor Scam was worth 175 Crores.2008 — Pune Billionaire Hasan Ali tax default scam was worth Rs 50,000 crores.2008 — Satyam Scam was worth Rs 10.000 Crores.2008 — Army Ration Pilferage Scam was worth Rs 5000 crores.2008 — 2G Spectrum Scam was worth Rs 60.000 Crores.2008 — State Bank of Saurashtra Scam was worth Rs 95 crores.2008 — Illegal money in Swiss Bank is worth Rs 71,00,000 Crores.2009 — Jharkhand Medical equipment scam was worth Rs 130 Crores.2009 — Rice export scam was worth Rs 2500 crores.2009 — Orissa Mine scam was worth Rs 7000 crores.2009 — Madhu Koda scam was worth Rs 4000 crores.2010 — IPL fraud involving swine called Lalit Modi option yet to be fixed.2010 — Commonwealth Games scam. Quantum of loot yet to be fixed.2011 — Reddy brothers illegal mining activity. Recently arrested by CBI on High Courts directive. Quantum of loot yet to be fixed.

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Conclusion:

Over the years, there has been changes in law to prevent and combat scam, initiatives like RTI act has enabled some power to common man. Can even say RTI has added more definition to the rights and duties of a citizen in Democracy. Some Scams involve Stock market while some don’t. When investing in Stock markets take enough time to look around for reliable information on any company or financial instrument you are looking to invest in. While significant research is needed to understand and combat scams, the impacts of these scams are that you will not know till its too late. Is there a moral of the story? Yes, always invest with care and maintain a well - diversified portfolio. The main aim of this report is to educate more people on this inter-disciplinary practice and hopefully prevent being affected by a financial fraud or a Scam.

Sources and References

http://www.southasiaanalysis.org/%5Cpapers3%5Cpaper219.htmhttp://www.thegeminigeek.com/what-is-corruption/http://youthink.worldbank.org/issues/corruptionhttp://www.mensxp.com/special-features/today/5619-top-10-corruption-scams-inindia.htmlhttp://info.worldbank.org/etools/docs/library/35970/mod03.pdfhttp://www.unodc.org/unodc/en/treaties/CAC/index.htmlhttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.indianexpress.com/news/india-is-4thworst-bribe-paying-country/722460/0http://transparency.org/news_room/in_focus/2008/bpi_2008http://report.globalintegrity.org/India/2009https://secure.traceinternational.org/news/pdf/IndiaReportPressKit011009.pdfhttp://accountabilityindia.blogspot.com/2010/03/indias-anti-corruption-agency-inglobal.htmlhttp://www.thehindu.com/news/national/article2012804.ecehttp://www.u4.no/helpdesk/helpdesk/query.cfm?id=188http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=555151&num=0http://www.supersystems.in/economy/economy4.htmhttp://ebookbrowse.com/ketan-parekh-scam-pdf-d194144535http://www.globalpost.com/dispatches/globalpost-blogs/india/coalgate-scam-environmenthttp://www.howtoarticlesabout.com/biggest-scams-in-indian-history/http://news.in.msn.com/gallery.aspx?cp-documentid=5140159&page=3http://theindianawaaz.com/index.php?option=com_content&view=article&id=6780&catid=12http://centralwakfcouncil.org/

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