Student Name: NeerajPurohit

Class: MFM 2nd Year SEM: IV

Batch: 2018-2021

Roll No: PF1819

Subject: FMPI

1. Harshad Mehta Scam

Harshad Mehta was an Indian stockbroker, well known for his wealth and for having
been charged with numerous financial crimes that took place in the 1992 securities
scam.

Of the 27 criminal charges brought against him, he was only convicted of four, before
his death at age 47 in 2001.
It was alleged that Mehta engaged in a massive stock manipulation scheme financed
by worthless bank receipts, which his firm brokered in "ready forward" transactions
between banks. Mehta was convicted by the Bombay High Court and Supreme Court
of India[3] for his part in a financial scandal valued at ₹ 5000 Crores which took place
on the Bombay Stock Exchange (BSE). The scandal exposed the loopholes in
the Indian banking system, Bombay Stock Exchange (BSE) transaction system and
SEBI further introduced new rules to cover those loopholes. He was tried for 9 years,
until he died in late 2001.

GrowMore Research and Asset Management

1. In 1984, Mehta was able to become a member of the Bombay Stock Exchange
as a broker and established his own firm called Grow More Research and
Asset Management, with the financial assistance of associate.

2. when the BSE auctioned a broker's card. He actively started to trade in

1986. By early 1990, a number of eminent people began to invest in his firm,
and utilize his services. It was at this time that he began trading heavily in the
shares of Associated Cement Company (ACC). The price of shares in the
cement company eventually rose from Rs. 200 to nearly 9000 due to a massive
spate of buying from a set of brokers including Mehta.
 3. Mehta justified this excessive trading in ACC shares by stating that the stock
had been undervalued, and that the market had simply corrected when it
revalued the company at a price equivalent to the cost of building a similar
enterprise; the so-called "replacement cost theory" that he had put forward.

4. During this period, especially in 1990–1991, the media portrayed a

heightened deified image of Mehta, calling him "The Big Bull". He was covered
in a cover page article of a number of publications including the popular
economic magazine Business Today, in an article titled "Raging Bull". His
flashy lifestyle of a sea facing 15,000 feet penthouse in the tony area
of Worli complete with a mini golf course and swimming pool, and his fleet of
cars including a Toyota Corolla, Lexus Starlet, and Toyota Sera were flashed
in publications. These further exemplified his image at a time when these were
rarities even for the rich people of India.

5. In criminal indictments later brought by the authorities, it was alleged that

Mehta and his associates then undertook a much broader scheme, which
resulted in manipulating the rise in the Bombay Stock Exchange. The scheme
was financed by supposedly collateralised bank receipts, which were in fact
uncollateralised. The bank receipts were used in short-term bank-to-bank
lending, known as "ready forward" transactions, which Mehta's firm brokered.
By the second half of 1991 Mehta had earned the nickname of the "Big Bull",
because he was said to have started the bull run in the stock market.Some of
the people who worked in his firm included Ketan Parekh, who later would be
involved in his own replicate scam.

Background of the 1992 securities scamEdit

Stamp paper scam

Up to the early 90s, banks in India were not allowed to invest in the equity markets.
However, they were expected to post profits and to retain a certain ratio (threshold) of
their assets in government fixed interest bonds. Mehta cleverly squeezed capital out
of the banking system to address this requirement of banks and pumped this money
into the share market. He also promised the banks higher rates of interest, while asking
them to transfer the money into his personal account, under the guise of buying
securities for them from other banks. At that time, a bank had to go through a broker
to buy securities and forward bonds from other banks. Mehta used this money
temporarily in his account to buy shares, thus hiking up demand of certain shares (of
good established companies like ACC, Sterlite Industries and Videocon) dramatically,
selling them off, passing on a part of the proceeds to the bank and keeping the rest
for himself. This resulted in stocks like ACC (which was trading in 1991 for Rs.
200/share) to nearly Rs. 9000 in just 3 months.

Bank receipt scam

Another instrument used in a big way was the bank receipt (BR). In a ready forward
deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e.
the seller of securities, gave the buyer of the securities a BR. The BR confirms the
sale of securities. It acts as a receipt for the money received by the selling bank.
Hence the name - bank receipt. It promises to deliver the securities to the buyer. It
also states that in the meantime, the seller holds the securities in trust of the buyer.

Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs
not backed by any government securities. Two small and little known banks - the
Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in
handy for this purpose.

Once these fake BRs were issued, they were passed on to other banks and the banks
in turn gave money to Mehta, plainly assuming that they were lending against
government securities when this was not really the caseHe took the price of ACC from
Rs. 200 to Rs. 9,000. That was an increase of 4,400%.The stock markets were
overheated and the bulls were on a mad run. Since he had to book profits in the end,
the day he sold was the day when the markets crashed.

Outbreak of 1992 security scam

On 23 April 1992, journalist SuchetaDalal exposed Mehta's illegal methods in a

column in The Times of India. Mehta was dipping illegally into the banking system to
finance his buying.
A typical ready forward deal involved two banks brought together by a broker in lieu
of a commission. The broker handles neither the cash nor the securities, though that
wasn't the case in the lead-up to the scam. In this settlement process, deliveries of
securities and payments were made through 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 payment to the seller. In this
settlement process, the buyer and the seller might not even know whom they had
traded with, either being known only to the broker. This the brokers could manage
primarily because by now they had become market makers and had started trading
on their account. To keep up a semblance of legality, they pretended to be
undertaking the transactions on behalf of a bank.
Having figured out his scheme, Mehta needed banks which issued fake BRs (Not
backed by any government securities). "Two small and little known banks – the Bank
of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) – came in handy for
this purpose. These banks were willing to issue BRs as and when required, for a
fee," the authors point out. Once these fake BRs were issued, they were passed on
to other banks and the banks in turn gave money to Mehta, 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 went on as long as the stock prices kept going up, and no one had a clue about
Mehta's operations. Once the scam was exposed, though, a lot of banks were left
holding BRs which did not have any value – the banking system had been swindled of
a whopping ₹40 billion (US$560 million). He knew that he would be accused if people
came to know about his involvement in issuing cheques to Mehta. Subsequently, it
transpired that Citibank, brokers like PallavSheth and Ajay Kayan, industrialists
like Aditya Birla, Hemendra Kothari, a number of politicians, and the RBI Governor
R.Venkitaramanan all had played a role in allowing or facilitating Mehta's rigging of the
share market.Exposure, trial and conviction
 2. 2G spectrum case
1. The 2G spectrum case was an alleged scam that the politicians and private
officials under the United Progressive Alliance coalition government in India
were accused of committing.

2. It was claimed that the magnitude of the scam was 2,867,800,000,000 rupees.
The Union Government of that time was accused of undercharging mobile
telephone companies for frequency allocation licenses, which they used to
create 2G spectrum subscriptions for cell phones. The Government chose NM
Rothschild and Sons to design a first-of-its-kind e-auction mechanism in the
world, a US$2.27 billion landmark deal. The difference between the money
collected and that mandated to be collected was estimated by the Comptroller
and Auditor General of India at ₹1.76 trillion (US$25 billion), based on 2010 3G
and BWA spectrum-auction prices.

3. In a charge sheet filed on 2 April 2011 by the Central Bureau of

Investigation (CBI), the loss was pegged at ₹3,098,455
million (US$43 billion).In a 19 August 2011 reply to the CBI, the Telecom
Regulatory Authority of India (TRAI) said that the government had gained
over ₹30 billion (US$420 million) by selling 2G spectrum.

4. On 2 February 2012, the Supreme Court of India ruled on a Public interest

litigation in India filed by Subramanian Swamy related to the 2G spectrum
allocation. The court declared the allotment of spectrum "unconstitutional and
arbitrary", cancelling the 122 licenses issued in 2008 under A. Raja,
the Minister of Communications & IT from 2007 to 2009, the primary official
accused.According to the court, Raja "wanted to favor some companies at the
cost of the public exchequer" and "virtually gifted away important national
asset[s].

5. The zero-loss theory was discredited[6] on 3 August 2012 when, after a

Supreme Court directive, the Government of India revised the base price for 5-
MHz 2G spectrum auctions to ₹140 billion (US$2.0 billion), raising its value to
about ₹28 billion (US$390 million) per MHz (near the Comptroller and Auditor
General estimate of ₹33.5 billion (US$470 million) per MHz).

6. According to some analysts, many corruption scandals including the 2G

spectrum case, the coal mining scam, Adarsh Housing Society scam and
the Commonwealth Games scam were major factors behind the Indian
National Congress-led UPA government's defeat in the 2014 Lok Sabha
election. Time magazine listed the India's Telecoms Scandal as one of the Top
10 abuses of power
.
7. On 21 December 2017, the special court in New Delhi acquitted all accused in
the 2G spectrum case including prime accused A Raja and Kanimozhi. This
verdict was based on the fact that CBI could not find any evidence against the
accused in those 7 years. As per the judgement, "Some people created a scam
 by artfully arranging a few selected facts and exaggerating things beyond
recognition to astronomical levels.
8. On 19 and 20 March 2018, the EnforcementDirectorate and CBI respectively
filed appeals against this verdict in the Delhi High Court.In Feb 2019, Justice
Najmi Waziri ordered the defendants to plant 3,000 trees each for seeking
more time to file their responses on the appeal challenging their acquittal in a
2G scam case.

Background
India is divided into 22 telecommunications zones, with 281 zonal licenses. In 2008,
122 new second-generation 2G Unified Access Service (UAS) licenses were granted
to telecom companies on a first-come, first-served basis at the 2001 price. According
to the CBI charge sheet, several laws were violated and bribes were paid to favor
certain firms in granting 2G spectrum licenses. According to a CAG audit, licenses
were granted to ineligible corporations, those with no experience in the telecom sector
(such as Unitech and Swan Telecom)and those who had concealed relevant
information. Although former Prime Minister Manmohan Singh advised Raja to allot
2G spectrum transparently and revise the license fee in a November 2007 letter, Raja
rejected many of Singh's recommendations.In another letter that month, the Ministry
of Finance expressed procedural concerns to the DOT;[20] these were ignored, and
the cut-off date was moved forward from 1 October to 25 September 2007.
On 25 September 2007 the DOT announced on its website that applicants filing
between 3:30 and 4:30 pm that day would be granted licenses.Although the policy for
awarding licenses was first-come, first-served, which was introduced during Atal Bihari
Vajpayee Government, Raja changed the rules so it applied to compliance with
conditions instead of the application itself.On 10 January 2008, companies were given
only a few hours to supply Letters of Intent and payments; some executives were
allegedly tipped off by Raja. Although the corporation was ineligible, Swan Telecom
was granted a license[18] for ₹15.37 billion (US$220 million) and sold a 45-percent
share to the UAE-based Etisalat for ₹42 billion (US$590 million).Unitech Wireless (a
subsidiary of the Unitech Group) obtained a license for ₹16.61
billion (US$230 million), selling a 60-percent share for ₹62 billion (US$870 million) to
Norway-based Telenor.
The following is a list of companies who received 2G licenses during Raja's term as
telecom minister; the licenses were later cancelled by the Supreme Court.

# of
Telecom
Company license Remarks
regions
s

Haryana, Adonis Projects, Nahan Properties, Aska

Himachal Projects, Volga Properties, Azare
Pradesh, Properties & Hudson Properties were
Jammu & acquired by Unitech. Since Unitech
Adonis
Kashmir, 6 Infrastructure and Unitech Builders &
Projects
Punjab, Estates were subsidiaries of Unitech
Rajasthan, Group, in 2008 Unitech had 22 2G
Uttar Pradesh licenses. Later that year, Telenor bought
(East) a majority share in the telecom company
 Assam, Bihar, from the Unitech Group and provided
North East, service as Uninor with 22 licences.
Nahan Orissa, Uttar
6
Properties Pradesh
(east), West
Bengal

Andhra
Pradesh,
Aska Projects 3
Kerala,
Karnataka

Gujarat,
Volga Madhya
3
Properties Pradesh,
Maharashtra

Azure
Kolkata 1
Properties

Hudson
Delhi 1
Properties

Unitech Tamil Nadu

Builders & (including 1
Estates Chennai)

Unitech
Mumbai 1
Infrastructures

Bihar,
Gujarat,
Himachal
Pradesh,
Kerala,
Kolkata,
Punjab,
Rajasthan,
Uttar
Loop Telecom Pradesh, 21
West Bengal,
Andhra
Pradesh,
Delhi,
Haryana,
Karnataka,
Maharashtra,
Odisha(Oriss
a), Tamil
Nadu
 (including
Chennai),
Assam,
Jammu &
Kashmir,
Madhya
Pradesh

Andhra
Pradesh,
Assam, Bihar,
Gujarat,
Haryana,
Himachal
Pradesh,
Jammu &
Kashmir,
Karnataka,
Kerala,
Kolkata,
Datacom
Madhya 21 Operates as Videocon Telecom
Solutions
Pradesh,
Maharashtra,
Odisha,
Rajasthan,
Tamil Nadu
(including
Chennai),
Uttar
Pradesh,
West Bengal,
Delhi,
Mumbai

Madhya
Pradesh,
Kerala,
Kolkata,
Punjab, Uttar
Pradesh, ShyamTelelink&ShyaniTelelink have a
West Bengal, combined 21 licenses. In late 2008
ShyamTelelink Andhra 17 Russia-based Sistema bought a majority
Pradesh, share in the company, which now
Delhi, operates as MTS India.
Haryana,
Karnataka,
Maharashtra,
Odisha, Tamil
Nadu
 (including
Chennai),
Assam,
Jammu &
Kashmir,
North East

Mumbai,
Bihar,
ShyaniTelelink Gujarat, 4
Himachal
Pradesh

Andhra
Pradesh,
Gujarat,
Haryana,
Karnataka,
Kerala,
Maharashtra,
Swan was a subsidiary of Reliance
Punjab,
Swan Telecom 13 Telecom established to circumvent the
Rajasthan,
one-company-one-license rule. In 2008,
Tamil Nadu
Swan merged with Allianz Infratech; late
(including
in the year Abu Dhabi's Etisalat bought
Chennai),
about 45 percent of the company,
Uttar
renaming it Etisalat DB Telecom.
Pradesh,
Delhi,
Mumbai

Bihar,
Allianz
Madhya 2
Infratech
Pradesh

Assam,
Punjab,
Karnataka,
Jammu and Since Idea Cellular bought Spice
Kashmir, Communications in 2008 for ₹27
North East, billion (US$380 million),[28] of the 122
Idea Cellular Kolkata, West 9 spectrum licenses sold in 2008 Idea owns
Bengal, 13. Seven are in use by the company,
Odisha(Oriss and the remainder are overlapping
a), Tamil licenses.[29]
Nadu
(including
Chennai)
 Delhi, Andhra
Spice
Pradesh,
Communicatio 4
Haryana,
ns
Maharashtra

Assam,
In January 2009, Bahrain
Jammu and
Telecommunications agreed to buy 49
Kashmir,
percent of S Tel for
Odisha(Oriss
S Tel 6 $225 million. ChinnakannanSivasankaran
a), North
owns the remaining share.[30][31] In May
East, Bihar,
2009, Sahara Group bought an 11.7-
Himachal
percent share in S Tel.[32]
Pradesh

In late 2008 Tata sold a 26-percent share

Jammu and
to the Japanese NTT DoCoMo for
Tata Kashmir,
3 about ₹130.7 billion (US$1.8 billion), or
Teleservices Assam, North
an enterprise value of ₹502.69
East
billion (US$7.0 billion).[33]

3. NSE SCAM

The NSE co-location scam relates to the market manipulation at the National Stock
Exchange of India, India's leading stock exchange. Allegedly select players obtained
market price information ahead of the rest of the market, enabling them to front run the
rest of the market, possibly breaching the NSE's purpose
of demutualisation exchange governance and its robust transparency-based
mechanism.[3] The alleged connivance of insiders by rigging NSE's algo-trading and
use of co-location servers ensured substantial profits to a set of brokers. This multi-
dollar, widespread market fraud came to light when markets' regulator, the Securities
and Exchange Board of India (SEBI), received the first anonymous complaint through
a whistle-blower's letter in January 2015. The whistle-blower alleged that trading
members were able to capitalise on advance knowledge by colluding with some
exchange officials. The overall default amount through NSE's high-frequency
trading (HFT) is estimated to be 50,000 crores over five years.
The NSE co-location case is under investigation by the Central Bureau of
Investigation (CBI), the Securities and Exchange Board of India (SEBI) and the
Income-tax Department (I-T department) who are probing the involvement of NSE and
SEBI officials, as well as NSE's former and current executives and brokerages.
In a recent verdict, the Madras High Court issued a notice to SEBI, MCA, ED in
response to a Public Interest Litigation (PIL) filed by the Chennai Financial Markets
and Accountability (CFMA).

Background
In January 2010, the NSE began offering a co-location facility to members. Members
could place their servers in the Exchange's premises in return for a fee. This allowed
them faster access to the buy and sell orders being disseminated by the exchange's
trading engine. The term 'co-location' means 'a setup wherein the broker's computer
is located in the same area as the stock exchange's server.In addition, High-frequency
trading (HFT) or algorithmic trading refers to the use of electronic systems, which can
potentially execute thousands of orders on the stock exchange in less than a second.
Also, retail investors monitoring prices are subject to a delay as compared to the tick-
by-tick data broadcast a user receives in a co-location facility. Unusually, the SEBI did
not put out a discussion paper to collect market feedback before giving permission to
proceed with the facility. There are no public records on HFT executed on the
NSE.[17] SEBI needs to consult with Technical Advisory Committee (TAC) for such
market developments.However, no notification was received from SEBI in regard to it
approving for all exchanges. During that time, the managing director of the NSE was
Ravi Narain and C. B. Bhave was the chairman of SEBI.[19] It is mentioned in passing
in the NSE's 2009-10 annual report statement: "In keeping with global trends, the
exchange has provided members a co-location facility for low latency high frequency
trading. The Co-location data centre is an international standard, state of the art, highly
robust, resilient and secure infrastructure."

The whistle-blower's letter that was addressed to SEBI and copied to the leading
financial magazine, Money life. clearly stated that:
when the co-location was started by NSE it took some time for the more
enterprising to figure out what was happening in the system. By the end of the
year, smart people had all figured out the way to game the system lay in being
the first one to connect to the server and preferably the server, which was
fastest.
The co-location case was initiated when certain members associated with HFT
allegedly teamed up and worked in coalition for about four years, i.e. 2010- 2014
overriding rules and regulations set in place by SEBI, the market regulator. According
to an unnamed individual familiar with SEBI's investigation: "Access to co-location
facilities and HFT trading gave the select brokers differential advantage such as
display of market data, viewing order book prior to order execution."

4. K-10

‘Ketan Parekh is a former stock broker from Mumbai, India, who was convicted in
2008, for involvement in the Indian stock market manipulation scam that occurred
from late 1998 to 2001.During this period, Parekh artificially rigged prices of certain
chosen securities (informally referred to as K-10 stocks), using large sums of money
borrowed from banks including the Madhavpura Mercantile Co-operative Bank, of
which he himself was a director. As a result, he was barred from trading in the Indian
stock exchanges till 2017.

Parekh started his career in the late 1980s at NarbheramHarakchand Securities (NH
Securities), a reputed institutional brokerage firm. In the 90s, he came in contact with
Harshad Mehta, a well known stock broker and subsequently joined Mehta's
firm GrowMore investments, a firm that Mehta had set up and which was involved in
the 1992 Indian stock market scam. Though one of the accused in some of the scams
that Growmore was involved in, Parekh was never convicted in them. Unlike Mehta,
Parekh ensured that he remained low key, with a simple lifestyle thus presenting a
humble "feet-on-the-ground" demeanor even when interviewed by journalists like
SuchetaDalal, as she related in her 2003 article in rediff.
However, this started to change in 1999-2000 as Parekh got closer to celebrities.
Parekh began cultivating friendships with people in Bollywood including Amitabh
Bachchan and the diamond merchant Bharat Shah, thus coming into the media's eye
and limelight. This led to an investigative story on him which was first published on 25
August 2000 covering a millennial bash that he had given at his palatial bungalow
at Mandwa (near Mumbai), which was attended by Mumbai's gliteratti, industrialists
and media personalities. This was followed by his acquiring expensive luxury cars
including a Cadillac, throwing regular high profile parties that were eagerly lapped up
by the tabloid media. His pictures began to appear in newspapers with his comments
on matters related to finance and the budget. The media covered every incident in his
life including that of him forming KVP Ventures (a collaboration with Vinay Maloo and
the Australian magnate Kerry Packer), forming an investment bank (Triumph
international) and turning the loss making ABCL into a profitable firm by arranging
funding from HFCL. He invested heavily in stocks related to IT, media and
communication and propagated them. As cover stories emerged in the financial media
of his malpractices related to the stock market, scrutiny shifted to his activities leading
to his arrest on 30 March 2001.[

Parekh purchased large stakes in less known small market capitalization companies,
and jacked up their prices through circular trading with other traders, and collusion
with these companies and large institutional investors. This resulted in steep hikes in
share prices (for example: shares of Zee telefilms zoomed up from Rs. 127 to a price
of Rs. 10,000.This set of ten stocks was colloquially referred to as "K-10" stocks and
Parekh was playfully referred to as "Pentafour".
It later transpired that promoters and industrialists often gave Parekh funds to
artificially rig up their share prices. Thus in just a few months, scrips of virtually
unknown companies like Visualsoft rose from Rs 625 to Rs 8,448 per share and
Sonata Software rose from Rs 90 to Rs 2,936.60. However, the bear cartel in Bombay
stock exchange started to hammer his K-10 stocks in February 2001, leading them to
fall and precipitating a payment crisis in Kolkata.
On 1 March 2001, just after the Indian Union Budget had been presented, the BSE
Sensex crashed 176 points, prompting the then NDA government to set up an inquiry
into the market reaction. Subsequently the RBI refused to clear pay orders (POs) that
had been given by Parekh as collateral for loans to BOI (Bank of India), as they found
them to be suspicious. The RBI commenced an investigation against Parekh. Around
the same time, a bear cartel of brokers in Mumbai opposed to Parekh tried to dump
their shares of K-10 stocks. Panicking, Parekh sold off his entire ownership of the so
called K-10 stocks that he had successfully jacked up over the past two years,
especially those of two entities - GTB bank and MMCB bank. He carried out this large
scale dump in the evening, after regular trading hours, from 5 pm to midnight at
the Calcutta Stock Exchange. This resulted in a stock market crash the next day,
resulting in large scale losses for large institutional investors, including insurance
companies and mutual funds.
A 30 member Joint Parliamentary Committee (JPC) investigation ensued which found
that Parekh had been involved in circular trading throughout the time period from and
with a variety of companies, including Global Trust Bank (GTB) and Madhavpura
Mercantile Cooperative Bank (MMCB). The JPC found him to have played a major role
in rigging the prices of a set of ten Indian companies, from 1995 up to 2001.
This resulted in Parekh's first conviction, which carried a one-year sentence, coming
as a result of a transaction he conducted involving a unit of Canara Bank in 1992.
Though Parekh was subsequently barred from stock trading, the Securities and
Exchange Board of India alleged in 2009 that a variety of companies and other actors
were trading on behalf of Parekh. An investigation ensued and 26 entities were banned
from trading as a result of that investigation. In March 2014 he was convicted by a
special CBI court in Mumbai for cheating and sentenced to two years rigorous
imprisonment.