Chapter 3 INFAMOUS CORPORATE FRAUDS IN INDIA AND ABROAD

SYNOPSIS 1. Infamous Corporate Frauds in India 63 1.1 The Harshad Mehta Case (1992) 64 1.2 The C R Bhansali Case (1992-96) 66 1.3 The Virendra Rastogi Case (1995-96) 67 1.4 The Cobbler Case (1995) 68 1.5 The JVG Case (1997) 69 1.6 The Anubhav Plantation Case (1998) 72 1.7 The Abdul Karim Telgi Case (2000) 73 1.8 The UTI Case (2000) 75 1.9 The Dinesh Dalmia Case (2001) 76 1.10 The Ketan Parekh Case (2001) 77 1.11 The Sanjay Agarwal Home Trade Case (2001) 79 1.12 The IPO Demat Case (2005) 80 1.13 The Satyam Case (2009) 81 1.14 The Saradha Group- Case (2013) 84 1.15 The Limited (NSEL) Case (2013) 87 1.16 The Bank of Baroda Case (2015) 92 1.17 The PACL Case (2015) 93 2. Infamous Corporate Frauds Abroad 94 2.1 The Enron Case (1985) 94 2.2 The World Com Case (2002) 96 2.3 The Tyco Case (2005) 96 2.4 The Ponzi Scheme (Fort Lauderdale) Case (2009) 96 2.5 The Mark Todd Case (2002-2005) 97 2.6 The President of California Agribusiness Case (1999-2002) 98 2.7 The Maximum Dynamics Case (2000-2005) 98 2.8 The Corporate Funding Financial of America Case (2001) 99 2.9 The Edward Ehee Case (2001-2006) 100 2.10 The Fisher Sand & Gravel Co. Case (2009) 100 2.11 The Marian Gardens Tree Farm Case (2007) 101 2.12 The Quality Trucking Case (2000-2002) 101 2.13 The Philadelphia Academy Charter School Case (2009) 101 2.14 The Rajat Gupta Case (2012) 102 3. Features of Corporate Frauds in India 109 3.1 Fraud Perpetrators 109 3.2 Common types of Frauds 109 3.3 Lack of Action against Perpetrators 109 60 Corporate Frauds & their Regulation in India Chap. 3 3.4 Accountability 109

3.5 Unsufficient authorities 110 60 3.6 Insufficient Powers with fraud regulating agencies 110 3.7 Approach of the Adjudicating Agencies 110 3.8 Time Taken in Disposal of Cases 110 3.9 Weak anti-fraud measures 110 4. Summary 110

This chapter briefly describes the cases of corporate frauds which attracted public FraudsCorporate & attention through mass media because of the huge amount involved and the larger stakes of the public. Corporate frauds have shown an unprecedented increase in India in recent years and have posed serious questions before managers, regulators and professionals, on the effectiveness of corporate governance mechanism, regulatory mechanism, and the role of corporate and individual ethics. With the advancement of th

commerce and technology, India, like many other countries, has been in the grip eir Regulation in India of corporate frauds. The enormous increase in corporate frauds in India in recent decades owes its origin to fast-developing economy and industrial growth. In the Western countries, particularly the UK and the USA, numerous studies in the finance, economics and law literature have been conducted with a view to ascertain incentives and monitoring deterrents of corporate frauds, and to identify the loopholes in the government control systems. However, in India, this important area of business appears to have escaped the attention of research scholars. No doctoral research work was available on the subject in the Social Science Documentation Centre of the Indian Council of Social Science Research

(ICSR). The author has been awarded a doctoral degree on Corporate Frauds in Chap. 3 India- Nature, Consequences and Regulation. Fortunately, a periodical comprehensive survey had been conducted by a reputed consultancy firm KPMG. Moreover, an interesting and in-depth account of white-collar crimes is given by Girish Mishra and Braj Kumar Pandey1. Probably the first major corporate scam in Independent India was what is referred to as the Mundhra scam. Hari Das Mundhra, an industrialist and stock speculator, sold fictitious shares to the Life Insurance Corporation of India (LIC) and thereby defrauded the corporation by `1.25 crore in 1957. He was found guilty and was sentenced to imprisonment for 22 years. The then Union Finance Minister, T.T. Krishnamachary had to resign from his prestigious post in the face of scathing criticism within and outside Parliament. After the Haridas Mundra case of 1957, another major scam in the mid-sixties and early-seventies was associated with Jayanti Dharma Teja. He availed loans

1 Girish Mishra and Braj Kumar Pandey (1998), White-Collar Crimes: Current Affairs, Crime, Education, Literature, Media, Politics, Religion, Sociology (Delhi: Gyan Publishing House) Chap. 3 Infamous Corporate Frauds in India and Abroad 61 from banks and financial institutions and used this easy money to establish a shipping empire, in the name of Jayanti Shipping Company Limited. While he Chap. 3 had set up this company with a paid-up capital of a mere `200/- and took government loans amounting to `22 crore, Teja evaded government taxes and committed frauds by various ways. First, he, in collusion with his second wife, produced a forged resolution of the board of directors of the company authorising him to be the sole beneficiary of a letter of credit for $ 1,200,000. Secondly, by Infamous Corporate Frauds in India and Abroad using forged documents and making false statements, he withdrew $ 1,36,800 from his wife’s personal account. Thirdly, he misappropriated $ 87,600, paid by the Norwegian company for the charter of a ship. Lastly, he fraudulently retained a two percent commission on the amount paid by his company to Mitsubishi International Company, for building 11 vessels for the company. Teja was charged with offences under Sections 409 and 467 of the Indian Penal Code (IPC), which are punishable with imprisonment for life, together with offences under Sections 420, 477A, and 120B of the IPC for the embezzlement of about two crores of rupees in foreign exchange out of the funds belonging to Jayanti Shipping Company of which he was a permanent Chairman. The infamous corporate frauds reported since 1992 can be divided into three categories: (1) Corporate Scams, (2) Individual Scams and (3) Political and Government Scams. These are listed in Tables 3.1, 3.2 and 3.3 respectively: Table 3.1 Infamous Corporate Scams in India S. Year Name of the Scam Amount Involved No. (` Crore) Approx. 61 1. 1992 Harshad Mehta Securities scam 5,000 2. 1995 Preferential Allotment scam 5,000 3. 1995 Cobbler scam 2,880 4. 1995 Preferential Allotment scam 5,000 5. 1996 Virender Rastogi scam 43 6. 1996 CR Bhansali scam 1,200 7. 1997 JVG scam 1,000 8. 2001 Dinesh Dalmia Stock scam 595 9. 2001 Ketan Parekh Securities scam 1,250 10. 2005 IPO-Demat scam 146 62 Corporate Frauds & their Regulation in India Chap. 3

S. Year Name of the Scam Amount Involved 62 No. (` Crore) Approx. 11. 2009 Satyam scam 10,000 12. 2013 Saradha scam 4,000 13. 2013 Reebok Shoes Company scam 8,700 Corporate FraudsCorporate & 14. 2013 National Spot Exchange Limited 5,600 scam 15. 2015 Bank of Baroda scam 6,172 16. 2015 PACL scam 47,000 th

Table 3.2 eir Regulation in India Infamous Individuals Scam S. Year Name of the Scam Amount Involved No. (` Crore) 1. 1994 Sugar Import scam 650 2. 2000 Telgi Stamp Paper scam 172 3. 2001 Sanjay Agarwal Home Trade scam 600 4. 2008 Pune Billionaire Hassan Ali Khan tax 50,000 default sacm Chap. 3 5. 2008 Illegal Money in Swiss Banks scam 71,00,000 6. 2011 Hasan Ali Khan scam 50,000

Table 3.3 Infamous Political/Government Scams S. Year Name of the Scam Amount Involved No. (` Crore) 1. 1995 Meghalaya Forest scam 300 2. 1996 Fertiliser Import scam 1,300 3. 1996 Urea scam 133 4. 1996 Bihar Government Fodder scam 950 Chap. 3 Infamous Corporate Frauds in India and Abroad 63

S. Year Name of the Scam Amount Involved Chap. 3 No. (` Crore) 5. 1997 Sukh Ram Telecom scam 1,500 6. 1997 SNC Lavalin Power Project scam 374

7. 1997 Bihar Land scandal 400 Infamous Corporate Frauds in India and Abroad 8. 1998 Teak Plantation scam 8,000 9. 2000 Unit Trust of India scam 4,800 10. 2005 Bihar Flood Relief scam 17 11. 2005 Scorpene Submarine scam 18,978 12. 2006 Punjab’s City Centre Project scam 1,500 13. 2006 Taj Corridor scam 175 14. 2008 Army Ration Pilferage scam 5,000 15. 2008 State Bank of Saurashtra scam 95 16. 2009 Jharkhand Medical Equipments scam 130 17. 2009 Rice Export scam 2,500 18. 2009 Orissa Mine scam 7,000 19. 2009 Madhu Koda Mining scam 4,000 20. 2010 2-G Spectrum scam 60,000

21. 2010 Adarsh Housing Society scam 8.5 63 22. 2010 Common Wealth Games scam 70,000 23. 2010 UP Food Grains scam 2,00,000 24. 2010 ISRO-Devas S Band scam 800 25. 2010 IPL Cricket scam 5,500 26. 2014 Wyapam scam ----

1. Infamous Corporate Frauds in India The major cases of corporate frauds occurred as shown in Table 3.4, which were reported during the period from 1992 to 2015 briefly described below, so as to bring out their features and modus operandi. 64 Corporate Frauds & their Regulation in India Chap. 3 Table 3.4 64 Major Scams of Corporate Sector

S. Year Name of the Scam Amount Involved No. (` Crore) 1. 1992 Harshad Mehta scam 4,000 Corporate FraudsCorporate & 2. 1992-96 C R Bhansali scam 12,000 3. 1995 Cobbler scam 2,880 4. 1995-96 Virendra Rastogi scam 43 5. 1997 JVG scam 1000 6. 1998 Anubhav Plantation scam 400 th 7. 2000 Abdul Karim Telgi scam 171 eir Regulation in India 8. 2000 UTI scam 4800 9. 2001 Dinesh Dalmia scam 595 10. 2001 Ketan Parekh scam 1,000 11. 2001 Sanjay Agarwal Home Trade scam 600 12. 2005 IPO scam 4.04 13. 2009 Satyam scam 8,000

14. 2013 Saradha scam 4,000 Chap. 3 15. 2013 National Spot Exchange Limited scam 5,000 16. 2015 Bank of Baroda scam 6,172 17. 2015 PACL scam 47,000

1.1 The Harshad Mehta Case (1992) Born in a modest Gujarati Jain family, Harshad Mehta was a stockbroker, and is reported to have engineered the rise in the in the year 1992. Starting as a dispatch clerk in the New India Assurance Company Ltd, he along with his brother, Ashwin developed interest in the stock markets operations. His earlier childhood was spent in Mumbai (Kandivali), where his father was a small-time businessman. Later, the family moved to Raipur in Chhattisgarh. Harshad Mehta started his venture, by establishing a company known as Grow More Research and Asset Management Company Limited. Mehta gradually rose Chap. 3 Infamous Corporate Frauds in India and Abroad 65 to become a stock broker on the Bombay Stock Exchange and developed an expensive lifestyle. He lived in a 15,000 square feet (1,400 square metre) Chap. 3 apartment, which had a swimming pool as well as a golf patch. He rose and survived the bear runs. This earned him the nickname of the Big Bull of the trading floor. By the late 1980s, the media started projecting him as ‘stock market success’ and ‘the story of rags-to-riches’. By 1990, Mehta had risen to prominence in the stock market. He was buying shares heavily, the shares which Infamous Corporate Frauds in India and Abroad attracted his attention were shares of Associated Cement Company Limited (ACC). He took the price of ACC shares from `200 to `9,000 per share. In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was all along considered as the architect of the Bull Run was blamed for the crash. He had manipulated the Indian Banking systems to siphon off the funds from the banking system, and used the liquidity to build large positions in a select group of stocks. The broker was dipping illegally into the banking system to finance his buying. The crucial mechanism through which the scam was affected was the ready forward (RF) deal and the bank receipt (BR). The RF is an evidence of a secured short-term loan from one bank to another. Mehta used the RF deal with great success to channelise money through bank. A typical RF deal involves two banks brought together by a broker in lieu of a commission. The broker handled neither cash nor securities. In this settlement process, delivery of securities and payments was made through the broker. That is, the seller handed over the security 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, rather being known only to the broker. This the brokers could

manage primarily because by now they had become market-makers and had 65 started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank. Another instrument used in a big way was the bank receipt (BR). Securities were not actually traded in reality in a ready forward deal but the seller gave a BR which was a confirmation of sale of securities. It acted as a receipt for the money received by the selling bank. It promised to deliver the securities to the buyer. It also stated that the seller holds the securities for the time being in trust of the buyers. To figure this out, Mehta needed banks which could issue fake BRs (i.e., BRs not backed by any government securities). Two small and little known banks, the Bank of Karad and the Metropolitan Co-operative Bank, came in handy for this purpose. These banks were willing to issue BRs as and when required for a fee. Once these fake BRs were issued, they were passed on to the other banks which, in turn, gave money to Mehta, obviously assuming that they were lending against government securities, whereas this was not really the case. 66 Corporate Frauds & their Regulation in India Chap. 3 This money was used to drive up the stock prices in the stock markets. At the time of returning the money, the shares were sold for a profit and the BR was 66 retired. The game went on as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. Once the scam was exposed, many were left holding the BRs which did not have any value; the banking systems had been swindled of a whooping `4,000 crore. The concept of BR was finally removed

and many people were bankrupted and committed suicide. FraudsCorporate & Harshad and his associates by taking advantages of the loopholes in the banking system, triggered a securities scam diverted funds to the tune of `4,000 crore (`40 billion) from the banks to stockbrokers from April 1991 to May 1992. He was later charged with 72 criminal offences. A special court also sentenced Sudhir Mehta, Harshad Mehta’s brother, and six others, including four bank officials, to rigorous imprisonment (RI), ranging from 1 year to 10 years, on the th

charge of duping the State Bank of India to the tune of `600 crore (`6 billion) in eir Regulation in India connection with the securities scam that rocked the financial markets in 1992. He died in 2002, leaving behind many court cases pending against him. In 2006, a Hindi movie known as ‘Gafla’ was released and the movie was about stock market scam and was based on Big Bull of stock market ‘Harshad Mehta’. The movie showed lot of instances from his life. This movie won the best award at Cyprus Film Festival in 2008. Chap. 3 Chap. 3 Infamous Corporate Frauds in India and Abroad 67 - to ment Time Award Punish Taken Trial of 9 of Trial years 5 years 2 years 10 --- — - 000/ , 10 ` years years years Action Taken Action Consequences/ Imprisonment 2 imprisonment and fine 7 imprisonment — 9 22 imprisonment Life 8 Body Concerned Regulatory Code SEBI SEBI CourtCivil Civil CourtCivil PenalIndian 7 crore) ` Amount ( Involved 1.25 22 4000 1200 600 - existent - 6 documents documents and 1.24 1.24 crore in the ies. ` Modus Modus Operandi Table 3.6 Table banks banks in fictitious/ the nonexistent Co name of Inducing Inducing Life Corporation Insurance of India invest to share of his six troubled companies. Evading taxes and using forged making false statements, withdrew belonging $ to account 136,800 personal Trading in in market. stock premium shares at Collecting money public from and same transfer the compan to non Borrowing loans from 5 Fraud irector Perpetrators Infamous Corporate Frauds in India Frauds Corporate Infamous Promoter Promoter Managing D Managing Director Promoter 4 Industry Nature of Nature Making Capital Market Capital Market Capital Market Capital Market Shoe - 3 Year/ Period 1992 1996 1995 1957 1965 1992 2 Scam Scam Bhansali Name Fraud/ of Name C.R Cobbler Hari Das Mundhra Das Hari Dharma Jayanti MehtaHarshad 1 S. . No. 5. 3. 4. 2 1. 68 Corporate Frauds & their Regulation in India Chap. 3 - to ment Time Award Punish Taken — 7 years — 7 years 10 13 years — - prisonment years year Action Taken Action 202 fine crore Consequences/ — impri 13 years and sonment ` 3 im 1 imprisonment 9 10 years imprisonment On Bail 8 Body Concerned Regulatory SEBI CourtCivil SEBI SEBI Civil CourtCivil SEBI 7 crore) ` Amount ( Involved 43 1000 400 171.33 32 1500 . 6 fake fake stamp papers Modus Modus Operandi maximum banking banking limits. maximum operative operative societies of shoe makers. Exporting bicycles invoices inflated at Accepting beyond the limits permissible Deposits and maintain liquid failed Avoiding depositors assets to certificates. fake dubbing by Defaulting in the payment investor deposits the of to Printing and circulating market in the Purchasing securities for existed. nobuyer which Availing loan help with of bankers, above the the 5 Fraud Perpetrators Chief Executive Officer Chairman Chairman Promoter Chairman, Executive Director, Broker Stock Managing Director 4 Industry Nature of Nature Trading Capital Market Plantation Printing of Stamp Papers Mutual Fund Capital Market - 3 Year/ Period 2000 2001 1995 1996 1997 1998 2000 2 Scam Name Fraud/ of Name UTI Parekh Ketan Virendra Rastogi Virendra Kumar Vijay Sharma Plantation Anubhav Telgi Abdul Karim 1 S. No. 11. 9. 10. 7. 8. 6. Chap. 3 Infamous Corporate Frauds in India and Abroad 69 - to ment Time Award Punish Taken Arrested on Arrested the same of his day confession - 10 — 5 years 5 Crore 5 ` 1,800 ` e each. e Directions by Directions years Action Taken Action 1,500 Crores as 1,500 Crores 3,200 Crores. Consequences/ 1. Raju and 9 1.and Raju 7 others get rigorous years jail and fin 2. SEBIRaju to to and Company return andCrores ` interest, totally ` On Bail 9 — 3 imprisonment to and banned 10 trade for years 8 Body Concerned Regulatory SEBI SEBI SEBI SEBI 7 crore) ` 95 Amount ( Involved 5600 600 5 8000 - pay same about goods nearly banks. the interest the from of other sold 6 on ey to loss and mon and Modus Modus Operandi banks Fake Fake certificates availability sale for meant of Taking 20 securities Defaulting ments Trading in shares which were not listed in Exchange. Stock inflated Hugely accounting entries 5 Fraud Perpetrators Promoters, Auditors and Members Chairman, Executive Director Managing Director Auditor, Director, Manager 4 Industry Nature of Nature Exchange Financing Information Technology Information Technology 3 Year/ Period 2013 2001 2009 2001 2 Dalmia Scam Name Fraud/ of Name NSEL Dinesh Satyam Sanjay Agarwal Sanjay 1 S. No. 15. 13. 14. 12. 70 Corporate Frauds & their Regulation in India Chap. 3 - to ment Time Award Punish Taken - 10 - - 269 Crore , Action Taken Action 7 Consequences/ ` and MD fine in CBI custody 9 3 years Proceedings Ongoing 8 Body Concerned Regulatory SEBI and MCA SEBI Reserve Bank India of Enforcement and Directorate 7 crore) ` Amount ( Involved 4000 6172 47000 existent - 6 Modus Modus Operandi Fake Collective Fake Schemes Investment Created a fraudulent trade circuit, where claim duty drawback exports on inflated export bills creation and Companies of payment to for non imports. make shell Lure investors by raising money against bogus land letters. allotment 5 Fraud Perpetrators Promoters General Manager, Foreign Exchange Officer Founder and KMP - 4 Industry Nature of Nature Chit Fund Money Laundering CIS includ Ponzi ing Scheme 3 Year/ Period 2015 2015 2013 2 Scam Name Fraud/ of Name Bank of Baroda of Bank PACL Saradha Group 1 S. No. 18. 16. 17. Chap. 3 Infamous Corporate Frauds in India and Abroad 71 10 6 8 Action Taken Action Consequences/ 3 years imprisonment and 3 years months imprisonment 4 years imprisonment 9 years imprisonment 10 10 years imprisonment and 1 years months imprisonment 5 years imprisonment te taxte 7 cing people falsely people cing Modus Operandi Modus with other documents and documents other with reports. corpora false Filing returns. tax false to file Conspiring returns. false a Subscribing filing and firm partnership a motive with returns false tax evasion. of Convin Retirement in their to invest tax false give and Accounts return. Manipulating financial Manipulating records from money Diverting personal to his SVEM accounts in information false Giving and annual quarterly the along SEC with statements 6 Fraud Perpetrators Investment Fund Investment Founder CEO and President executive Chief President and vice President President Manager Promoters 5 Amount Involved $1500 Million $1500 $221641 $402004 $500000 Million $20 $4 Million Million $10 Table 3.7 Table related e of e 4 ment Traded ment Industry Natur Non Energy Non activities Farming Invest Transport Activity Financial Investment Investment Infamous Corporate Frauds Outside India Outside Frauds Corporate Infamous - - - - - 3 Year/ Period 2001 2006 2002 2005 1999 2002 2000 2005 2000 2002 2001 1985 and ment ment Fraud Exchange Service (IRS) Service 2 Engineering Wire Fraud Wire Revenue Name of Scammer/ Case Scammer/ of Name San Francisco Invest San Francisco and Mail Salinas Valley Salinas (SVEM) Manufacturing Internal and and Securities (SEC) Commission Co. Trucking Quality of Financial Funding Corporate (CFFA) Inc America, Enron 1 S. No. 7. 5. 6. 3. 4. 1. 2. 72 Corporate Frauds & their Regulation in India Chap. 3 8 Action Taken Action Consequences/ 3 years and 1 and 3 years 3 years and 3 years 1 month imprisonment month imprisonment 5 years imprisonment 2 years imprisonment 5 years imprisonment 8 years imprisonment 20 years imprisonment return. trading - r 7 in securities frauds in securities Modus Operandi Modus Filing false Tax Return and Tax false Filing income all to report failed Tax individual on the Mail Return, false Filing a from Theft and Fraud program. funded federally fraudulently Promoter to investors inducing through money obtained and investments bogus schemes. other Involved to inside related Involving in the Tax Frauds Tax in the Involving CFO by loan private Taking without Tyco CEO from & appropriate receiving Tyco’s from approval committee compensation shareholder. notifying and Tax. Income Evading 6 Fraud Perpetrators CFO CEO Promoters CEO and Other CEO and Executives and CEO CFO Executive Member Board 5 Amount Involved 1200 Million 1200 $170 Million $170 Millions $9000 Million $10.5 $90000 $400000 $ $800,000 and e of e 4 Industry Natur Telecommunications Electronic Components Products care Health Farming (Trading) Steel Education Co. Investment Goods Consumer 3 Year/ Period 2012 2007 2009 2009 2009 2002 2005 s 2 Name of Scammer/ Case Scammer/ of Name FSG) Rajat Gupta Rajat Marian Gardens Tea Farm Tea Gardens Marian Co. Gravel & Sand Fisher ( Academy Philadelphia (PACS) School Chartered Firm Law Ft. Lauderdale WorldCom Tyco 1 S. No. 14. 12. 13. 10. 11. 9. 8. Chap. 3 Infamous Corporate Frauds in India and Abroad 73 3. Features of Corporate Frauds in India Chap. 3 On the basis of different frauds occurred in corporate sector during last 20 years, the following features of corporate fraud can be drawn: 3.1 Fraud Perpetrators A careful look at the major scams in the corporate world in India and abroad reveals that the maximum number of frauds has been perpetrated either by the Infamous Corporate Frauds in India and Abroad company management or by its top executives. The management or the executives, in connivance with the unscrupulous professionals and consultants, committed the frauds through various modus operandi in order to make personal gains at the cost of other stakeholders’. This may be partly due to the non- existence of independent directors and members in the audit committees. 3.2 Common types of Frauds It is noted that the most prevalent type of fraud in India and abroad is the manipulation of financial statements in order to evade taxes and other government levies. The second largest type of fraud prevailing in the corporate world is the one resulting from procedural lapses. These procedures include the carrying on of business ultra vires the company objects, merger and amalgamation, and seeking company liquidation on grounds having mala fide intentions. 3.3 Lack of Action against Perpetrators Companies are reluctant to take legal recourse against employees responsible for committing frauds. A few companies take disciplinary action against unscrupulous employees and their associate professionals. This may be due to fear of damages to company goodwill and reputation if news about the fraudulent 73 incidence leaks into public domain. Also companies prefer to avoid reporting of any economic offence to a regulator. Companies are generally interested in recovering the defrauded money rather than getting the culprit punished. The analysis of cases of corporate frauds reveals that the fraud perpetrators got imprisonment for a period ranging from one year to 22 years, besides imposition of penalty. 3.4 Accountability In the first reported major case of corporate fraud, namely, the Hari Das Mundhra case, the then Union Minister of Finance, the legendary T.T. Krishnamachary, and the Finance Secretary both had to resign from their posts. No such action was ever taken in any subsequent case. But, then that was the era of Jawaharlal Nehru and Lal Bahadur Shastri! In fact, no senior functionary in the government either owned up the responsibility or was impugned as a party to the fraud case for administrative lapses. 74 Corporate Frauds & their Regulation in India Chap. 3 3.5 Unsufficient Authorities 74 Lack of an effective regulatory and compliance mechanism, and weak law enforcement are equally responsible for facilitating frauds. Corporate frauds were unearthed because of legislations such as Right to Information Act (RIT) and Public Interest Litigation (PIL). 3.6 Insufficient Powers with Fraud Regulating Agencies Corporate FraudsCorporate & It is noted from the above cases that after the introduction of the SEBI Act in 1992, corporate frauds have been rampant in India, which may probably be due to the fact that the SEBI does not enjoy powers of a criminal court. Moreover, the SEBI also suffers from jurisdictional disadvantages in respect of non-listed companies. It appears that the major regulator of the corporate world has not made its presence felt in the market insofar as the regulation of corporate frauds is concerned. th eir Regulation in India 3.7 Approach of the Adjudicating Agencies The corporate fraud perpetrators have been treated in courts at par with other fraudsters, while the causes and consequences are entirely different and far- reaching. The time lag in judicial decisions is also responsible for inducing corporate fraud as no separate wing has existed to punish the guilty expeditiously. 3.8 Time Taken in Disposal of Cases The disposal of the fraud cases has on an average taken and relatively long period

of time. Most of the cases took more than 7 years. The minimum time was taken Chap. 3 in the Satyam Case, where the main accused B. Ramalinga Raju, the company chairman, was convicted in two months as he himself confessed the crime. Companies hesitate to record such matters to the police, apprehending the hardship they may face during the investigation and prolonged judicial trials. 3.9 Weak Anti-fraud Measures Companies still rely on old traditional techniques and measures for protection of frauds. Reliance on Internal and External Audit and code of conduct are main measures to detect and prevent frauds. These methods are not sufficient for detecting and preventing frauds. A few companies have pro-active fraud risk management initiatives and whistle-blowing mechanisms. It is surprising as fraudsters are using advance tools and technology to perpetrate frauds. 4. Summary Corporate governance is a multi-level and a multi-layered process that is distilled from an organisation’s culture, policies, values and ethics. It is an internal control in which responsibility is shared between the directors, the management and the Chap. 3 Infamous Corporate Frauds in India and Abroad 75 employees. It is the responsibility of the Board of Directors to ensure that the company has appropriate internal fraud-reporting mechanism, including Chap. 3 arrangements for management monitoring and reporting. A transparent, ethical, and responsible corporate governance framework essentially emanates from the intrinsic will and passion for good governance. The global financial crises during the recent past, along with some of the large corporate failures and frauds, have revealed that while the corporate governance superstructure in India is fairly Infamous Corporate Frauds in India and Abroad durable, there are certain weaknesses that might have their roots in the ethos of individual business firm. There are some legal and regulatory obligations on companies to report frauds to third parties. Significant and material frauds need to be disclosed to the statutory auditors, shareholders, and investors. Despite good corporate governance and existence of numerous legislations and regulatory authorities, corporate frauds appear to have been rampant throughout the country. A need was felt to streamline the existing legal and regulatory obligation to report frauds for the purposes of compliance, consistency, transparency, clarity and cost. These cases might uncover changes needed to minimise corporate frauds and may help to restore investor confidence in the corporate sector. Another possible outcome might help to identify potential weaknesses in the internal control framework that would help restore the investor’s confidence. As frauds are more prevalent in today's business world, a clear-cut policy regarding the prevention and control of fraud is a sine qua non for any organisation. 75