2G SPECTRUM SCAM

The 2G spectrum scam in India involved the issue of 1232 licenses by the ruling Congress-led UPA alliance[1] of the 2G spectrum to 85 companies including many new telecom companies with little or no experience in the telecom sector at a price set in the year 2001.The issue came to light after the auction of airwaves for 3G services which amounted to 677,190 crore (US$151.01 billion) to the exchequer.A report submitted by the Comptroller and Auditor General based on the money collected from 3G licenses estimated that the loss to the exchequer due to underpricing of the 2G spectrum was 176,379 crore (US$39.33 billion).The scam came to public notice when the took SubramanianSwamy's complaints on record [With Case type: Writ Petition (Civil), Case No: 10, Year: 2011].

The scam involved allegations regarding

. The underpricing of the 2G spectrum by the Department of Telecommunications which resulted in a heavy loss to the exchequer, and

. The illegal manipulation of the spectrum allocation process to favors select companies.

Civil Servants, Politicians and Corporations Involved in scam bad

All the accused have been booked under sections 120(B) (criminal conspiracy), 468 (Forgery for purpose of cheating), 471 (using as genuine a forged document or electronic record), 420 (cheating and dishonestly inducing delivery of property) and 109 (abetment if the act abetted is committed in consequence, and where no express provision is made for its punishment) of the .

Politicians, Ministers and Parliamentarians involved

. Andimuthu Raja , Union Cabinet Minister for Communications and Information Technology : The Comptroller and Auditor General holds Raja personally responsible for the sale of 2G spectrum at 2001 rates in 2008, resulting in the previously mentioned loss of up to Rs. 1.76 lakh crores (US$40 billion) to the national exchequer.In August, 2010, evidence was submitted by the Comptroller and Auditor General (CAG) showing that Raja had personally signed and approved the majority of the questionable allocations.

. KanimozhiAravindhan , Member of RajyaSabha : On April 25, 2011 Kanimozhi was named as a co- conspirator in the supplementary charge sheet filed by the Central Bureau of Investigation (CBI) in connection with the 2G spectrum case. The charge sheet submitted before the Supreme Court establishes how Rs 200 crore connected with the scam traveled from a partnership firm of businessman ShahidBalwa of Swan Telecom to the -owned Kalaignar TV. She has been charged with section 7 and 11 of the Prevention of Corruption Act. The sections deal with acceptance of alleged gratification.

Bureaucrats involved . Siddhartha Behura , Civil Servant (IAS officer of 1973 batch UP cadre) : He was the Telecom secretary who served in the DOT at the time of the 2G allocation.

. PradipBaijal , Civil Servant (IAS officer of 1966 batch MP cadre) : He is alleged to have recommended policies that favored certain Telecom companies when he was heading the TRAI. Post retirement, Baijal joined Noesis, a consulting firm. Raja has made references to Baijal's decisions in 2003 as the basis for his decisions in 2008; something which has been attacked by ArunShourie and several media pundits. The houses and offices of the bureaucrat were recentlyvisited by the Central Bureau of Investigation as part of their investigations. [11] However, Baijal is expected to get a clean chit in this issue.

. R K Chandolia , Civil Servant (IES officer of 1984 batch cadre): He was private secretary of Raja during UPA-I when the licences were awarded. When Raja became the Telecom Minister once again in UPA-II, Chandolia had been promoted to the Joint Secretary rank. Raja re-designated him Economic Adviser that gave him the charge of all important policy-related work. Chandolia interacted with all the licensees. It is said that it was Chandolia who, from DDG-access services A K Srivastava's room, had handed out letters of intent to representatives of various companies.

Corporations involved

. Allianz Infra . . Dishnet Wireless . . SistemaShyam Mobile (MTS) – Sistema Mobile Russia . . . Swan Telecom . Tata Tele Services . Unitech Group . Videocon Telecommunications Limited . Vodafone Essar . Virgin Mobile India

Corporate personalities involved

. Anil Ambani - Reliance Group (ADAG)[15] - . Ratan Tata . ShahidBalwa - Swan Telecom (now Etisalat DB) . VinodGoenka - Swan Telecom (now Etisalat DB) . VenugopalDhoot - . PrashantRuia - Essar Group . Sanjay Chandra , Managing Director of Unitech Ltd and Unitech Wireless

All of them have either been questioned by the CBI or are prospective suspects in the scam.

Impact on stock markets

The first casualty in Stock Markets once Raja was arrested was DB Realty.[36] 20% fall in the stock prices of DB Realty. Sun TV had its shares fall by 10%.[37] Sun TV COO refused the allegations. Swan Telecom Chief Balwa was arrested on Feb 8 [38] and this led to rumours of links with Anil Ambani's Reliance ADAG and it led to 20% fall of his stocks . Its reported that nearly 2 Billion USD was eroded from his stocks .[39] Spicejet stocks went down after reports of investigation on Maran's recent takeover of Spicejet .

Media persons and lobbyists involved

. NiraRadia , a former airline entrepreneur turned corporate lobbyist whose conversations with politicians and corporate entities were recorded by the government authorities. The contents were later leaked by unknown parties creating the NiraRadia tapes controversy

Politicans, Ministers and Parlimentarians involved

. DayanidhiMaran , former Union Cabinet Minister for Textiles : The main allegation revealed by Tehelka magazine and followed up in several other reports, is that Maran forced C Sivasankaran, owner of Aircel, to sell the telecom company to Maran's Malaysia-based friend T Ananda Krishnan in 2006. The reports allege that Maran deliberately delayed issuing spectrum licenses to Aircel's sister concern, Dishnet Wireless, when it was owned by Sivasankaran. He issued the licenses soon after it changed hands to Ananda Krishnan who owns Maxis.[16]

. P. Chidambaram , current Union Cabinet Minister for Home Affairs : SubramaniamSwamy states that when the 2G Spectrum rate was finalised, P.Chidambaram was the finance minister of India and he had a major role in deciding the spectrum price with A.Raja. Subramaniam alleges that Chidambaram had received kickbacks and undervalued the spectrum cost.[17]

Petitioners to 2g scam

. SubramaniamSwamy , activist lawyer and politician, whose letters to the Prime Minister demanding action and affidavits and cases in the Supreme Court brought the issue into the public limelight.

. ParanjoyGuhaThakurta, a journalist who was one among the very first to write on the irregularities in the awarding of 2G spectrum allocation by the Telecom Ministry. He is also one of the petitioners in the 2G PIL currently being heard in the Supreme court.[18]

. PrashantBhushan , on behalf of the Centre for Public Interest Litigation.

. Anil Kumar, on behalf of the civil society organisationTelecom Watchdog

. Others:Several eminent people like former chief election commissioners J.M. Lyngdoh, T.S. Krishnamurthy and N. Gopalaswami and former central vigilance commissioner (CVC) P. Shankar are also petitioners in the suits filed by civil society groups.[14]

Loss to Exchequer

The Controller and Auditor General of India used three different methods to assess the presumptive loss to the exchequer resulting from not auctioning 2G spectrum.[19] The first method was based on the fact that S Tel, one of the licensees, explicitly offered to pay significantly higher license fees for the spectrum. Based on the fees offered by S Tel, the CAG estimated the loss to the exchequer at 67,364 crore (US$15.02 billion)

The second method was based on the price recovered by the 3G auction in 2010. The CAG reasoned that since 2G is really 2.75G (EDGE), its price should be comparable to that of 3G licenses. Based on this method, the CAG estimated the loss to the exchequer to be 176,000 crore (US$39.25 billion)

The third method was based on the fact that some of the licensees received FDI in the form of equity, shortly after the spectrum allocation. The CAG reasoned that this equity infusion was entirely due to the value of the allocated spectrum; this can be construed as re-sale of the spectrum by the licensee, and hence was a valid basis for assessing loss to the exchequer. Based on this method, theCAG estimated the loss to the exchequer to be anywhere between 57,666 crore (US$12.86 billion) (based on Etisalat's investment in Swan Telecom) and 69,626 crore (US$15.53 billion) (based onTelenor's investment in Unitech).

For its part, the Congress-party led government has publicly defended itself on this count and KapilSibal, who replaced A. Raja as the communication minister, has refuted the CAG reasoning.[20] He has also justified his government's decision not to auction 2G spectrum as being in line with the policy guidelines laid down by the 10th Five-Year Plan.[21][22]

Relationship between media and government

Main article: NiraRadia tapes controversy

Media sources such as OPEN and Outlook reported that BarkhaDutt and VirSanghvi knew that corporate lobbyist NiraRadia was influencing the decisions of A. Raja.[23] The critics alleged that Dutt and Sanghvi knew about corruption between the government and the media industry, supported this corrupt activity, and suppressed news reporting the discovery of the corruption.[23]

Ratan Tata petitions over leak

The tapes leaked to the public include conversations between NiraRadia and Ratan Tata. Tata petitioned the government to acknowledge his right to privacy and demanded accountability for the leak, with the Minister for Home Affairs, CBI, Indian Income Tax Department, the Department of Telecommunication, and the Department of Information Technology as respondents in the petition.[24]

On April 4, 2011 Indian Parliament's Public Accounts Committee (PAC)questioned Tata Sons Chairman Ratan Tata and corporate lobbyist NiiraRadia regarding their roles in 2G Scam.

Response to scam

In early November 2010 Telecom Minister A Raja resigned.

In mid November the controller VinodRai issued show-cause notices to Unitech, S Tel, Loop Mobile, Datacom (Videocon), and Etisalat to respond to his assertion that all of the 85 licenses granted to these companies did not have the up-front capital required at the time of the application and were in other ways illegal.[26] Some media sources have speculated that these companies will receive large fines but not have their licenses revoked, as they are currently providing some consumer service.[26]

In response to the various allegations, the Govt of India has replaced the then incumbent Telecom minister, A. Raja with KapilSibal who has taken up this charge in addition to being the Union minister for Human Resources Development.MrSibal contends that the "notional" losses quoted are a result of erroneous calculations and insists that the actual losses are nil.[20][21]

The CBI conducted raids on Raja and four other telecom officials - former telecom secretary SiddharthBehura, Raja's personal secretary R K Chandolia, member telecom K Sridhar and DoT deputy director general A K Srivastava on 8 December 2010.Kanimozhi, DMK MP and Karunanidhi's daughter, was arrested and sent to by a Delhi court which dismissed her bail plea in the 2G spectrum scam, saying there was a possibility of witnesses being influenced considering the "magnitude" of the crime.[27]

Arrests and Chargesheets

On February 2, 2011, the Central Board of Direct Taxes arrested former Telecommunications Union Minister Andimuthu Raja. The CBDT also arrested R.K. Chandolia, Raja's personal aide, andSiddharthBehura, the former Telecom Secretary.[28][29] Both Raja and Chandolia are heard in conversation with NiiraRadia in the released Radia tapes.

On February 8, 2011, the CBI arrested Mumbai based DynamixBalwas (DB) group managing director ShahidUsmanBalwa in connection with the 2G spectrum allocation scam. The CBI has evidence from the Income Tax department that ShahidUsmanBalwa, considered close to Raja, was instrumental in channelling the kickbacks allegedly received by the former telecom minister.[30]

On March 29, 2011, in Delhi, the CBI arrested AsifBalwa (younger brother of the arrested former Managing Director of DB-Etisalat Group, ShahidBalwa) and Rajeev Agarwal for their alleged involvement in money transfer to the DravidaMunnetraKazhagam's (DMK) Kalaignar TV channel.[31]

On April 2, 2011, the CBDT filed its first 80,000 page chargesheet in the 2G spectrum scam before a Special Court in Delhi naming nine individuals and three companies. It said the wrongful acts of the accused deprived the government exchequer of possible revenues amounting to INR Rs 30,985 crore (USD $ 6,983,322,233). The accused include the following individuals:[32]

1. Andimuthu Raja, former Telecom minister

2. SiddharthBehura, former Telecom Secretary

3. R.K. Chandolia, Raja's former personal secretary 4. ShahidUsmanBalwa, former Director of Swan Telecom (now Etisalat DB) 5. Sanjay Chandra , Managing Director of Unitech Ltd and Unitech Wireless 6. GautamDoshi , Group MD, Reliance Anil DhirubhaiAmbani Group 7. Hari Nair , Senior Vice-President, Reliance Anil DhirubhaiAmbani Group 8. SurendraPipara , Senior Vice-President, Reliance Anil DhirubhaiAmbani Group and Reliance Telecom Ltd 9. VinodGoenka , Director, Swan Telecom (now Etisalat DB)

The three companies named are:

1. Swan Telecom 2. Unitech Wireless 3. Reliance Telecom

In the first chargesheet, the CBI had named lobbyist NiiraRadia and 124 others as witnesses.

On 25 April 2011, in its second chargesheet in the scam, the Central Bureau of Investigation (CBI) named five more accused individuals:[33]

1. Kanimozhi - RajyaSabha Member of Parliament (DMK) and daughter of ex-Chief Minister M Karunanidhi 2. Sharad Kumar of Kalaignar TV 3. KarimMorani of Cineyug Films 4. AsifBalwa of Kusegaon Realty 5. Rajiv B Agarwal of Kusegaon Realty

On 20 May 2011, Special CBI Judge O P Saini of the Delhi court ordered the arrest of DMK Member of Parliament Kanimozhi and Kalaignar TV Managing Director Sharad Kumar after rejecting their bail pleas in the 2G spectrum case.[34]

Harshad Mehta Scandal Harshad Mehta was an Indian stockbroker caught in a scandal beginning in 1992. He died of a massive heart attack in 2001, while the legal issues were still being litigated. Early life Harshad Shantilal Mehta was born in a Gujarati jain family of modest means. His father was a small businessman. His mother's name was Rasilaben Mehta. His early childhood was spent in the industrial city of Bombay. Due to indifferent health of Harshad’s father in the humid environs of Bombay, the family shifted their residence in the mid-1960s to Raipur, then in Madhya Pradesh and currently the capital of Chattisgarh state. An Amul advertisement of 1999 during the conterversy over MUL saying it as "The Big Bhool" (Bhool in Hindi means Blunder) He studied at the Holy Cross High School, located at Byron Bazaar. After completing his secondary education Harshad left for Bombay. While doing odd jobs he joined Lala Lajpat Rai College for a Bachelor’s degree in Commerce. After completing his graduation, Harshad Mehta started his working life as an employee of the New India Assurance Company. During this period his family relocated to Bombay and his brother Ashwin Mehta started to pursue graduation course in law at Lala Lajpat Rai College. His youngest brother Hitesh is a practising surgeon at the B.Y.L.Nair Hospital in Bombay. After his graduation Ashwin joined (ICICI) Industrial Credit and Investment Corporation of India. They had rented a small flat in Ghatkopar for living. In the late seventies every evening Harshad and Ashwin started to analyze tips generated from respective offices and from cyclostyled investment letters, which had made their appearance during that time. In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to Bombay Stock Exchange (BSE) before becoming a jobber on BSE for stock broker P.D. Shukla. In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. After a while he was unable to sustain his overbought positions and decided to pay his dues by selling his house with consent of his mother Rasilaben and brother Ashwin. The next day Harshad went to his brokers and offered the papers of the house as guarantee. The brokers Shah and Sheth were moved by his gesture and gave him sufficient time to overcome his position. After he came out of this big struggle for survival he became stronger and his brother quit his job to team with Harshad to start their venture GrowMore Research and Asset Management Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for the same with financial assistance from Shah and Sheth, who were Harshad's previous broker mentors. He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as well as scrip-specific activities. By the end of eighties the media started projecting him as "Stock Market Success", "Story of Rags to Riches" and he too started to fuel his own publicity. He felt proud of this accomplishments and showed off his success to journalists through his mansion "Madhuli", which included a billiards room, mini theatre and nine hole golf course. His brand new Toyota Lexus and a fleet of cars gave credibility to his show off. This in no time made him the nondescript broker to super star of financial world. During his heyday, in the early 1990s, Harshad Mehta commanded a large resource of funds and finances as well as personal wealth. The fall 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. It transpired that 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. When the scam broke out, he was called upon by the banks and the financial institutions to return the funds, which in turn set into motion a chain reaction, necessitating liquidating and exiting from the positions which he had built in various stocks. The panic reaction ensued, and the stock market reacted and crashed within days.He was arrested on June 5, 1992 for his role in the scam. His favorite stocks included ACC Apollo Tyres Reliance Tata Iron and Steel Co. (TISCO) BPL Sterlite Videocon. The extent The Harshad Mehta induced security scam, as the media sometimes termed it, adversely affected at least 10 major commercial banks of India, a number of foreign banks operating in India, and the National Housing Bank, a subsidiary of the Reserve Bank of India, which is the central bank of India. As an aftermath of the shockwaves which engulfed the Indian financial sector, a number of people holding key positions in the India's financial sector were adversely affected, which included arrest and sacking of K. M. Margabandhu, then CMD of the UCO Bank; removal from office of V. Mahadevan, one of the Managing Directors of India’s largest bank, the State Bank of India. The end The Central Bureau of Investigation which is India’s premier investigative agency, was entrusted with the task of deciphering the modus operandi and the ramifications of the scam. Harshad Mehta was arrested and investigations continued for a decade. During his judicial custody, while he was in Thane Prison, Mumbai, he complained of chest pain, and was moved to a hospital, where he died on 31st December 2001. His death remains a mystery. Some believe that he was murdered ruthlessly by an underworld nexus (spanning several South Asian countries including Pakistan). Rumour has it that they suspected that part of the huge wealth that Harshad Mehta commanded at the height of the 1992 scam was still in safe hiding and thought that the only way to extract their share of the 'loot' was to pressurise Harshad's family by threatening his very existence. In this context, it might be noteworthy that a certain criminal allegedly connected with this nexus had inexplicably surrendered just days after Harshad was moved to Thane Jail and landed up in imprisonment in the same jail, in the cell next to Harshad Mehta's. Mumbai: Just as the year 2001 was coming to an end, Harshad Shantilal Mehta, boss of Growmore Research and Asset Management, died of a massive heart attack in a jail in Thane. And thus came to an end the life of a man who is probably the most famous character ever to have emerged from the Indian stock market. In the book, The Great Indian Scam: Story of the missing Rs 4,000 crore, Samir K Barua and Jayanth R Varma explain how Harshad Mehta pulled off one of the most audacious scams in the history of the Indian stock market. Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early childhood was spent in Mumbai where his father was a small-time businessman. Later, the family moved to Raipur in Madhya Pradesh after doctors advised his father to move to a drier place on account of his indifferent health. But Raipur could not hold back Mehta for long and he was back in the city after completing his schooling, much against his father’s wishes. Mehta first started working as a dispatch clerk in the New India Assurance Company. Over the years, he got interested in the stock markets and along with brother Ashwin, who by then had left his job with the Industrial Credit and Investment Corporation of India, started investing heavily in the stock market. As they learnt the ropes of the trade, they went from boom to bust a couple of times and survived. Mehta gradually rose to become a stock broker on the Bombay Stock Exchange, who did very well for himself. At his peak, he lived almost like a movie star in a 15,000 square feet house, which had a swimming pool as well as a golf patch. He also had a taste for flashy cars, which ultimately led to his downfall. Newsmakers of the week: View Slideshow “The year was 1990. Years had gone by and the driving ambitions of a young man in the faceless crowd had been realised. Harshad Mehta was making waves in the stock market. He had been buying shares heavily since the beginning of 1990. The shares which attracted attention were those of Associated Cement Company (ACC),” write the authors. The price of ACC was bid up to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation. The theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company. Through the second half of 1991, Mehta was the darling of the business media and earned the sobriquet of the ‘Big Bull’, who was said to have started the bull run. But, where was Mehta getting his endless supply of money from? Nobody had a clue. On April 23, 1992, journalist Sucheta Dalal in a column in , exposed the dubious ways of Harshad Metha. The broker was dipping illegally into the banking system to finance his buying. “In 1992, when I broke the story about the Rs 600 crore that he had swiped from the State Bank of India, it was his visits to the bank’s headquarters in a flashy Toyota Lexus that was the tip-off. Those days, the Lexus had just been launched in the international market and importing it cost a neat package,” Dalal wrote in one of her columns later. The authors explain: “The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jewellery….The borrowing bank actually 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.” It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system. 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 know 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. 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. As the authors write, a 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 mean time, the seller holds the securities in trust of the buyer.” Having figured this out, Metha 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 Metorpolitan 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, 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. The money due to the bank was returned. The game went on as long as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. 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 Rs 4,000 crore. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. This time around, he was in cahoots with owners of a few companies and recommended only those shares. This game, too, did not last long. Interestingly, however, by the time he died, Mehta had been convicted in only one of the many cases filed against him.

KP

"All my lifetime's savings are gone. I don't know how to feed my family." - A small investor hit by the Ketan Parekh scam, in April 2001. THE CRASH THAT SHOOK THE NATION The 176-point[1] Sensex[2] crash on March 1, 2001 came as a major shock for the Government of India, the stock markets and the investors alike. More so, as the Union budget tabled a day earlier had been acclaimed for its growth initiatives and had prompted a 177-point increase in the Sensex. This sudden crash in the stock markets prompted the Securities Exchange Board of India (SEBI) to launch immediate investigations into the volatility of stock markets. SEBI also decided to inspect the books of several brokers who were suspected of triggering the crash. Meanwhile, the Reserve Bank of India (RBI) ordered some banks to furnish data related to their capital market exposure. This was after media reports appeared regarding a private sector bank[3] having exceeded its prudential norms of capital exposure, thereby contributing to the stock market volatility. The panic run on the bourses continued and the Bombay Stock Exchange (BSE) President Anand Rathi's (Rathi) resignation added to the downfall. Rathi had to resign following allegations that he had used some privileged information, which contributed to the crash.The scam shook the investor's confidence in the overall functioning of the stock markets. By the end of March 2001, at least eight people were reported to have committed suicide and hundreds of investors were driven to the brink of bankruptcy The scam opened up the debate over banks funding capital market operations and lending funds against collateral security. It also raised questions about the validity of dual control of co-operative banks[4] . (Analysts pointed out that RBI was inspecting the accounts once in two years, which created ample scope for violation of rules.) The first arrest in the scam was of the noted bull[5], Ketan Parekh (KP), on March 30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports abounded as to how KP had single handedly caused one of the biggest scams in the history of Indian financial markets. He was charged with defrauding Bank of India (BoI) of about $30 million among other charges. KP's arrest was followed by yet another panic run on the bourses and the Sensex fell by 147 points. By this time, the scam had become the 'talk of the nation,' with intensive media coverage and unprecedented public outcry. THE MAN WHO TRIGGERED THE CASH 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[1] . He was known as the 'Bombay Bull' and had connections with movie stars, politicians and even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in new economy companies. Over the years, KP built a network of companies, mainly in Mumbai, involved in stock market operations. 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[2] contributed to the Bull Run[3] led by an upward trend in the NASDAQ[4].The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest Communications, and PentaMedia Graphics KP selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks The shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially (Refer Exhibit I for BSE Index movements). HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks. Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges (Refer Exhibit II for the price movements of K-10 stocks). HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion[5] . As such huge amounts of money were being pumped into the markets, it became tough for KP to control the movements of the scrips. Also, it was reported that the volumes got too big for him to handle. Analysts and regulators wondered how KP had managed to buy such large stakes THE FACTORS THAT HELPED THE MAN According to market sources, though Ketan Parekh [KP] was a successful broker, he did not have the money to buy large stakes. According to a report [1] 12 lakh shares of Global in July 1999 would have cost KP around Rs 200 million. The stake in Aftek Infosys would have cost him Rs 50 million, while the Zee and HFCL stakes would have cost Rs 250 million each. Analysts claimed that KP borrowed from various companies and banks for this purpose. His financing methods were fairly simple. He bought shares when they were trading at low prices and saw the prices go up in the bull market while continuously trading. When the price was high enough, he pledged the shares with banks as collateral for funds. He also borrowed from companies like HFCL. This could not have been possible out without the involvement of banks. A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP's main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000. In December 2000, when KP faced liquidity problems in settlements he used MMCB in two different ways. First was the pay order[2] route, wherein KP issued cheques drawn on BoI to MMCB, 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. As per a RBI inspection report, MMCB's loans to stock markets were around Rs 10 billion of which over Rs 8 billion were lent to KP and his firms 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. Apart from direct borrowings by KP-owned finance companies, a few brokers were also believed to have taken loans on his behalf. It was alleged that Madhur Capital, a company run by Vinit Parikh, the son of MMCB Chairman Ramesh Parikh, had acted on behalf of KP to borrow funds. KP reportedly used his BoI accounts to discount 248 pay orders worth about Rs 24 billion between January and March 2001. BoI's losses eventually amounted to well above Rs 1.2 billion. The MMCB pay order issue hit several public sector banks very hard. These included big names such as the State Bank of India, Bank of India and the Punjab National Bank, all of whom lost huge amounts in the scam. It was also alleged that Global Trust Bank (GTB) issued loans to KP and its exposure to the capital markets was above the prescribed limits. According to media reports, KP and his associates held around 4-10% stake in the bank. There were also allegations that KP, with the support of GTB's former CMD Ramesh Gelli, rigged the prices of the GTB scrip for a favorable swap ratio[3] before its proposed merger with UTI Bank. KP's modus operandi of raising funds by offering shares as collateral security to the banks worked well as long as the share prices were rising, but it reversed when the markets started crashing in March 2000. The crash, which was led by a fall in the NASDAQ, saw the K-10 stocks also declining. KP was asked to either pledge more shares as collateral or return some of the borrowed money. In either case, it put pressure on his financials. By April 2000, mutual funds substantially reduced their exposure in the K-10 stocks. In the next two months, while the Sensex declined by 23% and the NASDAQ by 35.9%, the K-10 stocks declined by an alarming 67%. 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. In December 2000, the NASDAQ crashed again and technology stocks took the hardest beating ever in the US. Led by doubts regarding the future of technology stocks, prices started falling across the globe and mutual funds and brokers began selling them. KP began to have liquidity problems and lost a lot of money during that period It was alleged that 'bear hammering' of KP's stocks eventually led to payment problems in the markets. The Calcutta Stock Exchange's (CSE) payment crisis was one of the biggest setbacks for KP. The CSE was critical for KP's operation due to three reasons. One, the lack of regulations and surveillance on the bourse allowed a highly illegal and volatile badla business (Refer Exhibit III). Two, the exchange had the third-highest volumes in the country after NSE and BSE. Three, CSE helped KP to cover his operations from his rivals in Mumbai. Brokers at CSE used to buy shares at KP's behest. Though officially the scrips were in the brokers' names, unofficially KP held them. KP used to cover any losses that occurred due to price shortfall of the scrips and paid a 2.5% weekly interest to the brokers. 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. The situation worsened as KP's badla payments of Rs 5-6 billion were not honored on time for the settlement and about 70 CSE brokers, including the top three brokers of the CSE (Dinesh Singhania, Sanjay Khemani and Ashok Podar) defaulted on their payments. By mid-March, the value of stocks held by CSE brokers went down further to around Rs 2.5-3 billion. The CSE brokers started pressurizing KP for payments. KP again turned to MMCB to get loans. The outflow of funds from MMCB had increased considerably form January 2001. Also, while the earlier loans to KP were against proper collateral and with adequate documentation, it was alleged that this time KP was allowed to borrow without any security. By now, SEBI was implementing several measures to control the damage. An additional 10% deposit margin was imposed on outstanding net sales in the stock markets. Also, the limit for application of the additional volatility margins was lowered from 80% to 60%. To revive the markets, SEBI imposed restriction on short sales[4] and ordered that the sale of shares had to be followed by deliveries. It suspended all the broker member directors of BSE's governing board. SEBI also banned trading by all stock exchange presidents, vice-presidents and treasurers. A historical decision to ban the badla system in the country was taken, effective from July 2001, and a rolling settlement system for 200 Group Ashares[5] was introduced on the BSE. THE SYSTEM THAT BRED THESE FACTORS The small investors who lost their life's savings felt that all parties in the functioning of the market were responsible for the scams. They opined that the broker-banker-promoter nexus, which was deemed to have the acceptance of the SEBI itself, was the main reason for the scams in the Indian stock markets. TSEBI's measures were widely criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in certain shares over an 18-month period prior to February 2001. Analysts also opined that SEBI's market intelligence was very poor. Media reports commented that KP's arrest was also not due to the SEBI's timely action but the result of complaints by BoI. A market watcher said[1] ,"When prices moved up, SEBI watched these as 'normal' market movements. It ignored the large positions built up by some operators. Worse, it asked no questions at all. It had to investigate these things, not as a regulatory body, but as deep-probing agency that could coordinate with other agencies. Who will bear the loss its inefficiency has caused?"An equally crucial question was raised by media regarding SEBI's ignorance of the existence of an unofficial market at the CSE Interestingly enough, there were reports that the arrest was motivated by the government's efforts to diffuse the Tehelka controversy. Many exchanges were not happy with the decision of banning the badla system as they felt it would rig the liquidity in the market. Analysts who opposed the ban argued that the ban on badla without a suitable alternative for all the scrips, which were being moved to rolling settlement, would rig the volatility in the markets. They argued that the lack of finances for all players in the market would enable the few persons who were able to get funds from the banking system - including cooperative banks or promoters - to have an undue influence on the markets. THE PEOPLE THAT THE SYSTEM DUPED KP was released on bail in May 2001. The duped investors could do nothing knowing that the legal proceedings would drag on, perhaps for years. Observers opined that in spite of the corrective measures that were implemented, the KP scam had set back the Indian economy by at least a year. Reacting to the scam, all KP had to say was, "I made mistakes." It was widely believed that more than a fraud, KP was an example of the rot that was within the Indian financial and regulatory systems. Analysts commented that if the regulatory authorities had been alert, the huge erosion in values could have been avoided or at least controlled. After all, Rs 2000 billion is definitely not a small amount - even for a whole nation.

Satyam

INTRODUCTION

Satyam fraud unfolded and so were the inherent weaknesses of Corporate Governance in India. Ramalinga Raju, once a posture boy of India’s growing software sector who could find a seat beside Bill Clinton on the dais, has become a villain in the corporate world for valid reasons. His emotionally charged four and half page letter of startling revelations shook the entire corporate world when he admitted of cooking the account and inflating the figure by Rupees 5040 crore. This scam is being equated with Enron of USA because here also the scam was orchestrated by its Auditor, Arthur Anderson, in Satyam, Price Waterhouse cooper. By the end of the 20th century, Satyam computers had made a name for itself on the globe and had emerged as the 4th largest software in the country. The meteoric rise of the company can be substantiated by the fact that it was established in 1987 as private company and got listed by BSE in 1991. In 2001 its share was listed in NYSE and in 2004 it made its place in European stock market. According to company’s statement, its revenue exceeds to 2 bn USD in 2008. Similarly Raju’s son’s companies also were moving with leaps and bound. Maytas infra got the ambitious Metro projects and bagged many tenders including one of construction of Technology Park.

CORPORATE GOVERNANCE IN INDIA- REALITY AFTER SATYAM SCAM Interestingly Satyam has bagged Golden Peacock award for best corporate governance by World Council for Corporate Governance only a few years ago. The scam has raised many doubts about the class of corporate governance in India. While speaking at a seminar on corporate governance organized by CII, Ministry of Company affairs and National foundation of corporate governance, C.B.Bhave, the chairman of SEBI said on 6th February, 2009 that the corporate governance is an ongoing process. There is a retrospection everywhere that some concrete steps with respect to it should be done. There are few importance elements of corporate governance namely Auditing, Independent Directors, Regulators and Finally the Board including CEO itself. If we examine these constituents one by one, it would be crystal clear that all the constituents either failed or did not act as was required. The role of Price water house Coopers (PwC), the Auditing firm of Satyam has been dealt. Institute of Chartered Accountants of India (ICAI) constituted under Charter Accountants Act, 1949 is the regulatory body of all the accounting and auditing firms across the countries. According to a report there is acute shortage of qualified chartered accountants and auditors in India and around the world also. The number of CAs passing every year is hopelessly small. It is apprehended therefore that the auditing firms out source unqualified or semi-qualified commerce graduates of Post graduates to do the auditing in the companies. The prestigious firms get the assignment by virtue of their name and fame which they recklessly sell in the market by out sourcing the auditors at a very low remuneration. In case of Satyam, the man who was supposed to do audit was incidentally executive member in ICAI.

The independent directors have also failed to discharge their duties properly. Section 49 of SEBI Act and section 229 A of Company Act, 1956 provides for appointment of Independent Directors in the Companies for protecting the rights of public at large in general and shareholders in particular. In the case of satyam T.R.Prasad, the retired Cabinet Secretary Govt of India was one of the directors. It speaks a lot about the procedure of appointment of independent directors. What kinds of people are being appointed in the company? Moreover, they are appointed by the Companies themselves and pay hefty salaries and perks for virtually doing nothing. Under this circumstance is it thinkable that these Independent directors would dare to peep into the affairs of the company against the wishes of the CEOs? There are only two possibilities in Satyam with respect to Independent directors. Either they connive with Raju and knew everything that was going on, or they did not know. In both the cases they failed miserably to discharge their duties. What is the need of such Independent Directors if they cannot do anything in this matter? One unpalatable justification is given that the Independent Directors participate in the meeting and are not concerned with autonomy of the company. It should be bone in mind the Enron scam was exposed by Sherron Watkins, a women independent director.

Thirdly, the SEBI and Ministry of Company Affairs too have failed in their assigned jobs. SEBI is the highest regulator and keeps eagle eye on the activities of the capital markets. When the profits of this company were registering abnormal growth, thereby the prices of the shares were soaring, what were these guys doing? There has been a lot of hue and cry with respect to insider trading; a howl SEBI failed to listen to and it inflicted heavily on Satyam. Raju had pledged almost all his shares so did many of the promoters. The newly appointed CEO Murthy is also said to have sold about 3.14 lakhs shares including 40,000 in December itself belonging to him and his family members. These are the insider trading. Although insider trading per se is not illegal but it is unethical, moreover when Company’s high official who were on share selling spree must had the idea of what was going in the company. All such transactions are needed to be probed.

As a matter of fact the tax holidays for the IT-BPO companies also needs to be said goodbye. Had Raju to pay the Income Tax according to the profits shown in the accounts, he would not have fudged it to this scale. The ministry of Finance must deliberate upon the entire gamut of issues related to tax heaven provisions.

RECOMMENDATIONS:

Taxonomy It is important to lay out the taxonomy of corporate frauds and governance failures. In jurisdictions such as the US and UK, managers (such as the CEO, CFO and other senior executives) are compensated through stock options and equity and hence there is a strong incentive to inflate earnings. On the other hand, in countries such as India where there is concentrated shareholding, the critical actor is not the senior management but the controlling shareholder (a.k.a. the promoter). In such a scenario, where fraud is involved, it usually does not result in an inflation of earnings, but in related party transactions whereby assets of a company are siphoned out to other companies owned by the controlling shareholder. In that sense, and in drawing international parallels, although the media has called Satyam “India’s Enron”, this case is more akin to the Parmalat case which also involved affiliated transactions and misstatement of financials. The regulatory response in terms of reforms will have to take into account the differences in the systems where diffused shareholding is the norm (US and UK) and where concentrated shareholding is the norm (e.g. India).

Audit Process There is clearly a case for reforms in the audit system. - The appointment of auditors ought to be shifted from the purview of the controlling shareholders to the independent audit committee so that auditors do not owe any allegiance whatsoever to the controlling shareholders, and that the process of appointment and removal of auditors is effected in a manner that is truly independent of controlling shareholder influence. - There is a case for the establishment of a body such as the Public Company Accounting Oversight Board (PCAOB) (that was established in the U.S. a few years ago), as that body would review the intensity and the integrity of audits by auditors on an annual basis. - There is need for auditor rotation as it prevents creation of any affinity between auditors and controlling shareholders, and avoids “capture” of the audit process by insiders in companies. - Auditor liability is currently an unresolved question, and the affixation of liability for malfeasance needs to be clearly defined. In some countries, the public regulatory authorities (such as the securities regulator) could directly initiate action against auditors and the merits of such an approach require careful consideration.

- Other precautionary processes may help as well. This could include meetings between audit committee members and auditors without the presence of management.

Independent Directors Independent directors tend to be in an unenviable position. Unless there are any red flags or warnings in a company’s operations, it is difficult to pinpoint board failure per se. For example, a board that receives false information, without any other warnings, is in a tough spot. Further, in controlling shareholder situations, the independent directors are often appointed by the controlling shareholders, and may hence owe a sense of responsibility to those shareholders. Having said that, the current norms on corporate governance in India do not go far enough to deal with independence of the board in controlling shareholder situations. Some of the possible reforms are as follows: - Making nomination committees mandatory for Indian companies. Currently, there is no requirement to have nomination committees, although several companies have established such committees voluntarily. When independent directors are chosen by an independent nomination committee and without the influence of controlling shareholders, there is a sense that it would instill greater independence of such directors from the controlling shareholders - Other processes relating to the functioning of independent directors may induce greater credibility in board decision making. These include: -The requirements of lead independent directors - Executive sessions among independent directors without the presence of management - Appointment of advisors (such as lawyers and accountants) by independent directors to advise them on significant transactions involving a company. Such advice would be provided independent of the management or controlling shareholders. - More fundamentally, there needs to be a re-evaluation of who appoints independent directors. Under the current system, they are appointed by the shareholder body as a whole, which is often considerably influenced by the controlling shareholder. What is required is a reform to consider other methods of appointing independent directors. For instance, they can be appointed by a majority of the minority shareholders, whereby the controlling shareholders do not have a say on the matter. Alternatively, there may be proportionate representation on boards of listed company where all shareholders have some level of say in appointment of directors and that the board is not dominated by controlling shareholder nominees. For example, in such a system, the minority shareholders obtain the right to elect such number of directors in proportion to the percentage holding of such minority shareholders. [Note: The system of proportional representation is already available under the Companies Act, in Section 265, but is only optional] - Moving from a regulatory perspective into standards of conduct and ethics, perhaps it would be useful for industry bodies such as the Confederation of Indian Industry (CII) to draw up guidance for directors that would help independent directors clearly determine what is expected of them in the boardroom. Investor Activism

There is greater need for activism on the part of the investors directly. Often, that is not possible because of the lack of coordination among various investors, referred to as the collective action problem. One method by which this has been resolved in the U.S. is through the existence of proxy consultants such as Institutional Shareholder Services or Risk Metrics who knit together coalitions of investors to actively play a role in significant decisions involving a company. Similarly, an active business press would also play an important role in enhancing governance practices. These are some of the key recommendations emanating from the panel discussion. Clearly, there is recognition that none of these systems will be failsafe. However, the solution in these circumstances is that if a number of such systems are put in place, it would reduce the statistical likelihood of things turning sour from a governance standpoint.

Indian Coal Allocation Scam

Coal allocation scam or Coalgate,[1] as referred by the media, is a political scandal concerning the Indian government's allocation of the nation's coal deposits to public sector entities (PSEs) and private companies. In a draft report issued in March 2012, the Comptroller and Auditor General of India (CAG) office accused the Government of India of allocating coal blocks in an inefficient manner during the period 2004-2009. Over the Summer of 2012, the opposition BJP lodged a complaint resulting in a Central Bureau of Investigation probe into whether the allocation of the coal blocks was in fact influenced by corruption. The essence of the CAG's argument is that the Government had the authority to allocate coal blocks by a process of competitive bidding, but chose not to.[2] As a result both public sector enterprises (PSEs) and private firms paid less than they might have otherwise. In its draft report in March the CAG estimated that the "windfall gain" to the allocatees was 1,067,303 crore (US$193.18 billion). The CAG Final Report tabled in Parliament put the figure at 185,591 crore (US$33.59 billion) On August 27, 2012 Indian Prime Minister read a statement in Parliament rebutting the CAG's report both in its reading of the law and the alleged cost of the government's policies.While the initial CAG report suggested that coal blocks could have been allocated more efficiently, resulting in more revenue to the government, at no point did it suggest that corruption was involved in the allocation of coal. Over the course of 2012, however, the question of corruption has come to dominate the discussion. In response to a complaint by the BJP, the Central Vigilance Commission (CVC) directed the CBI to investigate the matter. The CBI has named a dozen Indian firms in a First Information Report (FIR), the first step in a criminal investigation. These FIRs accuse them of overstating their net worth, failing to disclose prior coal allocations, and hoarding rather than developing coal allocations. The CBI officials investigating the case have speculated that bribery may be involved. The issue has received massive media reaction and public outrage. During the monsoon session of the Parliament, the BJP protested the Government's handling of the issue demanding the resignation of the Prime Minister and refused to have a debate in the Parliament. The deadlock resulted in Parliament functioning only seven of the twenty days of the session.