Corporate frauds have exploded in India and have become a phenomenon. From Harshad Mehta to Ketan Parekh, to Madhavapura Co-operatives in 2002 to the CRB scam involving RoopBhansal and further down to the initial public offering scam — popularly known as the Rupalben scam in late 2005 to the latest one Satyam’s fraud, it is a familiar story of a few corporate heads indulging in creative accounting with the sole object of enriching themselves at the cost of the lower middle-class investors.

Frauds are not new for the corporate world. This is because by it very definition, even bribery or supplier kickbacks comprise fraud. Other type of frauds includes accounting frauds (includes financial misconduct by top management), theft of intellectual property, data or information, counterfeiting etc. What is unfortunate is the fact that not many organizations seem to have a complete understanding of frauds that botch their balance sheets and cause financial injury even as they stand helpless in the wake of poor mechanisms to plug loopholes.

According to estimates, India is losing a whopping $40 bn per year because of corporate frauds, which is more than 4% of the country’s gross domestic product.

There is a crisis of confidence arising from the failure of the pillars of the capitalist system such as the stock market, financial analyst and accountants and the investment banks. It is unbelievable that the hundreds and thousands of “whistle-blowers” from board directors to corporate insiders and the accounting firms and the credit-rating agencies were kept in the dark about the goings-on in the Indian financial world.

LIST OF FRAUDS IN INDIA

The Flying Companies: In the last decade of nineteenth century IPO was the buzzword of the stock markets. Investors were lured due to the hefty returns on the listings. It was the IPO boom. There were however no stringent norms for the companies to come out with an IPO. The flying company scam or the IPO bubble in the mid nineties exposed the half baked nature of reforms of Indian Economy.

Plantation boom in 1990’s: Somebody promise that growing plants is the shortest way to create the wealth. Investors are taken for the ride in Plantation Fraud.

Market manipulations: Twice in the history of the stock markets in India single person succeeded in manipulating the share prices on large scale. Ketan Parekh and Harshad Mehta get the dubious distinction of being the Stock Market Fraudsters.

CRB Capital Markets (1996): Chairman Chain RoopBhansali was accused of using CRB’s accounts in SBI to siphon off Rs 1,200 crore bank funds, claiming the firm was encashing interest warrants and refund warrants. He used very innovative products to attract the depositors to his non-banking finance company. ITC-Chitalia’sFera Violation (1996): It was an $ 80 million fraud into exports transactions between ITC and EST Fibres of the Chitalia group during 1990- 1995 revealed Fera violations.

Western Paques:NandanGadgil who gave his investor the dream of making his company bigger than HDFC suddenly disappeared from the Indian Bourses. All his companies defaulted to a great extent.

Home Trade (2002): A Rs 6,000 crore fraud when eight co-operative banks, including Valsad People’s Co-operative Bank and Navsari Co-operative Bank among others collectively lost over Rs 80 crore.

SSI Technologies Inc: An arm of SSI Technologies Ltd, which figured in the K- 10 stocks of broker Ketan Parekh, who led the 2002 market collapse and was arrested later for alleged share price manipulation. Kalpathi Suresh, the chief executive of SSI, eventually sold the software services and software education businesses to PVP group.

DSQ Software (2003): Dinesh Dalmia’s DSQ Software was accused of dubious acquisitions and biased allotments made in 2000 and 2001. It was an Rs 595 crore fraud. In March 2006, Indian authorities arrested Dinesh Dalmia, chief executive of DSQ Software, for fraud and inducing US investors to part with $100 million for investment in substandard equipment for operating a back-office firm out of India.

Along with DSQ Software Ltd, companies like Pentasoft Technologies Ltd and Pentamedia Graphics Ltd also recorded scandals over insider trading and other corporate malpractices and collapsed after their promoters in 1999 diversified from the software and animation services business into new ventures such as resorts and multiplexes.

Rising instances of corporate fraud have set the alarm bells ringing within India Inc. Below is the fact file of Fraud Survey Report 2008, conducted by KPMG: · 70 percent companies believe fraud will increase over the next 2 years.

· 75 percent respondents identified fraud as a matter of highest concern. · 80 percent said fraud poses a big problem. · 60 percent acknowledged fraud occuring in their own companies. · 11 percent lost between Rs. 1 to 100 millions due to fraud. · 5 percent companies lost more than Rs. 100 millions due to fraud. · 53 percent reported loss less than Rs. 1 million. · Unethical behavior of employees and inadequate anti-fraud measure main worrying factors. · 60 percent respondents do not have adequate knowledge of anti-corruption law. · Financial sector hit worst – followed by real estate & infrastructure – pushing IT &ITeS to third place. Profile of a fraudster People who have longstanding relationships with the victim company perpetrate a majority of frauds.

How companies treat fraudsters More than a third of Indian companies do nothing about frauds.

The most vulnerable sectors The Indian financial servcies, real estate and IT/ITES sectors are most susceptible to frauds. SAYTAM’S FARUD

The purpose of the scam

The purpose was aimed to make the company more attractive for investors. Raju pointed out that given the low promoter holding in the company (8.6% as of September 2008), poor performance could result in a take-over. It was important, therefore, to make it seem as if both the top and bottom lines were growing at a healthy rate, even if that was not actually true.

How did the bubble build?

The problem with overstating performance is that if you want to keep growth rate looking good, the absolute extent of the exaggeration has to keep getting bigger. To take this particular example, in 2003-04 Satyam reported net sales of Rs 2,542 crore. In the four years since then, that figure was reported to have grown by 36%, 34%, 40% and 31% respectively to reach Rs 8,473 crore in 2007- 08.

Now, if an Rs 2,500-crore company wants to show 35% growth when it has actually grown by only say 25%, the extent of overstatement would be only Rs 250 crore (10% of Rs 2,500 crore).

But if an Rs 8,500-crore company wants to do the same thing, it will have to fudge the figures by Rs 850 crore. It is also important to realise that overstating revenues by 10% can overstate profit by a lot more.

For instance, if actual revenues were Rs 2,000 crore and actual net profits Rs 200 crore, an addition of Rs 500 crore to revenues without changing anything else would also add Rs 500 crore to net profit. While this would mean exaggerating revenues by only 25%, the profit figure would get overstated by 250% (500 cr is two-and-a-half times 200 crore).

Aftermath The incident has resulted in immeasurable and unjustifiable damage to Brand India and Brand IT in particular. No doubt, India Inc has reacted with shock and dismay to the scam and it is likely to dent the public credibility about the concepts of corporate governance that the Indian industry has been so persistently trying to cultivate for the last decade.

An accounting fraud was the last thing investors in India would have imagined as a trigger for a reversal in investor sentiment. The Satyam accounting fiasco has come at a time when the sentiment is already brittle and is likely to affect the image of Indian companies among foreign portfolio investors.

Impact on Satyam as a company

1. Satyam stock is being removed from its S&P CNX Nifty 50-share index from Jan 12 and the is expected to follow suit. Satyam will also be excluded from the CNX 100 index, CNX 500 index and the CNX IT index. Reliance Capital Ltd will replace Satyam in the main index. Satyam has lost more than 10000 Crore rupee in a single day trading (on Thrusday).

2. Satyam’s American Depository Receipts is halted for the time being (suspended) and replaced it by .

3. Satyam’s largest shareholder, Aberdeen AMC, dumped the tainted software entity’s shares on Wednesday, was also a seller in other index stocks like Reliance Communications and JP Associates.

4. Several domestic and foreign brokerage firms, including Credit Suisse, Religare and , suspended their coverage of Satyam shares.

5. The selling after Raju’s 7 pages letter to the board: (a) Swiss Finance Corp Mauritius Ltd: Sold 7786759 shares at Rs.74.61 (b) Aberdeen International India Opportunities Mauritius Ltd:Sold 9830811 shares of the company at Rs.43.41 (c) Aberdeen Asset Managers Ltd Aberdeen Global Asia Pacific fund: Sold 4179064 shares at Rs.43.41

Impact on Investor

Normally the common man did not really look at balance sheets and only went by media reports, stock market performance and word of mouth to make his investment decisions. Now, he will be careful.

Impact on FII’s

The fraud at Satyam, wherein the books were cooked to show inflated topline and bottomline, will most definitely make foreign institutional investors (FIIs), the biggest believers in the Indian IT story, look at this counter closely.

FIIs had walked the talk and are currently large shareholders of most publicly traded Indian IT companies. In Satyam Computer, the FII holding is about 47%. At Infosys Technologies, it is 41%. At Wipro they hold a third (7%) of the non- promoter stake. At HCL Technologies, of the 33% held by non-promoters, FII holding is 18%. At TCS, their stake is 11% (promoters own 76%). All figures are for September 30,2008.

FIIs will be cautious about investing in the IT services counter. Naturally there will be higher level of due diligence.

Foreign investor confidence is basically dependent on how the regulators act. In Satyam’s case, uniquely two regulators are involved, SEC in the US and SEBI in India, as Satyam is also listed in the US. A lot depends on how they behave. How our government behaves. Business will take cues from that.

Satyam’s fraud disclosure, the industry believes, has come at a bad time, when recession is likely to hurt the earnings of the IT industry.

Impact on employees

Co. will not pay 2 months salary to the 53,000 employees and strong chances to lay-off of people are there who were sitting on the bench or were close to completing their assigned projects.

For a company, which is indulged in service sector, employees contribute to almost 52% of the co. expense, so lay off is the strong tool to cut the cost.

The other Big IT giants like Infosys has refused to hire any Sataymite.

The India Inc. image

The whole of the Indian industry should not be tarred with the same brush as most of the companies uphold the highest standards of corporate governance and this will help in mitigating the damage done to India’s image.

However, the revival of India’s position as a preferred investment destination would depend on the speed of regulatory action to salvage the situation. The regulators would have to take drastic measures to regain the confidence of foreign investors in Indian companies as frauds like these will have greater implications on emerging markets than developed markets.

Now, All Indian companies listed in the US have to go through a lot of procedures and filings, which talks about risk factors and financial position of the company.

FIIs will be difficult to convince and it will take time before FIIs line up in India and India loss will be the gain of China.

The need of the hour

Tighter rules for accounting and corporate governance, including appointment of independent directors by selection committees, and greater oversight from regulatory and government authorities.

Noble Group also suggests separation of audit and consultancy functions at companies, and quicker publication of annual reports. India’s Volatility Index

The IPO Scam (1993-1996)9The entry of foreign institutional investors led to a massive bull run which saw secondary market recover from the scam even though stock trading was banned. Soon thereafter, the Control over Capital Issues Act was abolished with a one-line order and it opened the floodgates for a massive scam in the primary market (or Initial public offerings). This scam had two parts – the first was perpetrated by existing companies which ramped up their prices in order to raise money at hugely inflated premium to fund green field projects and mindless diversifications, most of which have either failed to take off or are languishing. The other half of the scam had a multitude of small traders, chartered accountants and businessmen, who teamed up with bankers and investment bankers to float new companies and raise public funds. The botched up M. S. Shoes case, exemplifies the first type of scam while the second type, which caused losses of several thousand crores of rupees was known as the ‘vanishing companies’ scandal. The IPO bubble which lasted three years from 1993 to96 finally burst when prices of listed companies began to crash. So huge was investors’ disappointment that the primary market remained dead for the next two years, almost until the beginning of 1999.

The1998 Collapse:13In 1998, Harshad Mehta, Scamster of 1992,made a comeback by floating a website and writing columns in several newspapers giving tips on stocks. The result was the collapse of BPL, Videocon and Sterlite shares. This led to illegal opening of the trading system in the middle of the night by BSE officials to cover up this issue.

KetanParekh's Case (1999-2000)14 Ketan Parekh, a based stock broker had large borrowings from Global Trust Bank during its Merger with United Trust of India Bank. He got a loan of about Rs.250 Crores from Global Trust Bank's Chairman Mr. Ramesh Gelli who was asked to quit later. This rigged the scrips of Global Trust Bank, Zee Telefilms, HFCL, etc. The prices of the selective shares constantly increased due to rigging .The investors who bought the share at higher prices thought that the market prices were genuine. Soon after the discovery of the scam of 1999-2000, the price of the stocks came down to the fraction of value at which they were purchased. The investors lost heavily. Even the banks faced a tremendous loss. Ketan Parekh was arrested in the year 2002. 8http://www.suchetadalal.com/?id=baebd5a4-0b2c-eda7- 492e8a70763c&base=sub_sections_content&f&t=10+years+of+financial+scam s

14http://www.indiastudychannel.com/resources/52080-years-major-financial- scams-India.aspx

India a resource rich country has all the means to achieve greatness but it's dense web of corruption has motivated a normal citizen to take the path of dishonesty to get richer. People are exploiting the loopholes in the cracked system at the cost pain and suffering of the poor and the middle class for meeting immediate needs. Indians proudly state that many millionaires are emerging and the country according to certain reports giving most honest people an illusion of hope. list of multi-crore scams from 2005...2010 Prominant Scams Before 2005

1. Harshad Mehta Big Bull Scam - 4000 crore

2. Lalu'sCharaGhotala - 950 crores - July 2008 IAS officer Sajjal gets four-yr RI for 39 crore scam

3. Hawala Scandal - 5000 crores

4. Bofors Scandal - 64 crores (Also Read: 1 2 3)

5. NarendraRastogi serial scammer - more than 43 crores (Read more 1)

6. Dalmia Scandal - 595 crores

7. Civil Aviation Minister Praful Patel fraud case-50 crores

8. UTI Scam - 32 crores

9. Mutual Fund Scam - 1350 crores

10.Bansali Scam - 1200 crores

11.Ketan Parekh's Sebi Scam- 888 crores - June 08 - SC issues arrest warrant against Ketan Parekh

12.Cobbler Scam - 1000 crores

13.Bribe to allot petrol pumps scam

14.Churhat lottery scam - ?

15.Anantnag transport subsidy scam - ? 16.Bangalore - Mysore Infrastructure Corridor - ?

17.Kerala SNC Lavalin power scandal - 374.5 crore loss - Dec 09 - Accused CPM leader Vijayan gets bail in graft case.

January 2005

1. Telgi Scam - 171 crores - Telgi was sentenced 13 yrs RI and 100 cr fine. (Read More 1 2 Timeline 3)

2. Mayawati'sTaj Corridor- 175 crores alleged scam - Case was dropped in 2007 by the pecial designated court due to insufficient evidence (Read more 1 Is Politics such a high paying profession ? 2 May 2008 -Mayawati attempts to stop CBI investigation 3)

3. MotilalGoel Scam - 1000 crore

February 2005

1. West Bengal Telecom Scam - 400 crores

2. India's unchecked textbooks racket - estimated 225 crores

3. Urea Scam - 133 crores

March 2005

1. Meghalaya lottery scam - 25000 crore

April 2005

1. Ration Card Scam - 3 crore

2. Car Financing Scam - ? crore

3. Junior Basic Trained teachers' recruitment scam- ?

May 2005

1. Flood Relief Scam - 13 crores (Read more 1)

2. Let them eat plastic bags - GautamGoswami

June 2005

1. Temple Lands Scam - 30 crores

2. Franking Scam - 30 crores

July 2005

1. Volkswagon Equity Scam - 11 crores - Sep 10 - CBI names 6 accused

2. National Slum Development Programme - 1.52 crores (Same guy of Flood Relief Scam May 05 who said "Victims can eat plastic bags") 3. Kerala State Electricity Board - 89.32 crores (alleged corruption worth Rs. 100 crores was also involved in the drinking water project)

August 2005

1. Indian Oil Corporation Scam - ? crores

September 2005

1. Just talks of investigation of scam shaves off 89000 crores from the market capital

1. CBI nets 70 officials in all-India anti-corruption drive

1. Nagmani Scam - 1.5crore

2. Stamp Scam (Goa) - 30.19 crore

October 2005

1. Evasion of duty on High End Car’s – ? crore

2. Okhla Industrial Development Authority (Noida) land scam – ? crore

3. Employment Guarantee Scheme (EGS) Scam- 9.1 crore

Delivering a talk on Corruption in democratic governance, Pandey said that "At present, the total amount of black money in India has been estimated to be in the range of Rs 50,000 crore and Rs 1,00,000 crore. The most worrisome is the fact that even those quarters that are supposed to fight corruption are not totally corruption-resistant".

November 2005

1. Local Area Development Scheme (MPLADS) Scam - ? crores

2. National Agricultural Cooperative Marketing Federation of India (NAFED) Scam - 250 crores - Sep 2007 - HC pulls up CBI for not registering case

3.

"I am pained to observe that the law in this country punishes very harshly the small offenders involved in offences of stealing of small amounts to the tune of few hundreds or few thousands. "Such accused are often sent to jail by the big fishes who defraud the exchequer of crores of rupees...they are dealt with by investigating agencies in a different manner and the law does not act with the same harshness to these offenders," Justice Dhingra observed in a recent order. "This attitude of the investigating agencies is beyong comprehension," he said while directing the CBI to register a case against PankajAggarwal, the alleged mastermind in the scam. Aggarwal has his business in Dubai.