Government of India Ministry of Finance PROGRESS OF THE ACTION TAKEN PURSUANT TO THE RECOMMENDATIONS OF JOINT PARLIAMENTARY COMMITTEE ON STOCK MARKET SCAM AND MATTERS RELATING THERETO December 2003 INTRODUCTION The Report of the Joint Parliamentary Committee on Stock Market Scam and matters relating thereto was presented to the Parliament on 19th December 2002. In para 3.31, the JPC recommended that the Government should present its Action Taken Report to the Parliament within six months and thereafter a progress report every six months until action on all the recommendations has been fully implemented to the satisfaction of Parliament. The Government had submitted Action Taken Report to the Parliament on 9.5.2003. JPC had made 276 recommendations. In the ATR, the recommendations were listed ad- seriatim alongwith the response of the Government in a columnar fashion. In the ATR, final response of the Government in respect of 111 recommendations/observations/conclusions had been given. The Progress Report lists remaining 165 recommendations ad-seriatim alongwith response of the Government as given in the ATR and further progress after the presentation of the ATR, including final response on further 39 recommendations. I N D E X Sl. No. Para. No. Subject in brief Page Nos. 1. 2.8 Role of the Ministry of Finance and other regulatory authorities. 1 2. 2.15 Nexus between brokers, banks and corporate houses. 2-4 3. 2.16 Need for applying more specific and effective mechanisms by the regulatory bodies. 5 4. 2.17 Lack of will to implement the suggestions of the previous JPC. 5-8 5. 2.20 Large scale manipulations by financial institutions and non-accountability in financial sector. 8-9 6. 2.21 Apathy and failure of regulatory bodies in exercising prudent supervision of stock market and banking transactions. 9-11 7. 3.11 Need to set up adequate number of courts to ensure speedy disposal of cases. 11-12 8. 3.14 Non-functioning of the Special Cell and action required to be taken. 12 9. 3.18 Disposal of disciplinary proceedings. 12-13 10. 3.21 Dual control and the role of RBI. 13-15 11. 3.22 Lack of concern and strict action by RBI. 15-23 12. 3.29 Monitoring, Surveillance of CSE. 23-26 13. 3.30 Lack of implementation of recommendations. 26 14. 3.31 Recommendation of the Committee. 26-27 15. 3.32 Casual approach of the MOF in implementation/monitoring the recommendations of last JPC’s. 27 16. 3.33 List of recommendation of previous JPC which are analogous. 27 17. 4.42 Modus operaendi of Shri Ketan Parekh. 28-30 18. 4.44 Swiss Bank accounts of Shri Ketan Parekh. 30-31 19. 4.45 Action to recover dues from Ketan Parekh entities. 31 20. 4.68 Proceedings against defaulters brokers. 31-33 21. 4.69 Criminal proceedings initiated against Shri H.C. Biyani. 33-34 22. 4.70 Transactions of H.C.Biyani with SHCIL. 34 23. 4.117 Irregularities in SHCIL. 34-38 24. 4.131 Irregularities in SHCIL. 38 25. 4.132 Action on the measure suggested by the inquiry against SHCIL. 38-39 26. 4.133 Prudential norms to be followed by SHCIL. 39 27. 5.55 Need for introducing a system of alerts in case of unusual market behavior. 39-40 28. 5.59 Violation of the RBI guidelines by the MMCB. 40-41 29. 5.62 Duality of control. 41 30. 5.63 Dubious role played by auditors. 41 31. 5.64 Expeditious disposal of criminal cases against Administrator, MMCB & Ors. 42 32. 5.66 Recommendations regarding MMCB and similar cooperative banks. 42-46 33. 5.109 Irregularities in the City Cooperative Banks Ltd., Lucknow. 46-50 34. 5.110 - do - 50-51 35. 5.111 Laxity on the part of apex. regulators –the RBI and RCS. 51-52 36. 5.112 Action against the erring executives of CCBL. 52 37. 5.113 Recommendations of the JPC. 52-53 (ii) Sl. No. Para. No. Subject in brief Page Nos. 38. 5.158 Diversion of funds and the cases before DRT. 53-54 39. 5.159 Action against CCBL. 54 40. 5.174 Violation of rules/ norms by BOI and the observations of the JPC. 54-58 41. 5.175 Recommendation of the JPC – action against officials of BOI. 58-59 42. 5.195 Irregularities relating to the Nedungadi Bank. 59 43. 5.196 Failure of RBI to take timely notice of irregularities in the Nedungadi Bank. 60 44. 5.197 Recommendations of the Committee. 60-62 45. 5.212 Persons holding executive position in the Stock Exchanges operating in the share market. 62-64 46. 5.213 Collusion between the CSE and IndusInd Bank. 64 47. 5.214 Recommendation of the JPC. 65 48. 5.223 Violations of the RBI regulations by the Centurion Bank. 65 49. 6.94 Involvement of Banks in the payment crisis in CSE. In action of CSE and SEBI. 66-69 50. 6.96 Violation of exposure of limits by brokers. 70 51. 6.97 Software bug in CSE. 70-71 52. 6.98 Responsibility of CMC Ltd. in software bug in CSE. 71 53. 6.99 Deactivating of trading terminal of brokers. 71-73 54. 6.101 CSE failed to enforce its own rules concerning trading and carry forward limits. 73-78 55. 6.104 Proactive role by SEBI in the affairs of CSE. 78-79 56. 6.105 Demutualisation of the Exchanges. 79 57. 6.106 Criminal action against broker directors. 79-85 58. 6.149 Review of surveillance function of Stock Exchanges. 85 59. 6.150 Demutualisation of the Exchanges. 86 60. 6.151 Action against the then ED of BSE. 86-87 61. 6.153 Role and function of SEBI nominee directors in Stock Exchange. 87-88 62. 7.3 Functioning of Special Cell. 88 63. 7.4 Investigating role of promoters and corporate entities. 88-89 64. 7.51 Expeditious action on involvement of promoters/corporate houses in manipulation of prices of scrips. 90 65. 7.53 Corrective measures on professional allotment and private placement. 91 66. 7.54 Non-availability of required support from concerned regulatory and marketing bodies to make purposeful recommendation on nexus of corporate bodies-brokers banks and other. 92 67. 8.76 Action against OCB’s and FII’s. 92-93 68. 8.77 Need for a comprehensive analysis by RBI of the foreign exchange inflow-outflow by OCBs over a period. 93-94 69. 8.78 Failure of RBI’s monitoring in detecting violation of the guidelines by OCBs. 94 70. 8.79 Clear policy guidelines about the responsibility to monitor OCBs. 95-97 71. 8.80 Review the ban imposed on OCBs and clearly lay down responsibility to a particular agency to oversee OCB operation. 97-98 72. 8.81 Misuse of participatory notes route by sub-accounts of FIIs. 98 73. 9.27 Non-compliance of inspection finding of SEBI by Stock Exchanges. 99-100 74. 9.28 Non-compliance of inspection finding of SEBI by CSE. 100 (iii) Sl. No. Para. No. Subject in brief Page Nos. 75. 9.29 Augmentation of staff strength by SEBI and increase its coverage of inspection of brokers. 100-101 76. 9.30 SEBI should strengthen its in house system and infrastructure and make optimum use of modern technology for carrying out focused inspection. 102 77. 9.31 Role of Eds/ nominee director in Stock exchanges vis-à-vis demutualisation. 102-103 78. 9.44 Centralised surveillance mechanism in all the exchanges. 103-104 79. 9.73 SEBI’s failure to take timely action. 104-108 80. 9.75 SEBI should view consolidated information of trades across all exchanges and generate its own alerts. 108 81. 9.76 Surveillance system in SEBI and Stock exchanges should be examined. 108-109 82. 9.77 Professional manpower in SEBI. 109 83. 9.78 Timely alert by regulators. 110 84. 9.79 Learning from past failures for improving market surveillance. Future dangers. 110-112 85. 9.125 Expedite corporatisation and demutualisation. 113 86. 9.126 Demutualisation should contain a judicious blend of the best elements. 113 87. 9.127 SEBI should extend its proactive supervision on the functioning of the subsidiaries and keep constant vigil. 113-114 88. 9.138 Reduction of settlement cycle to T+1 system to all scrips. 114-115 89. 9.158 SEBI should formulate a clear policy on short sales. 115 90. 9.159 Restrictions on stock lending by approved institutions. 115-116 91. 9.160 Proper segregation of cash and derivatives sectors. 116-117 92. 10.11 Observations regarding amending Chartered Accountants’ Act 1949. 117 93. 10.31 Need for regulators to take pre-emptive steps. 117 94. 10.72 Lack of interest by RBI in making the systemic changes proposed in the ATRs on the last JPCs report. 118 95. 10.74 Inaction on the part of the MOF and the regulators in effective regulation of foreign funds. 118-119 96. 10.75 Eternal vigilance and deterrent punishment- watchword of the regulator. 119 97. 10.76 Expeditious disposal of the RBIs proposals and review of existing laws by MOF. 119-121 98. 10.77 Need for improvement in the supervisory strategy and establishment of uniform banking standards. 121-122 99. 10.78 Improving financial supervision over banks. 122-123 100. 10.79 - do - 123-124 101. 10.80 Suggestions for setting up independent board for ensuring quality audit to strengthening of penal provisions against auditors. 124-125 102. 10.81 Suggestions for strengthening the vigilance machinery in Banks.