1. TERM PAPER
ON
“Study and analyse the impact of major
stock markets scams on Indian stock
market: causes, effects, Regulations made,
suggestions: Scam: Enron”
SUBMITTED BY- SUBMITTED TO-
MRIDULA SHARMA Mr VIKAS ANAND
R-1902 B31 LPU
10901806

2. WHAT IS STOCK MARKET
A stock market or equity market is a public market (a loose network of economic
transactions, not a physical facility or discrete entity) for the trading of
company stock (shares) and derivatives at an agreed price; these are securities listed on
a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion USD at the
beginning of October 2008. The total world derivatives market has been estimated at about
$791 trillion face or nominal value, 11 times the size of the entire world economy. The value
of the derivatives market, because it is stated in terms of notional values, cannot be directly
compared to a stock or a fixed income security, which traditionally refers to an actual value.
Moreover, the vast majority of derivatives 'cancel' each other out. Many such relatively
illiquid securities are valued as marked to model, rather than an actual market price.
IMPORTANCE OF STOCK MARKET
Function and purpose
The stock market is one of the most important sources for companies to raise money. This
allows businesses to be publicly traded, or raise additional capital for expansion by selling
shares of ownership of the company in a public market. The liquidity that an exchange
provides affords investors the ability to quickly and easily sell securities. This is an attractive
feature of investing in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up-and-coming
economy. In fact, the stock market is often considered the primary indicator of a country's
economic strength and development.
TYPES OF STOCK MARKET
There are two types of stock markets:-
1. Primary market
2. Secondary market

3. Basically the primary market is the place where the shares are issued for the first time. So
when a company is getting listed for the first time at the stock exchange and issuing shares –
this process is undertaken at the primary market. That means the process of the Initial Public
Offering or IPO and the debentures are controlled at the primary stock market.
On the other hand the secondary market is the stock market where existing stocks are bought
and sold by the retail investors through the brokers. It is the secondary market that controls
the price of the stocks. Generally when we speak about investing or trading at the stock
market we mean trading at the secondary stock market. It is the secondary market where we
can invest and trade in the stocks to get the profit from our stock market investment.
The classification is made on the type of instrument that is being traded at the market. Both
the Bombay Stock Exchange and the National Stock Exchange have these types of stock
markets.
Equity market
The first type of market is the equity market or the cash segment where stocks are traded. In
this type of trading the buyers of the stocks book a buying order with a bid price and the
order are executed through the broker at a negotiated ask price offered by the sellers at the
market. In most cases the deal is closed or the stocks are brought at the best available ask
price. In this type of trading the buyer pays the entire amount of the value of the stocks that is
determined by multiplying the number stocks with the current price of the stock. Once the
buyer pays the entire amount along with the brokerage and taxes of the transaction the stocks
are deposited to the DP account of the buyer.
Derivative Market
In the derivative market trading is done mainly through two instruments – the Future contract
and the Option contract. In both these types of contracts the stocks are bought and sold in lot.
The number of stocks for each lot depends on the valuation of the stock and the valuation of
the lot is determined by the number of the stocks in a lot multiplied with the current market
price of the stock. For trading in derivative market you have to buy either the future contract
or the option contract.

4. WHAT ARE STOCK MARKET SCAMS
Audit is the most pressing area for change; it is not the only one. The Enron fiasco has
shown that all is not well with the governance of many big American companies. Over the
years all sorts of checks and balances have been created to ensure that company bosses, who
supposedly act as agents for shareholders, their principals, actually do so.
Yet the cult of the all-powerful chief executive, armed with sackfulls of stock options, has too
often pushed such checks aside. Companies need stronger non-executive directors, paid
enough to devote proper attention to the job; genuinely independent audit and remuneration
committees; more powerful internal auditors; and a separation of the jobs of chairman and
chief executive.
The above is an assessment and warning by The Economist in the context of the collapse of
Enron, placed 5th in the latest Fortune 500 rankings of American companies. A number of
other disclosures including that of Tyco International, Adelphia Communications, Computer
Associates, Qwest Communications, Global Crossing and now WorldCom further deepened
the scepticism about the state of affairs in corporate America. These are stock market scams.

5. MAJOR STOCK MARKET SCAMS
RAMALINGA RAJU
The biggest corporate scam in India has come from one of the most respected
businessmen. Satyam founder Byrraju Ramalinga Raju resigned as its chairman after
admitting to cooking up the account books. His efforts to fill the "fictitious assets with real
ones" through Maytas acquisition failed, after which he decided to confess the crime. With
a fraud involving about Rs 8,000 crore (Rs 80 billion), Satyam is heading for more trouble
in the days ahead.
EFFECT
India's fourth largest IT company lost a staggering Rs 10,000 crore (Rs 100 billion) in
market capitalisation as investors reacted sharply and dumped shares, pushing down the
scrip by 78 per cent to Rs 39.95 on the Bombay Stock Exchange.
HARSHAD MEHTA’S SCAM
The major scam was perpetrated by Harshad Mehta. The diversion of funds from the
banking system led to zooming of share prices to unprecedented levels within a span of
three months (Jan-Mar 1992) during which time the BSE Sensitive Index (Sensex) more
than doubled from about 2,000 to 4,400.
EFFECT
This gave rise to a false impression of the windfall gains that could be had from the
stock market and created a `herd’ mentality. During the boom period, shares of even
loss-making companies commanded high premium. 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 charge of duping
State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the
securities scam that rocked the financial markets in 1992. He died in 2002 with many
litigations still pending against him.

6. Other major scandal of the initial period was the promoters, especially MNCs; issuing
themselves preferential shares at prices far lower than the then prevailing market prices.
Apart from the doubtful quality of many of the new issues, an important case which shook
the markets in early 1995 was the Rs. 350 crore Fully Convertible Debentures (FCD)
issues of M.S. Shoes.
EFFECT-
The Company was accused of inadequate disclosures. Taking advantage of free pricing
of issues, many companies charged high premium. But the post-listing returns proved
to be disappointing. In the post liberalisation period a good number of companies were
not only non-manufacturing ones, but the purpose of issue also varied from project
finance to working capital. In terms of numbers, about one-third of the issues were by
financial companies with a preponderance of non-banking financial companies
(NBFCs). A number of public issues were made without any critical scrutiny.
The Reliance share switching scandal, gross disappointment with Morgan Stanley’s
Mutual Fund issue, misdemeanours of the so-called plantation companies and the
turbulence in the NBFCs with the CRB group in the vanguard hurt the secondary market
and further eroded investors’ trust in the stock market.
Primary market scam of the mid-1990s, an important one in this sequence, which
meant unscrupulous fly-by-night promoters made good with public money and some of
them even ‘vanished’ after collecting funds from the public, severely shook the confidence
of the individual investors. In addition, communal disturbances – the latest being the
Gujarat carnage, war fears, East Asian financial crisis, sanctions following nuclear tests,
UTI’s US-64 troubles, etc. further contributed to the difficulties by periodically depressing
market.
THE KETAN PAREKH SCAM
It was an example of the inherently weak financial, regulatory and legal set up in India.
Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do share-
brokerage based family. He was involved in the shares scam of the year 2000/01.
CAUSE
The study by SEBI found that the flow of funds originating from Ketan Parekh, when
paired with securities market transactions of connected clients leads to the possibility

7. that these trades were executed to confuse the funds trail and to integrate the money
originating from the banned stock broker into the system of banking.
Ketan’s possible involvement was found by SEBI during its investigation into
professed manipulative trading in the scripts of Cals Refineries Limited, Confidence
Petroleum India Limited, Bang Overseas Limited, Shree Precoated Steels Limited and
Temptation Foods Limited.
ENRON CASE
Enron's demise was the creation of partnerships with shell companies, these shell
companies, run by Enron executives who profited richly from them, allowed Enron to
keep hundreds of millions of dollars in debt off its books. But once stock analysts and
financial journalists heard about these arrangements, investors began to lose confidence in
the company's finances. The results run on the stock, lowered credit ratings and
insolvency. According to claims and counter-claims filed in Delaware court hearings(of
the Enron Case); many of the most prominent names in world finance - including
Citigroup, JP Morgan Chase, CIBC, Deutsche Bank and Dresdner Bank - were still
involved in the partnership, directly or indirectly, when Enron filed for bankruptcy.
Originally, it appears that initially Enron was using 15 SPE's (Special Purpose Entities)
appropriately by placing non energy-related business into separate legal entities.
CAUSE
What they did wrong was that they apparently tried to manufacture earnings by
manipulating the capital structure of the SPEs, hide their losses, did not have
independent outside partners that prevented full disclosure and did not disclose the
risks in their financial statements.
Enron, in order to circumvent the outside ownership rules funnelled money through a
series of partnerships that appeared to be independent businesses, but which were
controlled by Enron management. The scope and importance of the off-balance sheet
vehicles were not widely known among investors in Enron stock, but they were no
secret to many Wall Street firms. By the end of 1999, according to company estimates,
it had moved $27bn of its total $60bn in assets off balance sheet.
IPO SCAM
The Securities and Exchange Board of India barred 24 key operators, including India bulls
and Karvy Stock Broking, from operating in the stock market and banned 12 depository
participants from opening fresh accounts for their involvement in the Initial Public Offer
scam.
.Suzlon Energy Ltd's Rs 1,496.34 crore (Rs 14.963 billion) public issue (September
23-29, 2005). The retail portion was oversubscribed 6.04 times and the non-

8. institutional portion was oversubscribed 40.27 times. Key operators used 21,692
fictitious accounts to corner 323,023 shares representing 3.74 per cent of the total
number of shares allotted to retail individual investors.
Jet Airways's Rs 1,899.3 crore (Rs 18.993 billion) public offer (Feb 18-24, 2005). The
retail portion was subscribed 2.99 times and the non-institutional portion by 12.5
times. Key operators used 1186 fake accounts for cornering 20,901 shares representing
0.52 per cent of the total number of shares allotted to retail investors.
Tata Consultancy Services’ Rs 4,713.47 crore (Rs 47.134 billion) public offer (Aug
19-23, 2004). The retail portion was oversubscribed 2.86 times and the non-
institutional portion by 19.15 times. Key operators used 14,619 'benami' accounts to
corner 261,294 shares representing 2.09 per cent of the total shares allotted to retail
individual investors.

9. REGULATIONS MADE
The past ten years are witness to many changes in line with this objective. Trading
and settlement procedures have been improved.
1) New instruments have been introduced.
2) Disclosure levels have been enhanced.
3) Measures to protect investors’ interest and educate them have been initiated at least
on paper.
4) A code of corporate governance has been put in place. Steps were initiated to change
the organisational structure of the stock exchanges:-
a. In appointing nominee directors by financial institutions was to keep a close
watch on the managements and make the company boards function
effectively.
b. Auditors on their part had to disclose the reasonableness of transactions with
related parties.
c. There were limits on managerial remuneration and inter-corporate investment
and loans. Many of these had to be introduced both with a view to improve
disclosures as also in response to the misdeeds of certain industrial Houses.

10. SUGGETSIONS
Here are the some of the suggestions that should be taken to reduce and more ever remove
these scams:-
1. It is desirable to have a diversified and balanced financial system where both financial
intermediaries and financial markets play important roles in imparting greater
competitiveness and efficiency to the financial system.
2. In the present context of financial liberalisation, stock markets and banks emerge as
sources of corporate finance and stock Market development actually tends to increase the
quantity of bank loans through improved debt equity ratios.
3. The coexistence of both systems is socially desirable not only because it encourages
competition, but also because it reduces transaction costs within the financial system, and
helps improve resource allocation within the economy.
4. The regulator should continuously monitor the investment pattern so that any undue
change in a particular stream, like the broker position, could be identified and immediate
investigation conducted.
5. The Government also should strengthen the investment institutions to facilitate long-term
investments.
6. Flow of money to the capital market from the lending institutions should be more
transparent so that undue concentration of lending on particular scrip is avoided.
7. Access to the market must be related to the genuine need for the funds rather than to
benefits flowing from limited public participation.
8. The minimum public offer should be placed considerably higher than the present 10
percent.
Thus we can say that the occurrence and reoccurrence of such security scams and financial
scandals can be attributed to a failure of corporate governance in finance despite the existence
of a functioning regulatory authority empowered with the legal sanctions but through
implication of these suggestions we curb these scams to a great extent.

11. CONCLUSION
The security scams and financial scandals discussed here involved the manipulation of huge
amounts of money. The purpose of the so called “traders” or “investors” was not genuine.
Audit is important not just from the point of protecting shareholders’ interest. It has a much
greater responsibility of informing the wider body of stakeholders of the fair and true status
of affairs of an entity.
Given the fact that one of the world’s top five accounting firms is involved in more than one
scam should send shivers down the spine of many. The leading firms are also involved in tax
havens. After all, these are the ones which are engaged to prepare consultancy reports for
Indian companies and governments. These are the ones appointed as investment advisors.
There is no point in blindly following their models, policies and procedures.
The perpetrators had such a comprehensive knowledge of how the system worked that they
manipulated it. It is clearly evident that the occurrence and reoccurrence of such security
Scams and financial scandals as some point in time are attributed to a failure of corporate
governance in finance and that of financial regulation.
Corporate Governance vs. Financial Regulation is more a personal thing which involves the
adherence to rules regulations and ethics by officials. It is more self enforced as a ethical
behaviour or a matter of pursuing codes of conduct without an outside agent monitoring, but
financial market regulation in exercised more by an external organization either a regulatory
body authorized to monitor and impose a surveillance mechanism to ensure frauds or
misdemeanours are not perpetuated and so that the market functions efficiently to oversee the
functions of the market participants and impose fines and other penalty for non-compliance.
In India corporate governance revolves around ethical behaviour on part of Management,
knowing to make right decisions and also knowing to choose between right and wrong.
Management should be made more accountable for their actions in terms of deployment of
funds, making decisions and also transmitting information.
There is no escape from developing proper checks and balances and enforcing them strictly.
For this one need not always have to reinvent the wheel or wait for some upheaval in
developed countries.

12. REFERENCES
http://isid.org.in/pdf/03_ksc2.pdf
http://ismb-india.blogspot.com/2009/01/indias-biggest-scams.html
http://www.capitalmarket.com/magazine/cm1603/mongor.htm
File:///www.isid./SAPM%20DATA-ndw/SAPM-DATA.htm
http://www.scribd.com/doc/24934385/Financial-Market-Regulation-Security-Scams-in-India-
With-Historical-Evidence-and-the-Role-of-Corporate-Governance