Topics Covered in this article
Corporate or white-collar crimes are those crimes which are committed by people with high corporate profile or position. It is the position which provide them the opportunity to commit breach of trust. Indian Economy is struggling to control the aftermaths of several high-profile scams. The series of these crimes seems to be never-ending which led to the top pen scams in India. The marks they leave on economy take years to get washed. It is not the person at the position committing crime or the organization which was instrumental in it that gets affected but it is the investor whose hard-earned money & trust is lost at the altar of someone’s greed or foolishness.
India has witnessed so many scams in such a short span since Independence, that before its economy can stand, someone is ready to give another jolt. Some of those scams which shook our economy to its core are mentioned in this Article.
TOP TEN SCAMS IN INDIA
It is one of the biggest scams committed in Indian stock which valued at Rs.5000 Crore. Harshad Mehta used the loopholes in the Banking system & Market Regulation System of the 1990s consisting of Ready Forward and Fake Bank Receipts to get money from banks which he pumped into the stock market.
Mechanism of Securities Scam:
- Ready Forward Deal (RFD): The banks were required by RBI to statutory liquidity Ratio (SLR), by acquiring at least 38.5% of government fixed Interest bonds. But banks were barred from participating in the stock market directly. So, they had to deal in securities through stock brokers like Harshad Mehta. Banks used RFD to do so. Harshad Mehta used to borrow large sum from banks in the name of buying government securities but ended up buying shares of private Companies for his personal financial gains. To reap higher profits other Investors & Brokers unaware of Harshad’s tactics, also started investing in those. Ultimately, raising the value of their shares. This led to bullish market. He failed to deliver the intended securities to the Banks, & when asked for the same, he roped in other banks too leading to a web of RFD.
- Fake Bank Receipts: He knew that banks will ask for their money or securities, to avoid this situation he colluded with Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) and forged fake bank receipts (BR), which signified confirmation of sale of securities to other banks. These fake receipts bore name of Government companies. This led to loss of both banks & PSU’s. He used the façade of Damayanti group, company established by him in 1996, to manipulate the market.
Journalist Sucheta Dalal was intrigued by the luxurious lifestyle of Harshad Mehta. She started uncovering the case & came to know about the extent & method of scams.
The stock market had lost a billion rupees. To investigate this RBI set-up a committee (Janakiraman Committee). It was noted by Committee that scam amounted to approx. 4025 Crore Rupees. CBI was also investigating the case & charged him with 72 criminal offences & more than 600 criminal action suits. SEBI had failed to effectively regulate market due to limitations on its power. To make SEBI more autonomous, several amendments were made to the Act.
This came as a second shock to market, instantly after the arrest of Harshad Mehta. This scam had once again attracted worldwide attention towards Bombay Stock Market for all the wrong reasons.
Ketan Paresh, CA by profession, was following the footsteps of Harshad Mehta & 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. He used ICE knowledge to buy shares of Companies with low market capitalization & liquidity in large numbers. This led to pumping of share prices, seeing this, other investors also started investing which created fictitious market with high prices for shares owned by Parekh. Then he would silently liquidate his holdings. He used this method on ten stocks which came to be known as K-10. He used the shares as collateral with bank to raise funds. It went well as long as the prices of shares were rising. But due to fall in NASDAQ, it started to fall, & banks started asking for more collateral or return of borrowed amount. This eventually led to payment crisis for Parekh. The MMCB bank was also not able to lend out credit to Parekh. Due to which, the brokers that were holding positions on his behalf in the Calcutta Stock Exchange were forced to liquidate too causing a massive floatation & sell off in the market. Investors lost approx. Rs 2000 crores ($4 billion).
The Intelligence Bureau (IB) unearthed this major stock market scam.
Inability of SEBI totrace scams one after another led tobreach of Investor’s trust & market place credibility, which had long lasting impact on our economy. SEBI’s role was more reactive rather than proactive, & due to this it was widely criticized. Further, RBI had ordered some banks to furnish data related to their capital market exposure. This was due to media reports regarding a private sector bank having exceeded its prudential norms of capital exposure, hence, contributing to the stock market volatility.
It is the biggest scam in the corporate history of India. That is why has been dubbed as “India’s Enron” by media. Satyam Computer services Limited was formed in 1987 in Hyderabad by Ramalinga Raju, for “outsourcing services” to IT sector. It generated significant corporate growth and shareholder value over the years.
From 2003-2008, in nearly all financial metrics of interest to investors, the company grew immeasurably. Satyam generated Rs. 25,415.4 million in total sales in 2003-04. By March 2008, the company sales revenue had grown by over three times. After five months of receiving award for corporate excellence in 2009, Ramalinga Raju confessed to Board of Directors in a letter that he had been overstating assets on Satyam’s balance sheet by $1.47 billion to misguide the shareholders. He also admitted that fake employee accounts were created to divert the finances & the assets in banks or in cash were non-existent.
It was observed that the reason of such a scam was failure to identify the owner & management dichotomy required for corporate governance. SEBI held Ramalinga Raju & 9 other associates to be guilty of insider trading, indulging in fraudulent and unfair trade practices and violation of Clause 49 of the listing agreement. Stricter regulations were formulated by SEBI, pertaining to reporting & auditing requirements of the Company.
- Sahara Scam
Sahara India had established two new companies- Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation (SHIC) in 2005 by registering them under the Companies Act, 1956.
In the annual general meetings held by both the companies, a resolution was passed to raise funds through private placement of optionally fully convertible debentures (OFCD’s), which is a hybrid form of bond & comes within the scrutiny of SEBI, hence, private placement of same without taking permission of SEBI is not allowed. In 2009, when a red herring prospectus for Sahara Prime City (a real estate venture of Sahara India) was submitted to SEBI for approval, SEBI noticed unusual fund-raising activity in the two firms SHICL and SIRECL. After receiving complaint from Roshan Lal, SEBI launched an investigation against Sahara India, inquiring into the fund-raising activity of both the Companies.
SEBI ordered Sahara to refund investors because, Sahara was raising money in violation of capital raising norms and certain sections of the Companies Act. It found that under the garb of an OFCD the company was running an extensive para-banking activity without conforming to regulatory disclosures and investor protection norms. SAT ordered Sahara to pay 24,000 Crore rupees along with 17% interest on investments. Supreme Court also upheld SAT’s decision. Pursuant to which, insolvency proceedings were initiated against Subrata Roy. It’s been more than a decade, but the investors have still not received their amount. Although, SEBI was vigilant this time but procedural delay is making the situation worse.
- Saradha chit fund case
Saradha Group of financial services was incorporated in 2006 in West Bengal. It offered the services of chit fund, in which small investors were enticed with guaranteed high returns, foreign trips, flats etc. on their investments, the trigger point was that it did not fully disclose the working mechanism & business of Company.
By the year 2010, it had expanded its parameters in tourism, real estate, motorcycle etc. Sudipto Sen, chairman of Saradha group had established a consortium of almost 200 private companies by utilising the money of investors. They were using money brought in by the newer investors to pay off the older investors whose investments had to be redeemed. In the beginning, the return was timely, but after gaining the trust of investors, it started convincing them to adjust the amount against renewals, hence, not actually making any payment of both principal & interest. The group collected around 200 to 300 billion from over 1.7 million depositors.
The scheme of Chit fund according to SEBI is Collective Investment Scheme & is required to be registered with the regulator. After 2012, SEBI started questioning Saradha Group’s failure to inform about this Ponzi Scheme & stop its working until permission of regulator was taken. SEBI also informed about this to West Bengal Government, but the Govt. neglected this because its own politicians were involved in this fake scheme. By January 2013, the company was engulfed in a crisis as its cash inflows were found to be lower than its outflows. The scheme collapsed by April, prompting agents and investors to file police complaints.
The West Bengal Government established special Investigation team (SIT) but it failed to work properly as it was heavily influenced by Political party in power. On the behest of Supreme Court, the case was transferred to CBI, this act was vehemently opposed by the CM of Bengal. After the discovery of this scam, the major affected persons were identified to be belonging from low income earning families. This was a huge hit on their financials & trust.
The Congress government’s, former Telecom minister, A. Raja allocated the licenses to his favorites i.e., 122 telecom licenses in response to 575 applications for license with 2G spectrum in January 2008 at the rates determined in 2001 (Rs 1,658 crore) hence, ignoring the current market value of the spectrum. Further, no procedural or auction requirements were followed by the Companies. After obtaining licenses at cheap rates, the private companies sold their shares to foreign companies at very high price. The Private entities were valued at 10000 Crore Rupees against 1658 Crore rupees, thus, the wide difference in amount was the loss suffered by the Indian Government. The report covering the Government finances till March 2010 submitted by CAG, unraveled the realities of granting licenses to these 122 Companies. The loss estimated by the CAG ranged from Rs 53,523 crores to 1,39,652 crores rupees.
On the 2 Feb. 2012, the Supreme Court, in response to a Public Interest Litigation (PIL), cancelled all 122 telecom licenses granted in 2008 and directed that the spectrum linked with these licenses be auctioned. But it failed to clear the position of those Foreign Investors who had already invested in Indian Company licenses believing that it was issued in the name of Government of India. This opened flood gate for more PILs.
- Commonwealth Scam
When India won the bid to host International Sports event in 2010, it was hoped that it is a chance for a South-Asia’s giant country to showcase its progress & national pride. But it proved to be an embarrassment for India. It attracted global media for all the wrong reasons. The Organizing Committee despite being allotted huge amount for the Games was accused of intentionally delaying construction of stadiums, corruption, poor quality of infrastructure, mismanagement etc. The Central Vigilance Commissioner (CVC), in his report submitted in July, 2008, highlighted 14 types of irregularities in Commonwealth games. The contracts for procuring equipments were inflated, the difference between original price & inflated price (due to false invoices presented by culprits) was enjoyed by the fraudsters. Several foreign Companies were also accomplice in artificially inflating the prices & issuing fake invoices. These challenges highlighted the inability of Government to effectively implement regulations.
The High Level Shunglu Commission which was appointed by Prime Minister, CVC, CAG, CBI, Income Tax Department, and Enforcement Directorate (ED) were involved in deciphering the actual happenings of the Organizing Committee. Pursuant to these allegations & investigations, former CWG organizing Committee chairman Suresh Kalmadi was arrested & was charged with corruption & other offences. CAG published report in 2009 titled “Preparedness for the XIX Commonwealth Games” highlighting the reasons of the scam & in 2011 report it has examined the detailed audit of the games involving scam amounting to approx. 70000 Crore rupees.
- Coalgate Scam
India is rich in mineral & coal is one of them. There are several coal blocks which are under the control of government. The Government allocates these blocks to Public & private bidders through the process of Auction. But in this Scam, UPA government allocated 194 coal blocks to private individuals without following the proper procedure of bidding. The private & public enterprises were given rights for captive use between 2004 to 2009.
The CAG in his final report tabled in the parliament put the figure of scam at Rs. 1.86 lakh crore. CBI started investigations & had filed FIRs against 12 major private companies for misdoings in coal block allocation. SC held that coal allocation from 1993-2010 were illegal, because the procedure adopted for auction was arbitrary & without proper screening.
In 2005, Vijay Mallya launched Kingfisher. In 2007, he bought the bleeding Air Deccan, India’s first low-fare carrier. In 2008, Kingfisher got the permit to operate on International routes. Due to increasing cost of expenditure & low revenue, it ran in huge debt of approx. 7000 Crore rupees in 2010. It had turned into Non-performing assets for the banks. Though the news of Kingfisher incurring losses was all over media, it was in 2011 when it declared financial losses due to rise in price of oil as reason for not being able to pay salaries to employees & cover its creditors. State Bank of India which was the largest creditor of Kingfisher declared Kingfisher as NPA. Hence, leading to cancellation of license of Kingfisher. Kingfisher’s lack of strategy, recession & high operational cost led to its fall.
Major Public Sector banks which had provided loans to Kingfisher had to face the set-back financially. Vijay Mallya was accused of money laundering & financial fraud. The banks declared Mallya “wilful defaulter” in 2014. Besides banks, CBI & Enforcement department also registered money laundering cases against him along with several officials of banks as well. But it seems that we’ve to wait longer for justice to be served.
- Punjab National Bank Fraud
The Indian Public Banking system was left shook to its core after this scam. It involved approx. $1.77 billion in Nirav Modi case. The major setback was faced by Punjab National Bank, India’s second biggest Public Bank, as it was not only ripped with huge amount but also the most important role was played by its own employees.
PNB employees issued fake Letter of understandings (LoU), these LoU were used by Modi & his associates for paying foreign suppliers of jewelry. Further, they were issued by in bank’s name without adequate collateral & documentation. Due to non-linkage of SWIFT with CBS (Core banking system), the scam carried for almost seven years without being noticed. When the employee involved in this scam retired & the new one came, he noticed discrepancies in Nirav’s Accounts. He informed the Head branch about it & a huge scam was unraveled which left a mark on PNB’s reputation in both national & International market.
RBI took the necessary steps i.e., making linking of SWIFT & CBS compulsory. CBI undertook investigations & filed several hundred cases against Nirav Modi, Mehul Choksi & others. But the culprits are still out of jurisdiction of Indian Government & justice at present seems to be a far-fetched concept.
It can be observed that the major reason people at position can commit & get away with their wrongdoings is because of lack of proper regulatory environment. Sometimes it’s the head of government departments who themselves are involved with the fraudsters or are the people responsible for the whole fiasco.
Another reason is lack of awareness in general population. We tend to believe in a person or organization which promises unreasonable guaranteed returns without disclosing the source of their business activity. The Regulatory Authorities like SEBI, RBI, other institutions (both government & non-government) are consistently working towards investor awareness. Corporate crimes are much more complex to trace & investigate but it does not mean that we should wait for them to happen & then start the blame game. It is our responsibility as investor, customer, employee, authority or regulator to adopt precautionary steps & report mismanagement when required, to avoid such financial loss to both oneself & to our nation.
 Dr. Madan Bhasin, (2013), Corporate Accounting Scandal at Satyam: A Case Study of India’s Enron, European Journal of Business and Social Sciences, Vol. 1, No. 12, pp 25-47, March 2013. URL: http://www.ejbss.com/recent.aspx, ISSN: 2235 -767X.
 By Simran Chandok, The Growth of Sebi – From Harshad Mehta to Subrata Roy, International Journal for Legal Developments & Allied Issues, Volume 1 Issue 2 [ISSN 2454-1273].
 Guru Acharya, (2012), India: Case Study on the Supreme Court Ruling on the 2G Spectrum Scam, SSRN Electronic Journal, DOI: 10.2139/ssrn.2048719.
 Syeda Sana Rahman, (2010), The 2010 Commonwealth Games: India’s Triumph or Disaster?, ISAS Brief, No. 166.
 Performance Audit of XIXth Commonwealth Games, Report No. 6 of 2011.
 Dr. Pooja Dasgupta & Tushar Kumrawat, (2016), Coal is Gold: The ‘Coalgate’ Scam, Global Journal of Commerce & management Perspective, Vol.5(2):16-21, ISSN: 2319 – 7285.
 Ms. Sweety Gupta & Mr. Shiv Gupta, (2017), Case Study from Riches to Rags: The Story of Vijay Mallya, Pacific Business Review International, Volume 9 Issue 7.
 Punjab National Bank v. M/s Stellar Diamonds (OA no.119/2018)