Capital Market Frauds in India

Public memory is very short and fails to recall that in the month of June, the NSE has issued a show cause notice to Inventure Growth and Securities and Prakash K Shah Shares and Securities who had put in orders 144 to 271 times their margin deposits. NSE has reported that one operator placed orders worth Rs 1,083 crore and another Rs 960 crore when their annual income was Rs 40 to 50 lakh

Indian economy of 2013 is different from 1953, and qualitatively even from 1993. The money market has slowly been transformed and the traditional usurers seem to have shifted their eye from pawn brokerage to stock exchange. In a short period, they have reformed the capital market and the economy. The capital market is one where buyers and sellers engage in transactions of securities like bonds, shares etc generally on a longer period of one year and beyond are now reached international standards. But, it was the government initiative and the Public sector that have provided the necessary background for industrialisation and later globalisation.

The year 1992 is a watershed in the capital market operations of the country. Harshad Mehta, a smalltime LIC representative turned sub-broker caught manipulating the Bombay share market. It was estimated that he got involved in manipulating around Rs 4,000 crore in the share market, was one of the earliest scams after globalisation. But, Prof Brahmananda’s report on the scam put the upshot figure at Rs 70,000 crore. Harshad could manipulate the market by trading in shares at premium with the help of a nondescript bank, Bank of Karad in Maharastra, GDRs, diversion of funds and so on. He was in a way responsible for the establishment of Securities and Exchange Board of India, SEBI to oversee the operations of the share market in India from 1993.

The volume of trade on BSE and NSE is increased in leaps and bounds during the post- reform period. The market capitalisation was Rs 1,88,146 crore in 1992-93 had become Rs 9,12,842 crore in 1999-2000 and Rs 1,23,11,459 crore in 2012-13. It means Rs 23 lakh crore more than our GDP. The market turnover of the share market was Rs 92,461 crore in 1992-93 reached Rs 20,59,219 crore in 1999-2000 and to Rs 27,80,968 in 2012-13 (rough). The numbers are mind-boggling, but that is the reality of our economy monetised and capitalised after 1992 with international corporates participation and probably indirect control.

How does the share market operate and influences the economy is not even intelligible to economists who do not specialize in Finance (see Samuelson’s remarks on derivatives). Most of the European and American Corporate Houses have almost given up industrial and manufacturing activities and are now concentrating on Finance. If one looks at the GDP accounts of these countries, one would notice that major part of their income comes from the service sector and within service sector, Finance and Banking activities in the World. We are told that the software business or services have a key activity relating to this sector and therefore, we quite often see the honchos of IT hobnob with share market and financial sector. A few years ago a news item in an English daily from Bangalore reported that Rs 800 crore was transferred from the city to a London Bank that was already closed and stopped operations. We have not read anything about it thereafter.

It is not only through dubious operations of some MNCs including Indian companies that frauds are taking place, but some of the operations of these companies themselves are dubious. The chairman of SEBI, U K Sinha, in his address to the PHD Chamber of Commerce and Trade, Delhi last week spoke on corporate frauds in Share market. He has identified around 5 categories. They are 1. Structured trading where securities like, bond, loan, shares etc are used in commodity finance by taking them as collateral is a non-standard trading, tends to involve in frauds. 2. Syncronised trading is dubious as the amount and orders on both the sides of buyers and sellers are identical. It is used to display the volume of trade. 3. Circular trading where particular scrip or scrips are traded by closely knitted entities to push the price. 4. Aggressive trading is done in large quantity and investment to capture the market. 5. Push the market by using market strategies of the product market (in share market).

UK Sinha narrated how the corporate world is involved in the share business misleads the client/subscriber with wrong information by ‘managing the media’. He has mentioned that some of them give specious information relating to the mergers, products, financial results, manipulation of balance sheets and several other innovative practices to dupe the customer. It is interesting to notice that Legal Firms are now very active in helping the corrupt through innovative ideas to avoid the present legal framework .He said that every day SEBI gives around 100 alerts based on their sources and parameters on frauds but, orders investigation into 8 cases. It shows the vulnerability of the system.

The size of our capital market in terms of operators consisting of brokers and sub-brokers is less than one lakh and around 1.8 crore investors participating in it. There are about 7,800 scrips, out of which only 3,000 are actively traded.The SENSEX is however is based on 30 scrips mostly the private corporates like Reliance, Tata, Infosys and ONGC etc. But the ordinary investor, the enthusiast, the villager, the NRI dependent, the pensioner etc are not fully aware of the theatrics and the frauds that land them in bankruptcy and sometimes silently commit suicides. How do the operators create frauds?

Public memory is very short and fails to recall that in the month of June, the NSE has issued a show cause notice to Inventure Growth and Securities and Prakash K Shah Shares and Securities who had put in orders 144 to 271 times their margin deposits. NSE has reported that one operator placed orders worth Rs 1,083 crore and another Rs 960 crore when their annual income was Rs 40 to 50 lakh. NSE seems to have initiated action that is contested and by now got relief in the emerging new judiciary .This is only an example and there are many such operators and companies that manipulate their accounts and records with designed data of mergers, innovations, financial results to influence the investor and get benefitted by the transactions in the share market. It is possible in India where only 25 percent of the scrips are available for trade and the rest are held by the companies or their proxies. We have not added the banking scam here that has bearing on capital market. This seems to be much bigger scam than all the Coalgate, 2Getc put together.

There could be experts and corporate defenders who might argue that it is how capital is to be accumulated for investment to usher in higher rates of growth and the corporates do no wrong. Can the charlatans maneuver markets without affecting the common man where too much money (artificial) is chasing (inflation) too few goods?