yoursnicky
Nishant Gehlot
RECENT CHANGES DEVELOPMENT& SCAMS IN FINANCIAL MARKET
________________________________________________________________________
SUBJECT: FMRS
ASSIGNMENT-1
Submitted as partial fulfillment of degree of
MBA-LLM 3rd Semester
By
Nishant
Roll No. 143
To
Mr. V. Srinivasan
2008
NATIONAL LAW UNIVERSITY
JODHPUR
Introduction
Perhaps foremost among recent changes in world financial markets have been their accelerating integration and globalisation. This development, which has been fostered by the liberalisation of markets, rapid technological progress and major advances in telecommunications, has created new investment and financing opportunities for businesses and people around the world. Easier access to global financial markets for individuals and corporations will lead to a more efficient allocation of capital, which, in turn, will promote economic growth and prosperity.
Apart from this ongoing integration and globalisation, world financial markets have also recently experienced increased securitisation. In part, this development has been spurred by the surge in mergers and acquisitions and leveraged buy-outs that has taken place in markets of late, not least in the euro area. One aspect of this securitisation process has been the increase in corporate bond issuance, which has also coincided with a diminishing supply of government bonds in many countries, particularly in the United States.
Other interesting developments in world financial markets include the continued broadening and expansion of derivatives markets. The broadening of these markets has largely come about because rapid advances in technology, financial engineering, and risk management have helped to enhance both the supply of and the demand for more complex and sophisticated derivatives products. The increased use of derivatives to adjust exposure to risk in financial markets has also contributed to the rise in the notional amounts of outstanding derivatives contracts seen in recent years, in particular in over-the-counter (OTC) derivatives markets with interest rates and equities as underlying securities. While the leveraged nature of derivative instruments poses risks to individual investors, derivatives also provide scope for a more efficient allocation of risks in the economy, which is beneficial for the functioning of financial markets, and hence enhances the conditions for economic growth.
Among the many changes in global financial markets, developments in the euro area have been particularly striking.
Recent trends in euro area financial markets
The launch of the euro on 1 January 1999 was a historic event. 11 national currencies were converted into one single currency overnight. It marked the start of a period of profound change in Europe's financial landscape. The successful launch of the euro, which is a key element in the creation of a stable, prosperous and peaceful Europe, has also boosted the integration of financial markets in the euro area. This process of integration in European financial markets coincided with the trend towards globalisation. Both these factors help to explain current developments in Europe's financial markets.
The main catalyst behind the huge changes that have taken place, and continue to take place, has, of course, been the arrival of the single currency. In January 1999, foreign exchange and interbank markets immediately switched over to the euro. At the same time, a single monetary policy was established, with a uniform policy implementation framework for all euro area countries. Furthermore, a unified payment system was introduced, providing for real-time gross settlement transfers throughout the euro area.
As regards euro area banks, the transparency brought about by a single currency and a single monetary policy makes it easier for customers to compare bank products and costs. This, in turn, will foster competition among banks. Although this increased competition will lead to lower bank margins, it will promote restructuring and consolidation among banks in the euro area, which will help them to compete globally. In fact, these events are already happening: banks all over Europe are merging or forming alliances on an unprecedented scale, thereby drastically changing the national banking environment and creating international networks. Hence, the introduction of the euro has not only provided banks with a market large enough to support their efforts in global competition, but also pressured them to undertake the restructuring and consolidation they need in order to be successful in an increasingly global market.
In addition to these changes in the banking sector, the advent of the euro also provided the basis for a Europe-wide securities market. The euro area money market underwent a wide-ranging process of integration and standardisation following the introduction of the single monetary policy framework. The unsecured deposit markets and the derivatives markets became fully integrated in early 1999. Moreover, the need to redistribute liquidity among euro area countries, including liquidity provided by the Eurosystem as part of its refinancing operations, fostered the development of area-wide transactions in the money market. TARGET, the new area-wide payment system which constitutes the major settlement system for payments in euro, has played a key role in facilitating the redistribution of liquidity across the euro area. In addition, by encouraging greater arbitrage activity, TARGET has facilitated an equalisation of prices prevailing in the various segments of the money market throughout the euro area. While there has been less integration in other segments of the euro area money market, such as the repo markets and the short-term securities markets, I am convinced that the integration process will continue in these areas, given the favourable conditions provided by European Economic and Monetary Union.
Another sector in which impressive changes have taken place following the introduction of the euro is the euro-denominated bond market. There was a marked rise in private bond issuance in the euro area in 1999, which has continued broadly unabated in 2000. Following the introduction of the euro, the euro-denominated component of international bond markets played a far larger role than the predecessor currencies of the euro had hitherto. In other words, the whole has turned out to be much greater than the sum of the parts. Apart from this, it also became clear that various characteristics of newly issued debt securities were changing. In particular, the average size of new bond issues rose considerably in 1999, as the number of very large issues, of EUR 1 billion or more, grew significantly. These changes show that the newly created euro-denominated bond market, by virtue of its size and high degree of openness, is more able to absorb very large issues than the individual bond markets of the predecessor currencies of the euro. Hence, the introduction of the single currency has resulted in more efficient and well-functioning markets, which benefit not only euro area residents, but also market participants outside the euro area. Furthermore, this market still has great potential since the use of securities finance by the corporate sector, relative to bank finance, is still only about half that of its counterpart in the United States.
The single currency also appears to be a catalyst for restructuring the European corporate sector, and for the emergence of new companies. The ongoing integration process of the national stock exchanges has also been supportive in this respect. Primary issues of European equities have reached record highs, with whole new markets, such as the Neuer Markt in Frankfurt, becoming prominent internationally. These developments can only favour those companies which may have found it difficult in the past to finance themselves, but which will now be able to raise equity more easily. In addition, a number of Europe-wide equity indices have been established, thereby contributing to extending the trading possibilities and the position-taking opportunities for investors. Alliances between stock exchanges should also foster the integration of stock market infrastructures. These changes are bound to intensify competition and make European markets more resilient and fit for the global economy.
China’s Stock Market
China’s economy has changed from a centrally planned economy (CPE), which was introduced in 1949, to a more market orientated economy since 1978 and is currently a significant participant in the global economy. There were some inherent shortcomings of the CPE, like the defective functioning of the planning mechanism, the monopolistic, non-contestable position of the State Owned Enterprises (SOE’s), the lack of financial sanctions, the lack of adequate incentives, the macro-economic, suboptimal allocation of resources, the autarchic isolation and Mao’s disastrous initiatives. This led to the reforms in the late 1970’s, which started with the de-collectivisation of agriculture, the gradual liberalization of prices, a diversified banking system, more autonomy for SOE’s, decentralisation of the fiscal system, development of the stock markets, the growth of the non-state sector and the opening to foreign trade and investment.
In Mainland China, the stock market reappeared in the 1980’s and has experienced a lot of growth ever since. The number of companies listed, increased from a dozen in 1991 to more than 600 in 1997. At the same time, the market capitalisation increased from less than 10 billion to more than 1300 billion RMB. The Chinese market has a number of unique features, like different shares issued to enterprises, state, individual share holders, who have different purchasing costs and circulation regulation. Other characteristics are strictly segmented markets for domestic investors and foreign investors, high transfer rates, high P/E ratios and high system risks. The Chinese government has formulated four principles of stock market development, namely: the legal system, standardization to normalize its stock market, supervision and self-discipline. One of the reforms that China gradually has implemented were the refinements in foreign exchange and bond markets and the sale of equity of China’s largest state banks to foreign investors in 2005.
China’s stock markets major turning point
Recently, the stock prices have been increasing caused by recoverable growth. Therefore, market-oriented adjustments are needed. China’s stock market went from a sustained slump to a stable development, but now, it has reached a major turning point. According to People's Daily Online, Zhou Zhengging states in a recent interview with the Chinese media, that the Chinese people should cherish this hard-won situation and use the opportunity to maintain the development of the stock market. Zhou Zhengging is the former chairman of the China Securities Regulatory Commission, a member of the NPC Standing Committee and vice president of the Financial and Economic Committee and according to him there is no serious bubble in China’s stock market.
China’s capital market has been stagnant since June 2001, which is not quite normal. Zhou claims that there are multiple reasons explaining this situation. One is a misunderstanding of the capital market’s development caused by flawed thinking. This type of thinking has had a negative impact on the capital market because people generally rejected China’s capital market and have been arguing and advocating a “new start”.
Efforts to improve and expand reforms resulted in the major shift and changes that occurred in 2006. Zhou emphasizes that China must cherish the situation they now have. Five factors can be distinguished that contributed to the turning point of 2006.
1. Firstly, the CPC Central Committee as well as the State Council have to consider the development of the capital market as one of their priorities. They also made important strategic plans and policy decisions.
2. Secondly, China has solved some of its major problems, by completing equity division reforms. This will have a long term impact on the healthy development of the capital market. In addition, shareholders no longer have the possibility to hold tradable shares as well as non-tradable shares at the same time or share the same equity property in order to strengthen the basic mechanism.
3. Thirdly, another factor conductive for the development of the capital market is the improved legal environment.
4. Fourthly, a favourable external environment for the capital market was created by the sustained and rapid development of the national economy. Zhou stated that especially the money market was more liquid, which helped to ease the shortage of funds in the capital market. This has been a problem for the past two years. In the meantime, the objective requirements for the development of China’s capital market have been raised by the growing demands of investors.
5. Finally, improving the regulation and supervision of China’s capital market and the quality and efficiency of the companies listed, are factors that also contributed to the recovery of the stock market.
Future of global financial market
It is tempting to conclude that global capital markets have reached the point of no return. Capital flows across borders have risen to new heights. This is true first and foremost of foreign direct investment, which has been stimulated by enterprise privatization, the development of global production networks, and the ready availability of finance for mergers and acquisitions. It is hard to imagine a return to significantly lower levels of FDI, since many of the facilitating conditions . the advent of the Internet, for example, which facilitates cheap communication with foreign branch plants, and instantaneous data transfer between cash registers at retail outlets and foreign production facilities are permanent. The same is true of foreign portfolio investment.
All of the advanced countries and a number of developing countries have relaxed or removed their most significant capital controls, and in neither world do policy makers show any interest in going back. At the same time, policy makers display more awareness of the dangers of excessive reliance on portfolio capital. Prudential supervision and regulation, corporate governance and macroeconomic policies have been strengthened to accommodate these changes in the financial environment.
Countries have accumulated reserves as protection against capital account reversals. They are more successfully resisting the temptation to expand public spending and acquiesce in a significant increase in private spending in periods when a large volume of foreign finance is flowing in. It is hard to imagine that what has been learned, often at considerable cost, will now be forgotten.
All this makes it important to recall that this is not the first time that financial markets are significantly globalized; this was also true before World War I. What many contemporaries regarded as a permanent condition was, in the end, only a passing phase.
Global financial markets shut down in the 1930s and then took two generations to recover. This resulted from an unfortunate confluence of factors: perverse macroeconomic policies, nationalistic trade policies, poorly regulated financial markets, and the absence of a framework for international cooperation, all against the backdrop of escalating diplomatic and political conflicts.41 Optimists will say that there have been significant improvements in the conceptualization and implementation of macroeconomic policies in the interim. The multilateral trading system is more deeply entrenched; it is institutionalized courtesy of the World Trade Organization. Financial markets and institutions are better regulated.
We possess a stronger multilateral framework, starting with the IMF, to facilitate cooperation on the regulation of financial markets and the conduct of macroeconomic policies. Pessimists will respond that a nationalist backlash is still possible.
The United States, seeing its bilateral trade deficit with China explode, continues to threaten unilateral action. In Latin America, where the benefits of globalization have been slow to trickle down to the poor, populism is alive and well. The privatization of public enterprise that has supported foreign direct investment has uncertain prospects in the wake of Bolivia.s re-nationalization of its energy sector in 2006. The disorderly correction of global imbalances, if it involves sharp shifts in exchange rates and significant increases in interest rates, could again place global financial stability at risk.
Top scams of global stock market
Scams occur in the stock market every day. Stock market scandals are woven into the fabric of our culture.
However, these are the TRULY outrageous stock market scams. The scams that when you hear about them, you say to yourself "How did they ever think that they would get away with this?"
Here are my top ten lists, starting from the least outrageous (but still outrageous) -
10. Anthony Elgindy and the corrupt FBI agent. Here is a guy who built up a large following in the late 90's by exposing overvalued stocks and then subsequently short-selling them for profit. He had a corrupt FBI agent on his payroll, Jeffrey Royer, who would log into government databases using his credentials and try to dig up confidential information that they could use to manipulate the stock market. For instance, if the CEO of a company had a criminal investigation against him ongoing, they would short the stock (bet that it would fall) and then disseminate the confidential information in order to create weakness in the stock. Elgindy would also inform the companies that he possessed this information, and then try to extort funds from them in exchange for not releasing the info. Eventually the FBI caught on to their scheme and Elgindy ended up receiving 11 years in jail, where he still is today.
9. Stock Exchange Hoax of 1814. One of the first instances of stock market manipulation. On February 21, 1814, a man in a British military uniform showed up in an inn on the coast of the English channel and pronounced that Napoleon had been killed and the Napoleonic Wars were now over. Word spread quickly and people celebrated by driving up the price of stocks on the London Stock Exchange. The only problem was that the news was soon discovered to be a hoax, and it was also revealed that someone had engaged in a plot to profit from this erroneous news. Lord Thomas Cochrane was eventually fingered as the culprit, but he was later pardoned by the King after it was determined that he was not involved. The true culprit was never found.
8. ZZZZ Best Inc. Meet Barry Minkow. You may think that he's just a normal, ordinary 16 year old but he's not. He actually runs a carpet cleaning company called "ZZZZ Best Inc." out of his garage. This "company" grew to a company with over 1400 employees who specialized in insurance restoration cleaning. The company was winning "big" contracts (from Mob families) and Barry was driving a Ferrari and living in a mansion. Life was good. In 1986, the company went public and temporarily had a market value of over $200 million, valuing Minkow personally at over $100 million dollars. Not bad for a teenager! However, the company was nothing more than a huge hoax. The company was simply a massive Ponzi scheme, raising money from new investors to pay off old ones. Thousands upon thousands of documents were forged to maintain the appearance of a thriving business. The company borrowed fake offices to maintain their image. Company officers were embezzling funds. The company tried issuing fake press releases to stave off worried investors. The company quickly collapsed, and Minkow and eleven others were indicted on 54 different counts of fraud. Minkow was sentenced to 25 years in prison, but served 7 1/2. He has now turned to God and is deeply religious.
7. Bre-X. Was, at one time, a company with a total capitalization of over $6 billion dollars. Was apparently sitting on the largest gold deposit in the world at their Busang site in Indonesia. Bought the Busang plot of land in 1993, and in 1995 announced that they had discovered significant amounts of gold. Bre-X's independent consulting company, Kilborn Engineering, estimated that there were 70 million ounces of gold in the Busang deposit. Others speculated that it might be as much as 200 million ounces. As you may guess, the entire thing turned out to be a massive fraud. Bre-X had "salted" the samples by placing shavings from gold jewelry in with the core samples to maintain the allusion of a massive gold deposit. The stock collapsed and went into bankruptcy, sparking many lawsuits and books written about the topic. The Bre-X story resembles a Hollywood movie; dead geologists who might not really be dead, corrupt governments and disgraced company officials in exile.
6. Nick Leeson. The man who single-handedly brought down Barings Bank, the UK's oldest investment bank (at the time). Used an "error account" to hide his trading losses. If a trade went well, he made sure that everyone knew about it; if the trade went poorly, he would hide it in this "error account" that was marked "88888." The error accounts losses reached 200 million pounds, and Leeson engaged in increasingly speculative trades to try and gain the money back. The end came when an earthquake in Japan sent the value of one of Leeson's positions tumbling, resulting in a total loss for Barings of over 800 million pounds, including all of Leeson's previous losses. Leeson fled and was eventually captured, and the company was declared insolvent. The company's lack of rules and regulations when it came to their star trader eventually led to their downfall.
5. Recruit Scandal. A massive scandal in Japan. The chairman of Recruit, Hiromasa Ezoe, offered shares in a Recruit subsidiary named Recruit Cosmos to many different prominent politicians including the Prime Minister, former Prime Minister and Chief Cabinet Secretary. The chairman of NTT was also involved. Basically, Ezoe offered unlisted shares of Recruit Cosmos at bargain basement prices to politicians, business leaders and journalists in an attempt to curry favor. The shares eventually went public and sky-rocketed in value. Word of these "deals" between Ezoe and the others soon leaked out, and the dominoes began to fall. The fallout was swift, with many of these politicans stepping down after being disgraced. The scandal rattled Japan and helped lead to a major slowdown of the country's economy.
4. Michael Milken. Known as the "Junk Bond King", Milken was another in our list who abused his privileges and power. Milken pioneered the use of high-yield debt (or junk bonds) to help finance corporate takeovers and corporate raids. He was more fond of enriching himself though, as he used his knowledge of forth-coming acquisitions to enrich himself and his cronies, through the purchase of warrants in companies that were about to be taken over and other beneficial self-dealings that would enrich him. Milken built up a net worth of over a billion dollars. When Ivan Boesky was taken down, he ratted out Milken and the entire house of cards came toppling down. It is said that the movie "Wall Street" is largely based upon Boesky and Milken.
3. Guinness Fraud. Speaking of Boesky, he paid dearly for his involvement in this scandal. Basically the scheme was this: inflate the price of Guinness shares by buying as many Guinness shares of they possibly could, maintain the price and then use the inflated market cap to take over Distillers, a much larger company. The "Guinness Four", Ernest Saunders, Gerald Ronson, Jack Lyons and Anthony Parnes were charged with using company money to try and artificially inflate the stock price of the company, which would allow them to take over Distillers. Guinness fronted money to various "investors", including Ivan Boesky, who would buy shares in the company and then receive a kickback for doing so. The merger was eventually completed, although the fallout was great once this insider scheme was uncovered. This scandal roiled global financial markets that were already shaky at the time.
2. Tang Wanxin. Formally one of the richest men in China, he played a major role in China's largest ever stock scandal. Tang raised over 45 billion yuan over a 4 year period without regulatory approval. Not only that, but Tang also rigged the prices of three listed companies that his company owned so that he could inflate the share prices, use the shares as collateral for loans and send more money into his company's. Many company executives were in on this scam to defraud the Chinese public. One of the biggest companies in China was taken down, one of the richest men in China fell from grace, and billions upon billions of dollars were involved. Certainly worthy of a number two spot on this list.
1. Enron. The grand-daddy of all scams. You have all of the elements. A company with incredible political connections. The seventh-largest company in the United States at the time. A darling of the stock market. Thousands of employees with their life savings tied up on the stock, and many more thousands with exposure to the stock either directly or indirectly. The multi-billion dollar company was mostly smoke and mirrors. Company officials were using shell companies to hide hundreds of millions of dollars in debt, and to inflate profits. Company officials were creating shell companies in order to enrich themselves as well through lucrative side deals. Enron truly signalled the end of the "boom era" in the United States stock market. Billions upon billions were lost. Arthur Andersen, one of the largest accounting firms in the US, shredded company documents and was eventually taken down. Congressional hearings. Whistle-blowers. Books. Movies. This one had it all, and was certainly the most outrageous stock market scam of all when you consider all of the elements involved.
Scams and scandals in Indian financial market
It terms of reform and development, the Indian capital market and financial sector have been the fastest to grab every opportunity presented by the paradigm shift in India’s economic policy. Their furious developmental activities have put the two top Indian bourses almost on par with the best in the world, in terms of their structure, systems and regulation. But for all the development efforts, the capital market remains seriously flawed because three key ingredients are still missing. They are adequate supervision, strict accountability, and appropriate punishment.
As a result, the markets have remained shallow and stunted and have lurched from one financial scandal to another over the last decade. Every policy change in the liberalisation process was pounced upon by unscrupulous companies, who aided by a retinue of investment bankers and consultants diverted thousands of crores of rupees to themselves. In the process, retail investors have been the biggest losers and the effect of their disenchantment is visible in the slow growth of India’s investor population. China has over 25 million investors, while India, with all its rapid development and its 130- year old stock exchange culture has only 19 million investors.
A simple roll-call of the scams of the last decade tells the story of why Indian investors are so frustrated.
1. The Securities Scam of 1992: This was the mother of all Indian financial scandals. It exposed the utter lawlessness and absence of supervision in the money markets; it allowed funds to be transferred with impunity from banks and corporate houses into the equity markets; and saw thousands of crores of bank funds to move in and out of brokers’ bank accounts in what was later claimed as a “accepted market practice”. A Special Court under a separate act of parliament was set up and over 70 cases were filed by the CBI but not a single scamster has been finally convicted by the excruciatingly slow judicial system. Instead, their repeated attempts to re-enter the market with the same bag of tricks have caused further losses to investors. More significantly, the Reserve Bank of India which was guilty of gross negligence and was discovered to have deliberately buried supervision reports was let off scot-free with just a couple of officials reprimanded.
2. The IPO bubble: The entry of Foreign Institutional investors led to a massive bull run, which saw the secondary market recover from the scam even though badla was banned. Soon thereafter, the Control over Capital Issues 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 premia to fund greenfield 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 is known as the vanishing companies scandal. The IPO bubble which lasted three years from 1993 to 96 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.
3. Preferential Allotment rip-off: This was an offshoot of the rampant price rigging on the secondary market. Apart from raising fresh funds, promoters of Indian companies who thought that prices would never come down, quickly orchestrated general body clearances to allot shares to themselves on a preferential basis and at a substantial discount to the market. Multinational companies such as Colgate and Castrol started the trend and it led to a benefit of nearly Rs 5000 crores (in relation to market prices at that time) to retail investors before the Securities and Exchange Board of India (SEBI) put in place a set of rules to block the practice. A public interest litigation filed at that time drags on in court.
4. CRB’s house of cards: Chain Roop Bhansali’s (CRB) cardboard empire is only the biggest and most audacious of many that were built and disappeared in the new ‘liberalised’ milieu of the mid-1990s. His Rs 1000 crore financial conglomerate comprised of a mutual fund, fixed deposit collection (with hefty cash kick backs), a merchant bank (he even lobbied hard to head the Association of Merchant Bankers of India) and a provisional banking license. Many of these licenses required adequate scrutiny by SEBI and the RBI, and that fact that they passed muster is another reflection of supervisory lethargy. Armed with these and favourable credit ratings and audit reports, CRB created a pyramid based on high cost financing which finally collapsed. The winner: C. R. Bhansali, who, after a brief spot of trouble with the authorities moved on to the dotcom business and the regulators who were never held accountable. The losers: millions of small investors who lost through fixed deposits or the mutual fund. The CRB collapse caused a run on other finance companies causing a huge systemic problem and further losses to investors.
5. Plantation companies’ puffery: These followed the same strategy as vanishing companies, and since they were subject to no regulation, could get away with wild profit projections. They positioned themselves as part mutual fund, part IPO and promised the most incredible returns – over 1000 per cent at least in seven years. High profile television campaigns, full-page advertisments and glossy brochures had the investors flocking for more. Almost all these project, with barely any exception have vanished. The cost: Rs 8000 crores plus.
6. Mutual Funds disaster: The biggest post-liberalisation joke on investors is the suggestion that small investors should invest in the market through Mutual Funds. Yet, over the decade, a string of government owned mutual funds have failed to earn enough to pay the returns ‘assured’ to investors. Starting with the scam-hit Canstar scheme, most mutual funds had to be bailed out by their sponsor banks, or parent institutions. The came the big bail out of Unit Trust of India. Since UTI is set up under its own act, it was the tax- payers who paid for the Rs 4800 crore bailout in 1999. Just three years later, it was back buying recklessly into the Ketan Parekh manipulated scrips and suffering big losses in the process. The record of the private mutual funds has also been patchy – after hitting a purple patch in 1999-2000, many of the sector specific funds are down in the dumps. It will be a long time indeed before small investors consider mutual funds a reasonably safe investment.
7. The 1998 collapse: What could be a bigger indicator of the ineffectiveness of the regulatory system and the moral bankruptcy in the country than the return of Harshad Mehta? In 1998, the scamster, who was the villain of 1992, made a comeback by floating a website to hand out stock tips and writing columns in several newspapers who were told that his column would push up their circulation figures. His relentless rigging of BPL, Videocon and Sterlite shares ended with the inevitable collapse and a cover up operation involving an illegal opening of the trading system in the middle of the night by the Bombay Stock Exchange officials. It cost the BSE President and Executive Director their jobs, but the broker and the companies have got away so far.
8. The K-10 gimmick: This too is already on the way to be hushed up even before it is fully investigated. Though everybody knows this as a Ketan Parekh scandal, but if one examines the selective leak of the SEBI investigation report to the media, it would seem as though only three operators caused the problem by hammering down prices. The government promised stringent action not only against Ketan Parekh and the brokers who hammered down prices, but also the regulators who slept over their job and companies/banks which colluded with them to divert funds to the market. Yet, within a month, the pressure for action is off and the momentum has been lost.
A decade later we seem to have come a full circle. The Ketan Parekh led scandal has been considered big enough to warrant the setting up of another Joint Parliamentary Committee. And the fact that the second JPC has been spending its first few weeks action (not) taken on the previous JPC report says it all about supervision, regulation and accountability
Conclusion
. It is clearly evident that the occurrence and reoccurrence of such security scams and financial scandals as some point in time be 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 (management).It is more self enforced as a ethical behavior 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 misdemeanors are not perpetuated and so that the market functions efficiently to over see the functions of the market participants and impose fines and other penalty for non-compliance. 25Though standard corporate governance theory states that corporate governance includes the role that equity and debt holders have to play in influencing managers to act in the best interests of suppliers of capital it should not be forgotten that it also includes the role that creditors, owners and government in the same capacity.
corporate governance ensures a regular supply of capital and fair share of profit to investors it's role does not end there. Corporate Governance at that level does not mean that it is entirely solved but definitely can be improved on. Shareholders and other parties find difficulty in exercising corporate governance because of poor legal systems, corruption and bankruptcy.
Also regulations and prohibitions of entry of foreign banks reduces competition and market pressures on managers to earn profits. Corporate Governance problem can be improved by increasing private monitoring and reducing government ownership when it interferes with private monitoring. The opacity of banking processes should be removed and a proper information flow should ensue. A lack of this can be attributed to the Asian Crisis and collapse of Enron
________________________________________________________________________
SUBJECT: FMRS
ASSIGNMENT-1
Submitted as partial fulfillment of degree of
MBA-LLM 3rd Semester
By
Nishant
Roll No. 143
To
Mr. V. Srinivasan
2008
NATIONAL LAW UNIVERSITY
JODHPUR
Introduction
Perhaps foremost among recent changes in world financial markets have been their accelerating integration and globalisation. This development, which has been fostered by the liberalisation of markets, rapid technological progress and major advances in telecommunications, has created new investment and financing opportunities for businesses and people around the world. Easier access to global financial markets for individuals and corporations will lead to a more efficient allocation of capital, which, in turn, will promote economic growth and prosperity.
Apart from this ongoing integration and globalisation, world financial markets have also recently experienced increased securitisation. In part, this development has been spurred by the surge in mergers and acquisitions and leveraged buy-outs that has taken place in markets of late, not least in the euro area. One aspect of this securitisation process has been the increase in corporate bond issuance, which has also coincided with a diminishing supply of government bonds in many countries, particularly in the United States.
Other interesting developments in world financial markets include the continued broadening and expansion of derivatives markets. The broadening of these markets has largely come about because rapid advances in technology, financial engineering, and risk management have helped to enhance both the supply of and the demand for more complex and sophisticated derivatives products. The increased use of derivatives to adjust exposure to risk in financial markets has also contributed to the rise in the notional amounts of outstanding derivatives contracts seen in recent years, in particular in over-the-counter (OTC) derivatives markets with interest rates and equities as underlying securities. While the leveraged nature of derivative instruments poses risks to individual investors, derivatives also provide scope for a more efficient allocation of risks in the economy, which is beneficial for the functioning of financial markets, and hence enhances the conditions for economic growth.
Among the many changes in global financial markets, developments in the euro area have been particularly striking.
Recent trends in euro area financial markets
The launch of the euro on 1 January 1999 was a historic event. 11 national currencies were converted into one single currency overnight. It marked the start of a period of profound change in Europe's financial landscape. The successful launch of the euro, which is a key element in the creation of a stable, prosperous and peaceful Europe, has also boosted the integration of financial markets in the euro area. This process of integration in European financial markets coincided with the trend towards globalisation. Both these factors help to explain current developments in Europe's financial markets.
The main catalyst behind the huge changes that have taken place, and continue to take place, has, of course, been the arrival of the single currency. In January 1999, foreign exchange and interbank markets immediately switched over to the euro. At the same time, a single monetary policy was established, with a uniform policy implementation framework for all euro area countries. Furthermore, a unified payment system was introduced, providing for real-time gross settlement transfers throughout the euro area.
As regards euro area banks, the transparency brought about by a single currency and a single monetary policy makes it easier for customers to compare bank products and costs. This, in turn, will foster competition among banks. Although this increased competition will lead to lower bank margins, it will promote restructuring and consolidation among banks in the euro area, which will help them to compete globally. In fact, these events are already happening: banks all over Europe are merging or forming alliances on an unprecedented scale, thereby drastically changing the national banking environment and creating international networks. Hence, the introduction of the euro has not only provided banks with a market large enough to support their efforts in global competition, but also pressured them to undertake the restructuring and consolidation they need in order to be successful in an increasingly global market.
In addition to these changes in the banking sector, the advent of the euro also provided the basis for a Europe-wide securities market. The euro area money market underwent a wide-ranging process of integration and standardisation following the introduction of the single monetary policy framework. The unsecured deposit markets and the derivatives markets became fully integrated in early 1999. Moreover, the need to redistribute liquidity among euro area countries, including liquidity provided by the Eurosystem as part of its refinancing operations, fostered the development of area-wide transactions in the money market. TARGET, the new area-wide payment system which constitutes the major settlement system for payments in euro, has played a key role in facilitating the redistribution of liquidity across the euro area. In addition, by encouraging greater arbitrage activity, TARGET has facilitated an equalisation of prices prevailing in the various segments of the money market throughout the euro area. While there has been less integration in other segments of the euro area money market, such as the repo markets and the short-term securities markets, I am convinced that the integration process will continue in these areas, given the favourable conditions provided by European Economic and Monetary Union.
Another sector in which impressive changes have taken place following the introduction of the euro is the euro-denominated bond market. There was a marked rise in private bond issuance in the euro area in 1999, which has continued broadly unabated in 2000. Following the introduction of the euro, the euro-denominated component of international bond markets played a far larger role than the predecessor currencies of the euro had hitherto. In other words, the whole has turned out to be much greater than the sum of the parts. Apart from this, it also became clear that various characteristics of newly issued debt securities were changing. In particular, the average size of new bond issues rose considerably in 1999, as the number of very large issues, of EUR 1 billion or more, grew significantly. These changes show that the newly created euro-denominated bond market, by virtue of its size and high degree of openness, is more able to absorb very large issues than the individual bond markets of the predecessor currencies of the euro. Hence, the introduction of the single currency has resulted in more efficient and well-functioning markets, which benefit not only euro area residents, but also market participants outside the euro area. Furthermore, this market still has great potential since the use of securities finance by the corporate sector, relative to bank finance, is still only about half that of its counterpart in the United States.
The single currency also appears to be a catalyst for restructuring the European corporate sector, and for the emergence of new companies. The ongoing integration process of the national stock exchanges has also been supportive in this respect. Primary issues of European equities have reached record highs, with whole new markets, such as the Neuer Markt in Frankfurt, becoming prominent internationally. These developments can only favour those companies which may have found it difficult in the past to finance themselves, but which will now be able to raise equity more easily. In addition, a number of Europe-wide equity indices have been established, thereby contributing to extending the trading possibilities and the position-taking opportunities for investors. Alliances between stock exchanges should also foster the integration of stock market infrastructures. These changes are bound to intensify competition and make European markets more resilient and fit for the global economy.
China’s Stock Market
China’s economy has changed from a centrally planned economy (CPE), which was introduced in 1949, to a more market orientated economy since 1978 and is currently a significant participant in the global economy. There were some inherent shortcomings of the CPE, like the defective functioning of the planning mechanism, the monopolistic, non-contestable position of the State Owned Enterprises (SOE’s), the lack of financial sanctions, the lack of adequate incentives, the macro-economic, suboptimal allocation of resources, the autarchic isolation and Mao’s disastrous initiatives. This led to the reforms in the late 1970’s, which started with the de-collectivisation of agriculture, the gradual liberalization of prices, a diversified banking system, more autonomy for SOE’s, decentralisation of the fiscal system, development of the stock markets, the growth of the non-state sector and the opening to foreign trade and investment.
In Mainland China, the stock market reappeared in the 1980’s and has experienced a lot of growth ever since. The number of companies listed, increased from a dozen in 1991 to more than 600 in 1997. At the same time, the market capitalisation increased from less than 10 billion to more than 1300 billion RMB. The Chinese market has a number of unique features, like different shares issued to enterprises, state, individual share holders, who have different purchasing costs and circulation regulation. Other characteristics are strictly segmented markets for domestic investors and foreign investors, high transfer rates, high P/E ratios and high system risks. The Chinese government has formulated four principles of stock market development, namely: the legal system, standardization to normalize its stock market, supervision and self-discipline. One of the reforms that China gradually has implemented were the refinements in foreign exchange and bond markets and the sale of equity of China’s largest state banks to foreign investors in 2005.
China’s stock markets major turning point
Recently, the stock prices have been increasing caused by recoverable growth. Therefore, market-oriented adjustments are needed. China’s stock market went from a sustained slump to a stable development, but now, it has reached a major turning point. According to People's Daily Online, Zhou Zhengging states in a recent interview with the Chinese media, that the Chinese people should cherish this hard-won situation and use the opportunity to maintain the development of the stock market. Zhou Zhengging is the former chairman of the China Securities Regulatory Commission, a member of the NPC Standing Committee and vice president of the Financial and Economic Committee and according to him there is no serious bubble in China’s stock market.
China’s capital market has been stagnant since June 2001, which is not quite normal. Zhou claims that there are multiple reasons explaining this situation. One is a misunderstanding of the capital market’s development caused by flawed thinking. This type of thinking has had a negative impact on the capital market because people generally rejected China’s capital market and have been arguing and advocating a “new start”.
Efforts to improve and expand reforms resulted in the major shift and changes that occurred in 2006. Zhou emphasizes that China must cherish the situation they now have. Five factors can be distinguished that contributed to the turning point of 2006.
1. Firstly, the CPC Central Committee as well as the State Council have to consider the development of the capital market as one of their priorities. They also made important strategic plans and policy decisions.
2. Secondly, China has solved some of its major problems, by completing equity division reforms. This will have a long term impact on the healthy development of the capital market. In addition, shareholders no longer have the possibility to hold tradable shares as well as non-tradable shares at the same time or share the same equity property in order to strengthen the basic mechanism.
3. Thirdly, another factor conductive for the development of the capital market is the improved legal environment.
4. Fourthly, a favourable external environment for the capital market was created by the sustained and rapid development of the national economy. Zhou stated that especially the money market was more liquid, which helped to ease the shortage of funds in the capital market. This has been a problem for the past two years. In the meantime, the objective requirements for the development of China’s capital market have been raised by the growing demands of investors.
5. Finally, improving the regulation and supervision of China’s capital market and the quality and efficiency of the companies listed, are factors that also contributed to the recovery of the stock market.
Future of global financial market
It is tempting to conclude that global capital markets have reached the point of no return. Capital flows across borders have risen to new heights. This is true first and foremost of foreign direct investment, which has been stimulated by enterprise privatization, the development of global production networks, and the ready availability of finance for mergers and acquisitions. It is hard to imagine a return to significantly lower levels of FDI, since many of the facilitating conditions . the advent of the Internet, for example, which facilitates cheap communication with foreign branch plants, and instantaneous data transfer between cash registers at retail outlets and foreign production facilities are permanent. The same is true of foreign portfolio investment.
All of the advanced countries and a number of developing countries have relaxed or removed their most significant capital controls, and in neither world do policy makers show any interest in going back. At the same time, policy makers display more awareness of the dangers of excessive reliance on portfolio capital. Prudential supervision and regulation, corporate governance and macroeconomic policies have been strengthened to accommodate these changes in the financial environment.
Countries have accumulated reserves as protection against capital account reversals. They are more successfully resisting the temptation to expand public spending and acquiesce in a significant increase in private spending in periods when a large volume of foreign finance is flowing in. It is hard to imagine that what has been learned, often at considerable cost, will now be forgotten.
All this makes it important to recall that this is not the first time that financial markets are significantly globalized; this was also true before World War I. What many contemporaries regarded as a permanent condition was, in the end, only a passing phase.
Global financial markets shut down in the 1930s and then took two generations to recover. This resulted from an unfortunate confluence of factors: perverse macroeconomic policies, nationalistic trade policies, poorly regulated financial markets, and the absence of a framework for international cooperation, all against the backdrop of escalating diplomatic and political conflicts.41 Optimists will say that there have been significant improvements in the conceptualization and implementation of macroeconomic policies in the interim. The multilateral trading system is more deeply entrenched; it is institutionalized courtesy of the World Trade Organization. Financial markets and institutions are better regulated.
We possess a stronger multilateral framework, starting with the IMF, to facilitate cooperation on the regulation of financial markets and the conduct of macroeconomic policies. Pessimists will respond that a nationalist backlash is still possible.
The United States, seeing its bilateral trade deficit with China explode, continues to threaten unilateral action. In Latin America, where the benefits of globalization have been slow to trickle down to the poor, populism is alive and well. The privatization of public enterprise that has supported foreign direct investment has uncertain prospects in the wake of Bolivia.s re-nationalization of its energy sector in 2006. The disorderly correction of global imbalances, if it involves sharp shifts in exchange rates and significant increases in interest rates, could again place global financial stability at risk.
Top scams of global stock market
Scams occur in the stock market every day. Stock market scandals are woven into the fabric of our culture.
However, these are the TRULY outrageous stock market scams. The scams that when you hear about them, you say to yourself "How did they ever think that they would get away with this?"
Here are my top ten lists, starting from the least outrageous (but still outrageous) -
10. Anthony Elgindy and the corrupt FBI agent. Here is a guy who built up a large following in the late 90's by exposing overvalued stocks and then subsequently short-selling them for profit. He had a corrupt FBI agent on his payroll, Jeffrey Royer, who would log into government databases using his credentials and try to dig up confidential information that they could use to manipulate the stock market. For instance, if the CEO of a company had a criminal investigation against him ongoing, they would short the stock (bet that it would fall) and then disseminate the confidential information in order to create weakness in the stock. Elgindy would also inform the companies that he possessed this information, and then try to extort funds from them in exchange for not releasing the info. Eventually the FBI caught on to their scheme and Elgindy ended up receiving 11 years in jail, where he still is today.
9. Stock Exchange Hoax of 1814. One of the first instances of stock market manipulation. On February 21, 1814, a man in a British military uniform showed up in an inn on the coast of the English channel and pronounced that Napoleon had been killed and the Napoleonic Wars were now over. Word spread quickly and people celebrated by driving up the price of stocks on the London Stock Exchange. The only problem was that the news was soon discovered to be a hoax, and it was also revealed that someone had engaged in a plot to profit from this erroneous news. Lord Thomas Cochrane was eventually fingered as the culprit, but he was later pardoned by the King after it was determined that he was not involved. The true culprit was never found.
8. ZZZZ Best Inc. Meet Barry Minkow. You may think that he's just a normal, ordinary 16 year old but he's not. He actually runs a carpet cleaning company called "ZZZZ Best Inc." out of his garage. This "company" grew to a company with over 1400 employees who specialized in insurance restoration cleaning. The company was winning "big" contracts (from Mob families) and Barry was driving a Ferrari and living in a mansion. Life was good. In 1986, the company went public and temporarily had a market value of over $200 million, valuing Minkow personally at over $100 million dollars. Not bad for a teenager! However, the company was nothing more than a huge hoax. The company was simply a massive Ponzi scheme, raising money from new investors to pay off old ones. Thousands upon thousands of documents were forged to maintain the appearance of a thriving business. The company borrowed fake offices to maintain their image. Company officers were embezzling funds. The company tried issuing fake press releases to stave off worried investors. The company quickly collapsed, and Minkow and eleven others were indicted on 54 different counts of fraud. Minkow was sentenced to 25 years in prison, but served 7 1/2. He has now turned to God and is deeply religious.
7. Bre-X. Was, at one time, a company with a total capitalization of over $6 billion dollars. Was apparently sitting on the largest gold deposit in the world at their Busang site in Indonesia. Bought the Busang plot of land in 1993, and in 1995 announced that they had discovered significant amounts of gold. Bre-X's independent consulting company, Kilborn Engineering, estimated that there were 70 million ounces of gold in the Busang deposit. Others speculated that it might be as much as 200 million ounces. As you may guess, the entire thing turned out to be a massive fraud. Bre-X had "salted" the samples by placing shavings from gold jewelry in with the core samples to maintain the allusion of a massive gold deposit. The stock collapsed and went into bankruptcy, sparking many lawsuits and books written about the topic. The Bre-X story resembles a Hollywood movie; dead geologists who might not really be dead, corrupt governments and disgraced company officials in exile.
6. Nick Leeson. The man who single-handedly brought down Barings Bank, the UK's oldest investment bank (at the time). Used an "error account" to hide his trading losses. If a trade went well, he made sure that everyone knew about it; if the trade went poorly, he would hide it in this "error account" that was marked "88888." The error accounts losses reached 200 million pounds, and Leeson engaged in increasingly speculative trades to try and gain the money back. The end came when an earthquake in Japan sent the value of one of Leeson's positions tumbling, resulting in a total loss for Barings of over 800 million pounds, including all of Leeson's previous losses. Leeson fled and was eventually captured, and the company was declared insolvent. The company's lack of rules and regulations when it came to their star trader eventually led to their downfall.
5. Recruit Scandal. A massive scandal in Japan. The chairman of Recruit, Hiromasa Ezoe, offered shares in a Recruit subsidiary named Recruit Cosmos to many different prominent politicians including the Prime Minister, former Prime Minister and Chief Cabinet Secretary. The chairman of NTT was also involved. Basically, Ezoe offered unlisted shares of Recruit Cosmos at bargain basement prices to politicians, business leaders and journalists in an attempt to curry favor. The shares eventually went public and sky-rocketed in value. Word of these "deals" between Ezoe and the others soon leaked out, and the dominoes began to fall. The fallout was swift, with many of these politicans stepping down after being disgraced. The scandal rattled Japan and helped lead to a major slowdown of the country's economy.
4. Michael Milken. Known as the "Junk Bond King", Milken was another in our list who abused his privileges and power. Milken pioneered the use of high-yield debt (or junk bonds) to help finance corporate takeovers and corporate raids. He was more fond of enriching himself though, as he used his knowledge of forth-coming acquisitions to enrich himself and his cronies, through the purchase of warrants in companies that were about to be taken over and other beneficial self-dealings that would enrich him. Milken built up a net worth of over a billion dollars. When Ivan Boesky was taken down, he ratted out Milken and the entire house of cards came toppling down. It is said that the movie "Wall Street" is largely based upon Boesky and Milken.
3. Guinness Fraud. Speaking of Boesky, he paid dearly for his involvement in this scandal. Basically the scheme was this: inflate the price of Guinness shares by buying as many Guinness shares of they possibly could, maintain the price and then use the inflated market cap to take over Distillers, a much larger company. The "Guinness Four", Ernest Saunders, Gerald Ronson, Jack Lyons and Anthony Parnes were charged with using company money to try and artificially inflate the stock price of the company, which would allow them to take over Distillers. Guinness fronted money to various "investors", including Ivan Boesky, who would buy shares in the company and then receive a kickback for doing so. The merger was eventually completed, although the fallout was great once this insider scheme was uncovered. This scandal roiled global financial markets that were already shaky at the time.
2. Tang Wanxin. Formally one of the richest men in China, he played a major role in China's largest ever stock scandal. Tang raised over 45 billion yuan over a 4 year period without regulatory approval. Not only that, but Tang also rigged the prices of three listed companies that his company owned so that he could inflate the share prices, use the shares as collateral for loans and send more money into his company's. Many company executives were in on this scam to defraud the Chinese public. One of the biggest companies in China was taken down, one of the richest men in China fell from grace, and billions upon billions of dollars were involved. Certainly worthy of a number two spot on this list.
1. Enron. The grand-daddy of all scams. You have all of the elements. A company with incredible political connections. The seventh-largest company in the United States at the time. A darling of the stock market. Thousands of employees with their life savings tied up on the stock, and many more thousands with exposure to the stock either directly or indirectly. The multi-billion dollar company was mostly smoke and mirrors. Company officials were using shell companies to hide hundreds of millions of dollars in debt, and to inflate profits. Company officials were creating shell companies in order to enrich themselves as well through lucrative side deals. Enron truly signalled the end of the "boom era" in the United States stock market. Billions upon billions were lost. Arthur Andersen, one of the largest accounting firms in the US, shredded company documents and was eventually taken down. Congressional hearings. Whistle-blowers. Books. Movies. This one had it all, and was certainly the most outrageous stock market scam of all when you consider all of the elements involved.
Scams and scandals in Indian financial market
It terms of reform and development, the Indian capital market and financial sector have been the fastest to grab every opportunity presented by the paradigm shift in India’s economic policy. Their furious developmental activities have put the two top Indian bourses almost on par with the best in the world, in terms of their structure, systems and regulation. But for all the development efforts, the capital market remains seriously flawed because three key ingredients are still missing. They are adequate supervision, strict accountability, and appropriate punishment.
As a result, the markets have remained shallow and stunted and have lurched from one financial scandal to another over the last decade. Every policy change in the liberalisation process was pounced upon by unscrupulous companies, who aided by a retinue of investment bankers and consultants diverted thousands of crores of rupees to themselves. In the process, retail investors have been the biggest losers and the effect of their disenchantment is visible in the slow growth of India’s investor population. China has over 25 million investors, while India, with all its rapid development and its 130- year old stock exchange culture has only 19 million investors.
A simple roll-call of the scams of the last decade tells the story of why Indian investors are so frustrated.
1. The Securities Scam of 1992: This was the mother of all Indian financial scandals. It exposed the utter lawlessness and absence of supervision in the money markets; it allowed funds to be transferred with impunity from banks and corporate houses into the equity markets; and saw thousands of crores of bank funds to move in and out of brokers’ bank accounts in what was later claimed as a “accepted market practice”. A Special Court under a separate act of parliament was set up and over 70 cases were filed by the CBI but not a single scamster has been finally convicted by the excruciatingly slow judicial system. Instead, their repeated attempts to re-enter the market with the same bag of tricks have caused further losses to investors. More significantly, the Reserve Bank of India which was guilty of gross negligence and was discovered to have deliberately buried supervision reports was let off scot-free with just a couple of officials reprimanded.
2. The IPO bubble: The entry of Foreign Institutional investors led to a massive bull run, which saw the secondary market recover from the scam even though badla was banned. Soon thereafter, the Control over Capital Issues 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 premia to fund greenfield 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 is known as the vanishing companies scandal. The IPO bubble which lasted three years from 1993 to 96 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.
3. Preferential Allotment rip-off: This was an offshoot of the rampant price rigging on the secondary market. Apart from raising fresh funds, promoters of Indian companies who thought that prices would never come down, quickly orchestrated general body clearances to allot shares to themselves on a preferential basis and at a substantial discount to the market. Multinational companies such as Colgate and Castrol started the trend and it led to a benefit of nearly Rs 5000 crores (in relation to market prices at that time) to retail investors before the Securities and Exchange Board of India (SEBI) put in place a set of rules to block the practice. A public interest litigation filed at that time drags on in court.
4. CRB’s house of cards: Chain Roop Bhansali’s (CRB) cardboard empire is only the biggest and most audacious of many that were built and disappeared in the new ‘liberalised’ milieu of the mid-1990s. His Rs 1000 crore financial conglomerate comprised of a mutual fund, fixed deposit collection (with hefty cash kick backs), a merchant bank (he even lobbied hard to head the Association of Merchant Bankers of India) and a provisional banking license. Many of these licenses required adequate scrutiny by SEBI and the RBI, and that fact that they passed muster is another reflection of supervisory lethargy. Armed with these and favourable credit ratings and audit reports, CRB created a pyramid based on high cost financing which finally collapsed. The winner: C. R. Bhansali, who, after a brief spot of trouble with the authorities moved on to the dotcom business and the regulators who were never held accountable. The losers: millions of small investors who lost through fixed deposits or the mutual fund. The CRB collapse caused a run on other finance companies causing a huge systemic problem and further losses to investors.
5. Plantation companies’ puffery: These followed the same strategy as vanishing companies, and since they were subject to no regulation, could get away with wild profit projections. They positioned themselves as part mutual fund, part IPO and promised the most incredible returns – over 1000 per cent at least in seven years. High profile television campaigns, full-page advertisments and glossy brochures had the investors flocking for more. Almost all these project, with barely any exception have vanished. The cost: Rs 8000 crores plus.
6. Mutual Funds disaster: The biggest post-liberalisation joke on investors is the suggestion that small investors should invest in the market through Mutual Funds. Yet, over the decade, a string of government owned mutual funds have failed to earn enough to pay the returns ‘assured’ to investors. Starting with the scam-hit Canstar scheme, most mutual funds had to be bailed out by their sponsor banks, or parent institutions. The came the big bail out of Unit Trust of India. Since UTI is set up under its own act, it was the tax- payers who paid for the Rs 4800 crore bailout in 1999. Just three years later, it was back buying recklessly into the Ketan Parekh manipulated scrips and suffering big losses in the process. The record of the private mutual funds has also been patchy – after hitting a purple patch in 1999-2000, many of the sector specific funds are down in the dumps. It will be a long time indeed before small investors consider mutual funds a reasonably safe investment.
7. The 1998 collapse: What could be a bigger indicator of the ineffectiveness of the regulatory system and the moral bankruptcy in the country than the return of Harshad Mehta? In 1998, the scamster, who was the villain of 1992, made a comeback by floating a website to hand out stock tips and writing columns in several newspapers who were told that his column would push up their circulation figures. His relentless rigging of BPL, Videocon and Sterlite shares ended with the inevitable collapse and a cover up operation involving an illegal opening of the trading system in the middle of the night by the Bombay Stock Exchange officials. It cost the BSE President and Executive Director their jobs, but the broker and the companies have got away so far.
8. The K-10 gimmick: This too is already on the way to be hushed up even before it is fully investigated. Though everybody knows this as a Ketan Parekh scandal, but if one examines the selective leak of the SEBI investigation report to the media, it would seem as though only three operators caused the problem by hammering down prices. The government promised stringent action not only against Ketan Parekh and the brokers who hammered down prices, but also the regulators who slept over their job and companies/banks which colluded with them to divert funds to the market. Yet, within a month, the pressure for action is off and the momentum has been lost.
A decade later we seem to have come a full circle. The Ketan Parekh led scandal has been considered big enough to warrant the setting up of another Joint Parliamentary Committee. And the fact that the second JPC has been spending its first few weeks action (not) taken on the previous JPC report says it all about supervision, regulation and accountability
Conclusion
. It is clearly evident that the occurrence and reoccurrence of such security scams and financial scandals as some point in time be 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 (management).It is more self enforced as a ethical behavior 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 misdemeanors are not perpetuated and so that the market functions efficiently to over see the functions of the market participants and impose fines and other penalty for non-compliance. 25Though standard corporate governance theory states that corporate governance includes the role that equity and debt holders have to play in influencing managers to act in the best interests of suppliers of capital it should not be forgotten that it also includes the role that creditors, owners and government in the same capacity.
corporate governance ensures a regular supply of capital and fair share of profit to investors it's role does not end there. Corporate Governance at that level does not mean that it is entirely solved but definitely can be improved on. Shareholders and other parties find difficulty in exercising corporate governance because of poor legal systems, corruption and bankruptcy.
Also regulations and prohibitions of entry of foreign banks reduces competition and market pressures on managers to earn profits. Corporate Governance problem can be improved by increasing private monitoring and reducing government ownership when it interferes with private monitoring. The opacity of banking processes should be removed and a proper information flow should ensue. A lack of this can be attributed to the Asian Crisis and collapse of Enron