Reforms initiated by the SEBI after 2 historic scams

1. REFORMS IN INDIAN
MONEY AND
CAPITAL MARKET
Presented By-
PUNEET BANDHU(09)
AMRIT MOHANTY(28)
MISHAYE KAPOOR(35)
VARSHA LAWRENCE
ABHISHEK KUMAR(48)
NAINCY SHAHDEO

2. INTRODUCTION
Financial
Market
Capital
Market
Money
Market

3. CAPITAL MARKET :
 Capital market is the part of financial system which is
concerned with raising capital funds by dealing in share,
Bonds, and other long term investments.
 The market where investment instruments like bonds,
equities and mortgages are traded is known as capital
market.

4. EXAMPLE

6. MAKES A BUSINESS DEAL WITH GUCCI BRAND TO
EXPORT TEXTILE CLOTHS TO THEIR
MANUFACTURING UNIT

7. WHERE CAN HE GET MONEY FROM?

8. 1. FROM BANK
ABCTextile can approach banks, but it will not prove to be healthy option
because :
 Bank will charge high rate of interest.
 Lendings of loans is a very tedious task. Bank first scrutinizes the papers/
documents, verifies them.
 Very time consuming.
Thus, this idea is not an effective one.

9. 2. Can go public and get listed on the Stock
companies.

10. Major suppliers of funds in Capital Market
•Commercial banks.
•Insurance companies.
•Business corporation.

11. Types of Capital Market
Primary
market.
Secondary
market.

12. Money Market
• Money market is a mechanism that’s deals with short term funds ( less
than 1 year)
• A segment of financial market in which financial instrument with high
liquidity and very short maturities are traded.

13. Need for Money Market
• Need for short term funds by banks.
• Outlet for deploying funds on short term basis.
• Need to keep the SLR as prescribed.
• Regulate the liquidity and interest rates.

14. Instruments of Money Market
• Certificate of Deposit
• Call money/notice money
• Commercial paper
• Treasury bills

15. Money Market Risk and Return

16. Some problems which leads to financial market reform in india
in 1991.
• Economic instability/fiscal deficit.
• Gulf war/ crisis.
• Shortage of foreign exchange reserves.
• Burden of debt/ liquidity crisis.
• Inefficient industrial growth.
• Fall growth rate.
• Inflationary pressure.
• Poor performance in financial sector.
• The Indian currency, the rupee, was inconvertible and high tariffs and
import licensing prevented foreign goods reaching the market.

17. Reforms package included in Financial Market
in INDIA
• There was a economic reform in INDIA in 1991 to provide an environment of
sustainable growth and stability.
• Liberalisation and globalisation was the principle instrument for achieving
the aim of reform
• The govt. therefore, adopted a phased approach to liberalise the various
sector of economy.

18. Contd.
• Deregulation of interest rates.
• Encouraging direct foreign investment as a source of technology upgradation.
• Disinvestment of PSUs
• Reform of tax system to create a broader base of taxation by moderating tax
rates.
• India also operated a system of central planning for the economy, in which firms
required licenses to invest and develop.
Hence, the steps to improve the financial system were an integral part of the
economic reform initiated in 1991.

19. MONEY MARKET
Condition of Money Market in the pre-reform
period (before 1991)
Financial system functioned in an environment of constriction, driven primarily
by fiscal compulsions. It was geared to provide significant support for
Government expenditure.
The monetary and debt management policy was underlined by excessive
monetisation of Central Government's fiscal deficit.
Money and Govt. Securities market did not display any vibrancy and had limited
significance in the indirect conduct of monetary policy.Money Market
instruments were few.
Market had a narrow base and limited to a few participants - commercial banks
and six all India Financial Institutions

20. Rate of interest on money market instruments was regulated.
Money market instruments consisted of Treasury Bills (91-days T-Bills) and
term securities of different maturities issued by the Central and State
Governments.
The average maturity of securities remained fairly long, that is above 20-
years, reflecting the preference of more the Issuers than those of the
Investors
Government borrowings were done at rates, which were far below the
market rates. For example, for 30-year securities the interest rate was low at
6.5 per cent in 1977-78. The Policy led to distortions in the Banking System
with high lending rates on certain segments combined with relatively low
interest rates on deposits.
Contd….

21. REFORMS INTHE INDIAN MONEYMARKET
Indian Government appointed a committee under the chairmanship of Sukhamoy Chakravarty
in 1984 to review the Indian monetary system. Later, Narayanan Vaghul working group and
Narasimham Committee was also set up. As per the recommendations of these study groups
and with the financial sector reforms initiated in the early 1990s, the government has adopted
following major reforms in the Indian money market.
Deregulation of the Interest Rate : In recent period the government has adopted an interest rate
policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills
rediscounting, etc. Commercial banks are advised to see the interest rate change that takes place within
the limit. There was a further deregulation of interest rates during the economic reforms. Currently
interest rates are determined by the working of market forces except for a few regulations.
Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment
revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992.
MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments
has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds.

22. REFORMS INTHE INDIAN MONEYMARKET
Establishment of the DFI : The Discount and Finance House of India (DFHI) was set up in April 1988 to
impart liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and Financial
Institutions. DFHI has played an important role in stabilizing the Indian money market.
Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a
continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or
injection of financial resources.
Electronic Transactions : In order to impart transparency and efficiency in the money market
transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly
it is useful for the RBI to watchdog the money market.
Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001.
The CCIL clears all transactions in government securities, and repose reported on the Negotiated Dealing
System.
Development of New Market Instruments : The government has consistently tried to introduce
new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers,
Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.
These are major reforms undertaken in the money market in India. Apart from these, the stamp duty
reforms, floating rate bonds, etc. are some other prominent reforms in the money market in India. Thus, at
the end we can conclude that the Indian money market is developing at a good speed.

23. REFORMS INTHE INDIAN MONEYMARKET

24. REFORMS INTHE INDIAN MONEYMARKET

25. CAPITAL MARKET REFORMS
Primary Capital Market:
• SEBI was set up in 1988 as non statutory body. It was given statutory powers through the
enactment of SEBIAct, 1992 for regulating securities market.
• Diversification of infrastructure of Primary Capital market by setting up large number of
merchant bankers, investment and consulting agencies.
• Institutionalization of market started in 1987-88 when mutual funds sponsored by banks and
financial institutions were set up and gained momentum in 1990 when mutual funds were set
up in private sector.
• The requirement to issue shares at par value of Rs. 10 and Rs. 100 was withdrawn.
• Companies are required to disclose all material facts, specific risk factors associated with
their projects while launching public issues and it must ensure fair and truthful disclosures.
• To reduce the cost of issue, underwriting by the issuer was made optional, subject to the
conditions.

26. CAPITAL MARKET REFORMS
• Allowing Foreign Institutional Investors (such as mutual funds, pension funds,
country funds, etc.) to operate in Indian market and invest in govt. securities and
treasury bills.
• Besides merchant bankers some other intermediaries like mutual funds, portfolio
managers, underwriters, custodian of securities also been brought under the purview
of SEBI.
• A code of conduct for advertisement of mutual funds is issued for banning them
making claims that might mislead the public.
• Shares will now be allotted on proportionate basis, with predetermined minimum
allotment being equal to minimum application size.
• For issues priced below Rs. 500 per share, the face value of the share should be Rs. 10
per share and for the issue priced above Rs. 500, the minimum face value should not
go below Rs. 1.
• Central Listing Authority was set up to ensure uniform and standard practices for
listing the securities on stock exchanges.
• Electronic clearing services (ECS) was extended to refunds arising out of public issue
to ensure fast and hassle-free refunds.

27. CAPITAL MARKET REFORMS
Secondary Capital Market:
• The new stock exchange at national level was set up in the 1990s.
Over the Counter Exchange of India, 1994
Inter-connected Stock Exchange of India, 1999
• Framing and Implementing codes of corporate governance by the committee
appointed by SEBI under the chairmanship of Kumar Mangalam Birla, to protect the
interest of stakeholders.
• Companies are allowed to buy-back their own shares for capital restructuring, subject
to conditions that buy-back must not exceed 25% of the paid up capital and it must be
done to enhance liquidity and wealth of shareholders.
• In February 1999, trading terminals were allowed to be set up abroad to facilitate
market participation by non-residents. Internet trading was permitted in February
2000.

28. CAPITAL MARKET REFORMS
• It is mandatory for all brokers to disclose all details of block deals. Block
deals includes trading which accounts more than 0.5% of equity shares of
that listed company
• FII’s and NRI’s were permitted to invest in all exchange-traded derivative
contracts and participate in delisting offers and disinvestment by the
government in listed companies.
• Securities Contract Regulation Act, 2004 was introduced to protect the
interest of minority shareholder.

29. SCAM
obtaining money by means of deception including fake
personalities, fake photos, fake template letters, non-
existent addresses and phone numbers, forged
documents.

30. HARSHAD MEHTA
• was an Indian stockbroker.
• is alleged to have engineered the rise in the BSE stock exchange in 1992
• Exploiting several loopholes in the banking system, Mehta and his
associates siphoned off funds from inter-bank transactions and bought
shares heavily at a premium across many segments, triggering a rise in
the Sensex.

31. Overview of the Scam
• Triggered a rise in the BSE between April 1991 to May 1992.
• Traded shares at premium
• Diverted funds of Rs 40 billion- The “Securities Scam” refers to a diversion of
funds to the tune of Rs. 3,500 crores from the banking system to various
stockbrokers in a series of transactions (primarily in Government securities)
during the period April 1991 to May 1992.
•

32. On April 23, 1992, journalist Sucheta Dalal exposed Mehta's scam. She is columnist
inTimes Of India
Exposure of 1992 Securities Scam

33. •Capital market scam-It is basically fraud done in the
capital market with the investors by manipulating the
facts in order to attain enormous profit
• The story is quit similar only the star cast has changed .
• Both are big bulls
• Both big bulls used to buy stocks at rock-bottom prices
and push it up.
BOTH GAINED POPULARITY FOR

34. • In both these scams banks were involved. The HM scam was
related to bankers receipt while it was pay orders in KP scam
• In HM scam foreign banks including citibank, standard chartered
and ANZ grindlays were involved and in KP scam foreign
instituional investors including credit suisse and JM Morgan
stanley were invovled.
• In HM scam state Bank of India suffered a loss of 660 crores while
KP owes around Rs. 130 crore to Bank of India.

35. The Mechanics of the Scam
STEPS INVOLVED-
1) The settlement process in the govt securities market become broker
intermediate that is delivery and payment started getting routed through a
broker instead of being made directly between the transacting banksThat is,
the seller hands over the securities to the broker who passes them on to the
buyer, while the buyer gives the cheque to the broker who then makes the
payment to the seller.
2) The broker through whom the payment passed on its way from one bank to
another found a way of crediting the money into his account though the
account payee cheque was drawn in favor of bank

36. • Licensing system
• No permission for Liberalization, Privatization, Globalization
• Government intervention in business
• There were no permission for FII’s & FDI’s
Economic & Market position before the scam

37. • Mehta had used 2 instruments in this scam
1)Ready Forward Deal
2)Bank Receipts
The Instruments were used in Scam

38. A secured short-term (typically 15-day) loan from one bank to another
Bank lends against government securities
A broker usually brings together two banks for which he is paid a commission
The securities and payments were delivered through the broker in the
settlement process
In such settlement the banks may not know with whom they are dealing
Ready Forward Deal

39.  In a RF deal securities were not moved back and forth in actuality
 The borrower, i.e. the seller of securities, gave the buyer of the securities, a Bank Receipt
The Bank Receipt
• Something like IOU (I OweYou Securities)
• Confirms the sale of securities
• Acts as a receipt for money received by the selling bank
• Promise to deliver the securities to the buyer
• the use of the BR de facto converts an RF deal into an unsecured loan. The lending bank no longer has
the securities; it has only the borrower's assurance that the borrower has the securities which can/will
be delivered if/when the need arises.
In this scam Bank of Karad & Metropolitan Co-operative Bank had issued fake BR
Bank Receipts

40. Modus Operandi
Borrower bank
Broker
Harshad Mehta
Lender bank
Issue fake BR
Funds

42. IMPACT OFTHE SCAM
• The immediate impact of the scam was a sharp fall in the shares prices .The index
fell from 4500 to 2500 representing a loss of Rs. 100000 crores in the market
capitalization.
• The government liberalization policies came under sever criticism after the HM
scam
• Bowing to the political pressure and the bad press it received during the scam, the
liberalization was put on hold for a while by the government
• SEBI postponed sanctioning of private sector mutual fund
• Sensex fell from 4500 to 2500 loosing 100,000 crore in market capitalization
• The liberalization policies were put on hold by the government.
• Inability of Indian companies to raise capital in world markets

43. Steps taken by SEBI in response to the scam
• Special court set up for the trial
• Special ordinance passed- creation of tainted shares
• Banning of RF deals.
• Various committees were set up
• In order to increase liquidity, SEBI allowed banks to offer
collateralized lending only through BSE and NSE
• On march 8,2001, the SEBI banned short sales.In simple words,it
means that all short sales have to be covered by an equal amount
of long purchases.

45. • Ketan Parekh is a former stock broker from Mumbai, India Popularly known as ‘Bombay Bull’.
• KP arrested on 30 march 2001 for the security market scam known as Ketan Parekh scam.
• He was convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1999-2001.
• Currently he has been debarred from trading in the Indian stock exchanges till 2017
• He was a trainee of Harshad Mehta.
• Ketan Parekh can be best described as the Pied Piper of Dalal Street
• KP took advantage of low liquidity in certain stocks which later came to be known as ‘K-10’ Stocks
• Held significant stakes in the K-10 companies
• The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially
• As a result other brokers and fund mangers started investing heavily in these stocks
.
KETAN PAREKH SCAM

46. Formed a network of brokers and Identified and targeted 10 stocks.
• Aftek Infosys
• DSQ software
• Global telesystems
• Himachal Futuristic Communications
• Pentamedia Graphics
• Satyam computers
• Silverline Technology
• SSI
• Zee Telefilms
• Pritish Nandy Communications
Zee telefilms went up from Rs. 127 to Rs. 2330, Himachal Futuristic – Rs. 194 to
2553
THE K-10 STOCKS

47. • Though KP was a successful broker, he did not have money to buy large stakes as he held the
stakes of more than Rs 750 million in July 1999, according to a report.
• Analyst claimed that he had borrowed from various companies and banks for this purpose.
• He bought shares when they were trading at low price and saw the prices go up in the bull
market while continuously trading.
• When the prices was high enough, he pledged the shares with banks as collateral for funds, and
also borrowed from the companies like HFCL.
• It could not have been possible without the involvement of banks.
FACTORS THAT HELPED KETAN PAREKH

48. • A smallAhmedabad-based bank, Madhavapura MercantileCooperative Bank (MMCB) was
KP’s main ally in the scam. KP and his associate started tapping the MMCB for funds in
early 2000.
• In December 2000, when KP faced liquidity problem in settlement he used MMCB in two
different ways-
• First was the pay order route, where as KP issued cheques drawn on BoI to
MMCB, again which MMCB issued pay orders, the pay order discounted at BoI.
• The second route was borrowing from a MMCB branch at Mandvi (Mumbai)
where different companies owned by KP and his associates had accounts. KP
used 16 such accounts, either directly or through other broker firms, to
obtained funds.
Contd.…….

49. Funding Mechanism
• Simple borrowing mechanism
• Badla System-Indigenous carry-forward system invented
on the Bombay Stock Exchange
Badla trading involved buying stocks with borrowed
money.
The stock exchange acts as an intermediary.
Interest rate determined by the demand for the
underlying stock
Maturity not greater than 70 days

50. How was it detected
• Stock market crash of 2000
• KP started borrowing heavily
• Attempted to rig the price upwards and later sell.
• But failed to do so.
• IT department found discrepancies in sources of funds of KP
• Routine market surveillance of 5 stocks

51. Implications
RBI ordered some banks to furnish data of Capital market exposure
BSE President Anand Rathi’s resignation added to continued downfall of sensex
One of the biggest Fall in BSE -700 points
KP and other traders were banned from trading for 17 years
Short selling was banned for 6 months.
Badla system was banned
All shares that were put as collaterals should be done so through NSE and BSE.
RS. 2000 billion lost
The Retail investors were the worst hit
SBI, BOI, PNB had to suffer huge losses and MMCB also suffered huge losses
Opened debate over banks financial capital market operations, Lending funds against
collateral security, Dual control of co-operative banks
Ketan Parekh was arrested by CBI on 30th March 2001. He was charged befrauding Bank of
India by almost $20 Million

52. • To revive the markets SEBI imposed restriction on short sales
• It suspended all the broker member directors of BSE’S governing board
• SEBI also banned trading by all stock exchange presidents, vice presidents and treasurers
• SEBI allowed banks for collateralised lending only through BSE and NSE
• SEBI launched immediate investigation on the scam and inspected the books of several brokers
suspected of triggering the crash
• It suspended all the broker member directors of BSE’S governing board
• SEBI also banned trading by all stock exchange presidents, vice presidents and treasurers
• RBI started inspecting accounts and sub-accounts twice a year in spite of once in two year.
• SEBI allowed banks for collateralised lending only through BSE and NSE
SEBI’S ROLE AFTER SCAM

53. SATYAM COMPUTER SERVICE LIMITED
• Satyam Computer Services Limited was founded in 1987 by Mr. B Ramalinga
Raju.
• The company offered consulting and information technology services
spanning various sectors, including engineering and product development,
supply chain management, client relationship management, business process
management and business intelligence.

54. THE SATYAM SCAM
• The satyam computer services scandal was a corporate scandal that occurred in India in 2009
where chairman Ramalinga Raju confessed the company’s accounts had been falsified.
• This was perhaps India’s biggest corporate case where M/s Satyam Computer Services
caused loss to the investors to the tune of Rs.14,162crores.
• Ramalinga Raju had mislead various investors and was arrested by The Andhra Pradesh
police on charges of breach of trust, conspiracy, cheating, falsification of records.
• He admitted that satyam’s fixed deposits which supposedly grew from Rs. 3.35 crore in 1998-
99 to a massive Rs.3320.19 crore in 2007-08 all were fake.
• Raju had also used dummy accounts to trade in Satyam's shares.
• Funds from Satyam were diverted to Maytas
• On 22 January 2009,CID told in court that the actual number of employees is only 40,000
and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR
20 crore rupees every month for paying these 13,000 non-existent employees.

55. • A botched acquisition attempt involving Maytas in December 2008 led to a
plunge in the share price of Satyam.
• In January 2009, Raju indicated that Satyam's accounts had been falsified
over a number of years.
• He admitted to an accounting dupery to the tune of 7000 crore rupees or 1.5
Billion US Dollars and resigned from the Satyam board on January 7, 2009.

56. REASONS FOR SATYAM SCAM:-
• Raju wanted to take over his MAYTAS INFRA and MAYTAS
PROPERTIES.(company of his sons).
• He was blamed that he was using the funds of the investors for the
family business.
• World bank had banned the satyam to take any services for 8 years (due
to illegal profit and lack of essential document).

57. IMPACT OF SATYAM SCAM IN INDIAN
ECONOMY
• Satyam shares witnessed biggest single day fall in stock market and sensex fell by
7.25%
• Jobs of 50000 technocrats were at risk
• GDP fell by 0.4%
• IT sector suffered a downturn.
• Before the scandal its share price was Rs 300 in oct2008. just after this scandal the
share price went down to Rs 6.30.
• Indian firms are looking into methods to avoid scenarios of such scams within their
companies.

58. CRB SCAM
The company offered various schemes like merchant banking , leasing and hire
purchase , bill discounting and corporate funds management , fixed deposit and
resources mobilization , mutual funds and asset management , international
finance and forex operations.
CRB caps was also very active in stock-broking having a card both on the BSE and
the NSE.
CRB Corporation Ltd raised another Rs.84 crores through three public issues
between May 1993 and December 1995.
In August 1994 ,C R Bhansali launched CRB mutual funds (CRBMF) which raised
Rs.230 crores from the market through Arihant Mangal Growth Scheme.

59. The Man and the Mess!!!!!!!!!!
Suspicions arose when CRB cap’s networth grew from Rs.2 crores in 1992 to
Es.430 crores in 1996
It was in mid 1996 that reports regarding frauds being committed by the RBI
group began appearing in the media.
BhansaliWas ChargedWith Fraud, Cheating , And Siphoning Off Of
Funds From SBI.

60. Defrauding the SBI
In May’96 current account opened in SBI ‘s Mumbai branch
Only current account facility granted
No overdraft allowed
Dividend warrants treated as demand drafts
For about nine months all went well

61. SBI ‘s findings
In March’97 SBI discovered the fraud
Bhansali was investigated immediately
SBI accused Bhansali of printing 1800 fake dividend warrants
Bhansali used fake accounts in Chennai, Calcutta and Rajasthan to
withdraw these dividends
CRB Caps had an outstanding liability on 50 crores

62. Action’s taken by SBI
SBI officials met with Bhansali in April 1997
SBI demanded immediate repayment of the over drafted
amount
All property to be submitted as collateral security

63. The Systemic Rot
Lack of communication between the banks, RBI and the government
officials
Blame game between RBI and SEBI
RBI claimed that it had no power to examine the asset quality
In Dec’94 SEBI conducted a routine investigation
9 months ban on CRBMF

64. The Aftermath
Far reaching impacts on the economy
Declining investor confidence in banks
Poor performance of NBFC’s
Making investors more aware
Creation of smart investors

65. CONTROLLINGTHE SCAMS
•In addition to the present statutory requirement, companies should be
required to institute sufficient internal management controls.
•Management should ensure that the internal audit staffs are able to prevent
and detect financial statement fraud.
•Companies whose shares are publicly traded should be required to have audit
committees to monitor the internal control system and provide important links
to the internal audit staff.
•Sanctions against the perpetrators of financial statement fraud should be
increased by imposing fines and other deterrent measures like barring from
corporate office. However, in this case, there is a need to prevent innocent
managers from being too risk averse.

66. CONCLUSION
The financial sector has a vital role in promoting efficiency and growth.It intermediates the flow of
funds from those who want to save a part of their income to those who want to invest in productive
assets. Till about two decades ago. a large part of household savings was either invested directly in
physical assets, or put in bank deposits and Government small saving schemes.
lt is only since the late eighties that the equity market has started to play a role in this intermediation
process. Other markets such as the medium to long term debt markets and short-term money
markets, remain relatively segmented and underdeveloped. In recent decades, the Government and its
subsidiary Institutions and agencies, have had an overwhelming and all encompassing rote. This has
played a part in slowing the evolution and development of these markets. The extensive system of
controls, rules, regulations and procedures, directly or indirectly affects the development of these
markets. We need to clear this web in the interest of both savers and those who invest in productive
assets.

67. CONCLUSION
The two most serious problems in the financial system are
•the lack of flexibility in intermediary behavior
•the segregation of various markets and sets of financial intermediaries.
Well developed markets are interconnected; demand-supply imbalances in one market overflow into
related markets thereby dampening shocks and disturbances.This inter-connection also ensures that
interest rates and returns in any market, reflect the broad demand-supply conditions in the overall
market for savings.A rise in the demand for funds for investment, above the existing flow of funds from
savings, leads to a rise in the interest rate or rate of return in all markets. Conversely, a decline in demand
for kinds for investment below saving, leads to a fall in interest rates across the board.This does not
happen in segmented markets.
Consequently, adjustment to demand-supply imbalance m each segment was also very slow..The
widening and acceleration of reforms will increase the flexibility and responsiveness of the intermediaries
and promote integration.

68. THANK YOU…