The post economic liberalization era witnessed scams with cyclical regularity in the Indian capital market. The series of scams in the capital market may lead someone to believe that scams and liberalizations are correlated phenomena.
The most infamous scam, known as the 1992 securities scam, was master minded by Harshad Mehta and other bull operators, not without the connivance and collusion of banks. The consequences were so serious that the Bombay Stock Exchange remained closed for a month. This was followed by scams by unscrupulous promoters mostly of finance companies who took advantage of free pricing to raise money by price rigging. Such fly by night operators jolted both the stock exchange and investors. Besides price rigging, grey market activities were common where the share prices were quoted at a premium before they were listed on the stock exchanges. For instance, a Morgan Stanley Mutual Fund unit worth Rs 10 was commanding a premium of Rs 18, that is, it was quoted at Rs 28 during the subscription period. In March 1995, another scam known as the M S Shoes scam master minded by an exporter, Pavan Sachdeva, rigged up prices of shares, leading eventually to a crash. Once again the market had to be closed for three days. In December 1995, the Reliance shares issue – share switching scam – sprung up in which Fair Growth Financial Services, Reliance Industries and the stock exchange itself were involved. The Bombay Stock Exchange suspended trading in the famous RIL scrip for three days.
C R Bhansali, chartered accountant, shook the country’s financial system in May 1997. He identified weaknesses in the regulatory framework of the country’s financial system. By trimming the balance sheets of CRB capital markets, he positioned his company as a unique financial organization with excellent prospects. This created for him an almost unlimited supply of deposits with high interest rates on the one hand, and provided him leverage to rig prices in the market on the other. The investors were lured to part with their money and risk their future.
Price rigging became a recurring ailment of the Indian capital market. This is clearly evident from the fact that in 1998 the techniques of price rigging was successfully applied in case of the BPL Videocon and Sterlite scrips, which created a payment crisis. Brokers, who acted in concert with Harshad Mehta, had taken large positions in these scrips. As a consequence, these scrips had to be debarred form the market for a couple of years. J C Parekh, the then President, and other key members on the board of BSE were sacked by SEBI for price rigging and insider trading in this case. The history of insider trading was repeated in March 2001 when Ananad Rathi, the then President of BSE, was caught red handed and thereafter sacked by SEBI along with six other broker directors. Ketan Parekh, the new big bull, once again exploited the loop holes and the Anand Rathi bear cartel hammered the market. The hammering rocked the stock market again.
All the scamsters employed common ploys like price manipulation, price rigging, insider trading, cartels, collusion and nexus among the bankers, brokers, politicians and promoters. These ploys were successfully engineered and implemented particularly around public issues or mergers. The regulators were so ineffective that actions were undertaken only after the investors were looted of their hard earned money. The ignorance of investors and greed for quick money made the scamsters’ job all the more easy. Post scam inquiries are being carried.
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