Biggest scams in India

INTRODUCTION

Corporate frauds & scams have become plaque for all the economies worldwide. India is also no stranger to scams which have resulted in loss of lakhs of crores of rupees to its economy. Due to this they have become a threat to the society & financial market. In India, organizations irrespective of their gamut and orbit are subject to fraud. It causes enormous consequences to the organization, stakeholders and general public.[1] Scams like PNB Scam, Harshad Mehta Scam, Shardha Scam etc. have adversely affected the growth of our economic sector. These scams make the headlines for not only national news but also open them for international scrutiny which in turn disparage the Country’s reputation globally. Some of these infamous scams are mentioned in this article.

Satyam Scandal- 14000 Crore Rupees

Satyam Computer Services Ltd was founded in 1987 in Hyderabad by Ramalinga Raju, for “outsourcing services” in IT spanning various sectors. It generated significant corporate growth and shareholder value over the years. It won numerous awards for innovation, governance, and corporate accountability & soon became fourth largest IT Software exporter in India. From 2003 to 2008, in nearly all financial metrics of interest to investors, the company grew immeasurably. In 2008, R. Raju planned to acquire Maytas Infrastructure Limited, but this did not sit well with the shareholders which led to the decision being reversed in 12 hours, impacting the stock price. On December 23rd the World Bank barred Satyam from doing business with any of the banks’ direct contacts for 8 years.

After five months of receiving “golden peacock award” for corporate excellence in 2009, R. Raju confessed to Board of Directors in a letter that he had been overstating assets on Satyam’s balance sheet by $1.47 billion to misguide the shareholders & the deal with Maytas was to build the gap between the actual & faked figures. He also admitted that fake employee accounts were created to divert the finances & the assets in banks or in cash were non-existent.[2]

After this confession, Andhra Pradesh CID, CBI & SEBI were on alert mode. They undertook investigations & filed charges against accused. India’s corporate governance environment & role of auditors was criticised, pursuant to ICAI took certain steps like barring PWC to do audit in India, to ensure that such scams were avoided in future. Six years after the scam broke, the accused R. Raju was sentenced to 7 years jail by a special court in Hyderabad. The Company witnessed the lowest share price, & was subsequently bought by Mahindra group.

Saradha chit fund case – $4-6 Billion

Saradha Group of financial services was incorporated in 2006 in West Bengal. It offered the services of chit fund (Ponzi Scheme), in which small investors were enticed with guaranteed high returns, foreign trips, flats etc on their investments, the trigger point was that it did not fully disclose the working mechanism & business of Company.

By the year 2010, it had expanded its parameters in tourism, real estate, motorcycle etc. Sudipto Sen, chairman of Saradha group had established a consortium of almost 200 private companies by utilising the money of investors. They were using money brought in by the newer investors to pay off the older investors whose investments had to be redeemed. In the beginning, the return was timely, but after gaining the trust of investors, it started convincing them to adjust the amount against renewals, hence, not actually making any payment of both principal & interest. The group collected around 200 to 300 billion from over 1.7 million depositors.

The scheme of Chit fund according to SEBI is Collective Investment Scheme & is required to be registered with the regulator. SEBI had given warning-bell in 2009, but due to deliberate ignorance of politicians it went on for several more years. In 2012, SEBI started questioning Saradha Group’s failure to inform about this Ponzi Scheme & stopped its working until permission of regulator was taken. SEBI also informed about this to West Bengal Government, but the Govt. neglected this because its own politicians were involved in this fake scheme. By January 2013, the company was engulfed in a crisis as its cash inflows were found to be lower than its outflows. The scheme collapsed by April, prompting agents and investors to file police complaints.[3]

The state government launched an investigation & formed a Special Investigation Team. Crime branch of India launched charges & eventually, Sudipto Sen was sentenced three years’ rigorous imprisonment by Bandhinagar Court in 2018. But the politicians involved in the scam are still not convicted.

2G Spectrum Scam- 1.76 Lakh Crore Rupees

The Congress government’s, former Telecom minister, A. Raja allocated the licenses to his favourites i.e., 122 telecom licenses in response to 575 applications for license with 2G spectrum in January 2008 at the rates determined in 2001 (Rs 1,658 crore) hence, ignoring the current market value of the spectrum. Further, no procedural or auction requirements were followed by the Companies. After obtaining licenses at cheap rates, the private companies sold their shares to foreign companies at very high price. The Private entities were valued at 10000 Crore Rupees against 1658 Crore rupees, thus, the wide difference in amount was the loss suffered by the Indian Government. The report covering the Government finances till March 2010 submitted by CAG, unravelled the realities of granting licenses to these 122 Companies. The loss estimated by the CAG ranged from Rs 53,523 crores to 1,39,652 crores rupees.

In 2012, the Supreme Court, in response to a Public Interest Litigation (PIL), cancelled all 122 telecom licenses granted in 2008 and directed that the spectrum linked with these licenses be auctioned.[4] But it failed to clear the position of those Foreign Investors who had already invested in Indian Company licenses believing that it was issued in the name of Government of India. This opened flood gate for more PILs.

Commonwealth Scam- 70000 Crore Rupees

When India won the bid to host International Sports event in 2010, it was hoped that it is a chance for a South-Asia’s giant country to showcase its progress & national pride. But it proved to be an embarrassment for India.[5] It attracted global media for all the wrong reasons. The Organizing Committee despite being allotted huge amount for the Games was accused of intentionally delaying construction of stadiums, corruption, poor quality of infrastructure, mismanagement etc. The CVC, in his report submitted in July, 2008, highlighted 14 types of irregularities in Commonwealth games. The contracts for procuring equipments were inflated, the difference between original price & inflated price (due to false invoices presented by culprits) was enjoyed by the fraudsters. Several foreign Companies were also accomplice in artificially inflating the prices & issuing fake invoices. These challenges highlighted the inability of Government to effectively implement regulations.

The High Level (Shunglu) Commission was appointed by Prime Minister. In addition to this, CVC, CAG, CBI, Income Tax Department, and Enforcement Directorate (ED) were involved in deciphering the actual happenings of the Organizing Committee. Pursuant to these allegations & investigations, former CWG organizing Committee chairman Suresh Kalmadi was arrested & was charged with corruption & other offences. CAG published report in 2009 titled “Preparedness for the XIX Commonwealth Games” highlighting the reasons of the scam & in 2011 report[6] it has examined the detailed audit of the games involving scam amounting to approx. 70000 Crore rupees.

Punjab National Bank Fraud- 11400 Crore Rupees

The major setback was faced by Punjab National Bank, India’s second biggest Public Bank, as it was not only ripped with huge amount but also the most important role was played by its own employees. PNB employees were involved in issuing fake Letter of understandings (LoU), which were used by Modi & his associates for paying foreign suppliers of jewellery. Further, they were issued by them in bank’s name without adequate collateral & documentation. Due to non-linkage of SWIFT with CBS (Core banking system), the scam carried for almost seven years without being traced. When the employee involved in this scam retired & the new one came, he noticed discrepancies in Nirav’s Accounts. He informed the Head branch about it & a huge scam was unravelled which left a mark on PNB’s reputation in both national & International market.

RBI took the necessary steps i.e., making linking of SWIFT & CBS compulsory. CBI undertook investigations & filed several hundred cases against Nirav Modi, Mehul Choksi & others. But the culprits are still out of jurisdiction of Indian Government & justice at present seems to be a far-fetched concept.

Coalgate Scam- 1.86 Lakh Crore Rupees

India is rich in mineral & coal is one of them. There are several coal blocks which are under the control of government. The Government allocates these blocks to Public & private bidders through the process of Auction. But in this Scam, UPA government allocated 194 coal blocks to private individuals without following the proper procedure of bidding. The private & public enterprises were given rights for captive use between 2004 to 2009.[7]

The CAG in his final report tabled in the parliament put the figure of scam at Rs. 1.86 lakh crore. The Government defended it action by contending that the delay in auction process was due to coalition politics. A complaint filed by BJP resulted in CBI investigations which led to filing of FIRs against 12 major private companies for misdoings in coal block allocation. Coal ministry formed Inter-ministerial Group to decide on de-allocation or forfeiting guarantee. Supreme Court in 2014 ruled that coal blocks allocated by the government between 1993-2010 were illegal.

Kingfisher Airlines- 9000 Crore Rupees

Vijay Mallya launched Kingfisher Airlines in 2005. In 2007, he bought Air Deccan, India’s first low-fare carrier which was incurring huge losses. In 2008, Kingfisher got the licence to operate on International routes. Due to increasing cost of expenditure & low revenue, it ran in huge debt of approx. 7000 Crore rupees in 2010. It had turned into Non-performing assets for the banks. Though the news of Kingfisher incurring losses was all over media, it was in 2011 when it declared rise in price of oil as reason for not being able to pay salaries to employees & cover its creditors. State Bank of India which was the largest creditor of Kingfisher declared Kingfisher as NPA. Hence, leading to cancellation of licence of Kingfisher. Kingfisher’s lack of strategy, recession & high operational cost led to its fall.[8]

Major Public Sector banks which had provided loans to Kingfisher had to face the set-back financially. Vijay Mallya was accused of money laundering & financial fraud. The banks declared Mallya “wilful defaulter” in 2014. Besides banks, CBI & Enforcement department also registered money laundering cases against him along with several officials of banks as well. He fled to UK, & is still out of the clutches of Indian Government because UK Government has denied all the requests to extradite him.

Telgi Scam – 2000 Crore Rupees

Abdul Karim Telgi, was a travel agent & opened a company Arabian Metro Travels at New Marine Lines. He used to export manpower to Saudi Arabia.  It worked well for several years but he started defrauding his clients. He used to mix forged documents like stamps, passports etc. with original stamp papers for smooth passage of laborers from India to Gulf. He was heavily indulged in such activities as he was exploiting the weak link of law enforcement, by bribing.

He diversified his income through black market channels. This money-laundering caught the eye of CBI & it probed investigation. Finally, in 2001, he was arrested for running a counterfeit stamp paper racket for almost a decade by the Karnataka Police. Telgi was found guilty under Maharashtra Control of Organised Crime Act (MCOCA) & was sentenced to 13 years’ rigorous imprisonment and fine of Rs.251 crore was imposed.

Augusta Westland Chopper Scam – 3600 Crore Rupees

India’s UPA Government had signed a contract to purchase 12 AgustaWestland AW101 helicopters in February 2010 for the Communication Squadron of Indian Air Force to carry the president, PM and other VVIPs. The scam was unravelled by Italian authorities in 2013. They had arrested Bruno Spagnolini, the CEO of AgustaWestland on the ground of bribing Indian politicians & other middlemen to secure the deal with Indian Air Force.

After this arrest, Indian defence minister ordered CBI for further investigation into the case. Charges against Senior officials of Air Force & other VIPs were filed by CBI.  Indian Government cancelled 3600 Crore Rupees deal with Augusta Westland in 2014. After this cancellation it encashed the 250 crore rupees guarantee from Indian banks & 1818 Crore rupees from Italian Banks.  Further, Enforcement directorate had also started investigation for money laundering in 2015. The Investigation Agencies are still gathering evidence while Italian courts have acquitted ex-IAF Chief S.P. Tyagi from corruption charges & has sentenced the CEO for two years.

Harshad Mehta Securities Fraud – 5000 Crore Rupees

It is one of the biggest scams committed in Indian stock which valued at Rs.5000 Crore.  Harshad Mehta used the loopholes in the Banking system & Market Regulation System of the 1990s consisting of Ready Forward and Fake Bank Receipts to get money from banks which he pumped into the stock market. He used to borrow large sum from banks in the name of buying government securities but ended up buying shares of private Companies for his personal financial gains. Ultimately, raising the value of their shares. This led to bullish market & when he failed to deliver the intended securities to the Banks, & when asked for the same, he roped in other banks too leading to a web of RFD.

He forged bank receipts (BR), which signified confirmation of sale of securities to other banks. These fake receipts bore name of Government companies. This led to loss of both banks & PSU’s. He used the façade of Damayanti group, company established by him in 1996, to manipulate the market.Journalist Sucheta Dalal was intrigued by the luxurious lifestyle of Harshad Mehta. She started investigating the case & came to know about the extent & method of scams.

To investigate this RBI set-up a committee (Janakiraman Committee). It was noted by Committee that scam amounted to approx. 5000 Crore Rupees.  CBI was also investigating the case & charged him with 72 criminal offences & more than 600 criminal action suits. SEBI had failed to effectively regulate market due to limitations on its power. To make SEBI more autonomous, several amendments were made in the Act.

Ketan Parekh Security Scam – 1200 Crore Rupees

Ketan Paresh, CA by profession, was following the footsteps of Harshad Mehta & his knowledge of ICE (Information, Communications, and Entertainment) made him buy shares of Companies with low market capitalization & liquidity in large numbers. This led to pumping of share prices, seeing this, other investors also started investing which created fictitious market with high prices for shares owned by Parekh. Then he would silently liquidate his holdings. He used this method on ten stocks which came to be known as K-10. He used the shares as collateral with bank to raise funds. It went well as long as the prices of shares were rising. But due to fall in NASDAQ, it started to fall, & banks started asking for more collateral or return of borrowed amount. This eventually led to payment crisis for Parekh. The Intelligence Bureau (IB) unearthed this major stock market scam.

Inability of SEBI totrace scams one after another led tobreach of Investor’s trust & market place credibility, which had long lasting impact on our economy. SAT sentenced Ketan Parekh to 3 years jail for violation of SEBI Act. Further, RBI ordered certain banks to furnish data related to their capital market exposure to analyse the extent of effect of scam.

Bofors Scam- 400 Crore Rupees

In 1986, India had signed contract worth 1437.72 Crore Rupees with AB Bofors, a Sweden Company, to purchase 400, 155mm howitzers and ammunition for the Indian army. This deal was negotiated by the Prime Ministers of the two countries to avoid agents’ cost & ensure best price for India. In 1987, Swedish National Audit Bureau confirmed the payment of $40 million by Bofors to certain Indian middlemen.

In April 1988, an Indian newspaper published the facsimiles of letters & remittances. These allegations were continuously denied by the Indian Government. Later, the affair was investigated by CAG. In 1990, CBI registered the complaint against Hinduja Brothers & Bofors Company. Swiss Authorities froze the accounts of middlemen who were accused of receiving unauthorised commissions. Delhi High Court quashed charges of criminal conspiracy & cheating against the Hinduja Brothers & Bofors Company in 2005.

CONCLUSION

India has witnessed a number of scams since its independence. Its economy has been severely disturbed by them & it is still prone to such happenings in the future. It is important to be noted that majority of the fraudsters were able to commit frauds involving such huge amounts because they were backed by politicians & high-class officials. These scams come as a reality check for the regulatory authorities & put a lot of pressure on government to implement stricter regulations & adopt internationally accepted norms of corporate governance standards as soon as possible. Though we have variety of legislations to keep track of corporate frauds & government is continuously working on making them better but we still have long way to go before we can make our economy immune to losses caused by scams.

References:

[1] Ms. Shweta Wadhwani & Dr. Hema Menon, (2017), Corporate Frauds: Emerging Issues and Preventive Strategies, Bharati Law Review.

[2] Dr. Madan Bhasin, (2013), Corporate Accounting Scandal at Satyam: A Case Study of India’s Enron, European Journal of Business and Social Sciences, Vol. 1, No. 12, pp 25-47, March 2013. URL: ISSN: 2235 -767X.

[3] Prof. (Dr.) Sreekumar Ray, (2014), Corporate Scams and its Impact on Indian Economy: A Case on ‘Saradha Chit Fund, Global Journal for Research Analyses, Volume-3, Issue-11.

[4] Guru Acharya, (2012), India: Case Study on the Supreme Court Ruling on the 2G Spectrum Scam, SSRN Electronic Journal, DOI: 10.2139/ssrn.2048719.

[5] Syeda Sana Rahman, (2010), The 2010 Commonwealth Games: India’s Triumph or Disaster?, ISAS Brief, No. 166.

[6] Performance Audit of XIXth Commonwealth Games, Report No. 6 of 2011.

[7] Dr. Pooja Dasgupta & Tushar Kumrawat, (2016), Coal is Gold: The ‘Coalgate’ Scam, Global Journal of Commerce & management Perspective, Vol.5(2):16-21, ISSN: 2319 – 7285.

[8] Ms. Sweety Gupta & Mr. Shiv Gupta, (2017), Case Study from Riches to Rags: The Story of Vijay Mallya, Pacific Business Review International, Volume 9 Issue 7.