Major Securities Scams in India

There have been many occasions in the past where some people have taken advantages of knowledge of how the system works and manipulated the system to gain huge amount of money for themselves or their organization. While many of these cases do not come to public, the major ones that have been disclosed in public have shown the enormity of the scale at which these perpetuators have operated and the weakness of our system to stop them or catch them early. To get an idea of the size of these frauds let us have a look at India’s one of the most famous scam. Harshad Mehta’s securities scam, which came into light in 1992, involved misappropriation of funds well above 3500 crores INR (about a billion USD in 1992). The aftermath of this scam led to investors losing more than 100,000 crore INR (about 25 to 30 billion USD) in 2 months in stock market. Though after this scam regulation were strengthened and legal penalty was given to the accused, yet the steps were not enough to avoid another major scam which shook the markets. This time it was Ketan Parekh in 2001 and the scale of the damages were similar. And recently in 2009 another major scam came into public and shook the already feeble markets: the Satyam Accounting Fraud to the tune of 7000 crore INR (about 1.5 billion USD). The reoccurrence of these scams may suggest the lacuna in the current regulatory system which provides the scope for such practices.

There is always information asymmetry between different players in the financial markets. This being a necessary part of the system cannot be eliminated. However, appropriate rules and regulations can be put in place to prevent the misuse of this information asymmetry by any players. Rules for insider trading are in place in almost every country; still these can’t be fool-proof.

Year	Major Victims	Size of scam	Major accused
1991/92	Investors in related shares	Rs. 3500 crores	Harshad Mehta
	State Bank of Saurashtra	Investors lost market value
	SBI Caps	to the tune of 100,000 crores
	Standard Chartered Bank	rupees
	National Housing Bank
2001	Investors in related shares	~ Rs. 3000 crores	Ketan Parekh
	Calcutta Stock Exchange	20,000 crores rupees lost in
	UTI	the market capitalization
	MMCB
2008/09	Satyam Computers Ltd.	~Rs. 7000 crores (approx. $1.5 b USD)	B. Raju

Top 10 banks in the world by assets

The assets of some of the biggest banks of the world (from latest available balance sheet) is as follows:

Bank	Assets (million)	Currency	Date
The Royal Bank of Scotland Group	24,01,650	GBP	31-12-2008
Deutsche Bank	20,60,690	EUR	30-09-2008
BNP Paribas SA	20,75,550	EUR	31-12-2008
Barclays PLC	13,65,650	GBP	30-06-2008
Crédit Agricole SA	15,08,500	EUR	30-09-2008
UBS AG	19,96,720	CHF	30-09-2008
Société Générale	11,30,000	EUR	31-12-2008
UniCredit SpA	10,52,840	EUR	30-09-2008
ING Bank NV	13,75,810	EUR	30-09-2008
Mitsubishi UFJ Ltd	19,06,56,992	JPY	30-09-2008
Banco Santander SA	9,53,035	EUR	30-09-2008
JPMorgan Chase Bank	21,75,050	USD	31-12-2008
Bank of America NA	18,17,940	USD	31-12-2008
Citibank NA	19,45,260	USD	31-12-2008
HSBC Holdings	25,46,680	USD	30-06-2008
Credit Suisse Group	13,93,600	CHF	30-09-2008

The prevailing exchange rate of different currencies with USD:

EUR	1.2563
GBP	1.4044
JPY	0.01015
CHF	0.84933

At these rates the top 10 banks by assets when converted to USD are following:

	Assets trillion $
The Royal Bank of Scotland Group	3.37
BNP Paribas	2.61
Deutsche Bank	2.59
HSBC Holdings	2.55
JPMorgan Chase Bank	2.18
Citibank NA	1.95
Mitsubishi UFJ Ltd	1.94
Barclays PLC	1.92
Crédit Agricolé SA	1.90
Bank of America	1.82

Where is DJIA heading?

Today the Dow Jones industrial average (DJIA) saw its lowest opening in about 12 years. The trigger was provided by the biggest corporate lost posted by AIG and its subsequent restructuring plan. The sub-7000 levels on DJIA were last seen only in October 28, 1997. Although the blue-chip index has fallen by half from its peak of 14000 reached in October 2007, yet the bottom seems to be further down. It has seen sharp fall since it broke the 8000 level which was considered a major support. From the pure technical analysis, the next support (from the historical prices) comes at around 6800, and today mid-day (March 2, 2009) DJIA is close to that level. If this support level breaks, technicals will suggest DJIA to stabilize at around 5800-6000 levels.

Source: Google Finance
However how appropriate is it to apply purely technical analysis to this kind of situation. Never before corporate have run into such massive losses. Never before century old organizations like Bear Stearns, Lehman Brothers and Merrill Lynch collapsed simultaneously. While US has seen several recession phases in the past, the depth of the current recession is considered by many as comparable to “The Great Depression”. The GDP (gross domestic product) in the United States dropped at an annualized rate of 6.2 % in the last quarter of 2008. This is the steepest fall since the 1982 recession.

Another major worry for investors was Berkshire’s chairman Warren Buffett's annual chairman's letter, in which he talked about the tough 2008 his Berkshire Hathaway company experienced. He admitted that he "did some dumb things in investments" during the year. Notably earlier many investors had been following Mr Buffett in these tough times and his investment in stock market had kept many investors invested in market. With Buffett giving signals of a much bigger problem, faith of many investors will be lost from stock-market.

With the ailing financial system and fear of a long recession, pessimism is the dominant theme. Investors are looking for some clue that the situation is stabilizing and so far not much has come to their way. In such a scenario decline of the blue chip stocks can pull the index further down and a sub 6000-6500 levels can be witnessed in coming months.


DJIA is a price weighted average of top 30 companies in US. As on March 1, 2009 the weights of the stocks in DJI were:

SN	Stock	% Weight
1	IBM	10.4
2	Exxon	7.7
3	Chevron	6.8
4	McDonalds	5.9
5	Johnson & Johnson	5.6
6	Wal Mart	5.5
7	Procter & Gamble	5.4
8	3M	5.1
9	Coca-Cola	4.6
10	United Technologies	4.6
11	Boeing	3.5
12	Hewlett Packard	3.3
13	Verizon Communications	3.2
14	Caterpillar	2.7
15	Merck	2.7
16	AT&T	2.7
17	JPMorgan Chase	2.6
18	Kraft Foods	2.6
19	Home Depot	2.4
20	Dupont	2.1
21	Disney	1.8
22	Microsoft	1.8
23	Intel	1.4
24	Pfizer	1.4
25	American Express	1.4
26	General Electric	0.9
27	Alcoa	0.7
28	Bank of America	0.4
29	General Motors	0.2
30	Citigroup	0.1