Corporate Criminal Liability In Cases Of Capital Market Finance Essay

Role of a regulative authorization in a peculiar market depends on the phase of development that peculiar securities market is in. In an emerging market like India, the function of a regulative organic structure is non confined to ordinance of the market but it extends to creative activity of status that will foster development of the market through effectual discharge of its map of ordinance.[ 2 ]It is a paradox with both terminals tied up. Effective ordinance has to be the primary aim, but ordinance must pave the manner for development of the market. The success of a regulative authorization has to be scaled in footings of these parametric quantities. This double function will guarantee market development along with subject and equity in the market along with high grade of market unity. In 1992, the Securities and Exchange Board of India ( SEBI ) Act was enacted giving statutory position as an apex regulative organic structure. Therefore, in India SEBI is the apex regulation organic structure, with the duplicate objects of regulation and developing the capital market. In malice of a battalion of reforms brought into force by it, it has been criticised for its perennial failure to grok and forestall major capital market scams clip and once more. From Ketan Parekh to recent IPO cozenage, clip and once more SEBI has failed to forestall major capital market cozenages, in malice of conveying security reforms each clip. Surveillance by SEBI it seems has failed one excessively many times. It is about clip the cardinal spreads in ordinance by SEBI, that have plagued SEBI from Ketan Parekh to Chain Roop Bhanshali ( CRB ) , and IPO cozenages, are fixed.

1. The Event.

The 176-point Sensex clang on March 1, 2001 came as a major daze for the Government of India, the stock markets and the investors likewise. More so, as the Union budget tabled a twenty-four hours earlier had been acclaimed for its growing enterprises and had prompted a 177-point addition in the Sensex. This sudden clang in the stock markets prompted the Securities Exchange Board of India ( SEBI ) to establish immediate probes into the volatility of stock markets. SEBI besides decided to inspect the books of several agents who were suspected of triping the clang.[ 3 ]Over the subsequent period the Sensex further declined due to assorted affiliated events such as Bombay Stock Exchange President ( BSE ) Anand Rathi ‘s surrender following allegations that he had used certain privileged information which contributed to the clang.[ 4 ]By the terminal of March 2001, at least eight people were reported to hold committed self-destruction and 100s of investors were driven to the threshold of bankruptcy.[ 5 ]The first apprehension in the cozenage was of the celebrated bull[ 6 ], Ketan Parekh ( hereinafter KP ) , on March 30, 2001, by the Central Bureau of Investigation ( CBI ) . Soon, reports abounded as to how KP had individual handedly caused one of the biggest cozenage in the history of Indian fiscal markets. He was charged with victimizing Bank of India ( BoI ) of about $ 30 million among other charges. KP ‘s apprehension was followed by yet another terror tally on the Bourses and the Sensex fell by 147 points. By this clip, the cozenage had become the ‘talk of the state, ‘ with intensive media coverage and unprecedented public call.[ 7 ]With this background, the research worker shall seek to analyze the possible ground of the clang and the possible function of SEBI in the clang.

2. Understanding the clang

The rise of ICE ( Information, Communications, and Entertainment ) stocks all over the universe in early 1999 led to a rise of the Indian stock markets every bit good. The dotcom roar[ 8 ]contributed to the Bull Run[ 9 ]led by an upward tendency in the NASDAQ[ 10 ].The companies in which KP held bets included Amitabh Bachchan Corporation Limited ( ABCL ) , Mukta Arts, Tips and Pritish Nandy Communications. He besides had bets in HFCL, Global Telesystems ( Global ) , Zee Telefilms, Crest Communications, and PentaMedia Graphics. KP selected these companies for investing with aid from his research squad, which listed high growing companies with a little capital base. Harmonizing to media studies, KP took advantage of low liquidness in these stocks, which finally came to be known as the ‘K-10 ‘ stocks. The portions were held through KP ‘s company, Triumph International. In July 1999, he held about 1.2 million portions in Global. KP controlled about 16 % of Global ‘s drifting stock, 25 % of Aftek Infosys, and 15 % each in Zee and HFCL. The floaty stock markets from January to July 1999 helped the K-10 stocks addition in value. HFCL soared by 57 % while Global increased by 200 % . As a consequence, agents and fund directors started puting to a great extent in K-10 stocks. Common financess like Alliance Capital, ICICI Prudential Fund and UTI besides invested in K-10 stocks, and saw their net plus value surging. By January 2000, K-10 stocks on a regular basis featured in the top five traded stocks in the exchanges. HFCL ‘s traded volumes shot up from 80,000 to 1,047,000 portions. Global ‘s entire traded value in the Sensex was Rs 51.8 billion. As such immense sums of money were being pumped into the markets, it became tough for KP to command the motions of the scrips.[ 11 ]

KP was assisted financially by specific Ahmadabad based bank. KP ‘s modus operandi of raising financess by offering portions as indirect security was deceivingly simple and it worked good during the period of the roar. Probably the use and geting of bulk portions in the assorted companies would ne’er hold been detected had there non been a autumn in NASDAQ. But the autumn in NASDAQ triggered a concatenation reaction by cut downing the volatility of the portions and finally culminated in the historic clang of the Sensex.

3. Assessing SEBI ‘s function as a modulating authorization in the KP Scam.

The function of SEBI as a modulating authorization of the capital market came under enormous unfavorable judgment. Measures adopted by SEBI to extenuate the amendss were widely alleged as reactive instead than being proactive. The cozenage was an grounds of the unpardonable laxness on portion of the modulating authorization in non detecting the unusual monetary value motion and exceeding volatility in certain portions.[ 12 ]It was a black exhibition of SEBI ‘s hapless market intelligence. Possibly SEBI ‘s failure was a direct effect of hapless watchfulness of capital market. It has to be understood that the doctrine behind SEBI ‘s steps in ordinance has to be preventative instead than being disciplinary. A disciplinary doctrine in capital market will possibly ever result in SEBI being a cozenage tardily in forestalling cozenages in the capital market.

B. Analysing CRB cozenage as grounds of weak administration in the domain of Corporate Criminal Liability.

Till March 1997 CRB group was one of the taking groups in the finance industry. Investors and bankers were excessively eager to put their money with the group. The individual behind the group was C.R. Bhansali, after whom the group was named. C.R. Bhansali is best remembered for the amazingly simple methods he employed to juggle a big web of establishments and people at the Reserve Bank of India, Securities and Exchange Board of India ( SEBI ) , a figure of Bankss, recognition evaluation bureaus, hearers, media and investors.[ 13 ]His scheme was straight frontward and simple. To raise money from the market, Bhansali used his ain money to set up monetary values.

1. Facts and figures.

In the months taking up to January 1995, when CRB capital markets came to the market with Rs.86.75 crore at a premium of Rs90, the company ‘s portion monetary value doubled to Rs.142 and so went to drop dramatically after the issue. CRB Corporation ‘s portion monetary value history follows a similar tendency peaking at around Rs.65 at the clip of the large issue in late 1994. The monetary values were subsequently quoted at Rs.5 and Rs.3 when the cozenage broke out. Hence, most of the financess that the company raised by manner of equity were by manner of premium issues. Bhansali used two methods to set up monetary values. First, he siphoned money into his private finance companies, which would so purchase his stock. And so he used his other public companies to purchase into each other as cross-holdings. For e.g. , both CRB Mutual Fund and CRB Custodian services featured in the top 10 companies in which CRB Mutual Fund invested in 1994-95. CRB Custodian invested Rs. 15 crore into CRB Capital markets, which in bend invested Rs.17 crore in CRB Mutual fund. The latter holds 24 lakh portions of CRB Corporation, which once more has a 16 crore investing in CRB capital markets.[ 14 ]Simultaneously, Bhansali was besides intricately dressing up his balance sheet for the benefit of the public stockholders and the Bankss. In the three old ages get downing March 1994, CRB capital markets income jumped about five times to Rs.129 crore, while its net net income jumped three times to Rs.52 crore. This net income growing came when the company was demoing negative hard currency flows from operations -Rs.88 crore in 1995-96 and -Rs. 79 crore in 1994-95.[ 15 ]In the last two old ages of its operation, CRB group raised Rs. 466.2 crore from the capital market. Out of this Rs.320.35 crore went into the purchase of assets and investings Most of the financess that the company raised by manner of equity were by manner of premium issues.[ 16 ]Further, CRB Capital Market issued Rs.200 crore of secured unsecured bonds in April 1996. These unsecured bonds subsequently stood unbarred as the company did non register the charge on the assets. The company besides raised Rs.135.24 crore by manner of fixed sedimentations from the public with outstanding sedimentations as on March 1996 being Rs.139.83 crore.[ 17 ]With more than 80 per cent of the financess raised being in nature of unbarred loans, there were uncertainties whether the company has equal plus endorsing to pay off these loans. The crisis that unfolded had already had direct radioactive dust in station dated checks of depositors being dishonoured – making panic amongst sedimentation holders.[ 18 ]Other companies that belonged to the CRB group followed a similar theoretical account. For the intent of the present paper, traveling into farther inside informations as to how other CRB group companies siphoned investor ‘s financess by juggling them by set uping monetary value of the portions is irrelevant. What is relevant is the fact that there was extended rigging/ use of monetary value which finally resulted in fiasco in which the little investors were hit the hardest.[ 19 ]The of import inquiry is when monetary value use and set uping such outrageousness were taking topographic point on a uninterrupted footing, why was non SEBI able to unearth such malpractice which could hold prevented a fiasco of such magnitude where 100s of little investors were driven to the threshold of bankruptcy, with all their life ‘s nest eggs disappearing into wilderness? It is so a affair of deep self-contemplation.

2. Loopholes in ordinance that aided the cozenage.

The records in assorted beginnings sing SEBI ‘s function as a regulation authorization reveals a surprising fact. SEBI foremost detected the abnormalities in CRB ‘s operations every bit early as in December 1995 during a everyday review. Analysts say that even a casual expression at CRB Mutual fund ‘s balance sheet would uncover that the legal guardians and the fund directors did everything but run a proper fund.[ 20 ]what is even more baffling is the fact that SEBI informed the RBI that the enquiry conducted by them in regard of CRB was completed and later farther confirmed that they were free to establish new strategies from 1July 1996.[ 21 ]So, SEBI non merely had the cognition of abnormality at a really early phase, it underestimated such abnormality and condoned such abnormality by leting them to travel in front with their strategy. This exhibit incomprehensible laxness and inactiveness on portion of SEBI to take prompt action, and possibly a complete deficiency of apprehension of the possible branching of such abnormality. All SEBI did was to take a determination to carry on a survey to happen out whether there was any systematic failure that led to the CRB cozenage. That possibly can non be termed as proactive market watchfulness and intelligence. Another failure on the portion of SEBI was the fact that out of the overall liability of Rs. 600 crore, merely Rs. 230 crore could be recovered.[ 22 ]Majority of the majority of the investor ‘s money was siphoned away through assorted channels and was untraceable. In absence of any disgorgement proviso in the act, the major majority of money was ne’er recovered. This is a authoritative illustration of highly weak administration on portion of the regulation authorization, SEBI.

C. A expression at IPO cozenage: once more SEBI hoodwinked by alarmingly simple scheme of monetary value use.

1. The strategy of the cozenage.

The Economic Times on 27 Apr, 2007, 0130 hour IST, reported that the capital market regulator, SEBI “ has unearthed a new cozenage in the IPO market. ”[ 23 ]The scheme was surprisingly simple and cliched. A smattering of operators ensured that stock monetary values shoot up and remain high on the twenty-four hours of listing, as besides over the following few trading Sessionss with an intend to corner a ball of portions intended for retail investors and sell them when the demand shoots up.[ 24 ]After look intoing the listing form, SEBI found out that the “ dramatic rushs on the twenty-four hours of listing of securities or shortly thenceforth ” are driven by trades meant to be executed. In its probe, SEBI has observed that certain entities have placed an abnormally big portion orders at monetary values far below the prevailing market rates. The purpose of puting such orders was, hence, non echt trading but merely unreal sweetening of demand, which constitutes a manipulative pattern.[ 25 ]

2. A welcome move towards proactive ordinance by SEBI

It would be unjust non to acclaim the attempts of SEBI in the present cozenage towards bar of the cozenage. It has to be credited to SEBI that it has taken a few foliage out of the lessons it has received in the experience of the old cozenages. But at the same clip, the fact that SEBI was duped at least temporarily by such simple cliched monetary value use scheme does non talk good about SEBI ‘s administration of capital market. It boils down to the old defect in SEBI ‘s ordinance mechanism: hapless market watchfulness and market intelligence. But there are a few encouraging marks that has been exhibited by SEBI. The preventative attack was much prompter than in the old capital market cozenages.

3. A retort: weaving up the treatment

The consistent form that has emerged sing defect in SEBI ‘s regulative model in all the afore stated capital market cozenage is inability of SEBI as a modulating authorization to supervise events taking topographic point in the capital market. It is submitted that the research worker understands that such monitoring is an highly hard undertaking, but credence and dependance on regulative model would ask argus-eyed monitoring of the capital market. Another parallel statement is about complete deregulating, but since the present paper is covering regulative model, analysis of deregulating as a solution is beyond the range of the present paper. SEBI needs to come up with solutions for a more argus-eyed monitoring of the capital market. A more proactive execution of fact-finding powers expecting abnormality is necessary.

The Commission on the Regulation of U.S. Capital Markets in the twenty-first century[ 26 ]can supply a dependable paradigm towards better market ordinance but at the same clip the indispensable complexnesss of a developing market with that of a much leveler developed capital market should be borne in head. The rule recommendation for Reform and overhaul the federal authorities ‘s regulative attack to fiscal markets and market participants in order to give the Securities and Exchange Commission ( SEC ) the flexibleness to turn to issues associating to the execution of the Sarbanes-Oxley Act of 2002 ( SOX ) by doing it portion of the Securities Exchange Act of 1934.[ 27 ]

In context of application of better ordinance rules in capital markets, the UK Financial Services Authority ( FSA ) Act can supply helpful suggestions. FSA Act requires audience and cost benefit analysis which can be adopted in Neo Indian capital market scenario.[ 28 ]It recognizes a demand for move towards excess legal agencies for better ordinance. Market failure analysis is yet another possible solution.[ 29 ]


Throughout the whole experience of capital market cozenages, the form of failure of SEBI as a regulation authorization has more or less remained changeless. Poor market watchfulness and deficiency of market intelligence have been the primary cause of failure of SEBI to forestall capital market cozenages.

Lack of vision and foresight in watchfulness appears to be one of the primary failings in ordinance by SEBI. Framing of independent look intoing bureaus to be headed by professionally trained capital market analysts can be seen as a possible solution. For covering with market operators in existent clip, the enforcement process needs to be eased significantly, supplying much needed flexibleness in operation. Stricter punitory steps such as big mulcts seem to be necessary. The origin of vomit as a remedial civil action is besides necessary for retrieving manipulated sum.[ 30 ]

In position of this treatment, the hypothesis of the research worker about the demand for both significant and procedural amendments is found to be right.