Measures urgently required in Capital Market

Measures urgently required in Capital Market


Frauds in capital market occur at periodical intervals and each fraud is different from the earlier one. Fraudsters outsmart the authorities with their ingenuity in bypassing the regulatory and supervisory norms and taking every stake holder for a ride after winning the full confidence of all stakeholders. This is the Corporate Governance in practice in majority of corporate bodies. Truth only Triumphs is more practiced in breach than in action. The authorities have to factor in the ground realities of Corporate Governance when the rules and regulations are framed and supervisory norms implemented. If every body practices in letter and spirit the principles of Corporate Governance the present crisis the world is facing and our own country is subjected to could have been avoided if not eliminated.

To ensure smooth operation of the capital marked and to minimize the occurrence of frauds it is essential that some of the ground realities and market practices have to be thoroughly understood, areas where possibility of commitment of irregularities have to be identified and appropriate checks and balances to be introduced with provision for close scrutiny and supervision. Public should not be victims and their hard earned savings should be safe when they invest in companies although there is an element of risk in equity investments compared to bank deposits. Capital formation requires public involvement and loss of money due to greed of some promoter share holders as it happened in Satyam should be prevented at any cost. There should be credibility in the rules and regulations and loopholes if any to take the system for a ride need to be plugged. The market particularly secondary market should have flexibility, liquidity, transparency and above all public confidence in order to attract funds from individual investors, institutional investors both from domestic and international markets. To ensure credibility and continued support for the market SEBI has among others a key role to play and from this angle the following measures would be worth attempting.


1) Companies having subsidiaries, joint ventures and having direct or indirect interest in different areas of business need to be classified separately and brought under close regulation and scrutiny. In such cases the manipulation of accounts under circumstances beyond the control of promoters and otherwise to cover up certain difficult circumstances would arise and it would be easy without much of an audit trail and the genuineness of the transactions to indulge in inter-institutional transactions of very high magnitude which cannot be easily established. This is what has happened in Satyam’s case. As per paper reports about 200 companies are understood to have been established where Mr. Ramalinga Raju and his family have direct and indirect interest. How such companies are allowed to be established, from where they have brought capital, the need to have so many establishments, the competence to run (if not to run with the public funds) so many companies etc should have been under the regulators Notice and this information could/should have alerted the market, SEBI, bankers, auditors, investors, and the Government.

2) Promoter share holders stake in the company should be kept always under lock-in period and disposal of shares should be with specific knowledge of SEBI. Under any circumstances these shares should not be pledged and loans taken against these shares without the written consent of SEBI and the pledgee should not dispose of the pledged shares without prior knowledge of SEBI. Timing of pledging and selling of such pledged shares is very crucial in a volatile market and SEBI should factor this aspect while framing rules and regulations for pledge of promoters’ shares.

3) The promoter share holders’ interest in other companies and full details of relationship with other companies should be fully made known to SEBI and
The information should be subjected to periodical verification by an independent agency consisting of Accountants, Auditors, Bankers and Lawyers with proper accountability fixed. This information needs to be disclosed in the Balance Sheet and separate certificate to this effect to be obtained by SEBI from the Company’s auditors and from the auditor’s of the companies where promoter shareholders have interest.



4) The banks’ exposure to promoter shareholders needs to be closely monitored. Their exposure to companies associated with the promoters main company also should be kept under constant watch. Deposits and advances against such deposits need to be closely monitored to ensure against any suspicious nature of end use of funds.

5) Inter-company investment is another area to be closely regulated. For instance the need for investments by L&T in Satyam computers Ltd is questionable by the shareholders of L&T as there is erosion in the value of Satyam’s shares and along with it the value of L&T shares. It is still not known as to how many companies have such investments in Satyam and lost their money? It is better for SEBI to prescribe some measures for such inter company investments. There can be a ceiling on such investments and this ceiling can be linked to the capital of the investor company or invested company and under any circumstances such investments should result in losses for shareholders of Investor Company. Such investments need to be adequately and suitably hedged. It is better SEBI reviews inter-company investments and come out with some prudential norms to protect the interests of shareholders particularly public shareholders. The banks’ exposure to companies which have inter company investments should also be restricted as banks resources are generally scarce and should go only for productive purposes. This sort of exposure should have higher risk conversion for capital adequacy ratio. SEBI and Banks should come out with proper norms for exposures to companies having inter-corporate interest and investments.

6) Auditors should be different for companies having common promoter shareholders. It is advisable to include lawyers as part of audit team to ensure that the transactions involving heavy cash transfers, real estate, family members, close friends etc do not violate laws of the land. Legal system has many weak links and enforceability to secure shareholders’ interest under circumstances like Satyam type of fraud should not face any hindrance what so ever.


The capital market which is the essential link between investors and companies has to function smoothly enjoying flexibility, liquidity, and credibility. While range bound volatility is required in market, but the violent fluctuations particularly on account of irregularities committed by promoter shareholders, banks and institutional investors have to be totally eliminated. This depends on the ability of the market regulator. Fundamentals of the economy and fundamentals of the company are complementary to each other and character and conduct of the promoter share holders are major contributors of the fundamentals of the companies. This is the foundation for success and endurance.


Dr.T.V.G.Krishnan

If seeing is believing,then experiencing is realising

If seeing is believing then experiencing is realizing

It is essential for politicians, bureaucrats and persons occupying high positions who include lawyers, industrialists, professionals of eminence in different fields, academicians who matter in society in framing public policies, rules and regulations, system and procedures and executing them for general welfare of the people, to undergo temporary stay at least six months incognito in a place to understand the experiences of a common man in our society and how he struggles to keep himself and his family alive overcoming more than anything man made rules and the discrimination exhibited in enforcing the rules and at the same time making avenues to make revenues in the process.

He should move to a new place where his identity is totally unknown and try to set up his family consisting of one or two kids and parents. The exercise starts with hunting for a good house with reasonable safety, adequate water supply, and access to bus stop, school, banks, post office, market and medical facilities. He can consider himself lucky if he gets a house without verifying the know your customer(KYC) norms the landlords have set for their tenants.

The rent is negotiated and the lease is finalized after paying the advance rent depending on market practices. It may vary from three months rent to a huge sum VIZ Deposit without reference to monthly rent without any interest. This has to be generally paid in cash as cheque payment is inconvenient to the landlord. The whole system of leasing a house has undergone some changes in some metropolitan centers thanks to frequent terrorist attacks and problems encountered by the landlords because of tenant’s misbehavior and misuse/abuse of the premises let out. Registration of lease agreement is now insisted upon and it involves additional expenditure towards advocate fees, stamp papers and other miscellaneous expenditures all to be shared equally by the tenant and the landlord.

Once he settles his housing issue, real struggle to live starts. Getting a gas connection is a Herculean task. It requires a ration card or else a very high recommendation to get under VIP quota. Getting a ration card has its own procedures and one has to find time, energy and diplomacy to tackle petty government officials apart from greasing their palms suitably. If one is lucky he can get one in a month’s time or wait indefinitely. Then think of getting admission for the kids. Timing is very essential element here. For academic year starting from June one has to keep trying right from October/November in the previous year. Otherwise one has to carry a letter from VIP to get preference over others from assured quota. Admission involves minimum donation and there is no prescribed ceiling. Cash is preferable and happily accepted. School fee includes library fees, books and stationary, sports and cultural activity fees, transportation and normal fees for coaching for twelve months. This can be conveniently paid in one lump sum payment or in three or four installments. Once school admission is over, one has time to arrange for admission in coaching centers. This is to ensure that kids do well in studies and be prepared to crack admission in well established institutions.


Once the basic and minor responsibilities are over, then one can think of going in for major responsibilities for an election card, change of address, change of vehicle registration if the place of residence is a different state, mobile connection, renewal of driving licence and passport if falling due etc. The system and procedure, expenditure towards officially prescribed fees and the other charges for getting the work done involved for each item of work will make any normal person go in for saintly life but cannot do so as the procedure to become a monk leaving wife and family is still more difficult.

It is high time our administrators and policy makers experience the ground realities an ordinary citizen faces in our country and realize themselves that life is really an adventure. It is time for all of us interested in the welfare of humanity to remember and practise the saying that I shall not pass this way again .Any good that I can do, or any kindness that I can show , let me do it now. Let me not defer it or neglect it, for I shall not pass this away again. It is possible to make the living enjoyable provided the ambience is made comfortable. It is in the hands of policy makers and enforcement agencies. It is apt to quote Swami Vivekananda here “They alone live, who live for others, the rest are more dead than alive.”


T.V.G.Krishnan

Next scam is in Communication area

After IT, the visible boom in India is in communication. Several Companies have come up with revolutionary facilities in communication and the services are really commendable and people are benefited and enjoying. But the services come at a heavy cost although they are made out to be cheap. The overall billing system is not fully known to customers and the customers feel that they are paying more because of some hidden charges which are not verifiable and humanly impossible to keep a track of them and get them satisfactorily checked. Affordability of people to go for such facilities has no doubt increased thanks to visible prosperity in the economy, but this appears to be exploited by the service providers. Besides system and procedure to ensure against fraudulent accounting, auditing etc does not seem to be foolproof as is evidenced in Satyam Computers Ltd where fraud involving around Rs 7800 crores has come to light.

In the area of mobile services, the charges presently levied particularly under the prepaid category do not satisfy the transparency norms if any and customers end up paying what ever is asked for. The validity period under prepaid is one way of taking the customer for a ride as it is very difficult for the subscriber to have his own satisfactory terms complied with. There is no way the subscriber can come in contact with the service provider other than the recorded message route which is very convenient way of avoiding direct contact with customers. Prepaid services are generally availed of by comparatively lower strata of society and it is easy for service providers to exploit them.

It is high time the authorities wake up and ensure that the accounting by service providers is okay and there is no exploitation of subscribers. It is essential that there should be some mechanism for customers to contact service providers and get their doubts convincingly clarified. Otherwise suspicion will continue to linger in the minds of subscribers. There should be some more transparency in the method of collection of subscription money by service providers particularly in respect of prepaid service. Nothing to suspect in their services needs to be assured to the subscribers.

Dr.T.V.G.Krishnan

Bailing out Satyam

Promoter of Satyam has committed a major fraud and swindled a huge sum of Rs 7800 crore according to his own submission. All stake holders in Satyam have been taken by surprise and for a ride when the promoter confessed in writing that he has inflated balance sheet to the tune of Rs 7800 crores and he has been fudging the balance sheet for the past seven years. It is a matter of shame for everyone directly and indirectly associated with Satyam that an individual could perpetrate such a major fraud without being noticed by anyone all these years despite the system and procedure supposed to be in place for concurrent auditing, regular auditing, bank auditing, periodical submission of returns to regulatory authorities, provision for valuation of sensitive assets and liabilities on a realistic basis at least at the time of finalization of books of accounts if not on random basis at periodical intervals, overseeing of operations by executives at different levels , overall supervision by committees appointed by board and by the entire board itself consisting of veterans drawn from different fields. The promoter could do this with perfection is really something one has to be proud of although it has brought shame and damage to the reputation of the country’s image beyond anybody’s imagination.

Now the issue is how to bail out the company as the stake is very high for IT sector, the economy, the investors, the clients, and the employees. The amount required to rescue the company cannot be easily arrived at as the actual amount involved in the fraud and the modus operandi adopted to swindle cash without giving room for suspicion all these years have not yet been assessed. Right from cash to the last item on the asset side and capital to the last item on the liability side of the balance sheet seem to have been fudged and well certified by all concerned making the assessment of the damage extremely difficult. The liabilities appear to be real and the assets


seem to be unreal. The task to arrive at the reality is very high and complicated.

What appears from press reports is that the fraudster has siphoned off funds for purchase of real estate through subsidiary set ups. Transactions done by subsidiaries, real estate deals recorded in various registrars offices and outflow and inflows of cash indicated in Satyam’s books both through creative accounting and otherwise need to be correlated. Such an exercise will help to track the real estate purchases and cash outflows. This has to be done retrospectively. The booming of real estate prices in Andhra region and the real purchasers need to be taken up as a case study by some management institution quickly and the findings there on to be related to Satyam fraud for further analysis on the magnitude of fraud , the callousness of the authorities in freely allowing the transactions and the deficiencies in the system and procedure in accounting and auditing of the transactions.

The question of bailing out Satyam by the Government is ridiculous and will be a moral hazard besides creating a very bad precedence. At best what the Government can do is to issue Government Guarantee for a prescribed fee for the company to raise resources from market. This can be in the form of private or public issue of shares or bonds, long term loans from banks and financial institutions. The money particularly rose through bonds or loans should carry a charge against the recovery of funds from the sale of real estate to be identified as purchased from the resources of Satyam. The entire accounting should be kept separate and identifiable as such from the books of accounts.


Dr.T.V.G.Krishnan

It is a fraud fraud fraud fraud world

The questions what to believe, whom to believe, how to believe and why at all to believe come to the mind of common man these days seeing and experiencing from day to day life events which he should not normally worry about. He comes across political fraud, social fraud, economic fraud and technological fraud and these frauds are perpetrated in a very refined and sophisticated manner and are justifiable if not acceptable by any ethical standards.

Political system governing the country itself is a major fraud perpetrated on people by genius brains, well administered by intelligent bureaucrats and supported by well planned social and economic institutions. Democratic system of political governance well intended for the benefit of people governed if not brought to power with all ethics, accountability and transparency ,the foundation cannot be said to be strong and problem starts thereon. Common man has no choice but to adjust to what ever may be the system formed to govern. He can consider himself lucky if the evils emanating from the system are bearable, manageable and kept within the tolerance limit set by him.

Economic system developed by the ideologies of the political system in the country determines the living standards of the people. Growth of the economy, agriculture and industrial advancement, trade and commerce, investment and employment, distribution of wealth and income, development of supporting system by way of economic institutions to

provide needed infrastructure for sustenance and growth of the economy etc; are taken care of by the economic system with possible and believable governance standards so that people have some confidence in the system although aberrations often do take place in every area and are discussed, debated and legally fought and finally forgotten as people have by then other pressing issues to be sorted out. The frauds under the system fortunately are incomprehensible for the common man and he struggles and carries on his life .For example putting up with inflation which has no reality with the market prices of his consumption needs and all other economic related problems. The fraud through economic system is something the people have to learn to put up with without any practical short term or long term remedy.

Social system really does all the wonders to justify right and wrong in the society because of the religious beliefs, educational standards, quality of life imposed by the society through its good and bad customs, habits, beliefs, practices ,rules and regulations, legal system, public policies and general administration standards. Permitting simultaneous existence of affluence and extreme poverty, generation of black money through corruption and illegal methods, perpetration of one fraud or other in every walk of life, knowingly or unknowingly taking people for a ride can be the biggest social fraud on people. It is surprising that religious places, educational institutions, legal houses, government institutions are places known for mal practices, corruption, black money, and what not. People are victims of major frauds under the social system. Frauds under land transactions, banking transactions, capital market transactions, and fraudulent generation of various documents like ration cards, driving licence, passports, and identity cards are very common these days and go undetected for ever. The positive aspect is that risk management has become a habit among people although they have not been given a formal education on the subject by management institutions and they know how to set their own benchmarks on minimum and maximum risks arising out of any deal they put through.

Technological system developed for the benefit of mankind adds its own contribution for accelerating commitment and perpetration of fraud on society and nobody knows what is in store for him for his smooth conduct of his day to day transactions without being exposed or subjected to fraud.

His life is more dependent on some Personal Identification Number generated by some machine some where and the reliability on this PIN is a billion dollar question mark.

It is better for people to understand the present world better where frauds have become a way of life and gradually learn to forget understanding the meaning of the words values, ethics, principles, honesty, integrity, loyalty, sincerity and commitment. By this one can easily be prepared and convinced that he is not being defrauded. This is the truth and truth only triumphs.

It is high time for people to remember Mahatma Gandhi for his words “Devotion to Truth is the sole justification for Our Existence. All our activities should be centred in Truth. Truth should be the very Truth of our life. When once this stage in the pilgrim’s progress is reached, all other rules of correct living without effort, and obedience to them will be instinctive. But without truth it is impossible to observe any principles or rules in life."  Will politicians, industrialists, administrators, academicians, social reformers, religious leaders, lawyers, doctors and others interested in the welfare of the society do an introspection and correct themselves to ensure that truth prevails in all their thinking and actions. Financial crisis can be overcome but the crisis that arises out of unjustifiable and fraudulent actions cannot be so easily erased from the minds of people.