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