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CORPORATE FRAUDS

& SECURITIES

(MAJOR SCAMS IN

SECURITIES MARKET)

NAME: SABA. SAYYED

PRN No: 1092180009 5 TH^ YEAR BBA LLB SUBMITTED TO: PROF. AAYUSH. MISHRA TOPIC: CORPORATE FRAUDS (SEMINAR PAPER)

WHAT IS CORPORATE FRAUD?

• (^) CORPORATE FRAUD DEFINITION
• (^) SECTION 17 of the Indian Contract Act defines Fraud as: “Fraud" means and includes any of the following acts like crime committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into a contract. “Corporate Fraud” as defined by CIMA (Chartered Institute of Management Accountants) is a type of fraud that essentially involves using deception to make personal gain for oneself dishonestly and/or create a loss for others” Corporate fraud is defined as unlawful, misleading activities conducted by a company or a person using highly trained accounting practices to inflate a company’s apparent earnings, which can take years to identify. Corporate fraud is any act that a person or business does that is dishonest or illegal and is intended to benefit the person or business that is engaging in the act. Corporate fraud schemes are distinguished by their complexity and economic impact on the business, other employees, and third parties, and go beyond the scope of an employee's stated position.

TYPES OF CORPORATE FRAUDS

• 1) Accounting Fraud Accounting fraud occurs when any one person or the entire accounting team in charge follows the practices of manipulating your accounts payable or receivables to cover their theft; embezzlement; multiple cheque payments, fraud, lapping, fictitious sales, skimming, etc.
• (^) 2) Vendor Frauds Vendor frauds can take place when your employees collude with your vendors to allow overbilling for earning an extra profit under fictitious billing schemes, bribery, overbilling, price-fixing, etc.
• (^) 3) Payroll Fraud Payroll fraud is the most prevalent type of employee fraud and includes Timesheet fraud where employees fake their working hours or plot with the payroll department for bogus employee schemes, fake advances to employees, etc.
• (^) 4) Asset Misappropriation Asset misappropriation is a fraud of company assets by an employee that includes stealing inventory; misusing company assets or tampering with cheques and invoices to inflate expenses & procurements.
• (^) 5) Data Theft Your business data is your biggest asset. Right from the data concerning your payments; credit or debit card numbers; or any intellectual data breach or proprietary information that can be sold to the competitor is known as data theft.
• (^) 6) Bribery and Corruption Bribery & Corruption not only amounts to a crime but also tarnishes the reputation of your organization badly. It includes situations where an employee demands a bribe from an outsider in return for some service or compromises the company’s position to receive a personal benefit or even the creation of shell companies to divert funds & assets of the company.

CONCEPT OF CORPORATE

FRAUDS IN INDIA

• (^) India has developed into a corporate hub over the past few decades.

Because the financial losses caused by corporate frauds are

significantly greater than those caused by robberies, theft, swindling,

and other forms of fraud, they have emerged as a threat to society

and the financial sector.

• (^) In India, organizations of all sizes and scopes are victims of fraud.

Without them, society would not be able to survive. It makes huge

results the association, partners and overall population. Our nation

has been a observer to numerous corporate frauds, including the

1992 Harshad Mehta scam, the 2009 Satyam scandal, the Saradha

Chit Fund scam, and the Sahara Fraud Case. These scandalous

embarrassments have antagonistically impacted the advancement of

the financial area of our country.

Harshad Mehta Scam

• (^) In the history of the Indian stock market, the Harshad Mehta Scam is probably the biggest Indian scam perpetrated. Harshad Mehta, a well-known broker, colluded with bank employees to manipulate the Bombay Stock Exchange (BSE).
• (^) Allegedly, Harshad Mehta and some bank employees got fake bank receipts (BRs) issued which were then used to get other banks to lend him money under the impression that they were lending against securities. Government securities are considered to be credit risk-free debt instruments, but fake bank receipts hold practically no value.
• The total amount Harshad Mehta scammed the banks amounted to ₹4,000 cr, which was used to manipulate stock prices.
• (^) Ketan Parelkhs case
• (^) After the Harshad Mehta scam, a Chartered Accountant named “Ketan Parekh” had similar plans of arranging comparable securities scam. Coincidently, Ketan used to work as a trainee under Harshad Mehta earlier and hence also known as the heir of Harshad Mehta’s scam technique.
• (^) However, Ketan Parekh not only used to procure funds from the banks but also other financial institutions. Like Harshad Mehta, he also used to inflate the stock prices artificially. Apart from the Bombay Stock Exchange, the other stock markets where Ketan Parekh actively operated were the Calcutta Stock Exchange and the Allahabad Stock Exchange.
• (^) Nonetheless, Parekh used to deal mostly in ten specific stocks, also known as the K-10 stocks. He applied the concept of circular trading for inflating their stock prices. You might be surprised to know that even the promoters of some companies paid him to boost their stock prices in the market. Anyways, after the Union budget in 2001 was announced, the Sensex crashed by 176 points. The Government of India carried out an intensive investigation into this matter. At last, it was the Central Bank who determined Ketan Parekh to be the mastermind behind this scam and he was barred from trading in the Indian stock exchanges till 2017.

• (^) The UTI Case (2000)
• (^) The Unit Trust of India was a mutual fund company set up by Parliament. However, it was accused of one of the worst cases of arbitrary power abuse and insider trading. The chairman was accused of investing in unsecure stocks while abusing his position and of passing secret information to outside parties so that he could get more money back from his investment.
• (^) UTI continued to buy such non performing shares and furthermore proceeded to buy garbage bonds. The wealthy received public funds at the expense of their innocent sum. Through further investment by UTI, thousands of crores of the funds raised by public investment were distributed to wealthy individuals. Through deceptive propaganda, the chairman deceived millions of small investors while allowing big companies that had invested in the UTI to profit.
• (^) A sizable sum of Rs. 4141 Crore was exchanged in the two months prior to the UTI share trading freeze. Out of these 4000 were corporate speculations made and further falsely made by the UTI. The little financial backers of UTI likewise lost due to the repurchase of offers at 14.20 when genuine worth was 8, they by and large lost around 1300 crores. The massive withdrawals and information leaks exacerbated the crisis.

CONCLUSION

• (^) Corporate frauds are rising all around the world and in India also. Fraudsters consider monetary organizations to be a progression of interaction that they need to survive, however when stabbed, the rewards can be charitable. The system and society as a whole have been petrified by fraudulent acts, which have grown into a huge devil. We are now witnessing an increasing trend in which individuals entrusted with the significant responsibility of managing businesses manage solely for their own benefit. Academics who study corporate fraud, investigators and experts who investigate it, and intellectuals who debate it have all moved on to other topics. As a result, society is more concerned with dealing with the consequences of frauds than with preventing them.
• (^) In light of the growing fraud's mirror image, it is felt that strict and focused action is required immediately. Even though it would be ideal to live in a society without crime, we should work hard to keep it to a minimum. Legislators and controllers need to go an additional mile in front of fraudsters to keep them under control.

• (^) Even though we have a number of corporate fraud-related laws, as mentioned earlier, that can be used to investigate cases of fraud, we can instead take strategic steps like:
• granting investigators and regulators, particularly SEBI, additional authority;
• (^) The primary concern of enforcement agencies should be the identification and prevention of such frauds;
• (^) Discipline of the guilty party and delinquent people of the corporates can limit extortion indeed;
• (^) The new regulatory paradigm should be enforced more heavily;
• Close contact ought to be kept up with between controllers like SEBI, CBI, ED and SFIO;
• (^) Additionally, one of the best methods for preventing corporate fraud is a whistleblower policy.