SEBI since its inception till now has completed an eventful journey as a capital markets regulator and has tried to create a market infrastructure which is far better than many of the countries. No doubt that the markets earlier were restricted to few hands, entities and intermediaries, but now there has been a quantum jump on this front, as now the information is more widely available in the open market under public domain.

But amidst this growth, what is most important is safeguarding investor’s interest, as many-a-times in the atmosphere of disbelief, financial statements are viewed with skepticism which ultimately led to erosion of trust and confidence among various participants in this system, and therefore what can perfectly be concluded here is that majorly the scams have taken place because of failure of corporate governance and weak financial regulations. No doubt that the mechanisms of corporate governance are decided by legal institutions and are influenced by politics but it’s success to a greater extent depends upon the sincerity, diligence and principles of management when adhering to such rules and regulations.

And it is this failure of corporate governance principles that such kind of scams happen because the utility of doing the same far outweighs the penal provisions, which though a subjective issue yet does depends upon the amount, severity and gravity of that financial crime committed on one hand, and the efficacy of the concerned regulator on the other hand.

There are various attributes which can be attached to know the causes of such scams after having gone through some important case studies like:

1) Lack of operational efficiency in terms of reference to availability of information to the market players, which many-a-times get leaked and gets the victim of Insider Trading.

2) Structural and organizational imbalance as majority of the turnover of share trading is confined to two premier stock exchanges, which stands against the recommendations given by Pherwani Committee.

3) Excessive speculation often hampers the growth of capital market, and there are brokers as well as high end individuals who have used this method to achieve illegal gains, like Ketan Parekh, Harshad Mehta, Dinesh Dalmia etc.

4) Existence of Vanishing Companies (the scam that majorly took place between 1992-1996).

5) Failure of Depositories and involvement of financial institutions, wherein the classic example can be of IPO scam (e.g. IDFC IPO and other IPO’s) happened during 2005 mainly because of the tacit consent of banks and their poor surveillance techniques.

6) Insider Trading and role of Auditors, wherein the best example can be of Satyam scam. And apart from this, some other examples are of HUL-BBLIL (1998), Wockhardt Insider Trading (2006), and many others

7) False books and Bogus Accounting.

8) Dubious role of Rating Agencies.

There can be other varied reasons for such scams too, but there are some scams that have taken place but have never came up in limelight or in media, and in those cases also, millions of rupees were lost by genuine investors by investing in those scrips.

To overcome such scams, there are some recommendations which can be incorporated to make this system stringent yet investor friendly at the same time:

1) Discover and punish the guilty strictly, as many-a-times the system fails in performing its duty, and loses the confidence of its investors and genuine public, as seen in many earlier cases, that the economic offender is sent behind bars for some months/ years, and then released on bail, and then nothing happens which ultimately questions the accountability of such regulator.

2) Recover the money as securities fraud encompasses stock manipulation, outright theft from investors, insider trading, front running, and many other deceptive and unethical practices, and in response to them the provisions like ‘Attachment of Property’, ‘Voiding of Transactions’ are some measures which must be undertaken on a larger scale.

3) Publicity about capital market need to be done as this will ultimately help the investors to understand the market intricacies, and will help in reducing the cases of fraud relating to investors who patronized unregistered or fake share brokers.

4) Standardization of Records: For e.g. Sec 11(2) of SEBI Act 1992 provides for registering and regulating of stock brokers and sub brokers, and in addition to it, books, documents and other records are maintained as per Securities Contract (Regulation) Rules 1957 and SEBI (Stock Brokers and Sub Brokers) Regulation 1992, but there are some common irregularities which are observed like Non reporting of ‘off-floor’ transactions, Non-issuance of contract notes, Non-maintenance of books of accounts, Misuse of Exchange settlement mechanism to secure unrelated loan transactions, etc. which thereby needs to be identified and rectified by doing a proper systemization of available records and data.

5) Algorithmic Trading: As volume of trades is getting increased day-by-day, it is required from the side of brokers and traders, to properly understand the trading platforms, and retail investors have long been yearned for a crack at such trading which involves pre-set computer programs, and therefore proper and effective education must be provided to them first.

6) Establishing prevention strategies which are supported from both the internal and external environment like greater role of intermediaries, effective role of corporate governance, etc.

7) Establishing effective detection strategies as apart from whistle blowing and hotlines, a proper surveillance system is equally important, and various data mining techniques can be used to identify and detect such kind of financial frauds.

8) Verify and check one’s broker as it is very much important to know his reputation, both offline and online, and its also needed to take some references from other people who are already in this field and dealing in securities from a considerable point of time.

9) Questioning the likelihood of any return, since there are brokers in the form of scammers who are going to convince us to buy or sell this scrip or hold this stock, and at that time, what is required from our side is to be more cautious, careful and utilize our intelligence on such guidance.

10) It is also necessary on our part to be a responsible citizen and abide by all the laws, rules and regulations thereof, and fulfil our duties faithfully, diligently and carefully and must strive to eradicate all such frauds which comes to our notice through all the necessary and required means available to us. And as a vigilant citizen, we must inform the concerned regulator, if we see any kind of mishappening taking place in securities market without any delay.

11) Media should actively come in and give a proper coverage on the respective financial fraud with complete and accurate detail, and therefore print and electronic media should be given more and primary importance in effectual dissemination of such frauds.

12) One thing which can be inferred is that the artificial lining of closely related markets from one other is counterproductive in the long run, as just water found its way, money also tries to ensure highest levels of return after necessary adjustments for liquidity and risk, and therefore there is this need to minimize the artificial barrier between capital and money market on one hand, and corporate securities and government securities on the other hand to allow a coherent yield curve to curve the entire financial market at one go.

13) There is also a need to reinstate a discretionary power on SEBI for levying penalties, as here, a company’s ‘net worth’ can be used to calculate the penalty, and not only confining it to the minimum and maximum criteria.

Disclaimer:- The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation, and the views expressed  here are personal in nature. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.


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Qualification: CS
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Location: Shubham Phophalia, Gujarat, India
Member Since: 08 May 2021 | Total Posts: 54
I am Shubham from Batch 2016-21 of GNLU. I am in my final year of 5 years integrated BA LLB course from GNLU, Gandhinagar, and I have completed Company Secretary Course meanwhile with 3rd Rank in Ahmedabad, Gujarat in CS Professional. I am a keen reader and enthusiastic listener of Corporate laws an View Full Profile

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June 2021