INTRODUCTION

The post- economic liberalization era witnessed scams with cyclical regularity in the Indian Capital market. The series of scams in the capital market may lead someone to believe that scams and liberalization are correlated phenomena.

The most infamous scam, known as the 1992 securities was master-minded by Harshad Mehta and other bull operators, not without connivance and collusion of banks. The consequences were so serious that the Bombay Stock Exchange remained closed for a month. This was followed by scams by unscrupulous promoters mostly of finance companies who took advantage of free pricing to raise money by price rigging. Such fly-by-night operators jolted both the stock exchange and investors. Besides, price rigging, grey market activities were common where the share prices were quoted of a premium before they were listed on the stock exchanges. For instance, a Morgan Stanley Mutual Fund unit worth Rs 10 was commanding a premium of Rs 18, that is, it was quoted at Rs. 28 during the subscription period. In March 1995, another scam known as the M S Shoes scam masterminded by an exporter, Pavan Sachdeva, rigged up prices of share leading eventually to a crash. Once again the market had to be closed for three days. In December 1995, the Reliance shares issue—share switching scam—sprung up in which Fair Growth Financial Services, Reliance Industries, and the stock exchange itself were involved. The Bombay Stock Exchange suspended trading in the famous RIL script for three days.

C R Bhansali, a chartered accountant, shook the country’s financial system in May 1997. He identified weaknesses in the regulatory framework of the country’s financial system. By trimming the balance sheet of CRB capital markets, he positioned his company as a unique financial organization with excellent prospects. This created for him an almost unlimited supply of deposits with high interest rates on the one hand, and provided him leverage to rig prices in the market on the other. The investors were lured to part with their money and risk their future.

Price rigging became a recurring ailment of the Indian capital market. This is clearly evident from the fact that in 1998 the technique of price rigging was successfully apply in case of BPL-Videocon and Sterlite scrips, which created a payment crisis. Brokers who acted in concerts with Harshad Mehta, had taken large positions in these scrips. As a consequence, these scrips had to be debarred from the market for a couple of years J C Parekh, the President and other key members of the board of BSE were sacked by SEBI for price rigging and insider trading in this case. The history of insider trading was repeated in March 2001 when Anand Rathi, the President of BSE, was caught red-handed and thereafter sacked by SEBI along with six other broker directors. Ketan Parekh, the new big bull, once again exploited the loopholes and the Anand Rathi bear cartel hammered the market. The hammering rocked the stock market again.