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Explore various laws governing Compare and contrast different regulatory and
Indian financial system banking laws.
Explore various banking operations Compare and contrast how banks can avoid risk
on lending. and make profits.
Explore various means mergers and Identify legal and accounting procedures in
acquisition. mergers.
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MERIT CRITERIA DISTINCTION CRITERIA
MET MET
M1 Y D1 Y
M2 Y D2 Y
M3 Y D3
PASS
A pass grade is achieved by meeting all the requirements defined in the assessment
criteria for the unit.
MERIT
In addition, students will also show your skills in selecting appropriate sources of finance
from a wide range and discussing in some detail the implications of making that selection.
Illustrative figures will be used but may not be based in research carried out. Issues relating
to financial planning will be raised but may not be covered in detail, or may omit one of the
four key areas.
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DISTINCTION
In addition, to earn this grade the assignment must be meticulously planned and students
must be able to demonstrate an ability to anticipate and solve complex tasks in relation to
the case study. Students must demonstrate considerable research over and above class
materials and synthesis information accurately.
Name of Verifier :
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Wigan & Leigh collage
Aurangabad.
Project Report
ON
Submitted By:-
Sunil B. Chungade
PCL-1 Finance
(14109004)
4
WLC Aurangabad Campus.
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Q.No.1
Study the developments that led to the Ketan Parekh scam and
comment on SEBI’s actions and role before and after the scam were
unearthed. The Ketan Parekh scam was an example of the inherently
weak financial, regulatory and legal set up in India. Discuss the above
statement, giving reasons to justify your stand?
Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do
share-brokerage based family. He was involved in the shares scam of the year
2000/01. The study by SEBI found that the flow of funds originating from
Ketan, when paired with securities market transactions of connected clients
leads to the possibility that these trades were executed to confuse the funds
trail and to integrate the money originating from the banned stock broker into
the system of banking.
SEBI also found that the ‘connected entities’ or fronts used by Ketan for
his transactions often sold shares without having them in their possession. They
subsequently obtained the shares in time for delivery through off-market
transactions through other ‘connected entities’ within the circle of operators.
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Evidence of Ketan Parekh’s massive market activities was his ability to pay back
well over Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative
Bank (MCCB) which had collapsed and caused thousands of depositors to lose
money when he pump off Rs880 crore to fund his market misbehavior in the
year 1999-2000.
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There has been a flow of money from banks to capital market in recent
months. Private sector banks are prominent among them, including the Global
Trust Bank (GTB). However, a reversal of banks' exposure to capital market
recommended by the RBI-SEBI committee in September last year is not a
solution. What is essential is that the banks should have expertise in judging
the risk of the business as well as the organisational ability to administer such
schemes.
Moreover, the prima facie evidence in price rigging of GTB shares raises
doubts over the regulators' surveillance mechanism. The RBI was aware of
some unusual price movements in GTB share prices in November last year itself
and the SEBI took another three months to inform the RBI that it had found
evidence of price rigging in GTB share prices. The true measure of regulatory
competence is the ability of the regulators to take quick corrective action.
Further, the GTB's loan to Mr. Parekh without collateral is another issue that
raises questions on the RBI's role as a regulator. Regulation and supervision
and the quality of on and off-site supervision of the RBI and the SEBI should be
strengthened and they should be delinked from the Finance Ministry with more
autonomy and powers.
The financial crisis in Asia in 1997 has led to a fundamental re- think
about the way in which financial markets should be governed. While other Asian
countries are converging towards an international set of governance best
practices, India is still lagging behind in terms of quality and speed of
implementation. In a globalize economy, countries which fail to base the
financial liberalization on strengthened economic policies and institutional
structures are bound to suffer financial crisis.
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Q.No.2
Comment on management of asset and liabilities and also risk, profit
planning for commercial banks including their working, with specific
reference to the KP Scam?
Ketan Parekh was threatening to sue the Bank of India for defamation,
because it complained about the bouncing of Rs 1.3-billion pay orders issued to
the broker by the Madhavpura Mercantile Cooperative Bank. He seemed to
suggest there is nothing more that the authorities would be able to pin against
him.
Money abroad
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All it has done is to request the Mauritius Offshore Business Activities
Authority to give details in respect of actual beneficiaries, source and utilisation
of funds of OCBs and sub-accounts mentioned in its preliminary report.
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Himachal Futuristic; Rs 5.15 billion from the Zee Group and Rs 2.56 billion
directly from the Global Trust Bank.
• NEDUNGADI BANK:
After the Ketan Parekh bubble burst in 2001, the RBI suddenly swung
into action and began to go through Nedungadi’s books with a toothcomb.
Punjab National Bank took over the bank that was up for sale after RBI initiated
the move to weed out the broker promoter Rajendra Bhantia from the bank.
• CO-OP BANKS:
The saga of failed co-operative banks is continuing. The collapse of
Madhavpura Mercantile Co-operative Bank after Ketan Parekh used the bank to
fund his stock market rigging was the high point. As per the RBI data, the
accumulated losses of cooperative banking sector has touched Rs 1598 crore —
an alarming rise of 241 per cent. The gross non-performing assets were Rs
5053 crore — enough to fund a world-class airport.
While the latest fraud may not be on the scale of the scams involving
Harshad Mehta (around Rs.5,000 crores) or Ketan Parekh (Rs.800 crores), what
is alarming is that this time the scammers' tentacles have spread to the Public
Provident Fund (PPF) - the repository of the savings of millions of ordinary
Indians. More than Rs.92 crores is missing from the Seamen's Provident Fund,
which has 26,500 members. Worse still, the regulatory authorities admitted
that they were aware of the mess and gave various excuses for not having
taken timely action.
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Global Trust Bank was on the verge of getting merged with UTI Bank to
become one formidable entity in the Indian banking sector, when the Great
Crash of March 2001 occurred, and along with stock prices, the marriage too
came unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs 6,198.85 crore as
on 31 March 2000.)
The report was believed to have noted that there was evidence that
Parekh was involved in manipulating the stock prices of GTB prior to the merger
announcement on 20 January 2001, and a swap ratio of 2.5 shares of UTI Bank
for 1 share of GTB, two days later.
However, this time, SBI’s losses are restricted to about Rs 40 crore, lent
against pay orders issued by Ahmadabad based Classic Co-operative Bank.
According to bank analysts polled by Capital Market, this is "loose change" for
the bank of its size.
Bank of India
The five banks hit by pay order defaults, Bank of India has unfortunately
been the worst hit. It cashed Rs 137-crore fictitious pay orders issued by the
Ahmadabad based Madhavpura Bank to arrested broker Ketan Parekh. The
banking sector is estimated to have taken a hit of more than Rs 1,000 crore
due to the pay order scam indulged in by many Gujarat co-operative banks. It
was Bank of India’s complaint to Central Bureau of Investigation that resulted
in Parekh’s arrest on 30 March 2001.
The Bombay Stock Exchange witnessed one of the worst bear runs
leading to a 177-point crash on 2 March 2001. On 23 May, the BSE announced
the launch of trading in index options in the first week of June, based on the
Europian style. For this purpose, the exchange has joined hands with the
Chicago Mercantile Exchange to adopt its system of calculating margin
requirements and managing risk, known as Standard Portfolio Analysis of Risk
(SPAN).
Co-operative banks
To stem the losses, nationalized banks and money market intermediaries have
reportedly stopped dealing with co-operative banks. The National Stock
Exchange, too, has decided not to accept fresh bank guarantees and renewals
from 5 private banks as a precautionary measure in the wake of the pay order
scam.
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Q.No.3
What effect did this scam have on the stock markets? Carry out a risk
return analysis of the portfolio held by KP. What would this portfolio be
like in today’s stock market if an individual investor had invested 100
shares in the same companies and had kept it as an investment?
The panic run on the bourses continued and the Bombay Stock Exchange
(BSE) President Anand Rathi's (Rathi) resignation added to the downfall.
Rathi had to resign.
By the end of March 2001, at least eight people were reported to have
committed suicide.
Hundreds of investors were driven to the brink of bankruptcy.
A change of Re. 1 in the price of a share when one speaks of a share rising
or falling by so many points. In stock market indices, however, a point is
one unit of the composite weighted average on market capitalization of
rupee values.
A stock market index indicating weighted average of 30 scrips, also known
as the BSE Sensitive Index. The daily closing figure of this index broadly
reflects the performance of the capital markets.
It was alleged that Global Trust Bank exceeded its Capital market exposure.
An investor who expects share prices to go up and hence buys them. But
during this period it was the reverse. People got panicked.
Many took back there investments.
it affected the fdi’s and the FII’s
the Sensex lost over 700 points and more than 500 of the 1364 actively
traded shares touched 52-week lows. In the entire month of March 2001, a
total wealth of nearly Rs.1460000 million (approximately US$32 billion) was
wiped out in market capitalization, more than Rs.45000 million a day.
The immediate fallout of market crash in Bombay was so widespread that
shock waves were also felt in Calcutta and other financial centers.
The payment crisis broke out in the Calcutta Stock Exchange (CSE) with
nearly 100 brokers unable to meet payment obligations. Later, all broker-
directors of the CSE governing board resigned.
Although Ketan Parekh came to public notice only in early 1999, his
overarching influence on the financial markets could be gauged from the
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fact that his favorite stocks were known as “KP Stocks” and market players
had more faith in the “KP Index” rather than the Sensex.
Global, Himachal and DSQ Software will not fit in the universe of an
institutional investor, but for Parekh's presence. The country's largest mutual
fund, UTI's Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the
portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and
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Q.No.4
KPV venture was formed for funding. Explain the legal procedures and
accounting procedures in this kind of mergers, for floating a new
company?
FINANCIAL PROCEDURES
Budget holders can place orders for goods or services within their budget
areas, subject only to cash-flow restraints. All orders of £1,000 or more must
be authorized by the budget holder, except for specific areas of expenditure
where written procedures have been agreed (e.g. book printing). Under £1,000,
the budget holder may delegate all ordering as appropriate. Budget holders will
discuss with the Financial Controller appropriate parameters, plus maximum
allowed deviations before the budget holder or senior manager is brought in,
which will be documented.
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without adequate advice from a relevant professional adviser (e.g. accountant,
solicitor, and surveyor).
While claims for small items of expenditure may be made via petty cash (see
section 4), adequate supporting documentation, preferably receipts must be
obtained. Large items requiring cash payment must be checked with Finance
before the arrangement is confirmed.
Signatories will only be drawn from senior staff and Trustees, and any
new signatory must be approved by the Trustees before the bank is notified. All
cheques for £100 or over require two signatories. Cheque signatories should
check that the expenditure has been authorized by the appropriate person
before signing the cheque. Salary payments require the signature of the
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Director, Company Secretary, Financial Controller or a member of the Board of
Trustees, plus one other.
4. Handling of cash
Petty cash will be topped up on the 'imp rest' system, where the amount
spent is reimbursed. It is intended for small items, up to £20. Anything over
this should be paid by cheque where possible. The imp rest has a balance limit
of £250. The petty cash balance will be reconciled when re-storing the imp rest
balance, or monthly if this is more frequent.
All cash collected from Finance will be signed for, and receipts will be
issued for all cash returned. Specific extra cash floats (for tills at events etc.)
should be arranged with the Financial Controller. The person signing for the
float is responsible for ensuring cash and receipts are returned as soon as
possible after the event etc. No further floats may be issued to that person, or
another person in the same department for a similar purpose, unless the
previous float has been accounted for.
Mixing money or receipts from different petty cash sources creates large
accounting problems. In a real emergency, where another cash float has to be
used for something, a clear record must be kept, and brought to Finance
Section's attention.
Any cash income will be banked via Finance, and not used for petty cash
expenditure. Such cash will be passed to Finance:
Payments for additional work over and above standard hours must be
approved by the relevant Department Head. Clear written authorization must
be given in adequate time for Finance to process it for the relevant payroll.
These claims are financial records, and should be treated in the same way as
any other.
Payment will usually be made via the NatWest Autopay service, direct to
employees' bank account. The salary payment listings will be checked by the
Financial Controller. Salaries will be paid on the 28th of the month, or nearest
working day, apart from in December, when it will be the 23rd.
Staff loans are not issued, but advances may be made against salary due, by
arrangement with Finance.
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• Making the correct deductions for Income Tax, NI, court orders and any
other appropriate deduction authorized by staff; ensuring that deductions
are paid to the correct body, and necessary returns made.
• Administering the Statutory Sick Pay and Statutory Maternity Pay
schemes, alongside any additional related benefits provided by AN
ORGANISATION.
6. Income
Information about non-routine and all grant income must be passed to Finance
with the cheque or remittance advice. This will be filed by Finance for reference,
and used to ensure such income is correctly recorded in the accounts and grant
conditions etc. noted. Lack of documentation will lead to such items being 'held
on suspense'. It is the responsibility of the person gaining the grant to ensure
all grant income is claimed as it becomes due or available, and that all
appropriate staff and the Finance Section are aware of relevant grant conditions
and exactly how the grant is to be expended.
Post opening (and control of cheques and cash in) will be subject to random
management checks. The process will be written down, so that there is a clear
standard for those doing the work regularly, and others covering or checking.
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7. Bank accounts
All income will be paid into the current accounts as soon as possible, not less
than once a week. The make up of each banking will be clearly recorded, for
later computer entry.
Proper accounting records will be kept. The accounts systems are based
around computer facilities, using Sage and Excel, but manual/paper records will
also be used if appropriate.
• Appropriate control accounts (i.e. bank control, petty cash control, VAT
control).
• Salary control account.
• Monthly trial balances.
Petty cash and bank accounts will be reconciled at least monthly, and VAT
returns produced on the required quarterly cycle.
All vouchers entered into the computer system will be clearly initialed by
the person entering it, along with date and accounts reference. All
income/expenditure information will be recorded within three days. All
corrections and adjustments will be clearly noted in written ‘Journal’ giving
reasons for them, with supporting documentation where available.
Purchase Ledger, other cheque payments and banking sheets will be filed
in the appropriate reference order, with any supporting documentation. All
petty cash vouchers, cheque stubs etc. will be retained for audit and for
statutory purposes thereafter.
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All fixed assets costing more than £250 (or such other level as may from
time to time be agreed by the trustees) will be capitalized in the accounts and
recorded in a fixed assets register. This register will record details of date of
purchase, supplier, cost, serial no. where applicable, description and in due
course details of disposal.
9. Budget setting
Department budgets are prepared by the Head of Department, working with the
Financial Controller. Central management budgets are prepared by the Financial
Controller in consultation with the Director. The Management Team will play a
lead role in ensuring that budgets are set fairly, efficiently and in time.
Approval of the budgets is by recommendation of the Management Team to the
Board of Trustees.
All budget holders will receive appropriate, regular reports of income and
expenditure against budget.
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11. Role of Treasurer
The Treasurer works in close co-operation with, and provides support and
advice to, the Financial Controller. Specific responsibilities are to:
• Guide and advise the Board in the approval of budgets, accounts and
financial statements, within a relevant policy framework.
• Keep the Board informed about its financial duties and responsibilities.
• Advice the Board on the financial implications of An Organization’s
strategic plans and key assumptions included in management's
operational plan and annual budget.
• Confirm that the financial resources of An Organisation meet present and
future needs.
• Understand the accounting procedures and key internal controls, so as to
be able assure the Board of An Organization’s financial integrity.
• Ensure that the accounts are properly audited, that accepted
recommendations of the auditors are implemented, and meet the auditor
at least once a year.
• Formally present the accounts at the AGM, drawing attention to important
points.
• Monitor An Organization’s investment activity and ensure its consistency
with policies, aims, objectives and legal responsibilities
The Management team consists of Heads of This That and the Other,
Financial Controller, plus the Director. Each has responsibility for their
individual department's financial performance and ensuring that the department
complies with Financial Procedures. They will receive weekly snapshots and
monthly management accounts, keeping adequate records to be in control
between monthly reports. The Team will review finances thoroughly at its
monthly meetings.
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14. Role of Financial Controller
The Financial Controller is the lead person for processing all changes and
exceptional items, and will assist the Treasurer in any financial matter
connected with the organization.
The Financial Controller will ensure that adequate security precautions are
taken to safeguard financial and other assets.
Q.No.5
Analyze the Indian scenario of FII’s since then and its effect on India
as an investment destination for FIIs. Please explain with relevant
figures.
India is the second largest country in the world, with a population of over 1
billion people. As a developing country, until recently, however, India has
attracted only a small share of global Foreign Direct Investment (FDI) and
foreign institutional investment (FII) primarily due to government restrictions
on foreign involvement in the economy. But beginning in 1991 and accelerating
rapidly since 2000, India has liberalized its investment regulations and actively
encouraged new foreign investment, a sharp reversal from decades of
discouraging economic integration with the global economy. Foreign
Institutional Investment (FII) is defined as “an investment that is made to
acquire a lasting interest in an enterprise operating in an economy other than
that of investor”.
2) FIIs would be welcome to invest in all the securities traded on the Primary
and Secondary markets, including the equity and other securities/instruments
of companies which are listed/to be listed on the Stock Exchanges in India
including the OTC Exchange of India. These would include shares, debentures,
warrants, and the schemes floated by domestic Mutual Funds. Government
would even like to add further categories of securities later from time to time.
5) For granting registration to the FII, SEBI should take into account the track
record of the FII, its professional competence, financial soundness, experience
and such other criteria that may be considered by SEBI to be relevant. Besides,
FII seeking initial registration with SEBI were be required to hold a registration
from the Securities Commission, or the regulatory organization for the stock
market in the country of domicile/incorporation of the FII.
6) SEBI's initial registration would be valid for five years. RBI's general
permission under FERA to the FII would also hold good for five years. Both
would be renewable for similar five year periods later on.
7) RBI's general permission under FERA would enable the registered FII to buy,
sell and realize capital gains on investments made through initial corpus
remitted to India, subscribe/renounce rights offerings of shares, invest on all
recognized stock exchanges through a designated bank branch, and to appoint
a domestic Custodian for custody of investments held.
8) This General Permission from RBI would also enable the FII to:
a. Open foreign currency denominated accounts in a designated bank. (There
could even be more than one account in the same bank branch each designated
in different foreign currencies, if it is so required by FII for its operational
purposes);
b. Open a special non-resident rupee account to which could be credited all
receipts from the capital inflows, sale proceeds of shares, dividends and
interests;
c. Transfer sums from the foreign currency accounts to the rupee account and
vice versa, at the market rate of exchange;
d. Make investments in the securities in India out of the balances in the rupee
account;
e. Transfer repairable (after tax) proceeds from the rupee account to the
foreign currency account(s);
f. Repatriate the capital, capital gains, dividends, incomes received by way of
interest, etc.and any compensation received towards sale/renouncement of
rights offerings of shares subject to the designated branch of a bank/the
custodian being authorized to deduct withholding tax on capital gains and
arranging to pay such tax and remitting the net proceeds at market rates of
exchange;
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g. Register FII's holdings without any further clearance under FERA.
11) The maximum holdings of 24% for all non-resident portfolio investments,
including those of the registered FIIs, were to include NRI corporate and non-
corporate investments, but did not include the following:
a. Foreign investments under financial collaborations (direct foreign
investments), which are permitted up to 51% in all priority areas.
b. Investments by FIIs through the following alternative routes:
i. Offshore single/regional funds;
ii. Global Depository Receipts;
iii. Euro convertibles.
These guidelines were suitably incorporated under the SEBI (FIIs) Regulations,
1995. These regulations continue to maintain the link with the government
guidelines through an inserted clause that the investment by FIIs should also
be subject to Government guidelines. This linkage has allowed the Government
to indicate various investment limits including in specific sectors.
Investment by FIIs has seen a steady growth since the opening of the
equity markets in September 1992. The share of FIIs in total FPI has increased
from 47% in 1993-94 to around 74% in 2001-2002. FIIs have also acquired a
significant presence in the Indian stock market. The share of their trading in
total turnover attained a high of almost 30% in October 2001. In total market
capitalization FIIs account for about 13% and they make about 50-60% of
average daily deliveries on the stock market.
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