Ketan Parekh case

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Assessment Front Sheet PGDBEIMPORTANT : YOUR ASSIGNMENT WILL NOT BE ACCEPTED

FOR

ASSESSMENT WITHOUT THE COVERING SHEETS

PGDBE Programme : PCL – I -Finance Integrated assignment

Assignment Title The Crash that shook the

nation

Assessor :

Student Name :Kushan

Machhar

Kushan Khatri Year 2011

Given out

on :

Required Submission

Date :

Actual Submission

Date:

Submitted to :

OUTCOMESAssessment Criteria – To achieve each outcome a

student must demonstrate the ability to :

Explore various laws governing Indianfinancial system

Compare and contrast different regulatory and bankinglaws.

Explore various banking operations onlending.

Compare and contrast how banks can avoid risk andmake profits.

Explore various ways to prepare portfolio.

Compare and recommend portfolio managementstrategy.

Explore various avenues of the foreigninvestment in India.

Compare and contrast investments in to the Indianeconomy.

Explore various means mergers andacquisition.

Identify legal and accounting procedures in mergers.

Higher Level Skills

Students studying PGDBE will be expected to develop the following skillsin this assignment.Cognitive skills of critical thinking, analysis and synthesis.Effective use of communication and information technology for business applications.Effective self-management in terms of planning, motivation, initiative and enterprise.



OVERALL ASSESSMENT

GRADE

GRADING OPPORTUNITIES

MERIT CRITERIA

MET

DISTINCTION CRITERIA

MET

M1 Y D1 Y

M2 Y D2 Y

M3 Y D3

Plagiarism is a serious college offence.I certify this is my own work have referenced all relevant materials.TUTORS COMMENTS

OUTLINE ASSESSMENT CRITERIA

PASS

A pass grade is achieved by meeting all the requirements defined in the assessmentcriteria for the unit.

MERIT

In order to achieve a merit the students must:M1 Identify and apply strategies to find appropriate solutions.M2 Select/design and apply appropriate methods/techniques.M3 Present and communicate appropriate findings.



In addition, students will also show your skills in selecting appropriate sources of financefrom a wide range and discussing in some detail the implications of making thatselection. 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.

DISTINCTION

In order to achieve a distinction the students must:D1 Use critical reflection to evaluate own work and justify valid conclusions.D2 Take responsibility for managing and organizing activities.D3 Demonstrate convergent, lateral and creative thinking.

In addition, to earn this grade the assignment must be meticulously planned and studentsmust be able to demonstrate an ability to anticipate and solve complex tasks in relation tothe case study. Students must demonstrate considerable research over and above classmaterials and synthesis information accurately.

Name of Verifier :

Internal Verification Date :



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 wellto 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 tothe possibility that these trades were executed to confuse the funds trail andto integrate the money originating from the banned stock broker into thesystem of banking.

Ketan's possible involvement was found by SEBI during its investigationinto professed manipulative trading in the scripts of Cals Refineries Limited,Confidence Petroleum India Limited, Bang Overseas Limited, ShreePrecoated Steels Limited and Temptation Foods Limited.

Earlier, SEBI had Ketan and 17 other entities from participating in themarket following a study into purchase sale and dealing in the shares of companies like HFCL, Zee Telefilms, Adani Exports, Ranbaxy and Aftek Infosys between October 1999 and March 2001.

In its time order, SEBI banned 26 entities and persons, including MarutiSecurities Limited and asked them to reply in 15 day's time. The governmenthad set up the Joint Parliamentary Committee (JPC) to study the securitiesscam that hit the stock market during the year 1999-2001.

According to SEBI, the starting point was ‘routine market surveillance’ thatrevealed set trades in five scripts. It also had information from the ITdepartment on Ketan Parekh’s source of funds which trailed back to certainentities.



SEBI’s investigation showed that these entities built up large volumes in thefive scripts chosen for investigation; strangely enough, they often madelosses on their transactions, but continued to trade. SEBI has opinion thatthese independently incurred losses have a secondary motive that needs to beseparately investigated by the appropriate agency. It seems to have specificconcerns relating to money laundering to the enforcement and ITinvestigators.

SEBI also found that the ‘connected entities’ or fronts used by Ketan for histransactions often sold shares without having them in their possession. Theysubsequently obtained the shares in time for delivery through off-markettransactions through other ‘connected entities’ within the circle of operators.

Evidence of Ketan Parekh’s massive market activities was his ability to pay

back well over Rs325 crore to the Gujarat-based Madhavpura MercantileCooperative Bank (MCCB) which had collapsed and caused thousands of depositors to lose money when he pump off Rs880 crore to fund his marketmisbehavior in the year 1999-2000.

SEBI’s team led by Mr. S.Raman (chief general manager) must becongratulated for breaking this seemingly impenetrable system; but let usrecognise that this is only the tip of the market manipulation. Ketan Parekhis not the only manipulator to use this system; there are plenty of othersdoing it too. Also, the number of scrips in which Ketan has traded issubstantially higher than the five that were investigated by SEBI.

One of the best kept secrets is the action taken against those involved in thescam of 2000, which led to large-scale losses, the drop of two banks,Madhavpura Merc-antile Cooperative Bank (MMCB) and Global TrustBank (GTB) and split the giant Unit Trust of India (UTI) into two, after

pushing it to the brink of a collapse.

Whether the BSE directors had used their recourse to price sensitiveinformation or not for transactions in the market, having had direct access tothe data was in direct violation of SEBI rules, observes Oommen A. Ninan.

WHEN THE Sensex crossed the dizzy 5000 mark in October 1999, BombayStock Exchange (BSE) brokers literally took to the terrace of JeejebhoyTowers and released balloons. The celebration also marked their ``bullish



sentimentalism'' and showed lack of market prudence - that what goes up hasto come down; that the market is driven by its own dynamics.

The built up position of Mr. Parekh in certain equities known as `K 10', inthe normal circumstances, would not have had any major impact on themarket. With the elected directors, including the BSE president, having hadrecourse to the price sensitive information relating to outstanding positions,

purchases and sales by leading operators it is to be seen whether they haveused this advantage to depress the prices. The Securities and ExchangeBoard of India (SEBI) investigation will reveal it in the next few days.

The excitement indicated on Budget day by a sharp rise in the Sensex wasrather on the high side. There is actually nothing much in the Budget to

promote savings. On the contrary, savings have been discouraged by a drop

in interest rates.

It is now very doubtful whether demutualization or corporatisation of broker-driven exchanges is the answer. The experience of some of the stock exchanges like the London Stock Exchange, the Australian Stock Exchange,the Nasdaq, etc. is to be fully ascertained. Assuming that the brokers arekept away from the management of stock exchanges, restarting their roleonly to their trading rights, what is the guarantee that a new managementwill act in an objective manner.

There has been a flow of money from banks to capital market in recentmonths. Private sector banks are prominent among them, including theGlobal Trust Bank (GTB). However, a reversal of banks' exposure to capitalmarket recommended by the RBI-SEBI committee in September last year isnot 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 toadminister such schemes.

Moreover, the prima facie evidence in price rigging of GTB shares raisesdoubts 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 hadfound evidence of price rigging in GTB share prices. The true measure of regulatory competence is the ability of the regulators to take quick correctiveaction. 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 theSEBI should be strengthened and they should be delinked from the FinanceMinistry with more autonomy and powers.

The regulator should continuously monitor the investment pattern so thatany undue change in a particular stream, like the broker position, could beidentified and immediate investigation conducted. The Government alsoshould strengthen the investment institutions to facilitate long-terminvestments. Flow of money to the capital market from the lendinginstitutions should be more transparent so that undue concentration of lending on particular scrip is avoided.

The financial crisis in Asia in 1997 has led to a fundamental re- think aboutthe 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 thefinancial liberalization on strengthened economic policies and institutionalstructures are bound to suffer financial crisis.

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 issuedto the broker by the Madhavpura Mercantile Cooperative Bank. He seemed

to suggest there is nothing more that the authorities would be able to pinagainst him.

At last investigations by the Central Bureau of Investigation and theSecurities and Exchange Board of India reveal that the sheer magnitude of money moved around by Parekh or available to him for his marketmanipulation was a staggering Rs 64 billion.



Money abroad

The CBI called a press conference to announce it had unearthed a Swiss bank account in which Parekh was listed as the beneficiary. The Bureauclaimed there was $ 80 million (Rs 3.4 billion) in the account, which hassince been frozen. In the past, CBI announcements were usually followed upwith a quick arrest, this time it has gone silent.

New Overseas Corporate Bodies

The Securities and Exchange Board of India's preliminary investigation inMay revealed that Rs 29 billion was transferred out of the country throughfive Overseas Corporate Bodies between March 1999 to March 2001. TheseOCBs had together invested just Rs 7.77 billion in the Indian market but

remitted a whopping Rs 36.77 billion out of the country. This direct flight of capital occurred through European Investments, Far East Investments,Wakefield Holding, Brentfield Holdings and Kensington Investment. Threeof these companies have a paid up capital of just $ 10.

SEBI says the pattern of investments and transactions through theseaccounts shows a clear misuse of the OCB/Foreign Institutional Investor route. They seem to be used as a channel to repatriate profits earned throughstock price manipulation. Many of these OCBs were sub-accounts of CreditSuisse First Boston whose brokerage operations have been suspended. But

there were other FIIs too. Strangely, SEBI has not yet placed any restrictionson them so far.

All it has done is to request the Mauritius Offshore Business ActivitiesAuthority to give details in respect of actual beneficiaries, source andutilisation of funds of OCBs and sub-accounts mentioned in its preliminaryreport.

In answer to a Joint Parliamentary Committee query, Sebi now admits tohave unearthed six more OCBs, where there is evidence that Parekh's

companies may have used them for 'cornering and parking of stocks.'Dossier Stock Inc, Greenfield Investments Ltd, AOM Investments Ltd,Symphony Holdings Ltd, Almel Investments (Mauritius) Ltd, and DelgradaLtd.

However, since there was no other specific query about further repatriationof funds, SEBI is silent about other flight of capital through the OCB



window. However, it does admit there are clear inter-linkages between theOCBs and that some of them have issued participatory notes abroad to routefunds to India. It also says Parekh's entities have conducted many of their trading transactions.

In its preliminary investigation report, SEBI unearthed a transfer of nearlyRs 11 billion to Calcutta brokers, most of whom have had their businessessuspended because of payment defaults. In an answer to a JPC query, SEBInow says Parekh had sent over Rs 27 billion to Calcutta brokers betweenJanuary 2000 to March 2001. This suggests that as soon as the infotech,communication and entertainment stock-led boom began to lose momentum,Parekh shrewdly began to move his speculative activities to the unofficialmarket in Calcutta in order to avoid detection. SEBI says it is investigatingthe source of these funds and how they were utilised.

Ketan Parekh's stock holding

The process of ferreting out information on his portfolio is slow and tedious because SEBI has to depend on 'third party sources' such as banks,depositories and stock exchanges and because 'Ketan Parekh is not co-operating with the investigation.' Yet, three of the companies identified bySEBI where he held over five per cent are Aftek Infosys, ShonkhTechnologies and Global Trust Bank. According to SEBI, these companieshad omitted to inform stock exchanges about his holding having crossed five

per cent. It is not quite clear if the broker continues to hold these shares andwhat would be the value of this holding.

If one were to simply add up the amounts mentioned in SEBI's variousreports, the size of Parekh's manipulations is far bigger than the Rs 50-odd

billion securities scam of 1992. Yet, unlike the previous scam, this one isabsurdly simple and brazen in its execution. Sebi says that Rs 27 billion wassent by Ketan to Calcutta brokers; Rs 29 billion vanished overseas, Rs 3.4

billion ($ 80 million) was in a Swiss bank account; Rs 7 billion went to himfrom 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, theRBI 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.

• GLOBAL TRUST BANK : Ramesh Gelli’s search for high returns took

the new generation private bank to the stock market, where its involvementin the speculative activities associated with the Ketan Parekh scam and itshigh exposure soon resulted in substantial losses. The bank’s promotersattempted to merge the entity with the UTI Bank, and in the process theshare price was rigged so that the promoters could make a profit despite themess in the the bank. It was clear that unless some drastic measures weretaken, the bank was heading for closure. This led to the exit of Ramesh Gelliin 2001. Eventually, Oriental Bank of Commerce (OBC) took over thetroubled bank.

• CO-OP BANKS: The saga of failed co-operative banks is continuing. Thecollapse of Madhavpura Mercantile Co-operative Bank after Ketan Parekhused the bank to fund his stock market rigging was the high point. As per theRBI data, the accumulated losses of cooperative banking sector has touchedRs 1598 crore — an alarming rise of 241 per cent. The gross non-performingassets were Rs 5053 crore — enough to fund a world-class airport.

While the latest fraud may not be on the scale of the scams involvingHarshad 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 thePublic Provident Fund (PPF) - the repository of the savings of millions of ordinary Indians. More than Rs.92 crores is missing from the Seamen'sProvident Fund, which has 26,500 members. Worse still, the regulatoryauthorities admitted that they were aware of the mess and gave variousexcuses for not having taken timely action.

Global Trust Bank

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 GreatCrash of March 2001 occurred, and along with stock prices, the marriage toocame unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs 6,198.85 croreas on 31 March 2000.)



The report was believed to have noted that there was evidence that Parekhwas 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 UTIBank for 1 share of GTB, two days later.

State Bank of India

However, this time, SBI’s losses are restricted to about Rs 40 crore, lentagainst pay orders issued by Ahmedabad 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

Of 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 theAhmedabad based Madhavpura Bank to arrested broker Ketan Parekh. The

banking sector is estimated to have taken a hit of more than Rs 1,000 croredue 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 thatresulted in Parekh’s arrest on 30 March 2001.

Bombay Stock Exchange

The Bombay Stock Exchange witnessed one of the worst bear runs leadingto a 177-point crash on 2 March 2001.

On 23 May, the BSE announced the launch of trading in index options in thefirst week of June, based on the Europian style. For this purpose, theexchange has joined hands with the Chicago Mercantile Exchange to adoptits system of calculating margin requirements and managing risk, known asStandard Portfolio Analysis of Risk (SPAN).

Calcutta Stock Exchange



In fact the 177-point crash on 2 March 2001 was triggered by the paymentcrisis at Lyons Range (CSE) and Dalal Street (BSE). While investors werestill trying to digest the shortfall of Rs 100 crore for the settlement ended 1March on the CSE, the market was gripped with rumours of a fresh paymentcrisis on CSE for the following settlement ended 8 March. Although theCSE authorities denied the payment crisis initially, Sebi went ahead andsuspended 40 brokers on CSE.

Co-operative banks

It is now estimated that exposure to co-operative banks is going to cost the banking sector above Rs 1,000 crore.

To stem the losses, nationalized banks and money market intermediaries

have reportedly stopped dealing with co-operative banks. The NationalStock Exchange, too, has decided not to accept fresh bank guarantees andrenewals from 5 private banks as a precautionary measure in the wake of the

pay order scam.

Unit Trust of India

As on June 2000, UTI was believed to have a total investment of Rs 5,000crore in K-10 stocks (10 New Economy stocks backed by arrested broker Ketan Parekh), which today stands at less than one-fifth of its value. Another

fallout of the crash was that UTI-promoted UTI Bank’s merger with GlobalTrust Bank was called off by the latter, stung by allegations of pricemanipulation to get a better swap ratio with UTI Bank (2.25 shares of UTIBank for 1 share of GTB) .

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 hadkept it as an investment?

The effect of the Ketan Parekh scam on the stock markets:



The panic run on the bourses continued and the BombayStock 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 onespeaks of a share rising or falling by so many points. Instock market indices, however, a point is one unit of thecomposite weighted average on market capitalization of rupee values.

A stock market index indicating weighted average of 30scrips, also known as the BSE Sensitive Index. The dailyclosing figure of this index broadly reflects the

performance of the capital markets.

It was alleged that Global Trust Bank exceeded itsCapital 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 the1364 actively traded shares touched 52-week lows. In theentire month of March 2001, a total wealth of nearlyRs.1460000 million (approximately US$32 billion) waswiped out in market capitalization, more than Rs.45000million a day.

The immediate fallout of market crash in Bombay was sowidespread that shock waves were also felt in Calcuttaand 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 theCSE governing board resigned.

Although Ketan Parekh came to public notice only inearly 1999, his overarching influence on the financialmarkets could be gauged from the fact that his favorite



stocks were known as “KP Stocks” and market playershad more faith in the “KP Index” rather than the Sensex.

Global, Himachal and DSQ Software will not fit in the universe of aninstitutional investor, but for Parekh's presence. The country's largest mutualfund, 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

Global Tele-Systems (1.05 per cent) on September 30, 1999

companies Adj closeon march2001

Recent prices

Dividend(million)

Expected return

HimachalFuturistic

45.85 10.75 0 -0.077%

adani 298.58 826.85 - -0.34%

ZeeTelefilms

- 259 860 3.32%

Ranbaxy 423.85 446.25 2239.42 5.44%

Silverline 110 5.94 - -

Pentamedia Graphics

25.8 2.61 0 -0.3065%

SatyamComputer

5.38 110 - -

Aftek infosys

57.35 57.75 46.80 0.810%



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

Purpose of this document

To define the financial systems used by An Organisation and how they relate

to all areas of the organization (sometimes referred to as Financial StandingOrders).

Relevant to managers and finance staff. All suggestions for amendments toFinancial Controller. Minor amendments/updates to be agreed byManagement Team; major amendments by Board of Trustees.

1. Ordering supplies and services

All staff needs to be aware that expenditure is committed when an order is

placed on behalf of AN ORGANISATION, not when the cheque isrequested. Therefore, it is important that all orders are placed properly, andare within agreed budgets and delegated powers.

Budget holders can place orders for goods or services within their budgetareas, 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. Budgetholders 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.

Any lease, hire purchase agreement or other contract involving expenditurewill be subject to the same authorization procedure as above, with theappropriate expenditure amount being the total committed expenditure over the period of the contract, or where the contract is open-ended, over the first12 months of the contract. Larger contracts should not be entered intowithout adequate advice from a relevant professional adviser (e.g.accountant, solicitor, and surveyor).

Orders of £1,000 or more must be placed in writing. Orders under £1,000 but over £100 should be in writing where practical. Each Department willdevise appropriate ways of keeping records of such orders, which will becontained in an Appendix. Suppliers must be requested to produce invoices.If payment is needed on or before delivery or no credit is given, a 'pro-forma' should be provided.

While claims for small items of expenditure may be made via petty cash (seesection 4), adequate supporting documentation, preferably receipts must beobtained. Large items requiring cash payment must be checked with Finance

before the arrangement is confirmed.

2. Payment authorization and Purchase Ledger

All invoices must be authorized for payment by the budget holder, althoughthe actual checking of details may be delegated. The authorizing departmentis responsible for checking invoices for accuracy in terms of figures andconformity with the order placed, that the services or goods have beenreceived, and following up any problems. Finance must be informed if thereare queries delaying authorization or if payment is to be withheld for anyreason.

A Purchase Ledger is operated by Finance. All incoming invoices are to be passed to Finance section as soon as they arrive. Invoices will be recordedon to the Purchase Ledger within two days, unless there are coding

problems. They are then passed on to budget holders for authorization. Onceauthorized as above, suppliers will be paid within the appropriate timescale.



This is generally 14 days of invoice date for NICE PEOPLE, 30 days for others, unless there are exceptional cash-flow difficulties or specific supplier arrangements. The latter must be communicated by budget holders toFinance, who will inform them of any difficulties in meeting these.

Refunds of overpayments or cancellations of bookings/orders can be fullydelegated to the relevant activity manager or administrator (note that thisdoes not include any 'compensation' or similar payment).

3. Cheque writing and signing

Signatories will only be drawn from senior staff and Trustees, and any newsignatory must be approved by the Trustees before the bank is notified. Allcheques 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 theDirector, Company Secretary, Financial Controller or a member of theBoard of Trustees, plus one other.

Signatories will not sign cheques which are payable to themselves, or blank cheques. Cheques should be filled in completely (with payee, amount inwords and figures, and date) before cheques are signed. The only acceptableexception is that the amount can be blank as long as the cheque is endorsed'Not more than £ ....'. Receipts for this type of expenditure must be returned

immediately.

The day-to-day limit on encashment of cheques is £250. However, where alarger cash float is required (for a major event for example), this may beapproved by the Financial Controller with the Director. When signingcheques to restore the imprest balance (see section 4), receipts accompanied

by an add-list must be presented with the cheque request.

4. Handling of cash

Petty cash will be topped up on the 'imp rest' system, where the amountspent 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 balancelimit of £250. The petty cash balance will be reconciled when re-storing theimp rest balance, or monthly if this is more frequent.



All cash collected from Finance will be signed for, and receipts will beissued for all cash returned. Specific extra cash floats (for tills at events etc.)should be arranged with the Financial Controller. The person signing for thefloat 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 largeaccounting problems. In a real emergency, where another cash float has to

be used for something, a clear record must be kept, and brought to FinanceSection's attention.

Any cash income will be banked via Finance, and not used for petty cash

expenditure. Such cash will be passed to Finance:

• weekly for cash received in-house• monthly for payphone• Immediately after the end of an out-of-house event.

Cash will be kept in locked metal cabinets wherever possible. Appropriatearrangements will be made for till security.

5. Salaries, payroll and freelancers

AN ORGANISATION is required to operate the PAYE system, and makeannual returns to the Inland Revenue. All people working directly for ANORGANISATION, whether permanent or temporary, must provide a P45, or sign a P46 or student exemption certificate, or give reasons why they can't.All payments will be made by cheque or direct bank credit.

It is the nature of AN Organization’s activities that a large number of freelance consultants will be used. Freelance contractors will only be takenon when authorized in accordance with section 1 above. With a few

exceptions, they will be treated as self-employed, and contracts with such people must clearly indicate this. However, work in other areas of activitymust be assumed to be employed by AN ORGANISATION and so subjectto PAYE & NIC. Finance will obtain clarification of any unclear areas asneeded.



Payments for additional work over and above standard hours must beapproved 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 asany other.

Payment will usually be made via the NatWest Autopay service, direct toemployees' bank account. The salary payment listings will be checked by theFinancial 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.

Pay scales and new posts/re-structuring are approved by the Director, andare revised by March for implementation in April. The Board of Trusteeswill set the Director's remuneration. Appointments to existing posts are the

responsibility of the appropriate Department Head (or Director for senior positions).

Staff loans are not issued, but advances may be made against salary due, byarrangement with Finance.

The finance section is responsible for:

•

Paying each employee in accordance with the approved terms andconditions, and issuing pay slips.• Operating the PAYE system, keeping the required records, issuing

P45s and P60s, and communicating with the tax office as appropriate.• Making the correct deductions for Income Tax, NI, court orders and

any other appropriate deduction authorized by staff; ensuring thatdeductions are paid to the correct body, and necessary returns made.

• Administering the Statutory Sick Pay and Statutory Maternity Payschemes, alongside any additional related benefits provided by ANORGANISATION.

6. Income

The majority of income received by AN ORGANISATION is from sales of services and goods produced. With the exception of bookshop sales,invoices will be issued for every sale as soon as practical. For completeness





An automatic sweep arrangement between current and reserve accounts isoperated. These arrangements are subject to review, in the light of what ismost advantageous in terms of cost and service. All changes are to beauthorized by the Trustees.

All income will be paid into the current accounts as soon as possible, notless than once a week. The make up of each banking will be clearlyrecorded, for later computer entry.

8. Books of account and records

Proper accounting records will be kept. The accounts systems are basedaround computer facilities, using Sage and Excel, but manual/paper recordswill also be used if appropriate.

At a minimum, the following records will be kept:

• 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 VATreturns produced on the required quarterly cycle.

All vouchers entered into the computer system will be clearly initialed bythe person entering it, along with date and accounts reference. Allincome/expenditure information will be recorded within three days. Allcorrections and adjustments will be clearly noted in written ‘Journal’ givingreasons for them, with supporting documentation where available.

Purchase Ledger, other cheque payments and banking sheets will be filed inthe appropriate reference order, with any supporting documentation. All

petty cash vouchers, cheque stubs etc. will be retained for audit and for

statutory purposes thereafter.

All fixed assets costing more than £250 (or such other level as may fromtime to time be agreed by the trustees) will be capitalized in the accounts andrecorded in a fixed assets register. This register will record details of date of

purchase, supplier, cost, serial no. where applicable, description and in duecourse details of disposal.



9. Budget setting

12 monthly income and expenditure budgets will be prepared in time for final approval by the Board of Trustees in December, before the start of thefinancial year under consideration.

Department budgets are prepared by the Head of Department, working withthe Financial Controller. Central management budgets are prepared by theFinancial Controller in consultation with the Director. The ManagementTeam will play a lead role in ensuring that budgets are set fairly, efficientlyand in time. Approval of the budgets is by recommendation of theManagement Team to the Board of Trustees.

The approved budget will be used as a base to construct a cash-flow forecast

for the year, which will be updated quarterly.

10. Financial monitoring and audit

All budget holders will receive appropriate, regular reports of income andexpenditure against budget.

The Management Team will receive:

• Weekly snapshots of cash in hand, total creditors and total debtors.• Weekly graph of cash in hand.• Monthly reports of income and expenditure versus budget - within

two weeks of month end.

Detailed monthly payroll reports will be produced. Detailed cash-flowreports will be produced as appropriate.

AN Organization’s financial year is from 1st January to 31st December.

Annual accounts will be submitted for audit, as required under theCompanies Act, charity regulations and grant conditions, prepared per SORP for Charities and any other relevant accounting conventions. Finaldraft should be ready for and passed by Board of Trustees in March, withaudited accounts signed at the June meeting.



11. Role of Treasurer

The Treasurer works in close co-operation with, and provides support andadvice to, the Financial Controller. Specific responsibilities are to:

• Guide and advise the Board in the approval of budgets, accounts andfinancial statements, within a relevant policy framework.

• Keep the Board informed about its financial duties andresponsibilities.

• Advice the Board on the financial implications of An Organization’sstrategic plans and key assumptions included in management'soperational plan and annual budget.

• Confirm that the financial resources of An Organisation meet presentand future needs.

•

Understand the accounting procedures and key internal controls, so asto be able assure the Board of An Organization’s financial integrity.

• Ensure that the accounts are properly audited, that acceptedrecommendations of the auditors are implemented, and meet theauditor at least once a year.

• Formally present the accounts at the AGM, drawing attention toimportant points.

• Monitor An Organization’s investment activity and ensure itsconsistency with policies, aims, objectives and legal responsibilities

12. Role of Management

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 thedepartment complies with Financial Procedures. They will receive weeklysnapshots and monthly management accounts, keeping adequate records to

be in control between monthly reports. The Team will review financesthoroughly at its monthly meetings.

13. Role of Board of Trustees

The committee is responsible for:

• Approving the budget for the year.• Approving signatories to the bank accounts.• Appointments of staff where not delegated to the Director.



• Receiving reports from the Management Team on areas of concern.• Approving exceptional items of expenditure.• Monitoring the financial position based on monthly reports, with

advice from the Director.• Approving the annual accounts, auditors report and appointment.

14. Role of Financial Controller

The Financial Controller is the lead person for processing all changes andexceptional items, and will assist the Treasurer in any financial matter connected with the organization.

The Financial Controller will ensure that adequate security precautions aretaken to safeguard financial and other assets.



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.

FOREIGN INSTITUTIONAL INVESTORS (FII)

Institutional Investor is any investor or investment fund that is from or registered in a country outside of the one in which it is currently investing.

Institutional investors include hedge funds, insurance companies, pensionfunds and mutual funds. The growing Indian market had attracted theforeign investors, which are called Foreign Institutional Investors (FII) toIndian equity market, and this study present try to explain the impact andextent of foreign institutional investors in Indian stock market andexamining whether market movement can be explained by these investors. Itis often hear that whenever there is a rise in market, it is explained that it isdue to foreign investors' money and a decline in market is termed aswithdrawal of money from FIIs. This study tries to examine the

Influence of FII on movement of Indian stock exchange during the postliberalization period that is 1991 to 2007.

Foreign investment refers to investments made by the residents of a countryin the financial assets and production processes of another country. Theeffect of foreign investment, however, varies from country to country. It canaffect the factor productivity of the recipient country and can also affect the

balance of payments. Foreign investment provides a channel through whichcountries can gain access to foreign capital. It can come in two forms:

foreign direct investment (FDI) and foreign institutional investment (FII).Foreign direct investment involves in direct production activities and is alsoof a medium- to long-term nature. But foreign institutional investment is ashort-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, andforeign exchange markets. Hence, understanding the determinants of FII is



very important for any emerging economy as FII exerts a larger impact onthe domestic financial markets in the short run and a real impact in the longrun. India, being a capital scarce country, has taken many measures to attractforeign investment since the beginning of reforms in 1991.

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 hasattracted only a small share of global Foreign Direct Investment (FDI) andforeign institutional investment (FII) primarily due to governmentrestrictions on foreign involvement in the economy. But beginning in 1991and accelerating rapidly since 2000, India has liberalized its investmentregulations and actively encouraged new foreign investment, a sharpreversal from decades of discouraging economic integration with the globaleconomy. Foreign Institutional Investment (FII) is defined as “an investment

that is made to acquire a lasting interest in an enterprise operating in aneconomy other than that of investor”.

The policy framework for permitting FII investment was provided

under the Government of India guidelines vide Press Note dateSeptember 14, 1992. The guidelines formulated in this Regard was as

follows:

1) Foreign Institutional Investors (FIIs) including institutions such asPension Funds, MutualFunds, Investment Trusts, Asset Management Companies, NomineeCompanies andIncorporated/Institutional Portfolio Managers or their power of attorneyholders (providing discretionary and non-discretionary portfolio

management services) would be welcome to make investments under theseguidelines.

2) FIIs would be welcome to invest in all the securities traded on thePrimary 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 domesticMutual Funds. Government would even like to add further categories of securities later from time to time.

3) FIIs would be required to obtain an initial registration with Securities andExchange Board of India (SEBI), the nodal regulatory agency for securitiesmarkets, before any investment is made by them in the Securities of companies listed on the Stock Exchanges in India, in accordance with theseguidelines. Nominee companies, affiliates and subsidiary companies of a FIIwould be treated as separate FIIs for registration, and may seek separateregistration with SEBI.

4) Since there were foreign exchange controls in force, for various permissions under exchange control, along with their application for initial

registration, FIIs were also supposed to file with SEBI another applicationaddressed to RBI for seeking various permissions under FERA, in a formatthat would be specified by RBI for the purpose. RBI's general permissionwould be obtained by SEBI before granting initial registration and RBI'sFERA permission together by SEBI, under a single window approach.

5) For granting registration to the FII, SEBI should take into account thetrack record of the FII, its professional competence, financial soundness,experience and such other criteria that may be considered by SEBI to berelevant. Besides, FII seeking initial registration with SEBI were be requiredto hold a registration from the Securities Commission, or the regulatoryorganization 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. Bothwould 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 corpusremitted to India, subscribe/renounce rights offerings of shares, invest on allrecognized stock exchanges through a designated bank branch, and toappoint 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. (Therecould even be more than one account in the same bank branch eachdesignated in different foreign currencies, if it is so required by FII for itsoperational purposes);

b. Open a special non-resident rupee account to which could be credited allreceipts from the capital inflows, sale proceeds of shares, dividends andinterests;c. Transfer sums from the foreign currency accounts to the rupee accountand vice versa, at the market rate of exchange;d. Make investments in the securities in India out of the balances in therupee account;e. Transfer repairable (after tax) proceeds from the rupee account to theforeign 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/thecustodian being authorized to deduct withholding tax on capital gains andarranging to pay such tax and remitting the net proceeds at market rates of exchange;g. Register FII's holdings without any further clearance under FERA.

9) There would be no restriction on the volume of investment minimum or maximum-for the purpose of entry of FIIs, in the primary/secondary market.Also, there would be no lock-in period prescribed for the purposes of suchinvestments made by FIIs. It was expected that the differential in the rates of taxation of the long term capital gains and short term capital gains wouldautomatically induce the FIIs to retain their investments as long terminvestments.

10) Portfolio investments in primary or secondary markets were subject to aceiling of 30% of issued share capital for the total holdings of all registeredFIIs, in any one company. The ceiling was made applicable to all holdingstaking into account the conversions out of the fully and partly convertible

debentures issued by the company. The holding of a single FII in anycompany would also be subject to a ceiling of 10% of total issued capital.For this purpose, the holdings of an FII group would be counted as holdingsof a single FII.



11) The maximum holdings of 24% for all non-resident portfolioinvestments, including those of the registered FIIs, were to include NRIcorporate and non-corporate investments, but did not include the following:a. Foreign investments under financial collaborations (direct foreigninvestments), 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.

12) Disinvestment would be allowed only through stock exchange in India,including the OTC Exchange. In exceptional cases, SEBI may permit salesother than through stock exchanges, provided the sale price is notsignificantly different from the stock market quotations, where available.

These guidelines were suitably incorporated under the SEBI (FIIs)Regulations, 1995. These regulations continue to maintain the link with thegovernment guidelines through an inserted clause that the investment by FIIsshould also be subject to Government guidelines. This linkage has allowedthe Government to indicate various investment limits including in specificsectors.

These features of the market have a number of implications. To start with,Foreign Institutional Investors (FIIs), whose exposure in Indian markets isan extremely small share of their international portfolio, making Indiaalmost irrelevant to their international strategies, have an undue influence onthe performance of the markets. The sums they invest or withdraw can movemarkets in the upward and downward direction, as recent experience hasamply demonstrated. This forces governments that are keen to have themconstantly making net purchases and driving markets upwards to bend over

backwards in appeasing them. A corollary of this influence of the FIIs is thatany market player who is able to mobilize a significant sum of capital and iswilling to risk it in investments in the market can be a major influence onmarket performance. This explains the importance of operators like HarshadMehta and Ketan Parekh, the Big Bulls of the 1990s, who rose from beingsmall traders to become correlates and were lionized for their resourcemobilization and risk-taking abilities, which made them movers of markets.



Ketan Parekh is reported to have risked his investments on a few sectors (theso-called technology stocks) and few firms, and till the recent debaclealways seemed to come out right in terms of his judgment. He had, it nowappears, a major role to play in rigging share prices, as he allegedly did inthe case of Global Trust Bank (GTB) shares prior to the aborted merger of UTI Bank and GTB.

Investment by FIIs has seen a steady growth since the opening of theequity markets in September 1992. The share of FIIs in total FPI hasincreased from 47% in 1993-94 to around 74% in 2001-2002. FIIs have alsoacquired 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. Intotal market capitalization FIIs account for about 13% and they make about50-60% of average daily deliveries on the stock market.

Documents

Ketan Parekh case