Volume 2, No. 6-7, June-July 2001

Abisekh Banka, a 22 year sub-broker from Calcutta jumped into the swirling river and drowned. The next day his young wife jumped off a multistoreyed building. In Delhi a small-time investor on the stock exchange killed his two little children and then committed suicide with his wife. Many more such suicides were reported in March. Hundreds lined up each morning outside the Friends Cooperative Bank in Mumbai’s Kurla, hoping to retrieve their deposits. Thousands of small depositors with Rs. 1,100 crores in the Madhavapura Mercantile Cooperative Bank of Gujarat stood to lose their entire money unless it is given a Rs. 500 crore bail-out. Investors have lost half their capital in Prudential ICICI. Even the lakhs of UTI holders are in danger. Lakhs more will lose their deposits due to the collapse of hundreds of small banks who face collapse because of the loss of their investments through the stock market crash or bank defaults.

Such was the plight of lakhs of urban middle class investors in mid-March who have seen thousands of crores of their savings vanish overnight in the latest stock market scam, following the presentation of the budget. On the other hand, a cartel of FIIs together with their agents in this country have made gigantic profits through manipulating the stock market. It is they who ambushed the stock exchanges immediately after the ‘dream budget’ when the people least expected the crash. The massive sops given by Yeshwant Sinha to market capitalisation in the budget pushed up the BSE (Bombay Stock Exchange) index by 170 points on the very next day. When the stock markets were all set to boom, the FIIs and bear cartels ambushed it, by selling huge quantities of shares, leading to the crash on March 2. Ofcourse, they sold at peak prices making windfall profits, the bulk of which was siphoned out of the country to tax havens in Mauritius.

Defacto, overnight crores of middle class savings have landed up in the pockets of a handful of FIIs and their agents. It is invisible robbery that would make the Chambal dacoits mad with envy. Not only is the loot hundred times more than what the dacoits manage, it is legal, it is refined, it is clinical, it is not blood-letting (except for the suicides) and messy, and it is, in fact respectable. Besides, while the dacoits have to slog it out in the dense jungles, these scum enjoy their booty in five-star luxury.

Throughout the year 2000 the stock market prices were artificially pushed up by heavy purchases on the stock exchange. The front-man in these bull operations was the Mumbai stock broker Ketan Parekh. He operated through a vast network of brokers, companies and agents. The money was pumped in by the corporate bosses (mostly ICE companies — i.e., Infotech, Communications and Entertainment), bank advances and purchases, mutual fund (particularly UTI) investments, and vast sums by the FII (Foreign Institutional Investors). The purchases were limited to a handful of stocks, pushed by Ketan Parekh, which came to be known as the K-10 companies. These included Infosys Technologies, HFCL*, Zee Telefilms, DSQ Software, Global Telesystems, Cyberspace, Satyam, etc.

The corporate bosses lent vast sums to brokers, particularly Ketan Parekh (KP), to push up their share prices. So for example DSQ Software shares were hiked up by promoter Dinesh Dalmia, who lent Rs. 208 crores to stock brokers. Also, in the three months before the crash, KP was given Rs. 425 crores by HFCL and Rs. 340 crores by Zee. Till today, only these have come to light, many more would be involved.

Then the banks lent over Rs. 1,200 crores to KP. Of this, Rs. 800 crores were lent by the Madhavpura Mercantile Cooperative Bank (MMCB) and Rs. 256 crores by the Global Trust Bank (GTB).

Of the mutual funds the UTI invested heavily in
K-10 stocks. In fact GTB promoter, Ramesh Gelli, and KP manipulated share prices during Oct./Nov. 2000, prior to the announcement of the GTB’s merger with UTI. Prices of GTB scrip increased 68% in 23 trading days. If the merger had taken place massive amounts would have been lost by UTI share-holders through these manipulations, involving also the chairman of the UTI. KP had secretly purchased 20% of GTB stock which he had parked with Nirma owner, Karsanbhai Patel. Once UTI purchased GTB shares at the inflated rate, KP and his accomplices would have off-loaded the shares making windfall profits and leading to a crash in the GTB share value. The losers would be the UTI shareholders that would then be owning valueless GTB stock. Besides, UTI also invested large amounts in many dubious stocks, like Welspun Industries (which had already been listed as a willful defaulter by the RBI), Emtex Industries (though a winding up petition had already been filed against it), etc.

But the main players in this gigantic scam were the handful of FIIs operating through OCBs (Overseas Corporate Bodies) located in the Mauritius, and also directly. These include the giant investment bankers — Morgan Stanley, Lazard Fin, Deutsche International, Credit Suisse First Boston and a few others. The value of such transaction by FIIs since the beginning of the year 2000 amounted to a huge Rs. 1,47,000 crores, mostly funnelled through Ketan Parekh into the K-10 stocks.

With such vast sums coming in, it is no wonder that the stock exchange boomed, particularly in early 2000. The BSE index which started the year 2000 at about 5000, rose to 6,150 by February 15 — a rise in value of Rs. 2 lakh crores in just six weeks. The BSE crashed to 3096 in March 2001.

On March 1 itself the crash was initiated by Morgan Stanley through a huge off-loading of stock. The hammering of the stock market was systematically conducted by a bear cartel comprising FIIs and their Indian agents. So, for example JM Morgan Stanley securities sold $27.4 million (Rs. 130 crores) on March 1st and a further $10.7 million (Rs. 50 crores) on March 2. These were all the K-10 stocks like Satyam Computers, Infosys, HFCL, Zee, etc. The gigantic amounts sold can be understood from the fact that in just that one day, Infosys share values dropped by a huge Rs. 350 — an equivalent of 5% of its total shares were offloaded on that one day.

Roughly 700 points was lost on the BSE in the eight trading sessions from March 1st to March 13, 2001. Between February 2000 and March 2001 the stock market lost Rs. 2 lakh crores in market capitalisation. The following chart gives a picture of the extent of manipulation of the stock market.

Coincidentally, the Tehelka exposures took place amidst this stock market fall, around March 12. This further pushed down share values furthering the interests of the bear cartel. Interestingly an important broker of the bear cartel on the BSE, is one Shankar Sharma, who has a 15% stake in Tehelka.com !!

Ofcourse, those who suddenly off-loaded the stocks made enormous profits, while those left with the shares found their value eroded to a small fraction, within a few days.

The kind of profits made by these FII is indicated in a recent SEBI (Security and Exchange Board of India) report which revealed that the FIIs routed the funds through fake companies (OCBs) located in Mauritius, so that their loot can even escape taxation. So between January 1999 and March 2001, while the total inflow from OCBs was Rs. 777 crores they repatriated a massive Rs. 3,677 crores from the Indian stock market. The chart below indicates a number of OCBs (with barely no capital) acting as fronts for the major FIIs already mentioned :

No doubt the overall loot would be much more than that repatriated, with their network of agents (brokers and others) getting their commissions and profits garnered through ‘inside’ information.

The media focuses on one Ketan Parekh as the Khalnayak of the scam, while the murky dealings involve not only a wide spectrum of the big-wigs of society but the entire financial system of globalisation. Even KP, on release from jail, was given a heroic welcome; and, not surprisingly, on that day, the K-10 stocks rose. His arrest resulted from his inability to meet the payments due to the Bank of India based on the collaterals (shares) deposited with the Madhavpura Cooperative Bank. With the crash in share prices he could not pay back the loans taken.

First let us look at some of the murky dealings of the individuals involved and then look at the policies which are, in fact the driving cause of such scams and criminal deceit.

As already mentioned the main villains (and benefactors) are the FIIs who have operated through the likes of KP. KP was himself in league with the chairman of the banks to acquire the huge funds; with the chairman of UTI to manipulate the purchase of GTB; with the captains of industry to hike up share prices and park his shares; and with influential politicians and financiers. [Note: One single sentence in the original document has been removed here. For an explanation of why, and a corrigendum, see this separate file.] Shah played an important role in KP’s entry into the Entertainment Industry. They were seen together at a high profile party in April 2000 attended also by Maloo, the Australian top billionaire, Kerry Packer, and a host of top film stars, including Amitab Bachchan. KP publicly granted a cheque of Rs. 21 lakhs to the SP boss, Amar Singh, for ‘earthquake relief’.

Besides, top bureaucrats/brokers, running the very stock exchanges themselves have been deeply involved in the underhand deals.

The list could go on and on, but the real villain of this gigantic fraud, which has destroyed many a middle class household, is the government and their new economic policies of liberalisation which has created a system which facilitates such loot. Ofcourse, the villains themselves get let off without any real action. The FIIs are never touched; KP is out of jail with a heroic welcome; the top echelon of the stock exchange merely resign and get away with their booty; the captains of industry play the game discreetly from behind the screen; and even the big bull, Harshad Mehta, who is the single biggest defaulter of public bank loans, amounting to Rs. 812 crores, continues to move around freely from his super luxury flat in Mumbai in his fleet of imported cars.

There is no doubt that the villains involved are no less than the Chambal dacoits, and should be tried and sentenced to the maximum punishment, for the lakhs and lakhs of lives they destroy. But that alone will not solve the problem unless the very system that breeds these vermin is not changed.

The capital markets have never been more blatantly manipulated, as in the past three years. In fact, the entire financial sector has been rigged to subserve parochial interests through undeserved advances, influence peddling and downright bribery. Take even the recent policies of the government, they are all geared to promote even more speculation in the financial markets. In fact, the recent budget had this as its main focus.

Over the years the RBI guidelines regarding bank investment in the stock market have been substantially relaxed. In order to boost the stock exchanges, as part of the process of financial liberalisation, the new RBI guidelines issued in October 1996 allowed banks to increase their investments in equity to 5% of their deposits. In September last year the guidelines were relaxed even further allowing even more investment in equity.

Besides, banks have been allowed to give loans to brokers if shares are deposited as collateral security. This allows brokers unending utilisation of bank funds for speculative purposes.

The government has continuously reduced interest rates over the last two years on all saving schemes in order to push the maximum funds into the stock exchange — either directly or through mutual funds (like UTI).

It has encouraged speculation on the stock exchange, of both the legal and illegal variety. By opening up the country to trading in derivatives (options, futures, etc.) it has vastly increased (legal) speculative activities on the stock exchanges. Besides, it has turned a blind eye to the parallel badla market. The CSE is connected with the biggest badla market in the country, involving Rs. 3,000 crore and giving returns of upto 32%.

And most important of all, it has introduced a host of schemes that encourage and facilitate FII domination and control over India’s stock exchanges: They have assisted the repatriation of huge tax-free profits by allowing a tax haven in Mauritius; they have in this budget further enhanced the limit of FII investment in Indian equity to 49%; they create numerous loopholes in even what restrictions exist on paper, like the FII’s ability to operate through instruments called ‘Participatory Notes’ (PNs), etc.

And finally, the very watchdog created to monitor the proper functioning of the Stock Exchanges in the country — SEBI — has acted more in collusion with the mafia, than asserting controls. It is like asking the fox to guard the chicken-coop. Invariably, they wake up long after the damage is done. So, for example, though the markets were being obviously rigged throughout the year 2000 they did nothing. They only awoke weeks after the crash, and the actions taken were nowhere commensurate with the fraud involved. Besides, it took them three years to take (mild) action against the three companies — Videocon, BPL and Stearilite — involved in ‘insider trading’ (i.e., manipulating shares based on privileged information to make windfall profits) in 1998, in league with Harshad Mehta. Besides, the government has further encouraged such companies, by selling the PSU, Balco, to the NRI company Stearilite for a song (worth about Rs. 3,500 crores but 51% Balco shares sold for Rs. 550 crores), even though they were aware of this fraud.

So, the entire system of globalisation and liberalisation of the economy is geared to facilitate the operations of speculative capital within the country — particularly that of foreign capital. In this, the worst sufferers are the vast urban middle classes who are slowly losing their savings. Today the middle class is left with no outlet for safe returns on their savings. The security of the past no longer exists today. With the government reducing interest rates below the real inflation rates; with hundreds of NBFCs and small banks collapsing; with real estate prices crashing; and with frauds and manipulations in the stock market .... there is virtually no safe place for their savings.

But while the urban middle classes are being silently hit, the foreign investors and their comprador agents have made unbelievable profits — most of which gets siphoned abroad. This reality will soon awaken this vast class, who have, at present, been numbed into passivity, by the glitter of TV, computers and consumerism. Their aspirations of quick money fostered by a hyper-active media and their hopes for a secure, peaceful existence will lie shattered in the garbage can of unemployment, frauds, scams etc. Slowly, this class will also see revolution as the only alternative to their declining existence. Their latent revolutionary potential will come to the fore, once they realise this truth. The truth that, the glitter of globalisation sparkles only in the houses of a select elite, while the bulk of the urban middle classes (and ofcourse, society at large) face a bleak future !!

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