Q1.

Study the developments that led to the Ketan Parekh scam and comment on
SEBI’s actions and role before and after the scam was 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.

According to me Ketan Parekh scam was inherently weak

financial regulatory in India. Security and Exchange Board of India (SEBI) is governing stock
market operation since 1992 in spite of scam was took place. SEBI was actually sleeping
when the scam root was expanding in the Indian market. Because till after one month SEBI
was not find out the real problem on what was happened in the market. And after one month
when the help of the Reserve Bank of India (RBI) both in government institute is find out the
real problem actually what was the going in the market is.

Some reasons are as follows:

➢ RBI was inspecting the account once in two years, which created ample scope for
violation of ruler.
➢ K-10 stocks high volatile but SEBI was no examining it.
➢ Lack of regulatory for co-operative.
➢ Calcutta stock exchange helped to ketan parekh to cover his operations from his rivals
in Mumbai.
➢ SEBI market intelligence was very poor for examine such type of crash.
➢ Lack of implication of rules and regulation.

ROLE OF SEBI:

From this case study, we got some interesting fact and figure which
is able to explain the situation better than direct go towards the case study. If we look at
deeply then we are able to know that this entire process is take time to manage the situation
but less time to find the problem when the market is fall by 177point in march 1 2001,
everybody was blaming the bank and some other fact rather than going and try to know who
who the person at exchange to doing all those thing. After complete 1 month the SEBI was
able to know that behind the crash there is person name called Ketan parekh. SEBI role was
watch out at the exchange who are the buyer and who are the seller, what is the bulk deal
going in the market, is there any simply money case flow going only k-10 stock it will never
happen before. Company is actually running base on one person. Its SEBI’s role to place fund
manager to asset management company to invest there money in certain proportion with
help of public money.

SEBI BEFORE SCAM:

I. No dent on price manipulation.

II. Poor rate of conviction and very few cases of exemplary penal action.
III. No due process for framing/changing regulation.
IV. Turning a blind eye on bullish market.
V. Implementation of existing disclosure norms inadequate.
VI. Regulatory bias towards corporate sector and large investor.
VII.Indication of extraneous pressures, including government.
VIII.No disclosure norms for merger/demerger/asset sell-offs.
SEBI’S ROLE AFTER SCAM:

I. SEBI launch immediate investigation into exchange board of india.

II. SEBI also insist to RBI to furnish or scrutinize bank exposure of some bank.

III. All brokers acting as directors and other office bearers of the Bombay Stock Exchange
have been suspended for alleged insider trading. In order to prevent misuse of sensitive
information by broker-directors, stock markets will be corporatized soon.
IV. To contain volatility, SEBI has imposed an additional 10 per cent volatility margins on
all the A Group shares and additional margins on stocks in Automated Lending and
Borrowing Mechanism (ALBM) and Borrowing and Lending of Securities Scheme
(BLESS).
V. The SEBI has also imposed volatility margins on net outstanding sale positions of FIIs,
financial institutions, banks and mutual funds.
VI. On March 8, 2001, the SEBI banned naked short sales. In simple words, it means that all
short sales have to be covered by an equal amount of long purchases.
VII.Cutting gross exposure limit for brokers to 10 times the base capital in the case of
National Stock Exchange (NSE) and to 15 times in case of other stock exchanges.
VIII.Rolling settlements (which ensures that the settlement takes place two days after
trading) will now be compulsory.
IX. In order to increase liquidity, SEBI has allowed banks to offer collateralized lending only
through BSE and NSE.
X. Launching of trade guarantee fund to guarantee all transactions.
Q2.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.

Commercial Bank hit by this scam Like Bank of India, state bank, Punjab nation Bank,
etc,Madhav pura mercantile co-operative bank, Global trust bank etc, according to case study
bank had a mistake their management their assets and liability.

Management Assets and Liability:

Assets liability management (ALM) is a toll that enables Bank management to take business
decision in a more informed framework. The assets and liability management function
informs the manager what the current market risk profile of the Bank.

Bank should manage their assets against their liability. Bank should have assets liability ratio
1:1, if bank have more liability against the assets, it is red flag for the Bank than it indicate
that Bank cannot able to pay their liability and it is more risk for the Bank. So we can say that
Bank has to manage their assets and liabilities, if Bank cannot mange than it lead to Bank
toward the Bankrupt.

A bank with mismatched assets and liabilities can be badly hurt by unexpected interest rate
changes. In the 80’s, many Savings & Loan associations went bankrupt owing to rates
increases: since they had borrowed short and lent long, both their income and their net worth
had become negative

This case study lead to Ketan Parekh scam and so many Commercial Banks was hit by the
scam. Ketan Parekh was succefull broker but he did not have the money to buy large stake.
Ketan Parekh had 12 lacs share of global which was cost around Rs.200 million. Ketan Parekh
borrowed from various companies and bank.

When the share price was high enough, he pledge the share with banks as collateral for fund.
Ketan Parekh route was borrowing from a MMCB branch at Mandvi (Mumbai), where different
companies owned by KP and his associates had accounts.KP used around 16 such accounts,
either directly or through other broker firms, to obtain funds. Apart from direct borrowings by
KP-owned finance companies, a few brokers were also believed to have taken loans on his
behalf. It was alleged that Madhur Capital, a company run by Vinit Parikh, the son of MMCB
Chairman Ramesh Parikh, had acted on behalf of KP to borrow funds. KP reportedly used his
BoI accounts to discount 248 pay orders worth about Rs 24 billion between January and
March 2001. BoI's losses eventually amounted to well above Rs 1.2 billion.

Management of commercial Bank assets and Liability also risks are as follows:

Assets:

➢ Bank took share against the collateral as security then Ketan Parekh demanding more
fund from the bank.

➢ Bank had assets of the share but share price is depending upon the market it could be
up and down.

Liability:
 ➢ Bank was funding against pledge share as collateral by Ketan Parkeh and Bank create
their liability.

➢ Bank Global trust bank issued to loan Ketan Parekh and it exposure to the capital
market was above the prescribe limit.

➢ Madhavpura Marcabtuke Co-operative Bank gave the loan without collateral it is

liability for the bank.

Bank issued loan and funding or limit of exposure, guarantee,

according to this case study we have seen assets and liability mismatch, it was risked for the
bank.

Risk:

Assets and liability:

Bank assets and liability not match its liability so it was a red flag for the bank
from this indicate bank was not able to paid their liability. it was more risk for the bank.

Bank guarantee:

According to low bank cannot give guarantee financial broker but this case
study Ketan Parkeh was financial broker and bank gave the guarantee to him which was risk
for the bank.

Bank Loan:

Bank cannot issued loan above 10% of their net worth But Bank issued loan
above their prescribe limit. Bank was issued loan to Ketan Parekh without proper collateral, it
was risk for the bank.

Pay order:

In a practice public and private sector bank cannot discount pay-order of the
co-operative bank, if they discount than it risk for the bank of the discounted amount.

So we can say that from above point banks had a mistakes to manage their
assets and liability, it was lead to banks towards the bankrupt.

Banking and institutional management by Vasant Desai.

Q3.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 effect on the ketan parekh scam n the stock market:

➢ All my lifetime's savings are gone. I don't know how to feed my family."
➢ 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.
➢ Stock market was 176 points.
➢ Small investor lost their life time saving.
➢ investor lost confidence on the security and exchange board of india.
➢ The panic run on the bourses continued
➢ BSE president Annad Rathi resign from BSE.
➢ Eighat investor committed suicide.
➢ Ketan Parekh arrest followed by yet another panic run on the bourses and sensex fall
by 147 points.
➢ K-10 stocks were falling rapid.
➢ The immediate fallout of market crash in Bombay was so widespread that shock waves
were also felt in Calcutta and other financial centers.
➢ Many investor were took back investment from stock market.
➢ it was effect FDI and FII.

Ketan Parekh bought stock when share price low and he buy large stake
of various companies. Ketan Parkeh K-10 stocks was vary popular among the investor.

TABLE NALYSIS RISK AND RETURN

companie Price on Total P/E Ratio Price on Recent Profit/Loss
st st
31 march Investme 21 Investment
2001 ntonMarc December in stocks
h, 2001 2009

Mukta Arts 136.85 13685 22 50 5000 -8685

Tips 61.80 6180 8.79 48.20 4820 1360

Industries

Global 161.50 16150 6.4o 381.85 38185 22035

telesystems

Zee 121.60 12160 17.52 251.15 25115 12955

Telefilms

Pentamedia 89.20 8920 3.15 3.88 388 -8532

Graphics

Aftek 30.65 3065 6.5 16.85 1685 -1380

Infosys

Total -- 60160 - -- 75193 --

Investors were investing only that k-10 rather than its intrinsic value.
Mutual fund like Alliance capital, ICICI prudential fudn and UTI also invest in K-10 stocks.

Ketan parekh K-10 stocks were highly volatile but investor blindly
invested K-10 stocks. That was red flag of this particular K-10 stocks. So we can say that,
they took high risk with them.

Here I have selects 5 companies from K-10 stocks and evaluate this portfolio value and
returns or loss in 21st Dec 2009.

Here above we can see that investment Rs.60160 in 31st march 2001 it
is value 31st December 2009 at Rs.75193. It is indicate that portfolio give low return for 8
years. in a 8 years return around 24% and average return at 3%, it is lower than government
security. K-10 stocks share was high volatile and investor invest blindly in it. so we can say
that high risk with them.

Investment Analysis and Portfolio Management by B.K. Bhalla

 Q4.KPV venture was formed for funding. Explain the legal procedures and
accounting procedures in this kind of mergers, for floating a new company.

Merger:

In a merger, there is a complete amalgamation of the assets and

liabilities as well as shareholder interests and business of the merging companies. There is yet
another mode of merger. Here one company may purchase another company without giving
proportionate company or without continue the business of the acquire company.

KP venture merge with tycoon Kerry Australian packer but both business
was totally difference. it was a conglomerate types of merger. Tycone Kerry Australian Packer
is a press holding and media entertainment company and KP venture was Security Company.
Both companies were a difference business. So that it was a conglomerate types of merger.

Merger Procedure:

A merger is a complicated transaction, involving fairly complex

legal considerations. While evaluating a merger proposal, one should bear in mind the
following legal provisions.

Sections 391 to 394 of the companies act, 1956 contain the

provisions for merger. The procedure for merger normally involves the following steps:

Analysis of Proposal by the Companies: Whenever a proposal for merger comes up then
managements of concerned companies look into the pros and cons of the scheme. The likely
benefits such as economies of scale, operational economies, improvements in efficiency,
reduction in cost , benefits o diversification, etc. are clearly evaluated. The likely reactions of
shareholders, creditors and others are also assessed. The taxation implications are also
studied. After going through the whole analysis work, it is seen whether the scheme will be
beneficial or not. It is pursued father only if it will benefit the interested parties otherwise the
scheme is shelved.
Examination of object Clauses: The memorandum of association of both the
companies should be examined to check if the power to merge is available. Further, the
object clause of the amalgamated company (transferee company) should permit it to
carry on the business of the merger company (transferor company ) .If such clauses do
not exists, necessary approvals of the shareholders, boards of directors and Company Law
Board are required.

Intimation to stock Exchanges: The stock exchanges where the amalgamated and
amalgamating companies are listed should be informed about the amalgamation proposal.
From time to time, copies of all notices, resolutions, and orders should be mailed to the
concerned stock exchanges.

Determining Exchange Rations: The merger schemes involve exchange of shares. The
shareholders of amalgamated companies are given shares of the amalgamated company. It is
very important that a rational ratio of exchange of share should be decided. Normally a
number of factors like book value per share, market value per share, potential earnings, and
value of assets to be taken over are considered for determining exchange rations.

Approval of the draft amalgamation proposal by the Respective Boards: The

draft amalgamation proposal should be approved by the respective boards of directors.
The board of each company should pass a resolution authorizing its directors/executives
to pursue the matter further.

Application to the National Company Law Tribunal (NCLT): Once the draft of
amalgamation proposal is approved by the respective boards, each company should make
an application to the NCLT so that it can convene the meetings of shareholders and
creditors for passing the amalgamation proposal.

Dispatch of notice to shareholders and creditors: In order to convene the meeting

of shareholders and creditors, a notice and an explanatory statement of the meeting, as
approved by the NCLT, should be dispatched by each company to its shareholders and
creditors so that they get 21 days advance intimation. The notice of the meetings should
also be published in two newspapers (one English and one vernacular). An affidavit
confirming that the notice has been dispatched to the shareholders/creditors and that the
same has been published in newspapers should be filed with the NCLT.

Holding of Meetings of shareholders and creditors: A meeting of shareholders

should be held by each company for passing the scheme of amalgamation. At least 75
percent (in value) of shareholders in each class, who vote either in person or by proxy,
must approve the scheme of amalgamation. Likewise, in a separate meeting, the creditors
of the company must approve of the amalgamation scheme.

Petition to the NCLT for confirmation and passing of NCLT orders: Once the
amalgamation scheme is passed by the shareholders and creditors, the companies
involved in the amalgamation should present a petition to the NCLT for confirming the
scheme of amalgamation. The NCLT will fix a date of hearing. A notice about the same has
to be published in two newspapers. After hearing the parties the parties concerned
ascertaining that the amalgamation scheme is fair and reasonable, the NCLT will pass an
order sanctioning the same. However, the NCLT is empowered to modify the scheme and
pass orders accordingly.

Filing the order with the Registrar: Certified true copies of the NCLT order must be
filed with the Registrar of Companies within the time limit specified by the NCLT.
Transfer of Assets and Liabilities: After the final orders have been passed by the
NCLT, all the assets and liabilities of the amalgamating company will, with effect from the
appointed date, have to be transferred to the amalgamated company.

Issue of shares and debentures: The merged company, after fulfilling the provisions
of the law, should issue shares and debentures of the amalgamated company. The new
shares and debentures so issued will then be listed on the stock exchange.

ACCOUNTING PROCEDURE IN MERGER:

Pooling of Interests Method

In the pooling of interests method of accounting, the

balance sheet items and the profit and loss items of the merged firms are combined without
recording the effects of merger. This implies that asset, liabilities and other items of the
acquiring and the acquired firms are simply added at the book values without making any
adjustments.

Purchase Method

Under the purchase method, the assets and liabilities of

the acquiring firm after the acquisition of the target firm may be stated at their exiting
carrying amounts or at the amounts adjusted for the purchase price paid to the target
company.

➢ Amalgamation in nature of merger be accounted for under Pooling of Interest Method

and in nature of purchase be accounted for under Purchase Method.

➢ Under the Pooling of the Interest Method, assets, liabilities and reserves of the
transferor company be recorded at existing carrying amount and in the same form as it
was appearing in the books of the transferor.

➢ Difference between the amount recorded as share capital issued and the amount of
capital of the transferor company should be adjusted in reserves.

➢ Under Purchase Method, all assets and liabilities of the transferor company be
recorded at existing carrying amount or consideration be allocated to individual
identifiable assets and liabilities on basis of fair values at date of merger. The reserves
of the transferor company shall lose its identity. The excess or shortfall of
consideration over value of net assets be recognised as goodwill or capital reserve.

➢ In case of merger under the Pooling of Interest Method the treatment given to the
difference between the consideration and the value of the net identified assets
acquired is to be disclosed. In case of merger under the Purchase Method the
consideration and the treatment given to the difference compared to the value of the
net identifiable assets acquired including period of amortization of goodwill arising on
merger is to be disclosed.

Mergers, Acquisition and takeovers by new age

Q5. 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, pension funds and mutual funds. The growing Indian market had
attracted the foreign investors, which are called Foreign Institutional Investors (FII) to Indian
equity market, and this study present try to explain the impact and extent of foreign
institutional investors in Indian stock market and examining whether market movement can
be explained by these investors. It is often hear that whenever there is a rise in market, it is
explained that it is due to foreign investors' money and a decline in market is termed as
withdrawal of money from FIIs. This study tries to examine the influence of FII on movement
of Indian stock exchange during the post liberalization period that is 2000 to 2009.

Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India

which proposes to make investment in India in securities. A Working Group for Streamlining
of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended
streamlining of SEBI registration procedure, and suggested that dual approval process of SEBI
and RBI be changed to a single approval process of SEBI. This recommendation was
implemented in December 2003.
 India, the second fastest growing economy after China, has
recently seen positive foreign institutional investor (FII) inflows driven by the sound
fundamentals and growth opportunities.

 FIIs have been net sellers of equity since May 2008. In the seven months till November,
they repatriated Rs.43,000 crores. There was a pause in December and it looked as if
the FIIs were back in the market to buy.

 In the year 2008-09 there was a net disinvestment of Rs.73,000 crores and FIIs’ share
in market capitalization dropped to 12 per cent from 15 per cent at the end of March
2008. Since last March there has, however, been a change which signals that FIIs may
once again come back to roost.

 With this increase in shareholding, FIIs have retained the position as the largest non-
promoter investors in India (without factoring in the PSUs); and overall foreign share of
the market (including subsidiaries, direct, and portfolio) is more than 25%. The foreign
institutional portfolio in India now stands at more than Rs 87,900 Cr, up 27%, against
sensex's rise of 18%.

 FII investment in this year has crosses $ 3 billion or Rs. 15491 crores as per the latest
data available from SEBI`s website. The total investment of FIIs has crossed $ 58
billion. The total number of registered FIIs and sub-accounts are 1655 and 5103
respectively. From the financial markets perspective, everything now depends on
execution. The new government has the mandate, there is a h
uge opportunity to bring about structural change across sectors, and the policy road
map is also clear.

 We need the new government to deliver.FII inflow and outflow from 1999-2000 to 2006
-2007 are as follow:
 ➢ After the Keptan Parekh scam FII was shaking and lost their confidence in a Indian
market but than they have been starting inflow since, slowly in Indian market.

Trends in FII Investment

Gross Purchases Gross Sales (b) Net Investment (a-b)

Year (a) (Rs.crore) (Rs.crore) (Rs.crore) % increase

1999-00 56856 46734 10122 739.0151515

2000-01 74051 64116 9935 -1.847460976

2001-02 49920 41165 8755 -11.87720181

2002-03 47061 44373 2688 -69.29754426

2003-04 144858 99094 45764 1602.529762

2004-05 216953 171072 45881 0.25565947

2005-06 346978 305512 41466 -9.622719644

2006-07 520508 489667 30841 -25.62340231

2007-08 646752 694788 47970 15.6851

2008-09 576916 481916 95000 98.0404

➢ Market flow will depend on FII movement only. Movement Chart is directly proportional
to FII inflows or their outflow.(Ex: Year 2000 FII investment increase by 52%, the same
time market increase by 60% and when they withdraw their 53% investment in sep
2001 market was downed by 55%).

FIIs investments declined from Rs. 10122 crore during 1999-

2000 to Rs. 9935 crore during 2000-01. FII investment posted a year-on-year decline of 1.8 %
in 2000-01, 11.87 % in 2001-02 and 69.29 % in 2002-03. Investments by FII posted a fall of
80 % in 2002-03 as compared with investments in the period of 1999-00. Investments by FIIs
rebounded from depressed levels from the year 2003-04 and witnessed an unprecedented
surge. FIIs flows were recycled to India following readjustment of global portfolios of
institutional investors, triggered by robust growth in Indian economy and attractive
valuations in the Indian equity market as compared with other emerging market economies in
Asia. The slowdown in 2004-05 was on account of global uncertainties caused by hardening
of crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII
inflows to India from August 2004 continued till end 2004-05. The inflows of FIIs during the
year 2004-05 was Rs. 45881 crore. During 2006-07 the foreign institutional investors
continued to invest large funds in Indian securities market. However, due to global
developments like meltdown in global commodities markets and equity market during the
three month period between May 2006 to July 2006, and 2008-07 at was emerging from
economy so investor started invest in a market, and 2009 it is increase rapid which is good
for Indian economics form this we can say that FII’s now has changed their mentally and
invest in Indian equity market.

Foreign institutional investors by G Gopal Krishna Murthy

WASIM QURESHI-16541