1.
UNIT 3.
CAPITAL MARKET

2.
STOCK MARKET IS THE GAME OF ‘GREED’AND ‘FEAR’
UNIT 3. CAPITAL MARKET

3.
Capital Market: Components &
Functions of Capital Markets, Primary
& Secondary Market Operations,
Capital Market Instruments -
Preference Shares, Equity Shares,
Non-voting Shares, Convertible
Cumulative Debentures (CCD), Fixed
Deposits, Debentures and Bonds,
Global Depository receipts, American
Depository receipts, Global Debt
Instruments, Role of SEBI in Capital
Market.

4.
Capital markets, commonly referred to
as the stock markets have been in
existence for centuries.
The British East India Company was the
first company to invite the public to
buy shares in the company.
Since then, over the years, markets have
gone through tremendous changes.
The way the market works, the asset
classes, the framework of the
exchanges and everything has been
evolving over time.

5.
The changes have been brought in
gradually according to the
convenience of the investors and
market participants.
Also in order to prevent market
participants to take undue advantage
of information in order to gain
monetary benefits, the Securities
Regulatory bodies over the world
have surveillance methods for
mitigation of such acts.

6.
Capital Market Instruments
There are mainly two types of instruments
which are traded in the capital market, which
are:
Stocks: Stocks are sold and bought over a
stock exchange, They represnt ownership in
the company and the buyer of the share is
referred as the shareholder.
Bonds: The debt securities which are traded
in the capital market are known as the
bonds. Companies issue bonds for in order
to raise capital foe the expansion of the
business and growth.

7.
Capital Markets is viewed as a market
of financial assets with long or infinite
maturity, it actually plays a very
important role in mobilizing resources
and allocating them to productive
channels.
So it can be said that the process of
economic growth of a country is
facilitated by the Capital Markets.

8.
Economic Growth: Capital Market
helps in the proper allocation of
resources from the people who
have surplus capital to the people
who are in need of capital.
So, we can say that it helps in the
expansion of industry and trade of
both public and private sectors
leading to a balanced economic
growth in the country.

9.
2. Promotes Saving Habits: After the
development of Capital Markets, the
taxation system, and the banking
institutions provide facilities and
provisions to the investors to save
more.
In the absence of Capital
Markets, they might have invested in
unproductive assets like land or gold
or might have indulged in
unnecessary spending.

10.
3. Stable and Systematic Security
prices: Apart from the mobilization of
funds, the Capital Markets helps to
stabilize the prices of stocks.
Reduction in the speculative
activities and providing capital to
borrowers at a lower interest rate
help in the stabilization of the security
prices.

11.
4. Availability of Funds: Investments
are made in Capital Markets on a
continuous basis. Both the buyers
and sellers interact and trade their
capital and assets through an online
platform.
Stock Exchanges like NSE
and BSE provide the platform for this
and thus the transactions in the
capital market become easy.

12.
Features of Capital Market:
1. Serves as a link between Savers and
Investment Opportunities: Capital market
serves as a crucial link between saving and
investment process as it transfers money from
savers to entrepreneurial borrowers.
2. Long term Investment: It helps the investors to
invest their hard earned money in long term
investments.
3. Helps in Capital formation: Capital market
offers opportunities for those investors who have
surplus amount of money and want to park their
money in some type of investment and also take
the benefit of the power of compounding.

13.
4.Helps Intermediaries: While transferring
of shares and money from one investor to
another, it takes helps of intermediatries
like brokers, banks etc. thus helping them
in conducting their business.
5. Rules and Regulations: The capital
markets operates under the regulation
and rules of the Government thus making
it a safe place to trade.

14.
Financial Intermediaries are the organizations which help
in the transfer or channeling of funds from those who
have surplus funds to those who are in need of it. They
act as a middleman in connecting the surplus parties to
the deficit ones.
A classic example can be a bank which accumulates bank
deposits and uses them to provide bank loans.
The main Financial Intermediaries of India include:
Stock Exchanges: These include the NSE (National
Stock Exchange), BSE (Bombay Stock Exchange),
MCX (Multi Commodity Exchange), etc
Banks , Insurance Companies , Pension Funds
Mutual Funds

15.
Types of Capital Market:
“The stock market is the story of cycles and of
the human behaviour that is responsible for
overreactions in both directions.”- Seth
Klarman
Primary Market:
The primary market is a new issue market; it
solely deals with the issues of new
securities. A place where trading of securities
is done for the first time. The main objective
is capital formation for government,
institutions, companies, etc. also known as
Initial Public Offer (IPO).

16.
Functions of primary market:
 Origination: Origination is referred to as examine,
evaluate, and process new project proposals in the
primary market. It begins prior to an issue is present
in the market. It is done with the help of commercial
bankers.
 Underwriting: For ensuring the success of new issue
there is a need for underwriting firms. These are the
ones who guarantee minimum subscription. In case,
the issue remains unsold the underwriters have to
buy. But if the issues are completely subscribed then
there will be no liability left for them.
 Distribution: For the success of issue, brokers and
dealers are given job distribution who directly contact
with investors.

17.
Secondary Market:
The secondary market is a place where trading
takes place for existing securities. It is known as
stock exchange or stock market. Here the
securities are bought and sold by the investors.
Functions of secondary market:
 Regular information about the value of
security
 Offers liquidity to the investors for their assets
 Continuous and active trading
 Provide a Market Place

18.
Capital Market Instruments:
Pure Instruments: Pure instruments are those
instruments which are issued with their basic features.
It is unadulterated and is devoid of any feature of
other classes of financial instruments. Example:
Equity Shares, Preference Shares, debentures
and bonds.
Hybrid Instruments: There are instruments which
combine features of both debt and equity obligations.
Example: Convertible Preference Shares.
Cumulative convertible preference share, Partly
Convertible debentures, Optionally Convertible
Debentures, etc.
Derivatives: Derivative instruments are financial assets
whose value is derived from an underlying asset such
as equity, stock market index, interest rate, fixed-
income security, etc. Hence it is called derivatives.

19.
Security Scam: Introduction
A security scam has the following features:
 manipulation in share prices.
 monopoly in dealing with a huge number of
shares of a company.
 money laundering-borrowing money to trade
in securities but using the funds for
unconnected purposes.
According to the Securities Exchange
Act(1934)SEA-"It shall be unlawful for any
person to engage in any act, practice or
course of action which operates or would
operate as a fraud or deceit upon nay person
in connection with the purchase or sale of a
security."

20.
STOCK MARKET IS THE GAME OF ‘GREED’AND ‘FEAR’

21.
Greed – Make more
Money by any
means!!
Fear – Of Loss or
Getting Caught!!

22.
TYPES OF SECURITIES MARKET FRAUD
Intermediaries Fraud
Research Report/
Investment Advise
Fraud
UnauthorizedTrading
DabbaTrading
ColocationFraud
FrontRunning
Trading Frauds
MarketManipulation
InsiderTrading
CircularTrading
Price/VolumeRigging
SynchronizedTrade
L
T
C
GFraud
Reversaltradein
F&OSegment
Company Frauds
Illegalfundraising
IPOFraud
PonziSchemesFraud
G
D
RFraud
Accounts Manipulation
& Mis-
Governance

23.
COMMON REASON FOR FRAUDS AND
WHY THEY ARE NOT DETECTED AT
EARLY STAGE
 Diminishing Ethical Values
 Poor Governance
 Ineffective Internal Control Systems
 Compliances in letter; not in spirit
 Highly Volatile Securities Market
 Lack of Investor Awareness and Activism
 Lack of Protection for Whistleblowers

24.
TIMELINE OF INDIAN SECURITIES MARKET
FRAUD
2001
1992
2009
2010
2009-
2013
2013-
14
2013
2014-
15
2016-
17
2018
2019
Market
Manipulat
ion
(Harshad
Mehta)
Circular
Trading
(Ketan
Parekh)
Accounts
Manipula
tion and
Bad
Governa
nce
(Satyam
Computer
s)
Illegal
fund
raisin
g
(Sahar
a
India)
GDR
Fraud
NSEL
Scam &
IPO
Frauds
Ponzi
Scheme
Fraud
(Saradha
Group
Financial
Scandal)
Synchroni
zed and
reversal in
F&O
Segment
LTCG
Fraud &
Mass
Insider
Trading
Colocat
ion
Fraud
Unauth
orized
Tradin
g
(Karvy)
This is only a indicative timeline… Actual number of fraud in each category
are much more

25.
HARSHAD
MEHTA
SCAM: 1992
Modus Operandi:
Price/Volume Rigging
Insider Trading
Ballooning BSE Index.
Bank Fraud
Impact:
Scandal involved more than Rs. 24,000 Crores of
public money.
BSE index fell from 4500 to 2500 representing a
loss of Rs. 100,000 crores in market
capitalization.

26.
Year Victim Perpetrator Mechanism
Economics Of
Financial Market
Regulation
Misdemeanor
1991 Public buyers Harshad Borrow money from banks Clearing and
of shares of Mehta,Hiten on a ready forward basis settlements
companies Dalal, Batliwala thus violating RBI problem(Systemic
dealt with by & Karani guidelines and dealing in Risk),Money
manipulators, ,M/s V.B. Desai security transactions with Laundering
National , N.K. banks where issue of bank
Housing Aggarwala & receipts and SGL forms
Bank(NHB) Co., Mukesh were not supported by
State Bank Babu etc. genuine holding of
Of securities
Saurashtra
SBI Capital
Markets
Ltd(SBI
Caps)
Standard
Chartered
Bank

27.
KETAN PAREKH
SCAM: 2001
Modus Operandi:
Price/Volume Rigging
 Circular Trading
 Front Running
Impact:
BSE Sensex crashed badly.
Largescale losses to investors,
including large institutional investors,
insurance companies and mutual
funds.
2001 Public, Buyer Same as Metha but in this Clearing and
s of shares of case much of the Settlement
companies transactions had taken place Problem, Money
dealt with by through companies owned Laundering
manipulators, by Ketan
UTI,MMCB, Parekh, FII's(Foreign
Calcutta Institutional
Stock Investors, Banks ,Unit
Exchange Trust Of India

28.
FRONT RUNNING: 2009
Modus Operandi:
Front running in the orders/ trades;
Creating false and fictitious
records;
Impact:
Investors were cheated by
Intermediaries
Creation of Distrust between
Investors & Intermediaries
Vijay Vishal Shah

29.
SATYAM
COMPUTERS
SCAM: 2009
Modus Operandi:
Overstatement of Assets
Manipulation of Accounts
Siphoning of public money
False disclosures
Mis governance
Impact
Huge Public Money was lost.
Investor lost confidence in listed
companies.
Government had to make task
force to handle the situation.
Introduction of Companies Act,
2013 – tightening the rules of the game

30.
SAHARA FRAUD:
2010
Modus Operandi:
Illegal Money Collection from investors
Circumventing provisions of public issue
Non-disclosures/False disclosures
Diversion of funds
Re-payment default
Impact:
Huge monies approx. 24,000 Crore were
raised from over 3 crores investors, without
following the norms for bringing a public
Issue i.e. IPO.
As per reports, the total dues from
Sahara have gone up to Rs 40,000 Crore
with the accretion of interest.

31.
GDR FRAUDS: 2009-2013
Modus Operandi:
Farcing a non-genuine off-shore GDR
Making false disclosures – investors believed that GDR issue
was successful
Ballooning the market to lure Indian investors
Creation of an intricate web of
entitiesin offshore locations for multi-
layered transfers of funds before bringing them back to India.

32.
Modus Operandi:
Ponzi Scheme
Collection of monies from low incomes investors
Assured return to investors
Embezzling investors’ money
Re-payment defaults
Impact:
Around Rs 20 to 30 billion was lost by over 1.7 million investors.
Strict Laws were introduced for saving investors against such Ponzi
schemes. Noww collective investment schemes have to be regulated by
SEBI. Strong Penal measures are provided for violations.
SARADHA GROUP FINANCIAL SCANDAL : 2013

33.
Modus Operandi:
Fraudulent trading in Commodity
Excessive short selling
False reporting to the regulator – FMC
( Forward Markets Commission )
Diversion of Funds
Default in payment/delivery
Impact:
The fraud led to the closure of the Exchange in July 2013.
Trade Settlement Norms were changed after NSEL Scam
was busted
SEBI replaced FMC as Commodity market Regulator.
NATIONAL SPOT EXCHANGE PAYMENT
DEFAULT: 2013

34.
MISHKA FINANCE AND TRADING LIMITED – IPO FRAUD:
2013-14
Modus Operandi:
 Sham IPO and Corporate Actions
 Manipulation of Accounts
 Diversion of IPO Proceeds
 Conversion of unaccounted money
into legitimate market gains
 Price/Volume Rigging
 Dumping the inflated shares into
hands of investors
Impact:
 Investors Lost Money as well as
Confidence in Primary Markets

35.
PEARLS
AGROTECH
CORPORATION
PACL INDIAN
LIMITED
SCAM: 2015
Modus Operandi:
Ponzi Land Purchase Scheme
Collection of monies from low
incomes investors
Assured return to investors
Siphoning the collected money
Re-payment defaults
Impact:
Investors collectively lost Rs.
49,100 Crore.
SEBI came down heavily on
Ponzi/Unregulated Investment
Schemes

36.
REVERSAL TRADES IN F&O: 2007/2014-15 –
RAKHI TRADING CASE & ORS.
Modus Operandi:
Synchronized trading
Non-Genuine Reversal trades
Price/Volume Rigging
Conversion of unaccounted money into legitimate market
gains
Stock Market was used as a
platform for tax evasion and for
manipulating books
Impact:
Revenue Loss as large scale tax evasion occurred
Market integrity was compromised

37.
ECO FRIENDLY FOOD AND ESTEEM BIO ORGANIC –
LTCG/PENNY STOCK FRAUD
Modus Operandi:
In “Sham” transaction or “bogus” transaction or “fictitious” transaction”,
no transaction actually taken place and transaction merely shown to have
taken place on paper.
Sham IPO and Corporate Actions
Misuse of SME Platform
Diversion of IPO Proceeds
Circular trading amongst large number of entities with help of
conduits
Price/Volume Rigging
Conversion of unaccounted money into legitimate market gains
Stock Market was used as a platform for tax evasion
Impact:
Revenue Loss as large scale tax evasion occurred
Market integrity was compromised

38.
MASS INSIDER
TRADING:
2017
Modus Operandi:
 Leaking Price sensitive information
 Spreading false tips to do front
running
 Insider trading
 Market Manipulation
Impact:
Price discovery was distorted by fraud
Investors were cheated in Secondary
Market

39.
Modus Operandi:
Providing Preferential treatment to
Brokers
Disclosure of market price
information to few brokers
Facilitated Market Manipulation
through front running and privileged
access to market information
Impact:
 Creation of Illegal Cartel
 Loss of Opportunity to Other
Brokers
COLOCATION SCAM: 2018

40.
KARVY STOCK BROKING SCANDAL – UNAUTHORIZED
TRADING: 2019
Modus Operandi:
Misusing client’s funds
Unauthorized trading into client’s
account
Impact:
Investors lost money
Investors Lost faith in Market
Intermediaries

41.
IMPACT ON INVESTORS OF FRAUDS
Loss of Public Money – Crime against public at large
Loss of Investors’ Confidence - Investors’ do not return to Market
Markets do not reach full potential - Under developed Equity Cult
Loss of over all Economy of Nation -
Weak Stock Market reflects poorly on Economy
Investors’ Perception of Market gets hurt - Stock Markets are seen as a
den of speculation/gambling
Revenue Losses - Stock Markets misused as tool of Tax Evasion
Temptation to Fraud Increases - If he can, why I can’t?

42.
REFORMS IN LAW ON ACCOUNT OF FRAUD
SEBI got statutory recognition
Rules of Trading changed
Ring trading was replaced by system
driven electronic trading
Physical shares were replaced by digital shares
Settlement Mechanism was made Faster
and Faceless
Corporate Governance became part of the law
State of art surveillance systems deployed
by SEBI
Regulatory Thrust on Disclosures/Reporting by
companies and Monitoring

43.
Law introduced for hammering down Ponzi/ Fly by Night
Schemes
Code of Conduct for Market Intermediaries strengthened
Rules for Issuance of Securities Rationalized to prevent
frauds
Tough law to prevent and prohibit Insider Trading
More Powers to SEBI to investigate, order for
disgorgement, bar from securities market and even
arrest.

44.
Slide
- 44
-Sophocles
One of three Ancient Greek Tragedians
“
Rather fail with honour
than succeed by fraud
Law blocks road for; Fraud
And Greed builds Tunnel