Assessment Front Sheet PGDBE

IMPORTANT : 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 Assessor : Col. Sanjib Nag
the nation
Student Name : Sunil B. chungade Year 2009-2011

Given out 06/12/2010 Required Submission 23/12/20 Actual Submission

on : Date : 10 Date:23/12/2010
Mr. Sanjiv Hade
Submitted to :

Assessment Criteria – To achieve each

OUTCOMES outcome a student must demonstrate the
ability to :

Explore various laws governing Compare and contrast different regulatory and
Indian financial system banking laws.
Explore various banking operations Compare and contrast how banks can avoid risk
on lending. and make profits.

Explore various ways to prepare Compare and recommend portfolio management

portfolio. strategy.

Explore various avenues of the Compare and contrast investments in to the

foreign investment in India. Indian economy.

Explore various means mergers and Identify legal and accounting procedures in
acquisition. mergers.

Higher Level Skills

Students studying PGDBE will be expected to develop the following skills in

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

1
 MERIT CRITERIA DISTINCTION CRITERIA
MET 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 assessment
criteria 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 finance
from a wide range and discussing in some detail the implications of making that selection.
Illustrative figures will be used but may not be based in research carried out. Issues relating
to financial planning will be raised but may not be covered in detail, or may omit one of the
four key areas.

2
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 students
must be able to demonstrate an ability to anticipate and solve complex tasks in relation to
the case study. Students must demonstrate considerable research over and above class
materials and synthesis information accurately.

Name of Verifier :

Internal Verification Date :

3
 Wigan & Leigh collage
Aurangabad.

Project Report

ON

Ketan Parekh Scam

Submitted to:- Guidance By:-

Col. Sanjib Nagh Mr. Sanjiv Hade

Submitted By:-
Sunil B. Chungade
PCL-1 Finance
(14109004)
4
WLC Aurangabad Campus.

5
Q.No.1
Study the developments that led to the Ketan Parekh scam and
comment on SEBI’s actions and role before and after the scam were
unearthed. The Ketan Parekh scam was an example of the inherently
weak financial, regulatory and legal set up in India. Discuss the above
statement, giving reasons to justify your stand?

Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do
share-brokerage based family. He was involved in the shares scam of the year
2000/01. The study by SEBI found that the flow of funds originating from
Ketan, when paired with securities market transactions of connected clients
leads to the possibility that these trades were executed to confuse the funds
trail and to integrate the money originating from the banned stock broker into
the system of banking.

Ketan's possible involvement was found by SEBI during its investigation

into professed manipulative trading in the scripts of Cals Refineries Limited,
Confidence Petroleum India Limited, Bang Overseas Limited, Shree Precoated
Steels Limited and Temptation Foods Limited.Earlier, SEBI had Ketan and 17
other entities from participating in the market 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 Maruti Securities
Limited and asked them to reply in 15 day's time. The government had set up
the Joint Parliamentary Committee (JPC) to study the securities scam that hit
the stock market during the year 1999-2001.

According to SEBI, the starting point was ‘routine market surveillance’

that revealed set trades in five scripts. It also had information from the IT
department on Ketan Parekh’s source of funds which trailed back to certain
entities. SEBI’s investigation showed that these entities built up large volumes
in the five scripts chosen for investigation; strangely enough, they often made
losses on their transactions, but continued to trade. SEBI has opinion that these
independently incurred losses have a secondary motive that needs to be
separately investigated by the appropriate agency. It seems to have specific
concerns relating to money laundering to the enforcement and IT investigators.

SEBI also found that the ‘connected entities’ or fronts used by Ketan for
his transactions often sold shares without having them in their possession. They
subsequently obtained the shares in time for delivery through off-market
transactions through other ‘connected entities’ within the circle of operators.
6
Evidence of Ketan Parekh’s massive market activities was his ability to pay back
well over Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative
Bank (MCCB) which had collapsed and caused thousands of depositors to lose
money when he pump off Rs880 crore to fund his market misbehavior in the
year 1999-2000.

SEBI’s team led by Mr. S.Raman (chief general manager) must be

congratulated for breaking this seemingly impenetrable system; but let us
recognise that this is only the tip of the market manipulation. Ketan Parekh is
not the only manipulator to use this system; there are plenty of others doing it
too. Also, the number of scrips in which Ketan has traded is substantially higher
than the five that were investigated by SEBI.One of the best kept secrets is the
action taken against those involved in the scam of 2000, which led to large-
scale losses, the drop of two banks, Madhavpura Merc-antile Cooperative Bank
(MMCB) and Global Trust Bank (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 sensitive information or not for
transactions in the market, having had direct access to the data was in direct
violation of SEBI rules, observes Oommen A. Ninan. WHEN THE Sensex crossed
the dizzy 5000 mark in October 1999, Bombay Stock Exchange (BSE) brokers
literally took to the terrace of Jeejebhoy Towers and released balloons. The
celebration also marked their ``bullish sentimentalism'' and showed lack of
market prudence - that what goes up has to 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', in

the normal circumstances, would not have had any major impact on the
market. With the elected directors, including the BSE president, having had
recourse to the price sensitive information relating to outstanding positions,
purchases and sales by leading operators it is to be seen whether they have
used this advantage to depress the prices. The Securities and Exchange Board
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 was rather 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 are kept
away from the management of stock exchanges, restarting their role only to
their trading rights, what is the guarantee that a new management will act in
an objective manner.

7
 There has been a flow of money from banks to capital market in recent
months. Private sector banks are prominent among them, including the Global
Trust Bank (GTB). However, a reversal of banks' exposure to capital market
recommended by the RBI-SEBI committee in September last year is not a
solution. What is essential is that the banks should have expertise in judging
the risk of the business as well as the organisational ability to administer such
schemes.

Moreover, the prima facie evidence in price rigging of GTB shares raises
doubts over the regulators' surveillance mechanism. The RBI was aware of
some unusual price movements in GTB share prices in November last year itself
and the SEBI took another three months to inform the RBI that it had found
evidence of price rigging in GTB share prices. The true measure of regulatory
competence is the ability of the regulators to take quick corrective action.
Further, the GTB's loan to Mr. Parekh without collateral is another issue that
raises questions on the RBI's role as a regulator. Regulation and supervision
and the quality of on and off-site supervision of the RBI and the SEBI should be
strengthened and they should be delinked from the Finance Ministry with more
autonomy and powers.

The regulator should continuously monitor the investment pattern so that

any undue change in a particular stream, like the broker position, could be
identified and immediate investigation conducted. The Government also should
strengthen the investment institutions to facilitate long-term investments. Flow
of money to the capital market from the lending institutions 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
about the way in which financial markets should be governed. While other Asian
countries are converging towards an international set of governance best
practices, India is still lagging behind in terms of quality and speed of
implementation. In a globalize economy, countries which fail to base the
financial liberalization on strengthened economic policies and institutional
structures are bound to suffer financial crisis.

8
Q.No.2
Comment on management of asset and liabilities and also risk, profit
planning for commercial banks including their working, with specific
reference to the KP Scam?

Ketan Parekh was threatening to sue the Bank of India for defamation,
because it complained about the bouncing of Rs 1.3-billion pay orders issued to
the broker by the Madhavpura Mercantile Cooperative Bank. He seemed to
suggest there is nothing more that the authorities would be able to pin against
him.

At last investigations by the Central Bureau of Investigation and the

Securities and Exchange Board of India reveal that the sheer magnitude of
money moved around by Parekh or available to him for his market manipulation
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 Bureau claimed
there was $ 80 million (Rs 3.4 billion) in the account, which has since been
frozen. In the past, CBI announcements were usually followed up with a quick
arrest, this time it has gone silent.

New Overseas Corporate Bodies

The Securities and Exchange Board of India's preliminary investigation in

May revealed that Rs 29 billion was transferred out of the country through five
Overseas Corporate Bodies between March 1999 to March 2001. These OCBs
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. Three of these
companies have a paid up capital of just $ 10.

SEBI says the pattern of investments and transactions through these

accounts shows a clear misuse of the OCB/Foreign Institutional Investor route.
They seem to be used as a channel to repatriate profits earned through stock
price manipulation. Many of these OCBs were sub-accounts of Credit Suisse
First Boston whose brokerage operations have been suspended. But there were
other FIIs too. Strangely, SEBI has not yet placed any restrictions on them so
far.

9
 All it has done is to request the Mauritius Offshore Business Activities
Authority to give details in respect of actual beneficiaries, source and utilisation
of funds of OCBs and sub-accounts mentioned in its preliminary report.

In answer to a Joint Parliamentary Committee query, Sebi now admits to

have 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 Delgrada Ltd.

However, since there was no other specific query about further

repatriation of funds, SEBI is silent about other flight of capital through the OCB
window. However, it does admit there are clear inter-linkages between the
OCBs and that some of them have issued participatory notes abroad to route
funds 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 nearly

Rs 11 billion to Calcutta brokers, most of whom have had their businesses
suspended because of payment defaults. In an answer to a JPC query, SEBI
now says Parekh had sent over Rs 27 billion to Calcutta brokers between
January 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 unofficial
market in Calcutta in order to avoid detection. SEBI says it is investigating the
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 by SEBI
where he held over five per cent are Aftek Infosys, Shonkh Technologies and
Global Trust Bank. According to SEBI, these companies had 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 and what would be the value
of this holding.

If one were to simply add up the amounts mentioned in SEBI's various

reports, 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 is
absurdly simple and brazen in its execution. Sebi says that Rs 27 billion was
sent 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 him from

10
Himachal Futuristic; Rs 5.15 billion from the Zee Group and Rs 2.56 billion
directly from the Global Trust Bank.

• NEDUNGADI BANK:
After the Ketan Parekh bubble burst in 2001, the RBI suddenly swung
into action and began to go through Nedungadi’s books with a toothcomb.
Punjab National Bank took over the bank that was up for sale after RBI initiated
the move to weed out the broker promoter Rajendra Bhantia from the bank.

• GLOBAL TRUST BANK:

Ramesh Gelli’s search for high returns took the new generation private
bank to the stock market, where its involvement in the speculative activities
associated with the Ketan Parekh scam and its high exposure soon resulted in
substantial losses. The bank’s promoters attempted to merge the entity with
the UTI Bank, and in the process the share price was rigged so that the
promoters could make a profit despite the mess in the the bank. It was clear
that unless some drastic measures were taken, the bank was heading for
closure. This led to the exit of Ramesh Gelli in 2001. Eventually, Oriental Bank
of Commerce (OBC) took over the troubled bank.

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

While the latest fraud may not be on the scale of the scams involving
Harshad Mehta (around Rs.5,000 crores) or Ketan Parekh (Rs.800 crores), what
is alarming is that this time the scammers' tentacles have spread to the Public
Provident Fund (PPF) - the repository of the savings of millions of ordinary
Indians. More than Rs.92 crores is missing from the Seamen's Provident Fund,
which has 26,500 members. Worse still, the regulatory authorities admitted
that they were aware of the mess and gave various excuses for not having
taken timely action.

Global Trust Bank

11
 Global Trust Bank was on the verge of getting merged with UTI Bank to
become one formidable entity in the Indian banking sector, when the Great
Crash of March 2001 occurred, and along with stock prices, the marriage too
came unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs 6,198.85 crore as
on 31 March 2000.)

The report was believed to have noted that there was evidence that
Parekh was involved in manipulating the stock prices of GTB prior to the merger
announcement on 20 January 2001, and a swap ratio of 2.5 shares of UTI Bank
for 1 share of GTB, two days later.

State Bank of India

However, this time, SBI’s losses are restricted to about Rs 40 crore, lent
against pay orders issued by Ahmadabad based Classic Co-operative Bank.
According to bank analysts polled by Capital Market, this is "loose change" for
the bank of its size.

Bank of India

The five banks hit by pay order defaults, Bank of India has unfortunately
been the worst hit. It cashed Rs 137-crore fictitious pay orders issued by the
Ahmadabad based Madhavpura Bank to arrested broker Ketan Parekh. The
banking sector is estimated to have taken a hit of more than Rs 1,000 crore
due to the pay order scam indulged in by many Gujarat co-operative banks. It
was Bank of India’s complaint to Central Bureau of Investigation that resulted
in Parekh’s arrest on 30 March 2001.

Bombay Stock Exchange

The Bombay Stock Exchange witnessed one of the worst bear runs
leading to a 177-point crash on 2 March 2001. On 23 May, the BSE announced
the launch of trading in index options in the first week of June, based on the
Europian style. For this purpose, the exchange has joined hands with the
Chicago Mercantile Exchange to adopt its system of calculating margin
requirements and managing risk, known as Standard Portfolio Analysis of Risk
(SPAN).

Calcutta Stock Exchange

In fact the 177-point crash on 2 March 2001 was triggered by the

payment crisis at Lyons Range (CSE) and Dalal Street (BSE). While investors
were still trying to digest the shortfall of Rs 100 crore for the settlement ended
12
1 March on the CSE, the market was gripped with rumours of a fresh payment
crisis on CSE for the following settlement ended 8 March. Although the CSE
authorities denied the payment crisis initially, Sebi went ahead and suspended
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 National Stock
Exchange, too, has decided not to accept fresh bank guarantees and renewals
from 5 private banks as a precautionary measure in the wake of the pay order
scam.

Unit Trust of India

As on June 2000, UTI was believed to have a total investment of Rs 5,000

crore 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 Global Trust Bank
was called off by the latter, stung by allegations of price manipulation to get a
better swap ratio with UTI Bank (2.25 shares of UTI Bank for 1 share of GTB) .

13
Q.No.3
What effect did this scam have on the stock markets? Carry out a risk
return analysis of the portfolio held by KP. What would this portfolio be
like in today’s stock market if an individual investor had invested 100
shares in the same companies and had kept it as an investment?

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

 The panic run on the bourses continued and the Bombay Stock Exchange
(BSE) President Anand Rathi's (Rathi) resignation added to the downfall.
Rathi had to resign.
 By the end of March 2001, at least eight people were reported to have
committed suicide.
 Hundreds of investors were driven to the brink of bankruptcy.
 A change of Re. 1 in the price of a share when one speaks of a share rising
or falling by so many points. In stock market indices, however, a point is
one unit of the composite weighted average on market capitalization of
rupee values.
 A stock market index indicating weighted average of 30 scrips, also known
as the BSE Sensitive Index. The daily closing figure of this index broadly
reflects the performance of the capital markets.
 It was alleged that Global Trust Bank exceeded its Capital market exposure.
 An investor who expects share prices to go up and hence buys them. But
during this period it was the reverse. People got panicked.
 Many took back there investments.
 it affected the fdi’s and the FII’s
 the Sensex lost over 700 points and more than 500 of the 1364 actively
traded shares touched 52-week lows. In the entire month of March 2001, a
total wealth of nearly Rs.1460000 million (approximately US$32 billion) was
wiped out in market capitalization, more than Rs.45000 million a day.
 The immediate fallout of market crash in Bombay was so widespread that
shock waves were also felt in Calcutta and other financial centers.
 The payment crisis broke out in the Calcutta Stock Exchange (CSE) with
nearly 100 brokers unable to meet payment obligations. Later, all broker-
directors of the CSE governing board resigned.
 Although Ketan Parekh came to public notice only in early 1999, his
overarching influence on the financial markets could be gauged from the
14
 fact that his favorite stocks were known as “KP Stocks” and market players
had more faith in the “KP Index” rather than the Sensex.

Global, Himachal and DSQ Software will not fit in the universe of an
institutional investor, but for Parekh's presence. The country's largest mutual
fund, UTI's Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the
portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and

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

companie Adj close Recent Dividend Expected return

s on march prices (million)
2001
Himachal 45.85 10.75 0 -0.077%
Futuristic
adani 298.58 826.85 - -0.34%
Zee - 259 860 3.32%
Telefilms
Ranbaxy 423.85 446.25 2239.42 5.44%
Silverline 110 5.94 - -
Pentamed 25.8 2.61 0 -0.3065%
ia
Graphics
Satyam 5.38 110 - -
Computer
Aftek 57.35 57.75 46.80 0.810%
infosys

15
Q.No.4
KPV venture was formed for funding. Explain the legal procedures and
accounting procedures in this kind of mergers, for floating a new
company?

FINANCIAL PROCEDURES

Purpose of this document

To define the financial systems used by An Organization and how they

relate to all areas of the organization (sometimes referred to as Financial
Standing Orders).Relevant to managers and finance staff. All suggestions for
amendments to Financial Controller. Minor amendments/updates to be agreed
by Management 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 is requested.
Therefore, it is important that all orders are placed properly, and are within
agreed budgets and delegated powers.

Budget holders can place orders for goods or services within their budget
areas, subject only to cash-flow restraints. All orders of £1,000 or more must
be authorized by the budget holder, except for specific areas of expenditure
where written procedures have been agreed (e.g. book printing). Under £1,000,
the budget holder may delegate all ordering as appropriate. Budget holders will
discuss with the Financial Controller appropriate parameters, plus maximum
allowed deviations before the budget holder or senior manager is brought in,
which will be documented.

Any lease, hire purchase agreement or other contract involving

expenditure will be subject to the same authorization procedure as above, with
the appropriate expenditure amount being the total committed expenditure
over the period of the contract, or where the contract is open-ended, over the
first 12 months of the contract. Larger contracts should not be entered into

16
without 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 will devise
appropriate ways of keeping records of such orders, which will be contained 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 (see
section 4), adequate supporting documentation, preferably receipts must be
obtained. Large items requiring cash payment must be checked with Finance
before the arrangement is confirmed.

2. Payment authorization and Purchase Ledger

All invoices must be authorized for payment by the budget holder,

although the actual checking of details may be delegated. The authorizing
department is responsible for checking invoices for accuracy in terms of figures
and conformity with the order placed, that the services or goods have been
received, and following up any problems. Finance must be informed if there are
queries delaying authorization or if payment is to be withheld for any reason.

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 recorded on
to the Purchase Ledger within two days, unless there are coding problems.
They are then passed on to budget holders for authorization. Once authorized
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 to Finance, who will inform
them of any difficulties in meeting these.

Refunds of overpayments or cancellations of bookings/orders can be fully

delegated to the relevant activity manager or administrator (note that this does
not include any 'compensation' or similar payment).

3. Cheque writing and signing

Signatories will only be drawn from senior staff and Trustees, and any
new signatory must be approved by the Trustees before the bank is notified. All
cheques for £100 or over require two signatories. Cheque signatories should
check that the expenditure has been authorized by the appropriate person
before signing the cheque. Salary payments require the signature of the

17
Director, Company Secretary, Financial Controller or a member of the Board 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 in
words and figures, and date) before cheques are signed. The only acceptable
exception 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

a larger cash float is required (for a major event for example), this may be
approved by the Financial Controller with the Director. When signing cheques 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 amount
spent is reimbursed. It is intended for small items, up to £20. Anything over
this should be paid by cheque where possible. The imp rest has a balance limit
of £250. The petty cash balance will be reconciled when re-storing the imp rest
balance, or monthly if this is more frequent.

All cash collected from Finance will be signed for, and receipts will be
issued for all cash returned. Specific extra cash floats (for tills at events etc.)
should be arranged with the Financial Controller. The person signing for the
float is responsible for ensuring cash and receipts are returned as soon as
possible after the event etc. No further floats may be issued to that person, or
another person in the same department for a similar purpose, unless the
previous float has been accounted for.

Mixing money or receipts from different petty cash sources creates large
accounting problems. In a real emergency, where another cash float has to be
used for something, a clear record must be kept, and brought to Finance
Section's attention.

Any cash income will be banked via Finance, and not used for petty cash
expenditure. Such cash will be passed to Finance:

• 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. Appropriate

arrangements will be made for till security.
18
5. Salaries, payroll and freelancers

AN ORGANISATION is required to operate the PAYE system, and make

annual returns to the Inland Revenue. All people working directly for AN
ORGANISATION, 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 taken on
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 activity must be assumed
to be employed by AN ORGANISATION and so subject to PAYE & NIC. Finance
will obtain clarification of any unclear areas as needed.

Payments for additional work over and above standard hours must be
approved by the relevant Department Head. Clear written authorization must
be given in adequate time for Finance to process it for the relevant payroll.
These claims are financial records, and should be treated in the same way as
any other.

Payment will usually be made via the NatWest Autopay service, direct to
employees' bank account. The salary payment listings will be checked by the
Financial Controller. Salaries will be paid on the 28th of the month, or nearest
working day, apart from in December, when it will be the 23rd.

Pay scales and new posts/re-structuring are approved by the Director,

and are revised by March for implementation in April. The Board of Trustees will
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, by
arrangement with Finance.

The finance section is responsible for:

• Paying each employee in accordance with the approved terms and

conditions, and issuing pay slips.
• Operating the PAYE system, keeping the required records, issuing P45s
and P60s, and communicating with the tax office as appropriate.

19
 • Making the correct deductions for Income Tax, NI, court orders and any
other appropriate deduction authorized by staff; ensuring that deductions
are paid to the correct body, and necessary returns made.
• Administering the Statutory Sick Pay and Statutory Maternity Pay
schemes, alongside any additional related benefits provided by AN
ORGANISATION.

6. Income

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 of customer
and sales information, this includes where payment is received with order.

All invoices should be raised on AN ORGANISATION letterhead, or in a format

agreed with the Financial Controller and auditors, and be drawn up in
accordance with AN Organization’s standard invoice requirements. In particular
VAT invoices need to meet HM Customs and Excise requirements, and must
include the VAT registration number, VAT rate and VAT amount. All invoices will
be sequentially numbered, with each area of activity having its own prefix
reference, agreed with Finance. Any accidental deviations from such sequences
must be notified to Finance.

Invoice listings will be produced on a regular basis by the departments

generating them. This is at least monthly, to fit in with the reporting system,
although high volume activities are expected to be listed weekly. Outstanding
invoice payments will be followed up at least monthly by the relevant
department.

Information about non-routine and all grant income must be passed to Finance
with the cheque or remittance advice. This will be filed by Finance for reference,
and used to ensure such income is correctly recorded in the accounts and grant
conditions etc. noted. Lack of documentation will lead to such items being 'held
on suspense'. It is the responsibility of the person gaining the grant to ensure
all grant income is claimed as it becomes due or available, and that all
appropriate staff and the Finance Section are aware of relevant grant conditions
and exactly how the grant is to be expended.

Post opening (and control of cheques and cash in) will be subject to random
management checks. The process will be written down, so that there is a clear
standard for those doing the work regularly, and others covering or checking.

20
7. Bank accounts

AN Organization’s bankers are:

• National Westminster Bank plc, A Branch - Current, Business Reserve &

Capital Reserve.
• CAFCash high interest cheque account.

An automatic sweep arrangement between current and reserve accounts is

operated. These arrangements are subject to review, in the light of what is
most advantageous in terms of cost and service. All changes are to be
authorized by the Trustees.

All income will be paid into the current accounts as soon as possible, not less
than once a week. The make up of each banking will be clearly recorded, for
later computer entry.

8. Books of account and records

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

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 VAT
returns produced on the required quarterly cycle.

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

Purchase Ledger, other cheque payments and banking sheets will be filed
in the appropriate reference order, with any supporting documentation. All
petty cash vouchers, cheque stubs etc. will be retained for audit and for
statutory purposes thereafter.

21
 All fixed assets costing more than £250 (or such other level as may from
time to time be agreed by the trustees) will be capitalized in the accounts and
recorded in a fixed assets register. This register will record details of date of
purchase, supplier, cost, serial no. where applicable, description and in due
course details of disposal.

9. Budget setting

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 the
financial year under consideration.

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

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 and
expenditure 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-flow reports

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 the Companies Act,
charity regulations and grant conditions, prepared per SORP for Charities and
any other relevant accounting conventions. Final draft should be ready for and
passed by Board of Trustees in March, with audited accounts signed at the June
meeting.

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11. Role of Treasurer

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

• Guide and advise the Board in the approval of budgets, accounts and
financial statements, within a relevant policy framework.
• Keep the Board informed about its financial duties and responsibilities.
• Advice the Board on the financial implications of An Organization’s
strategic plans and key assumptions included in management's
operational plan and annual budget.
• Confirm that the financial resources of An Organisation meet present and
future needs.
• Understand the accounting procedures and key internal controls, so as to
be able assure the Board of An Organization’s financial integrity.
• Ensure that the accounts are properly audited, that accepted
recommendations of the auditors are implemented, and meet the auditor
at least once a year.
• Formally present the accounts at the AGM, drawing attention to important
points.
• Monitor An Organization’s investment activity and ensure its consistency
with policies, aims, objectives and legal responsibilities

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 the department
complies with Financial Procedures. They will receive weekly snapshots and
monthly management accounts, keeping adequate records to be in control
between monthly reports. The Team will review finances thoroughly at its
monthly meetings.

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.

23
14. Role of Financial Controller

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

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

Q.No.5
Analyze the Indian scenario of FII’s since then and its effect on India
as an investment destination for FIIs. Please explain with relevant
figures.

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 1991 to 2007.

Foreign investment refers to investments made by the residents of a country in

the financial assets and production processes of another country. The effect of
foreign investment, however, varies from country to country. It can affect the
factor productivity of the recipient country and can also affect the balance of
payments. Foreign investment provides a channel through which countries 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 also of a medium- to
long-term nature. But foreign institutional investment is a short-term
investment, mostly in the financial markets. FII, given its short-term nature,
can have bidirectional causation with the returns of other domestic financial
24
markets such as money markets, stock markets, and foreign exchange
markets. Hence, understanding the determinants of FII is very important for
any emerging economy as FII exerts a larger impact on the domestic financial
markets in the short run and a real impact in the long run. India, being a
capital scarce country, has taken many measures to attract foreign 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 has
attracted only a small share of global Foreign Direct Investment (FDI) and
foreign institutional investment (FII) primarily due to government restrictions
on foreign involvement in the economy. But beginning in 1991 and accelerating
rapidly since 2000, India has liberalized its investment regulations and actively
encouraged new foreign investment, a sharp reversal from decades of
discouraging economic integration with the global economy. Foreign
Institutional Investment (FII) is defined as “an investment that is made to
acquire a lasting interest in an enterprise operating in an economy other than
that of investor”.

The policy framework for permitting FII investment was provided

under the Government of India guidelines vide Press Note date
September 14, 1992. The guidelines formulated in this Regard were as
follows:

1) Foreign Institutional Investors (FIIs) including institutions such as Pension

Funds, Mutual
Funds, Investment Trusts, Asset Management Companies, Nominee Companies
and
Incorporated/Institutional Portfolio Managers or their power of attorney holders
(providing discretionary and non-discretionary portfolio management services)
would be welcome to make investments under these guidelines.

2) FIIs would be welcome to invest in all the securities traded on the Primary
and Secondary markets, including the equity and other securities/instruments
of companies which are listed/to be listed on the Stock Exchanges in India
including the OTC Exchange of India. These would include shares, debentures,
warrants, and the schemes floated by domestic Mutual Funds. Government
would even like to add further categories of securities later from time to time.

3) FIIs would be required to obtain an initial registration with Securities and

Exchange Board of India (SEBI), the nodal regulatory agency for securities
markets, before any investment is made by them in the Securities of companies
listed on the Stock Exchanges in India, in accordance with these guidelines.
Nominee companies, affiliates and subsidiary companies of a FII would be
treated as separate FIIs for registration, and may seek separate registration
with SEBI.
25
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 application addressed to RBI for
seeking various permissions under FERA, in a format that would be specified by
RBI for the purpose. RBI's general permission would be obtained by SEBI
before granting initial registration and RBI's FERA permission together by SEBI,
under a single window approach.

5) For granting registration to the FII, SEBI should take into account the track
record of the FII, its professional competence, financial soundness, experience
and such other criteria that may be considered by SEBI to be relevant. Besides,
FII seeking initial registration with SEBI were be required to hold a registration
from the Securities Commission, or the regulatory organization for the stock
market in the country of domicile/incorporation of the FII.

6) SEBI's initial registration would be valid for five years. RBI's general
permission under FERA to the FII would also hold good for five years. Both
would be renewable for similar five year periods later on.

7) RBI's general permission under FERA would enable the registered FII to buy,
sell and realize capital gains on investments made through initial corpus
remitted to India, subscribe/renounce rights offerings of shares, invest on all
recognized stock exchanges through a designated bank branch, and to appoint
a domestic Custodian for custody of investments held.

8) This General Permission from RBI would also enable the FII to:
a. Open foreign currency denominated accounts in a designated bank. (There
could even be more than one account in the same bank branch each designated
in different foreign currencies, if it is so required by FII for its operational
purposes);
b. Open a special non-resident rupee account to which could be credited all
receipts from the capital inflows, sale proceeds of shares, dividends and
interests;
c. Transfer sums from the foreign currency accounts to the rupee account and
vice versa, at the market rate of exchange;
d. Make investments in the securities in India out of the balances in the rupee
account;
e. Transfer repairable (after tax) proceeds from the rupee account to the
foreign currency account(s);
f. Repatriate the capital, capital gains, dividends, incomes received by way of
interest, etc.and any compensation received towards sale/renouncement of
rights offerings of shares subject to the designated branch of a bank/the
custodian being authorized to deduct withholding tax on capital gains and
arranging to pay such tax and remitting the net proceeds at market rates of
exchange;
26
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 such
investments 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 would
automatically induce the FIIs to retain their investments as long term
investments.

10) Portfolio investments in primary or secondary markets were subject to a

ceiling of 30% of issued share capital for the total holdings of all registered
FIIs, in any one company. The ceiling was made applicable to all holdings
taking into account the conversions out of the fully and partly convertible
debentures issued by the company. The holding of a single FII in any company
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 holdings of a single
FII.

11) The maximum holdings of 24% for all non-resident portfolio investments,
including those of the registered FIIs, were to include NRI corporate and non-
corporate investments, but did not include the following:
a. Foreign investments under financial collaborations (direct foreign
investments), which are permitted up to 51% in all priority areas.
b. Investments by FIIs through the following alternative routes:
i. Offshore single/regional funds;
ii. Global Depository Receipts;
iii. Euro convertibles.

12) Disinvestment would be allowed only through stock exchange in India,

including the OTC Exchange. In exceptional cases, SEBI may permit sales other
than through stock exchanges, provided the sale price is not significantly
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 the government
guidelines through an inserted clause that the investment by FIIs should also
be subject to Government guidelines. This linkage has allowed the Government
to indicate various investment limits including in specific sectors.

These features of the market have a number of implications. To start

with, Foreign Institutional Investors (FIIs), whose exposure in Indian markets is
an extremely small share of their international portfolio, making India almost
irrelevant to their international strategies, have an undue influence on the
performance of the markets. The sums they invest or withdraw can move
markets in the upward and downward direction, as recent experience has amply
27
 demonstrated. This forces governments that are keen to have them constantly
making net purchases and driving markets upwards to bend over backwards in
appeasing them. A corollary of this influence of the FIIs is that any market
player who is able to mobilize a significant sum of capital and is willing to risk it
in investments in the market can be a major influence on market performance.
This explains the importance of operators like Harshad Mehta and Ketan
Parekh, the Big Bulls of the 1990s, who rose from being small traders to
become correlates and were lionized for their resource mobilization and risk-
taking abilities, which made them movers of markets. Ketan Parekh is reported
to have risked his investments on a few sectors (the so-called technology
stocks) and few firms, and till the recent debacle always seemed to come out
right in terms of his judgment. He had, it now appears, a major role to play in
rigging share prices, as he allegedly did in the case of Global Trust Bank (GTB)
shares prior to the aborted merger of UTI Bank and GTB.

. Consolidated Summary of FII Investment Trends

Gross Gross Net Net Cumulative
Purchases Sales Rs.Investment Investment Net
Rs. Cr Cr Rs. Cr US$ m atInvestment
monthly exUS$ m at
rate monthly ex
rate
GT for 1993 2,661.9 66.8 2,595.1 827.2 827.2
GT for 1994 9,267.2 2,476.1 6,791.2 2,164.8 2,991.9
GT for 1995 6,665.9 2,812.2 3,853.8 1,191.4 4,183.4
GT for 1996 15,739.2 4,935.6 10,803.6 3,058.2 7,241.6
GT for 1997 18,926.5 12,719.2 6,207.3 1,746.7 8,988.2
GT for 1998 13,899.8 15,379.7 (1,479.9) (338.0) 8,650.0
GT for 1999 37,211.5 30,514.7 6,696.8 1,559.9 10,209.9
J2000 6,129.7 5,933.2 196.6 45.1 10,255.0
F2000 9,761.6 6,677.5 3,084.1 707.2 10,962.2
M2000 9,890.1 8,691.2 1,198.8 275.0 11,237.3
A2000 8,354.5 5,767.8 2,586.7 593.4 11,830.7
M2000 6,307.4 6,054.7 252.7 57.5 11,887.5
J2000 5,398.8 6,333.6 (934.8) (212.6) 11,674.9
J2000 5,857.6 7,259.4 (1,401.8) (313.7) 11,361.2
A2000 5,134.0 3,875.2 1,258.9 281.1 11,642.4
S2000 7,149.6 6,931.3 218.3 47.8 11,690.1
O2000 4,440.7 4,659.3 (218.5) (47.6) 11,642.5
N2000 4,791.1 3,885.7 905.4 195.3 11,837.8
D2000 4,451.5 5,086.6 (635.1) (135.8) 11,702.1
28
GT for 2000 77,666.6 71,155.4 6,511.2 1,492.2 11,702.1
J2001 8,601.0 4,327.7 4,273.3 914.1 12,616.2
F2001 6,586.4 4,722.7 1,863.8 400.4 13,016.6
M2001 6,978.0 5,212.4 1,765.6 379.5 13,396.1
A2001 5,079.9 3,101.1 1,978.8 424.5 13,820.6
M2001 3,976.0 3,300.0 676.1 144.5 13,965.1
J2001 4,118.9 2,939.2 1,179.7 251.4 14,216.5
J2001 3,665.0 3,187.3 477.7 101.6 14,318.1
A2001 3,248.5 2,746.3 502.3 106.5 14,424.7
S 2001 3370.1 3903.4 (533.4) (113.2) 14,311.5
O 2001 3,895.7 3,011.3 884.4 185.6 14,491.7
N2001 3,974.2 3,970.5 3.8 0.8 14,497.9
Grand Total53,343.8 40,279.0 13,064.8 2,795.8 .
for 2001
Grand Total235,382.4 180,338.7 55,043.8
till 28/11

Investment by FIIs has seen a steady growth since the opening of the
equity markets in September 1992. The share of FIIs in total FPI has increased
from 47% in 1993-94 to around 74% in 2001-2002. FIIs have also acquired a
significant presence in the Indian stock market. The share of their trading in
total turnover attained a high of almost 30% in October 2001. In total market
capitalization FIIs account for about 13% and they make about 50-60% of
average daily deliveries on the stock market.

29