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.

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.

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.

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.

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 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

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 Ahmedabad based Classic Co-operative Bank. According to bank
analysts polled by Capital Market, this is "loose change" for the bank of its size.

Bank of India

Of the five banks hit by pay order defaults, Bank of India has unfortunately been the
worst hit. It cashed Rs 137-crore fictitious pay orders issued by the Ahmedabad 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 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) .

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 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

companies Adj close Recent Dividend Expected return

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 - -
Pentamedi 25.8 2.61 0 -0.3065%
a Graphics
Satyam 5.38 110 - -
Computer
Aftek 57.35 57.75 46.80 0.810%
infosys
 4. KPV venture was formed for funding. Explain the legal procedures
and accounting procedures in this kind of mergers, for floating a new
company?

FINANCIAL PROCEDURES

Purpose of this document

To define the financial systems used by An Organisation and how they relate to all
areas of the organization (sometimes referred to as Financial 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 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 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.

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.
• 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.

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.

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.

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.

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.
 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 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 was 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.

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;
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 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 SalesNet Net InvestmentCumulative
Purchases Rs. Cr Investmen US$ m atNet
Rs. Cr t Rs. Cr monthly ex rate Investment
US$ m at
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
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 Total for53,343.8 40,279.0 13,064.8 2,795.8 .
2001
Grand Total till235,382.4 180,338.7 55,043.8
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.