Financial Scams and what investors can learn from them

The Indian stock market is one of the most robust ones in the world today. Thanks to a string of unprecedented financial scams in India that have made the regulator more accountable to the public and more stringent as far as regulations are concerned.

One of my readers Srividhya had requested for a run down on some of the financial scams that we have suffered and what learning’s we could take from them. So here are five that I can comment on.

Ramalinga Raju’s Satyam Scam

Beginning early 2000, Satyam promoters fudged with the account books of the software major to inflate profits and keep the share prices high. They offloaded their shares in the market to divert money to buy land.

The founder of Satyam, Ramalinga Raju, floated more than 300 infrastructure firms to acquire land and showed false fixed deposits and cash balances in the name of Satyam when actually it had little to show. In January 2009, he confessed to his crime.

Investors who held shares of the company saw their capital erode abysmally.

Learning for the investor : Satyam was regarded as one of the major software firms of India with innumerable buy recommendations to its name in-spite of gaping holes in its accounts which everyone missed.

Looks like, no one can accurately predict the inside machinations and working of a company. If investment bankers, brokerages houses and the directors on the board of the company were caught with their pants down, what chance does an ordinary investor  like you and me stand ?

Avoid direct trading if you cannot stomach your capital wipe-out and invest in mutual funds. If at all you choose a stock for investment, make sure you take a limited acceptable exposure to it.

Home Trade Scam

If you have the likes of Sachin Tendulkar, Hrithik Roshan and Shah Rukh Khan endorse a product, you would fall for it, nah ? Using the strategy to the hilt, Sanjay Agarwal launched a portal in 2000 that dealt in government securities, Gilts.

He lured the general public and brokers to invest in gilt through his company. The only problem was that these securities never existed.

Learning for the investor : Only you are responsible for your decisions on money making. If you trust flashy advertisements and Bollywood icons to advise you to invest your money, remember that every Friday most of their fates sink at the box office. So will yours.

And Tendulkar has gone for a duck several times. Keep the blitzkrieg on the side for a moment, shut off your television set and go back to basics – ask yourself  this – do you really need to invest in the product and is it in line with your goal based investing strategies ?

If not, chuck it.

The IPO Scam of 2004-2005

IPOs launched between 2003-2005 saw huge manipulation in the primary market by individuals who amassed many shares meant for retail investors through benaami demat accounts. In fact, some businessmen were found to have 5000 demat accounts at a time.

The shares once allotted to the benaami accounts were transferred to financiers who sold them on the first day of listing to make huge gains.

Learning for the investor : Many small time investors who did not get allotment for the IPOs of Yes Bank must have been crestfallen. But, there is no free lunch anywhere and you cannot get rich overnight. Making money is a dumb process and easily achievable over a long period of time by investing in the right products. IPOs don’t classify as products which will make you rich.

Avoid them. If you like them, you are off my Christmas and Happy New Year mailing list.

The UTI scam

US-64 scheme of UTI was meant to collect money from investors and channel it to high return instruments. P.S. Subramanyam, the then chairman of UTI used the funds to promote some business houses, pass the money to politicians and invest in junk bonds, all in return for fat commissions.

He helped some brokers and industrialists at the cost of the investor’s funds – finally the government had to bail out small time investors with their own tax paying money !

Learning for the investor : There you have it. Even mutual funds can bite the dust. DIVERSIFY intelligently across AMCs (Asset Management Company). Don’t put all your money into the same fund house. Each year, check the percentage of money you have in each AMC and if you see a huge exposure to any one, cut it down to size.

It’s better to be safe than sorry.

The CRB Scam

CR Bhansali launched companies in 1992 to collect money from the public via fixed deposits, bonds and debentures. He transferred the money to companies that did not exist. In three years, he was able to raise around 150 crores.

His fall from grace was precipitated when RBI refused banking status to CRB.

Learning for the investor : You will get a lot of fly by night operators in every walk of life. You need to do a thorough check on the credibility of the owners of the company before you invest your hard earned money.

If it is a little known new company, why would you risk your money with it ? Go with organizations that have been rated well by rating agencies. If you want good returns with capital safety, remember that you will need to pay a small premium for the guarantee you are looking for.

While the above list is in no way a sign of favoritism that I have made to the scamsters, there are other financial scams listed below that could easily make the cut as well.

1. The 1500 crore K-10 Ketan Parekh financial scam
2. The 30,000 fake stamp paper Telgi financial scam
3. Dinesh Dalmia DSQ Software financial scam
4. Big Bull Harshad Mehta financial scam