Top 10 Financial Scams in India

Top 10 financial frauds in India, delving into their origins, execution, and aftermath.

In the complicated world of finance, the unfortunate reality is that fraud is not an uncommon occurrence. From small-scale scams to large corporate scandals, financial fraud has been a dark underbelly of the Indian economy. This feature aims to shed light on the top 10 financial frauds in India, delving into their origins, execution, and aftermath.

Each case study in this feature is a stark reminder of the vulnerabilities that exist in our financial systems and the devastating impact they can have on individuals and society at large. From high-profile individuals to unsuspecting common people, no one is immune to the repercussions of these fraudulent activities.

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Through this exploration, we aim not only to inform but also to educate readers about the importance of vigilance and due diligence in financial dealings. After all, understanding these scams is the first step towards preventing them.

List of Top 10 Financial Scams in India

  • Harshad Mehta Scam

The 1992 securities market scandal, led by Harshad Mehta, a Mumbai-based stockbroker, is a notorious financial fraud in India’s history. Mehta manipulated stock prices by illegally obtaining money from banks using counterfeit bank receipts, involving major players like the State Bank of India (SBI) and the National Housing Bank (NHB). The scam totaled approximately ₹ 5,000 crores, causing the Indian stock market to crash and leading to numerous reforms in the Indian financial system.

Despite his fraudulent activities, Mehta lived a luxurious life. He was only convicted of four out of the 27 criminal charges before his death in 2001. His involvement in the scam made him infamous as a market manipulator. The scam exposed loopholes in the Indian banking system and the Bombay Stock Exchange (BSE) transaction system, leading to new rules introduced by the Securities and Exchange Board of India (SEBI).

  • Vijay Mallya Scam

Vijay Mallya, a high-profile Indian businessman, is at the center of a significant financial controversy. Mallya, the former chairman of United Spirits and the man behind the Kingfisher brand, is alleged to have defrauded various Indian banks of over ₹9,000 crore.

In 2016, Mallya left India for the UK, seemingly to avoid legal repercussions. The accusations against him include misrepresenting his financial status and the worth of his collateral to banks. It’s suspected that the loaned funds were misused and laundered. The Indian Government declared Mallya a Fugitive Economic Offender under the Fugitive Economic Offenders Act 2018, marking a significant development in the case. Despite this, Mallya continues to resist extradition from the UK to India. This case underscores the need for robust lending practices and stringent checks in the banking sector.

  • Stamp Paper Scam

The Telgi Scam, a notorious financial fraud that came to light in 2003, was orchestrated by Abdul Karim Telgi. He had a network that spanned several Indian states and was involved in the production and distribution of counterfeit stamp papers. Initially, Telgi was involved in forging passports and other documents for labor export to Saudi Arabia. However, he soon shifted his focus to the lucrative business of counterfeit stamp papers. He had a network of approximately 300 agents who sold these fake stamp papers to banks, insurance companies, and stock brokerage firms.

The scam had two main components: the production of counterfeit stamp papers and the creation of an artificial shortage of genuine stamp papers. This shortage allowed Telgi to flood the market with his counterfeit products. The scam is estimated to have cost the Indian economy over ₹30,000 crore.

Telgi was apprehended in 2001, and after a detailed investigation by the Central Bureau of Investigation (CBI), he was sentenced to 30 years of rigorous imprisonment in 2006.

  • Punjab National Bank Scam

The financial scandal that shook Punjab National Bank (PNB) in 2018 is considered one of India’s most significant monetary frauds. The key figures implicated in this case are diamond tycoon Nirav Modi, his relative Mehul Choksi, and their associated companies.

They are accused of manipulating Letters of Undertaking (LOUs) from PNB’s Mumbai branch to secure overseas bank credit for importing diamonds. This fraudulent activity was facilitated by complicit PNB employees and evaded the bank’s core banking system (CBS), highlighting severe oversight failures and inadequate risk control measures.

These LOUs were instrumental in transferring vast sums of money internationally every hour. In 2022, PNB disclosed another loan fraud involving Dewan Housing Finance Corp. The total estimated loss from these frauds is around $2 billion. Nirav Modi was apprehended and extradited to India to face legal proceedings. This scandal has triggered substantial changes in India’s banking sector to avert similar occurrences in the future.

  • Coalgate Scam

The Coalgate scandal is a significant event in India’s political history, involving the allocation of coal deposits to public and private entities. The Indian government’s auditing body, the Comptroller and Auditor General (CAG), criticized the government for its inefficient allocation of coal blocks from 2004 to 2009. The CAG argued that the government could have used competitive bidding but chose not to.

This decision led to both public and private companies paying less than they might have otherwise. The CAG estimated that this resulted in a “windfall gain” of  $130 billion for the allocatees. The scandal implicated many government officials, including then Prime Minister Manmohan Singh. The Central Bureau of Investigation conducted an inquiry into whether corruption influenced the allocation of coal blocks. This scandal significantly eroded public trust in the government.

  • 2G Spectrum Scam

The 2G Spectrum scandal was a major political event in India, implicating members of the United Progressive Alliance government. The scandal revolved around the alleged underpricing of 122 2G spectrum licenses, which were reportedly sold to certain telecom operators at a fraction of their market value. This alleged mispricing, spearheaded by the then Telecom Minister, A. Raja, supposedly led to a staggering loss of ₹1,760 billion (US$25 billion) in potential government revenue.

The scandal came to light in 2010 following a report by the then Comptroller and Auditor General (CAG) Vinod Rai, which claimed that the allocation had caused a loss of ₹1.76 lakh crore to the national exchequer. However, the CBI’s chargesheet later reduced this figure to around ₹30,000 crore.

Regarded as one of India’s most significant alleged scams, the 2G Spectrum case is often compared to the Indian Coal scam. Despite the severity of the allegations, all accused parties, including A. Raja and Kanimozhi, were acquitted in December 2017 due to insufficient evidence.

  • Satyam Scam

The Satyam scandal, a notorious episode in India’s corporate history, involved the manipulation of financial records by the top brass of Satyam Computer Services, a prominent IT firm. The deception included the fabrication of accounts, exaggeration of revenue, and overstatement of profits to the tune of around $1 billion.

Bogus invoices and receipts were generated to substantiate these fraudulent claims. The scam came to light in 2009 when the company’s founder admitted to the deceit. This confession sent ripples across the nation and the IT sector. The incident underscored the critical role of corporate governance in upholding audit committee norms and board member duties.It also resulted in a steep fall in Satyam’s stock price and tarnished India’s image in the international arena. The fallout from the scandal led to regulatory changes and a renewed focus on preventing such frauds in the future.

  • DHFL Scam

The Dewan Housing Finance Limited (DHFL) scandal is a significant event in India’s banking sector, involving an enormous amount of over ₹34,000 crore. The firm is implicated in a systematic fraud scheme that included providing loans to shell or pass-through companies allegedly connected to DHFL’s key shareholders via their proxies and allies. The Central Bureau of Investigation (CBI) has filed charges against Kapil Wadhawan and Dheeraj Wadhawan, the former promoters of DHFL, along with 13 others in relation to the case.

The scandal also has ties to the Pradhan Mantri Awas Yojana (PMAY). The fraud was executed by approving loans to shell companies associated with the company’s promoters. This case has been labelled as the largest scam in the country’s banking industry. The CBI court has directed that all 75 accused in the case be summoned.

  • Saradha Scam

The Saradha Group financial scandal, also known as the Saradha scam, was a significant financial fraud that came to light in 2013. Based in West Bengal, the Saradha Group was a conglomerate of 200 private entities that reportedly duped over a million investors through Ponzi schemes. The group amassed an estimated ₹200 to 300 billion (US$4–6 billion) from approximately 1.7 million depositors before its downfall in April 2013.

This scandal was a textbook example of a Ponzi scheme, where funds were raised through an extensive network of agents who were given commissions exceeding 25%. The scandal is linked to a financial fraud and political controversy triggered by the collapse of this scheme. Several high-profile individuals, including politicians and legislators, have been implicated in the scandal.

The Supreme Court assigned the investigation to the Central Bureau of Investigation (CBI) and directed the relevant state governments to provide all necessary assistance to the CBI team investigating the case. The central government also initiated a comprehensive probe into the scandal through multiple agencies, including the Income Tax Department and the Enforcement Directorate.

  • Commonwealth Games Scam

The 2010 Commonwealth Games, hosted in India’s capital, New Delhi, were unfortunately overshadowed by a significant corruption scandal. The event, which was intended to showcase the sporting prowess of the Commonwealth Nations, ended up exposing the dark underbelly of corruption.

The scandal involved an alleged misappropriation of a staggering ₹70,000 crores. The Organizing Committee’s Chairman, Suresh Kalmadi, found himself in the eye of the storm. Investigations revealed that Kalmadi had awarded Swiss Timings a contract worth ₹141 crore for timing equipment, a figure inflated by ₹95 crore. All those implicated, including Kalmadi, were charged with criminal conspiracy, theft, and corruption.

The fallout from the scandal was far-reaching. It tarnished India’s global image and led to international embarrassment. Despite lofty promises by the organizing committee, the games’ infrastructure was subpar. The financial cost to the government was an astronomical ₹70,000 crores, with only half of this amount estimated to have been spent on Indian athletes. The aftermath saw several high-ranking officials being investigated by the CBI for various forms of corruption, including forgery and criminal conspiracy. The Commonwealth Games scam is etched in history as one of India’s most notorious scams.

In conclusion, the top ten financial scams in India show us that we need better rules and careful monitoring to protect people who invest their money. These scams have caused a lot of harm and made people lose trust in the financial system. It’s important that we learn from these scams to stop them from happening again. Everyone involved in finance has a role to play in stopping fraud.