Ethical Challenges in Financial Sector: An Analysis of Current Financial Scams and Role of Ethics in Avoiding Them

Transcription

1 Ethical Challenges in Financial Sector: An Analysis of Current Financial Scams and Role of Ethics in Avoiding Them Aarti Dhanrajani Lecturer Bhagwan Parshuram Institute of Technology Affiliated to GGSIPU, Rohini, Sector 17, Delhi Urvashi Sahitya Assistant Professor Shivaji College Department of Business Economics University of Delhi Abstract: Purpose Approach!" # $ Findings " %! %& ' %& "!! Research Limitations T " ( Practical Implications " Keywords: ) * %& * # $ Paper type: +

2 1. Introduction: Finance, the lifeline of every economy has been inflicted with many cancerous issues ranging from IPO scandals, securities scams, churning and insider trading to window dressing, greenmail and agency issues in the corporate group. Responsibility in the area of finance is not simply a matter of private ethics. It also involves establishing and maintaining bonds of trust between holders and users of capital, as well as between the operators themselves. Such trust is the corner-stone of efforts to achieve the common good, whereby the interests of individual operators and financial institutions are integrated with those of the community at large. In the context of banking and insurance sectors, with increasing complexity in the business environment, being ethical is not merely a choice between what is right and wrong, but is more about confronting moral dilemmas in the course of business. Moral bankruptcy is more serious with far reaching consequences than financial bankruptcy. Financial services are today changing and evolving at a rapid pace. There has been a growing emphasis on the need for transparency, trust and concern for clients. But, how often do wealth managers and consultants put these values in the forefront over the desire to increase their wealth? In the world of investment, Insider trading that has swirled the stock markets across the globe has left behind a thin line of ethical issue attached to its name. Numerous instances of the same like the David Pajcin and the Harshad Mehta scams as well as the Yes Bank IPO scam have taken the world of financial markets by storm and managed to undermine investor confidence. Is it righteous for the executives to take advantage of their positions and exploit the innocent investors? 2. Major Financial Scams in India: Security scams and financial scandals have led to the manipulation of large amount of money, bloating stock markets and sensex. Even the financial markets having regulatory authority and empowered legal sections have failed in providing good corporate governance to some extent. Following paragraphs describe some of the leading financial scams in India, which have affected a large population of investors and involved huge sums of money. They managed to shake the very foundations of our financial system and were driven by that basest of human instincts i.e. Greed. In

3 most cases, it was the greed of just one individual, or a very small group of individuals, who managed to pull of such huge scandals: G Spectrum Scam: Former Telecom Minister A. Raja is the prime accused who is considered to be the mastermind in this scam by CBI. He stands accused of under-valuing spectrum as the country's Telecom Minister and selling it to companies he favored, though they were largely ineligible for licenses to run mobile networks. The loss to the national exchequer is pegged by the government auditor at a mind-boggling Rs lakh crore Satyam Case: Mr. Ramalinga Raju, the former Chairman and Chief Executive of Satyam Computer Services admitted to falsification in the company accounts and various other irregularities. The estimated fraud was Rs.700 Crore billion. Coming on the back of global recession, this incident busts the Indian Outsourcing Industry and the stock market IPO Scam: A number of key operators, including corporate stock brokers such as Karvy and Indiabulls, were involved in the IPO scam during The modus operandi of the scam was that the operators opened thousands of fake accounts to purchase shares in IPOs in the hope of selling later at huge profits. A spate of IPOs issued during this period was heavily oversubscribed due to this scam. Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam. The Income-Tax Department in Ahmedabad has found that two major accused, Panchal and Sugandh Investments, have together made Rs crore in 18 months DSQ Software Scam: Mr.Dinesh Dalmia, Managing Director of DSQ Software was accused of dubious aquisitions and biased allotment in the year 2000 and 2001.The amount involved in the Scam was Rs.595 Crores Telgi Scam: Abdul Karim Telgi mastered the art of forgery in printing duplicate stamp papers and sold them to banks and other institutions. He paid bribes to get access to the security press in Nasik, where stamp

4 papers and currency notes are printed. He later used this knowledge to print fake stamp papers. Telgi s network spanned 14 states, 125 banks and more than 1000 employees. The Telgi clearly had a lot of support from government departments that were responsible for the production and sale of high security stamps. The extent of this scam was estimated to be about 200 crores Securities Scam: Ketan Parekh, a Mumbai based stock broker and a qualified chartered accountant had large borrowings from Global Trust Bank during its Merger with United Trust of India Bank. He got a loan of about Rs.250 Crores from Global Trust Bank's Chairman Mr. Ramesh Gelli. The prices of the selective shares constantly increased due to rigging.the investors who bought the share at higher prices thought that the market prices were genuine. Soon after the discovery of the scam of , the price of the stocks came down to the fraction of value at which they were purchased. The investors lost heavily. Even the banks faced a tremendous loss. The amount involved in this scam was estimated to be around 1500 crores. 3. Public Perception of Finance Industry: The above mentioned scams are enough to shatter the confidence of an average investor who puts his hard earned money in a wish to earn something more. Although the finance industry is growing at a multiplier rate with all efforts being directed towards investors security, but the public perception of most financial firms as interested in making money at the expense of all other considerations seems to be unchanging. The financial services sector has an increasingly difficult task balancing the demands of a lengthening list of stakeholders - shareholders, the community, investors and pressure groups and demands of the regulator as well. The agony of public was clearly shown in Anna Hazare s movement against corruption. The movement led by him clearly showed what the general public feels about the system in general. This clearly indicates the need for Corporates to implement such strategies so as to incorporate ethics and morality among their workforce and overall thinking process of upper level management. 4. Corporate Governance and Ethics: Corporate governance involves a set of relationships between a company s management, its board, its shareholders and other stakeholders. It provides the structure through which the objectives of the

5 company are set, and the means of attaining those objectives and monitoring performance are determined. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result of this, the cost of capital is lower and firms are encouraged to use resources most efficiently thereby underpinning growth. Hence, good corporate governance is effectively better for everyone involved in the process of development Corporates, investors and public at large. Corporate governance promotes equity and ethics among the workforce and the top management s decision making. This can be understood by studying following points: i. Corporate governance incorporates accountability among the top management which is transferred to the middle and lower level management s way of performing duties. ii. Corporate governance inculcates a sense of trust among the investors that their hard-earned money is valued appropriately. iii. Corporate governance unlocks and capitalizes the strength of all its stakeholders irrespective of caste or gender. 5. Guiding Principles for being ethical or not: It can be clearly observed that one of the major reasons of ethical lapses in the financial sector is greed of mankind. This greed becomes an accumulation fever. If you accumulate for the sake of accumulation, it becomes the end by itself and if accumulation becomes the end, there is no place to stop. So the moral of the story is that we should never allow the self-interest turn into greed and selfishness. There can be a three-way test to decide whether your action is ethical or not. Test of Legality: If the decision taken is not legal, it is not ethical. Test of fairness: Being fair means providing equal advantages and disadvantages to all concerned parties. If it favours any particular party to an extent, it is not fair and therefore it is not ethical. Eleventh Commandment Test: If the decision taken is known publicly in the media, will you be ashamed?

6 6. Conclusion: The scams which go into crores of rupees are just a symptom of a problem that runs deep into the very subject of ethics. This poses a biggest challenge to the financial industry. An individual is not born ethical or unethical. It is his surrounding environment that has a larger bearing on a human s ethics. It directly points out to the overall process of growth and development through which a human being undergoes in his lifetime. It is the compounded effort of all the elements of a person s environment- his parents, teachers, friends and colleagues that has an impact on a person s ethical behavior. Developing and adopting ethical behavior is a long term process. References: Gini, A. (2005). Case studies in business ethics (5th ed.). Upper Saddle River, NJ: Prentice Hall Fernando A.C. (2009) Corporate Ethics, Governance and Social Responsibility, Pearson Education