Top 10 Financial Scams In India

Aryan Jakhar

9/9/20236 min read

person using MacBook Pro
person using MacBook Pro

In the complex realm of finance, it's an unfortunate reality that fraud is a recurring issue. From minor swindles to major corporate scandals, financial fraud has consistently cast a shadow over the Indian economy. This article aims to shed light on the top 10 financial frauds in India, delving into their origins, execution, and consequences.

Each case examined here serves as a stark reminder of the vulnerabilities present in our financial systems and the profound impact they can have on individuals and society as a whole. Whether high-profile figures or unsuspecting individuals, no one is immune to the fallout of these fraudulent activities.

Through this exploration, our intention is not only to inform but also to educate readers about the significance of vigilance and due diligence in financial transactions. Indeed, comprehending these scams represents the initial step in preventing their recurrence.

1. The Harshad Mehta Scam The infamous 1992 securities market scandal, led by Harshad Mehta, a Mumbai-based stockbroker, remains a dark chapter in India's financial history. Mehta manipulated stock prices by illicitly obtaining funds from banks through counterfeit bank receipts, with major institutions like the State Bank of India (SBI) and the National Housing Bank (NHB) becoming unwitting participants. This scam, totaling around ₹5,000 crores, precipitated a crash in the Indian stock market and prompted numerous reforms in the Indian financial system. Despite his fraudulent activities, Mehta led a luxurious life and was only convicted of four out of 27 criminal charges before his death in 2001. His involvement in the scam exposed significant loopholes in the Indian banking system and the Bombay Stock Exchange (BSE) transaction system, ultimately resulting in the implementation of new rules by the Securities and Exchange Board of India (SEBI).

2. The Vijay Mallya Scam Vijay Mallya, a prominent Indian businessman, finds himself at the epicenter of a substantial financial controversy. Accused of defrauding various Indian banks of over ₹9,000 crore, Mallya, the former chairman of United Spirits and the driving force behind the Kingfisher brand, fled India for the UK in 2016 to seemingly evade legal repercussions. Allegations against him include misrepresenting his financial status and the value of his collateral to banks. It's suspected that the borrowed funds were misused and laundered. Mallya was declared a Fugitive Economic Offender by the Indian Government 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, underscoring the necessity for robust lending practices and stringent checks in the banking sector.

3. The Stamp Paper Scam (Telgi Scam) The Telgi Scam, a notorious financial fraud that came to light in 2003, was orchestrated by Abdul Karim Telgi. Initially involved in forging passports and other documents for labor export to Saudi Arabia, Telgi soon shifted his focus to the lucrative business of counterfeit stamp papers. Operating through a network of around 300 agents, Telgi sold these fake stamp papers to banks, insurance companies, and stock brokerage firms. The scam had two primary components: the production of counterfeit stamp papers and the creation of an artificial shortage of genuine stamp papers, allowing 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 subsequently sentenced to 30 years of rigorous imprisonment in 2006 following a comprehensive investigation by the Central Bureau of Investigation (CBI).

4. The Punjab National Bank Scam The 2018 financial scandal that shook Punjab National Bank (PNB) is regarded as one of India's most significant monetary frauds. Key figures implicated in this case include diamond tycoon Nirav Modi, his relative Mehul Choksi, and their associated companies. They stand accused of manipulating Letters of Undertaking (LOUs) from PNB's Mumbai branch to secure overseas bank credit for importing diamonds. Complicit PNB employees facilitated this fraudulent activity, which evaded the bank's core banking system (CBS), highlighting significant oversight failures and inadequate risk control measures. These LOUs played a pivotal role in transferring vast sums of money internationally. In 2022, PNB disclosed another loan fraud involving Dewan Housing Finance Corp, with the total estimated loss from these frauds standing at around $2 billion. Nirav Modi was apprehended and extradited to India to face legal proceedings. This scandal has prompted substantial changes in India's banking sector to prevent similar incidents in the future.

5. The Coalgate Scam The Coalgate scandal represents a significant event in India's political history, revolving around the allocation of coal deposits to public and private entities. The Comptroller and Auditor General (CAG), India's government auditing body, criticized the government for its inefficient allocation of coal blocks between 2004 and 2009, contending that competitive bidding could have been employed but was not. This decision resulted in both public and private companies paying less than they might have otherwise, leading to an estimated "windfall gain" of $130 billion for the allocatees. The scandal embroiled many government officials, including then-Prime Minister Manmohan Singh, and prompted an inquiry by the Central Bureau of Investigation into whether corruption had influenced the allocation of coal blocks. This scandal severely eroded public trust in the government.

6. The 2G Spectrum Scam The 2G Spectrum scandal was a significant political event in India, implicating members of the United Progressive Alliance government. The scandal centered on the alleged underpricing of 122 2G spectrum licenses, reportedly sold to certain telecom operators at a fraction of their market value. This alleged mispricing, led by the then-Telecom Minister A. Raja, was said to have caused a staggering loss of ₹1,760 billion (US$25 billion) in potential government revenue, as reported by the Comptroller and Auditor General (CAG) Vinod Rai in 2010. However, the Central Bureau of Investigation's chargesheet later revised this figure to around ₹30,000 crore. Despite the severity of the allegations, all accused parties, including A. Raja and Kanimozhi, were acquitted in December 2017 due to insufficient evidence.

7. The Satyam Scam The Satyam scandal, a notorious episode in India's corporate history, involved the manipulation of financial records by top executives of Satyam Computer Services, a prominent IT firm. This deception encompassed fabricated accounts, revenue exaggeration, and profit overstatement to the tune of around $1 billion. Bogus invoices and receipts were generated to support these fraudulent claims. The scam came to light in 2009 when the company's founder admitted to the deceit, sending shockwaves across the nation and the IT sector. This incident underscored the critical role of corporate governance in upholding audit committee norms and board member duties. It also resulted in a significant drop in Satyam's stock price and tarnished India's international image. In the aftermath of the scandal, regulatory changes were implemented, and there was a renewed focus on preventing such frauds in the future.

8. The 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 through 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), with loans approved for shell companies associated with the company's promoters. This case has been labeled as the largest scam in the country's banking industry, with the CBI court summoning all 75 accused in the case.

9. The Saradha Scam The Saradha Group financial scandal, also known as the Saradha scam, was a significant financial fraud that emerged in 2013. Based in West Bengal, the Saradha Group consisted of 200 private entities that allegedly deceived over a million investors through Ponzi schemes, amassing an estimated ₹200 to 300 billion (US$4–6 billion) from approximately 1.7 million depositors before its collapse in April 2013. This scandal epitomized a classic Ponzi scheme, where funds were raised through an extensive network of agents who received commissions exceeding 25%. The scandal triggered a financial fraud and political controversy, implicating several high-profile individuals, including politicians and legislators. The Supreme Court assigned the investigation to the Central Bureau of Investigation (CBI) and directed state governments to provide all necessary assistance to the CBI team. The central government also initiated a comprehensive probe into the scandal through multiple agencies, including the Income Tax Department and the Enforcement Directorate.

10. The Commonwealth Games Scam The 2010 Commonwealth Games hosted in India's capital, New Delhi, were marred by a significant corruption scandal. Intended to showcase the sporting prowess of Commonwealth Nations, the event instead exposed the dark underbelly of corruption. The scandal involved an alleged misappropriation of a staggering ₹70,000 crores. Suresh Kalmadi, the Chairman of the Organizing Committee, found himself at the center of the storm, having awarded Swiss Timings a contract worth ₹141 crore for timing equipment, an amount inflated by ₹95 crore. All those implicated, including Kalmadi, faced charges of criminal conspiracy, theft, and corruption. The scandal tarnished India's global image and led to international embarrassment. Despite lofty promises by the organizing committee, the infrastructure for the games was subpar. The financial cost to the government amounted to an astronomical ₹70,000 crores, with only half of this sum estimated to have been spent on Indian athletes. In the aftermath, several high-ranking officials were investigated by the Central Bureau of Investigation 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 underscore the urgent need for enhanced regulations and vigilant oversight to safeguard the investments of individuals. These scams have caused significant harm and eroded trust in the financial system. Learning from these incidents is paramount to prevent their recurrence, and all stakeholders in the financial sector must play their part in thwarting fraud.