Most scams are like icebergs -- the larger part of consequences are hidden. For example, there is still negative fallout accruing from the Harshad Mehta scam in 1992 and investigations into the KP affair of 2000 have barely got off the ground. Even more than quantifiable monetary losses, the psychological impact can destroy sentiment.

The Capital Markets Crisis: Complete Coverage 

In the fake stamp paper scam, the consequences could prove truly disastrous despite the lack of apparent connection with the financial markets.

For one thing, the dimensions could be far larger than anything that has ever been unearthed -- figures in the range of Rs 20,000 crore (Rs 200 billion) and more have been bandied around by credible sources.

Every registered deal in Maharashtra and Karnataka over the last decade or so comes under scrutiny. This means every real estate deal and also company mergers and takeovers such as VSNL-Tata and perhaps even the PSU crossholding actions.

The legal position on this might be as follows: The deals stand BUT the stamp duty has to be paid again if the original paper is discovered to be false.

Lord alone knows how affected entities will have to calculate and provision for contingent liabilities and what it will do to their strategic plans.

This effect will hit individuals as well as corporates, given the leveraged nature of the financial markets. Somebody has mortgaged real estate to buy shares or mortgaged shares for a real estate play.

That person wouldn't know until several years later whether the deal is valid and if so, whether duties must be paid twice-over. The holder of the mortgage wouldn't know either.

Given the increasing drive into retail, every financial entity would be worried at the sheer amount of paperwork that needs to be rescrutinised.

The only gainers from the scam would be lawyers and accountants who are now guaranteed a vast volume of work that will keep them busy for the next decade or two.

The scam exposes the rotten nature of the entire Indian revenue system and that is where the rub lies. Even assuming that heads will roll and, that is a big assumption in white-collar crime with tangled paper trails leading to the highest levels, the system itself will probably not be cleansed in a manner that reassures burnt investors.

So where does investor confidence go? Right down the sewage system, I guess. This will happen slowly, rather than with the suddenness of 1992, 1995, 2000 et al because the scam doesn't directly hit markets.

But as new details are revealed, more and more people will start pulling back their horns. A slow dip into bearishness is probably preferable for the trader/ investor who has a chance to pull out.

So far as the markets are concerned, this is really history repeating itself. Every major bull-run since 1956 has been aborted at some stage by a financial scandal. It was insurance in 1956, it was HM in 1992, it was MS Shoes in 1995-96 and KP in 2000.