The Harshad Mehta Scam

HARSHAD MEHtA SCAM

Who is this man…????

The “BIG BULL” of the market

Early life  Harshad Mehta was born on 29 July 1954  Born in a Gujarati jain family of modest means.  Son of a small businessman

 Worked for New India Assurance Company

 SEVENTIES - Started analyzing tips generated from respective offices  EIGHTIES - Quit his job and sought a job with stock broker P. Ambalal

 Then became a jobber on BSE for stock broker P.D. Shukla.  1981 - became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth.

 Harshad and Ashwin started their venture GrowMore Research and Asset Management Company Limited.  He rose and survived the bear runs, this earned him the nickname of “THE BIG BULL”  31st December 2001- The Death Of The Bull

Lifestyle  At the peak of his glory, he lived in a 15,000 sq.ft. house (private swimming pool and golf patch).  His lavish lifestyle and flashy cars were the stuff known only of movie stars.

What Harshad Mehta Did..????  Middle man

 Very cleverly squeezed some capital out of the banking system.  Capital then invested in the stock market  Took the price of ACC from 200 to 9000

 The market went up like crazy and the bulls were on a mad run.  The day he sold was the day when the market crashed.  The same day Vijaya Bank chairman committed suicide

“NIMESH SHAH”

Favourite stocks ACC Apollo Tyres Reliance Tata Iron and Steel Co. (TISCO) BPL

Sterlite Videocon

Instruments used in the scam 1. RF (ready forward) deal

2. BR (bank receipt)

Ready Forward Deals  A secured short term loan from a bank to another bank.  Against government securities.  Provided much needed liquidity to the G-sec markets.  Helped banks to manage their SLR requirements.

ISSUE BR

BORROWER BANK

BR

BROKER

FUNDS

LENDER BANK

FUNDS

Bank receipts  A receipt for the money received by the selling bank.  Delivery of the securities to the buyer.

 Harshad Mehta needed banks which issued fake BRs not backed by any government securities

Mechanics of the scam  To make the scam possible, the RF had to undergo a complete change.  This change was brilliantly engineered by the brokers.  There are 3 parts to understanding the mechanism of the scam : 1)The settlement process 2)Payment of cheques 3)Eliminating / dispensing the security

The Settlement Process  Brokers became intermediaries to the transactions. Why?  Brokers started becoming market makers.  Brokers came in handy when banks wanted to conceal the fact that they had done an RF deal.

Payment Of Cheques  Brokers had to find a way of crediting the cheques to their accounts.  Account payee cheques were already being credited to different accounts well before the scam already.  Privileged customers were allowed to do this to avoid interest loss due to delay in settlement.

Eliminating The Security There are 3 ways of doing this : 1) Officials were either bribed or just negligent. (the arrangement was beneficial to many banks) 2) Replace securities with a fake BR. 3) Forge the securities themselves.

Where Has All The Money Gone?  Invested in shares.  A part of money was went out of India.

 Spent on bribes and kickbacks.  Finance the losses taken by the brokers.

How it was exposed  On April 23 1992 journalist Sucheta Dalal exposed Mehta’s illegal methods in ‘TIMES OF INDIA’  The crucial mechanism through which the scam was affected was ready forward(RF) deal.

 Another instrument used was the bank receipt

 The two main banks who were handy for this purpose were bank of Karad (BOK) and Metropolitan Co-operative bank  Once the scam was exposed a lot of banks were left holding BRS which did not have any value  After the scam was reveled the chairman of Vijaya bank committed suicide.

Unethical Issues In Mehta Scam  Imaginary companies created  Purchased Huge amount of shares of a targeted company like ACC .

 Caused false bull run

 Without verification, banks like “Vijaya Bank” issued the cheque.  Recommendation to purchase particular shares on his own website

Impact of the SCAM

 Index fell from 4500 to 2500,leads to loss of Rs.100,000 crore in market.  All the banks and financial institution start demanding to return the funds.  Shares were tainted.  Genuine investors fell like robbed, chaotic condition in the stock market.

 Government Liberalization policies on hold.  SEBI postponed sanctioning of private sector mutual fund

 Direct effect on FDI ,as entry of foreign pension funds and mutual funds becomes rare.

 The Euro-issues planned by several Indian companies were delayed.  Adversely affect 15 major commercial banks of India, foreign banks and NHB(national housing bank)  When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof, because of his active involvement in issuing cheques to Mehta.

Measures By Government 1. Discover and punish the guilty

2. Recover the money 3. Reform the system.

Credits 09

Harsh shah

18

Divyesh gulecha

19

Ankush jain

36

Akash pednekar

40

Shraddha sakharkar

54

Priyamvada singhania