Game of Scams

Harshad Mehta was an Indian stockbroker, who was well known in the industry for his fortune
but was also infamously charged for various financial crimes during 1992. Of around 27 charges
against him, he was convicted for only one of them, before his death at the age of 41 years in
2001. Mehta was believed to be involved in a major Capital Market scam executed through
stock price manipulation with the help of fraudulent bank receipts (BR) and the use of ready-
forward transactions to maintain the SLR (Statutory Liquidity Ratio).

Having figured out the masterplan for his scheme, Mehta used two small and little known banks
to issue fake BRs (which were not backed by any government securities) as and when required.
These BRs were passed onto other banks in exchange of money to Mehta, believing that they
were lending the money against the government securities but that was not the case. The
money received was used to purchase shares across different market segments at hefty
premiums, leading to an artificial increase in the prices of the BSE SENSEX. When the time
came to return the money due, the shares were sold and the BRs were retired.

They operated the scheme as long as the stock market kept going up because of the artificial
demand and once the scam was brought to light, many banks realised that they were left in
possession of BRs with only fictitious value.

Taking advantage of the various loopholes in the Indian financial system by siphoning off money
from the banking system to the financial markets, Mehta and his associates were able to divert
funds of approximately INR 4000 crores from the time period of April 1991 to May 1992. Mehta
was finally convicted by the Bombay High Court and the Supreme Court of India in a financial
scandal valued at INR 49.99 billion (USD 780 million).

Aftermath:
After the scandal was exposed in April 1992, the share market was left in utter chaos due to
steep fall in the share prices, with a great loss of life savings for thousands of innocent
investors. The stock market index fell from 4500 to 2500 leading evaporating approximately INR
100,000 crores in market capitalization.

Fake Bank Receipts (BR) which were one of the key instruments in executing this scam left the
banks in an extremely vulnerable situation. After the scam was exposed, these receipts were
rendered void and public money was at stake, impacting several domestic and foreign banks
operating in India; some of them being SBI, Standard Chartered and a subsidiary of RBI.

In hindsight, the scam could have been avoided with robust policies and procedures in place.
The Government, RBI and commercial banks were equally responsible for such an event.

Problem Statement-
Participants need to analyse the case and identify the loopholes in the erstwhile system from
the perspective of the following three stakeholders:
● RBI Governor
● Chairman of SBI
● Chairperson of SEBI

If you were put in the position of the above mentioned stakeholders, what checks and balances
would you have implemented to ensure that the scam would not have taken place?

Your submissions shall be judged on the following parameters:

● Identification of loopholes and root cause of the problem
● Recommendations to address the identified problem
● Feasibility and viability of the proposed recommendations
● Quality of the submission- brevity and comprehensiveness