Harshad Mehta

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Jump to: navigation, search This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (June 2009) Harshad Shantilal Mehta (Hindi: ôòä ëôâ÷) was an Indian stockbroker. He is alleged to have engineered the rise in the BSE stock exchange in 1992. Exploiting several loopholes in the banking system, Metha and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex. When the scheme was exposed, banks started demanding their money back, causing the collapse. He was later charged with 72 criminal offenses, and more than 600 civil action suits were filed against him. Mehta died in 2002 with many litigations still pending against him.

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1 Early life 2 Stock Market Scam 3 See also 4 References 5 External links

[edit] Early life
Harshad Shantilal Mehta was born on 29 July 1954 in a Gujarati Jain family of modest means. His early childhood was spent in Mumbai (Kandivali), where his father was a small time businessman. Later, the family moved to Raipur in Chattisgarh after doctors advised his father to move to a drier place on account of his health. Mehta studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur...

[edit] Stock Market Scam
Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and had an expensive lifestyle. He lived in a 15,000 square feet (1,400 m2) apartment, which had a swimming pool as well as a golf patch. By 1990, Mehta had risen to prominence in the stock market. He was buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid up to Rs 10,000. When asked, Mehta used the replacement cost theory as an explanation. The replacement cost theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company.

Another instrument used was the bank receipt (BR). The game went on as long as the stock prices kept going up. who then made the payment to the seller.Through the second hal of 1991 Mehta had earned the sobri uet of the µBig Bull¶ because he was said to have started the bull run. the Chairman of the Vijaya Bank committed suicide by jumping from the office roof. and no one had a clue about Mehta¶s modus operandi. The R is in essence a secured short term (typically 1 -day) loan from one bank to another. typically at a slightly higher price. assuming that they were lending against government securities when this was not really the case. When time came to return the money.´ This the brokers could manage primarily because by now they had become market makers and had started trading on their account. a BR ³confirms the sale of securities. though that wasn¶t the case in the lead-up to the scam. ³Two small and little known banks . ³In this settlement process. securities were not moved back and forth in actuality. the borrower. Once the scam was exposed.´ It was this ready forward deal that Mehta and his accomplices used with great success to channel money from the banking system. It acts as a receipt for the money received by the selling bank.the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) .000 crore. In this settlement process. When the scam was revealed. A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. giving tips on his own website as well as a weekly newspaper column. though. Instead. In a ready forward deal. As the authors write. they were passed on to other banks and the banks in turn gave money to Mehta. deliveries of securities and payments were made through the broker. He knew that he would be accused if people came to know about his involvement in issuing cheques to Mehta.´ the authors point out. Mehta needed banks which issued fake BRs. he was working with owners of a few .´ Having figured out his scheme. That is. On April 2 . To keep up a semblance of legality.bank receipt. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan. the seller holds the securities in trust of the buyer. the buyer and the seller might not even know whom they had traded with. while the buyer gave the cheque to the broker.came in handy for this purpose. i. either being known only to the broker. gave the buyer of the securities a BR. These banks were willing to issue BRs as and when required.the banking system had been swindled of a whopping Rs . It promises to deliver the securities to the buyer. Mehta made a brief comeback as a stock market guru. The authors explain: ³The crucial mechanism through which the scam was effected was the ready forward (R deal. the seller of securities. This time around. the seller handed over the securities to the broker..e. 1992. Crudely put. Hence the name . for a fee. The broker handles neither the cash nor the securities. This money was used to drive up the prices of stocks in the stock market. It also states that in the mean time. who passed them to the buyer. the shares were sold for a profit and the BR was retired. Mehta was dipping illegall into the banking system to finance his buying. Once these fake BRs were issued. a lot of banks were left holding BRs which did not have any value . the bank lends against government securities just as a pawnbroker lends against jeweller. they pretended to be undertaking the transactions on behalf of a bank. journalist Sucheta Dalal exposed Mehta's illegal methods in a column in The Times of India. The money due to the bank was returned. or BRs not backed by any government securities.

He takes money from A on Monday. the banks in India had to maintain a particular amount of their deposits in government bonds. So he said that the bank should write the cheque in his name rather than the other bank (which was forbidden by law). The capital freed in the starting of the week could then be invested. the government decided that the banks need not show their details on each day. 1] By the time he died. The broker knew which bank had more bonds (called µplus¶) and which has less than the required amount (called µshort¶). Harshad Mehta was one such broker. The Mehta scandal was portrayed in a recent Hindi movie. Each bank had to submit a detailed sheet of its balance at the end of the day and also show that there was a sufficient amount invested in government bonds. did not last long. Then. Also.and tells B that he¶ll pay on Tuesday. But he offered a 1 % return for bank B for the one day extension. This game. he took the money from A and went to B and said that he would pay the money on the next day to B but he needed the bonds right now (for A). He worked as a middle man between many banks for a long time and gained the trust of the banks¶ senior management. at the end of the week many banks would be desperate to buy bonds back. Now.' 2]     What Harshad Mehta did? ± The Stock Scam In the early 1990s. the banks agreed. For eg. Now what Harshad Mehta did was that he told the banker at A that he was dealing with many banks and hence did not know who would he deal in the end with. . He takes money from A on Monday.companies and recommended only the shares of those companies. ontinuedThe Stock Scam ± Page 2 Now since Harshad Mehta was dealing with many banks at the same time he could then keep some capital with him at all times. there was an extra clause that said that the average %age of bond holdings over the week needs to be above the SLR but the daily %age need not be so. For eg.. That meant that banks would sell bonds in the earlier part of the week and then buy bonds back at the end of the week. Now. Lets say that there are two banks A (short) and B (plus). Bank B readily agreed with this since it was getting such a nice return Now si ce Harshad Mehta was deali g with many banks at the same time he could then keep some capital with him at all times. This is where the broker comes in. going back to the example of bank A and B. then he takes money from C on Tuesday and tells D that he¶ll pay . 'Gafla. they need to do it only on Fridays. so that he could make the payment to whichever bank was required. This ratio was called SLR ( Statutory Liquidity Ratio). Mehta had been convicted in only one of the many cases filed against him. too. Since he was a trusted broker. He then acts as the middleman between the two banks.

Thats an increase of 00%!!!The market went up like crazy and the bulls were on a mad run. Read Indian Stock Market Articles He took the price of ACC from 200 to 9000. he would be dead meat. Since he had to book profits in the end. Nimesh Shah still deals in the stock market and is known to be a heavy player. It is rumored that when he died. the day he sold was the day when the market crashed. That man was Nimesh Shah. he still had 10% of ACC shares with him. The same day Vijaya Bank chairman committed suicide by jumping from the top of the banks¶ office. . The chairman knew that when it would become public that he had written cheques in the name of Mehta. One rather unknown fact about this scam is that there was a very important player in this scam who managed to keep a very low profile.on Wednesday and the money he gets from C is paid to B and as a result he has some working capital with him at all times if this goes on with other banks throughout the week. Harshad Mehta had very cleverly squeezed some capital out of the banking system. The banks at that time were not allowed to invest in the equity markets. He was just as involved as Harshad Mehta but he knew how keep out of the hands of the law. This capital he invested in the stock market and managed to stoke a massive boom. Harshad Mehta is now dead.

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