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TEJASWINI JADHAV NIJA PILLAI RIZWANA SHAIKH

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PROF :

UNDER THE GUIDANCE OF PAYAL samvani ACKNOWLEDGEMENT

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A project is an important part of education, without which education is incomplete. It has very vital and inevitable role to perform. Perhaps it is the essence or soul of knowledge. Theoretical knowledge acquired through reading, hearing or discussion can be confirmed through practical project only. Here one can see the knowledge being put into action that not only acts as cement lining of knowledge but also creates confidence in a student. We also express our sincere thanks to Mrs. Payal Samvani for her valuable guidance, suggestions, support and showing huge faith in us. Also we would like to thank him for her guidance, co-operation and timely help.

INDEX

Acknowledgement

Introduction Big Bull of the trading floor

How did he financed his deal

Market at Harshad Mehta scam

Where has all the money gone

I-T, PSBs recover dues nine years after Mehta's death

Who was Harshad Mehta? Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early childhood was spent in Mumbai where his father was a small-time businessman. Mehta first started working as a dispatch clerk in the New India Assurance Company. Over the years, he got interested in the stock markets and along with brother Ashwin. Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and did very well for himself. On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, exposed the dubious ways of Harshad Mehta. The broker was dipping illegally into the banking system to finance his buying..

Why was he known as Big Bull of the trading floor?

Harshad Mehta known to be Big Bull of the trading floor was an Indian stockbroker and is alleged to have engineered the rise in the BSE stock exchange in the year 1992. He and his associates draw 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, the banks started demanding the money back, causing the collapse. The broker was dipping illegally into the banking system to finance his buying. The amount that was involved in this scam was approx. to Rs. 5000 crs.

Growth period of Big Bull:

EXPLOITING THE LOOPHOLE IN THE BANKING SYSTEM After investing in stock exchange Harshad Mehta found some wrong patterN on trades in stock exchange. He found that companies are not rising and falling as over their fundamentals, and he started manipulating
How Harshad Mehta manipulated his deals & acted as a broker?

1 . By Making use of instrument like Ready forward Deal: Harshad Mehta worked on the mechanism of READY FORWARD (RF) DEALS. It's a secured short-term (typically 15-day) loan from one bank to another. The bank lends against government securities. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price. The deal was done between the banks through brokers for commissions. In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. Thus , both the parties may not know each other. It was this idea that made the mind of Harshad to involve into the modus operandi. Harshad in his scam took the help of Bank Receipts. In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR. A BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt promises to deliver the securities to the buyer and the seller holds the securities in trust of the buyer.

2. By Issuing fake Bank receipts?

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Having figured this out, Mehta needed banks, which issue fake BRs, or BRs not backed by any government securities. Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, obviously assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned. The game went on as long as the stock prices kept going up, and no one had a clue about Mehta's modus operandi. Once the scam was exposed though, a lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping Rs 4,000 crore.

HARSHAD MEHTA SECURITIES

HARS

HIS FAVOURITE STOCK INCLUDED:

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ACC

APOLLO TYRES RELIANCE TATA IRON & STEEL CO. BPL STERLITE VIDEOCON Read Indian Stock Market Articles He took the price of ACC from 200 to 9000.Thats an increase of 4400%!!!The market went up like crazy and the bulls were on a mad run. Since he had to book profits in the end, the day he sold was the day when the market crashed. 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, he would be dead meat. 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. That man was Nimesh Shah. He was just as involved as Harshad Mehta but he knew how keep out of the hands of the law. Nimesh Shah still deals in the stock market and is known to be a heavy player. Harshad Mehta is now dead. It is rumored that when he died, he still had 10% of ACC shares with him.

Market at Harshad Mehta scam

Graph

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Boom Period of Big Bulls life:

Year 1991. Mr Harshad Mehta is now darling of Indian media. He was dream seller. He was not only Harshad Mehta now.. but he was The Harshad Mehta. Boss of Growmore Research and Asset Management . People know this personality as The Big Bull of Indian stock exchange. Harshad Mehta thought different then others. The basic concept behind his view was very optimistic and somehow it was good for Indian money market too. He used to explain people that if fundamental of some company is good it should go up and should always goes up. But excess of anything is evil. The dream of great Indian story was becoming greed generator for Indian public and for Mr Harshad Mehta too. At his peak, he lived almost like a celebrity in a 15,000 sq ft house, which had a swimming pool ,beautiful golf patch. He also had a crush for flashy luxurious cars and no wonder he used to have some of the best car of 1990s in his huge parking.

Recession Period in Big Bulls life: His flashy life and charismatic personality was a problem for many Indian and international personalities. In 1992, 1st article came out against this dream merchant and the story was about 600+ Crores rupees scam !! it was written in article that Harshad Mehta had swiped 600 Crores. rupees from SBI. No one had clue at that time that it was starting of the most dramatic scam of Indian stock exchange. But fact was unknown till now . the amount is much more than what was said in that news article. As per that article Mr Harshad Mehta used Ready Forward Deal for this scam. As per this deal he used to take some short term loan from banks and used this money in stock exchange to rise the price is the security. Pure manipulation. As per Indian law it was not allowed to give such RF loan to any individual person by bank. So it was clear
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that more than one banks were involved in this scam. With this money mr Harshad Mehta used to make waves in Indian stock exchange. He was using this banks illegally to manipulate the stock exchange mechanism. He used the money he borrowed from lending bank on behalf of borrowing bank. And he invested that money in stock market. in this process the borrowing and lending banks knows only broker and may not know the name of the other party. And Harshad Mehta used this fact very well for his own personal benefit.

Depression of Big Bulls life: Mr Harshad Mehta had one habit of showing off. Larger than life kind of personality can make the worst enemies for you. When he came to know this truth it was too late. When he got some finest luxurious car of the world and he was giving some picture pose of him feeding bears in zoo, some big names like Anand Rathi and Krishnakant Damani were hurt badly it was not a good news for the big bull. Whole bear cartel is against Harshad Mehta now. Everyone knew that Harshad Mehta is getting money from somewhere. but from where? The bear cartel has exposed the truth behind the constant rise of this big bull. They have used almost all the resources they have. It was surprising to point out here that even this bear cartel was using same technique as Harshad Mehta used. But the difference was , public appearance. Bears cartel used the money from overseas banks where as Harshad Mehta used Indian banks for his growth. And this act was crime as per Indian law books. And on one not so fine day it was headline of Indian news paper regarding 4000 crore rupees scam in Indian stock market. Now Harshad Mehta was in trouble. As the scam was exposed the banks receipts (BR) value became almost zero. And it was enough reason for crash of some financial institutes which would lead Indian financial crises. Bear cartel was behind Harshad Mehta now. They filed as many cases as hey can against Harshad Mehta . They have used all their sources and made sure that Harshad Mehta would not get any bail. Indian Stock Market crashed like anything. It was one of the worst time Indian market have seen till day. Indian public faced tough times. Many suicidal notes were found near dead bodies of Indian stock traders. The big bull, The dream merchant, The Harshad Mehta is now The most hated person!! 4000 crore scam ,many financial firms were involved, many political parties were involved, many big names involved in the same case, but surprisingly only one man was trapped. Harshad Mehta.
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End of The Big Bull:

Late 2001, place : Thane jail. The jail superintendent came to know about end of the bull era with news of Harshad Mehtas death. Reason was heart attack. But it was shocking to know that before he died, he was proved innocent in all other cases against him, and found guilty in only one case..!!! That is how it happened. The chair person of Growmore Research and Asset Management died. And one Bull Run came to end.

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Where has all the money gone ???

It is becoming increasingly clear that despite the intensive efforts by several investigating agencies, it would be impossible to trace all the money swindled from the banks. At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Based on the result of investigations and reporting so far, the following appear to be the possibilities: A large amount of the money was perhaps invested in shares. However, since the share prices have dropped steeply from the peak they reached towards end of March 1992, the important question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. In the aftermath of the scam it fell to about 2500 before recovering to around 3000 by August 1992. Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's purchases were made at low prices, so that the average cost of his portfolio corresponds to an index well below 2500 or perhaps even below 2000. Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so cannot be dismissed without a serious consideration. Whether these shares are in fact traceable is another question. It is well known that while Harshad Mehta was the "big bull" in the stock market, there was an equally powerful "bear cartel", represented by Hiten Dalal, A.D. Narottam and others, operating in the market with money cheated out of the banks. Since the stock prices rose steeply during the period of the scam, it is likely that a
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considerable part of the money swindled by this group would have been spent on financing the losses in the stock markets. It is rumored that a part of the money was sent out of India through the Havala racket, converted into dollars/pounds, and brought back as India Development Bonds. These bonds are redeemable in dollars/pounds and the holders cannot be asked to disclose the source of their holdings. Thus, this money is beyond the reach of any of the investigating agencies. A part of the money must have been spent as bribes and kickbacks to the various accomplices in the banks and possibly in the bureaucracy and in the political system. As stated earlier, a part of the money might have been used to finance the losses taken by the brokers to window-dress various banks' balance sheets. In other words, part of the money that went out of the banking system came back to it. In sum, it appears that only a small fraction of the funds swindled is recoverable.

I-T, PSBs recover dues nine years after Mehta's death

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Nine years after Harsad Mehta died, the I-T department and public sector banks (PSBs) have successfully recovered a significant portion of their claims emerging out of the securities scam from his liquidated assets. The Supreme Court directed the Custodian of the attached properties and assets of the Harshad Mehta Group (HMG) in March 2011 to make payments of Rs1,995.66-crore to the I-T department and Rs 199.25-crore to the State Bank of India (SBI), making the two institutions two of the earliest claimants to recover their dues. While the SBIs total principal amount claim of Rs 1,000-crore have been largely settled, financial institutions have also received some money. However, Standard Chartered Bank, which had claimed Rs 500-crore, has yet to recover its dues it was one of the late claimants. Although the total claim over the HMG is of more than Rs 20,000-crore, the apex court has said that for the present, it would only consider claims towards the principal amount.

IMPACT OF SCAM

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The immediate impact of the scam was a sharp fall in the share prices. The index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization. Since the accused were active brokers in the stock markets, the number of shares which had passed through their hands in the last one year was colossal. All these shares became "tainted" shares, and overnight they became worthless pieces of paper as they could not be delivered in the market. Genuine investors who had bought these shares well before the scam came to light and even got them registered in their names found themselves being robbed by the government. This resulted in a chaotic situation in the market since no one was certain as to which shares were tainted and which were not.

The government's liberalization policies came under severe criticism after the scam, with Harshad Mehta and others being described as the products of these policies.
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Bowing to the political pressures and the bad press it received during the scam, the liberalization policies were put on hold for a while by the government. The Securities Exchange Board of India (SEBI) postponed sanctioning of private sector mutual funds. The much talked about entry of foreign pension funds and mutual funds became more remote than ever. The Euro-issues planned by several Indian companies were delayed since the ability of Indian companies to raise equity capital in world markets was severely compromised.

Introduction of SEBI in 1992 after Harshad Mehtas scam

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Sebi was provided with a statutory status in the immediate aftermathof infamous securities scam by Harshad Mehta. The scam shooked up the foundation of Indian financial framework. The stock market which was making a frenzied climbed upwardand a number of financial institutions and banks were forced to shut shop. That a single individual could twist and tweak the system,with all is apparent loopholes, for earning tremendous profits became painfully apparent to everyone. A number of financial institutions and other market players were left high and dry after the scam,but the biggest loser turned out to be the common investor.The economy had just started opening up after the 1991 economic reforms,and the india market was just taking its first tottering steps.At this stage,such a huge scam would not only have damaged the market,but would have severely damaged investor confidence. In time,investors could have lost trust in the system,thus adversely affecting the ability of companies to raise money in stock market.This,in turn,would have severely restricted industrial growth at a time when the economy had started improving. The securities and Exchange board of india act was passed in 1992,thus giving the regulatory teeth to the body.SEBI was entrusted with the primary task of protecting the interests of the investors. In addition,SEBI was also entrusted with the twin objectives of developing and regulating the stock market.In this regard,SEBI has done a decent job,though admittedly,there have been instances when the regulator has been caught napping!But overall,the lot of investors has definitely improved due to the policies and steps taken by the regulator.

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CONCLUSION

In order to be protected against scams like Harshad Mehta and ketan parek , the investors should be very alert while dealing with securities . Monitor your investments , ask tough questions. Be suspicious if you have trouble retrieving your profits or principal. As Stock market investment is subject to market risk. Please read the offer document carefully before investing.

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