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A project report submitted in partial fulfillment of the requirements for the program PGDM(2010-2012)
SUBMITTED TO : Prof.PRASHANT SIPANI
SUBMITTED BY : JEETENDRAA SINGH MANOJ PANJWANI NITESH KHANNA PRERNA BHADANI SANGEEV JHA
TITLE PAGE PROJECT REPORT ON INDIA’S SECURITIES SCAM BY HARSHAD MEHTA 2 .
DECLARATION We hereby declare that all the work presented in the project report entitled “India Securities Scam by Harshad Mehta” of the subject Process Finance is an authentic record of our own work carried out under the guidance of Prof. Date: 20thth March. Prashant Sipani. 2012 Jiteendra Singh Manoj Panjwani Nitesh Khanna Prerna Bhadani Sangeev Jha 3 .
Prashant Sipani (Project Guide) Date: 20thh March. Prof. Manoj Panjwani. Sangeev Jha is an authentic record of the candidate’s own work carried out by them under our guidance.CERTIFICATE This is to certify that project report entitled “India Securities Scam by Harshad Mehta”of the subject Derivative which is submitted by Jeteendra Singh. itesh Khanna. Prerna Bhadani. 2012 4 . The matter embodied in this thesis is original and has not been submitted for the award of any other degree.
Jaipur for his constant support. The project provided us an opportunity to understand theIndias biggest securities scam that aver happened in a better manner. Prashant Sipani of Jaipuria Institute of Management. guidance. Group-2 Jeetendra Singh Manoj Panjwani Nitesh Khanna Prerna Bhadani Sangeev Jha 5 . and motivation which helped us immensely in completing this project.ACKNOWLEDGEMENT We express our deep gratitude to Prof.
These scam masters through various fraudulent activities gather big chunks of money. 6 . Exploiting several loopholes in the banking system. The “Securities Scam” refers to a diversion of funds to the tune of Rs. namely. Harshad Mehta and his associates siphoned off funds from inter bank transactions and bought shares heavily at a premium across many segments. Using the ready forward (RF) deal which is a secured short-term (typically 15-day) loan from one bank to another Harshad Mehta was an Indian Stockbroker and is alleged to have engineered the rise in the BSE stock exchange in the year 1992. Financial Market Scams are the attempts by scam masters who indulge in crooked activities to fulfil the bellies of their own at the stake of common man.The Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) issued fake BRs. the Income Tax Department. bureaucrats and politicians. the Directorate of Enforcement and the Joint Parliamentary Committee (JPC) are currently investigating various aspects of the scam. brokers. A large number of agencies.500 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992.EXECUTIVE SUMMARY A lot is heard in the past and till today we hear a lot about the financial markets scams. or BRs not backed by any government securities. In this project report we have studied about one of the most infamous scams that has been unearthed “The Securities SCAM”. The functioning of the money market and the stock market has been thrown in disarray. 3. how it was done and the money that was involved in these scams. the Central Bureau of Investigation (CBI). In an ever expanding ambit. Our report is one such initiative to highlight a capital market scam or say securities scam in India. the Reserve Bank of India (RBI). triggering a rise in the Sensex. foreign banks and financial institutions. the scam has engulfed top executives of large nationalized banks.
3 9.TABLE OF CONTENT S.No.4 10 11 12 13 14 Introduction About Harshad Mehta Overview Of The Scam Ready Forward (RF) – Modus Operandi Settlement Process Payment Cheques Dispensing Of Securities Pg.No 8 8 9 10 11 11 12 12 13 13 13 14 14 14 14 14 15 15 16 16 16 17 Bank Receipts Control Systems Disappearance Of Money Unethical Issues In Mehta Scam After The Scandal Immediate Impact Impact On The Indian Economy Impact On The Bank Response Of The Government Policy Measures Action Taken By The Government Role Of The SEBI In The End Conclusion References 7 .3 5 6 7 8 9 9.1 9.2 9.2 4. Chapter Name 1 2 3 4 4.1 4.
scandals and stigmas have surfaced in the recent years. There is the famous Bofors scam.000 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992 2. which is used for recording documents for registration purpose. which was about the purchase of important defense equipment from foreign markets The list goes on & on & moreover there are continuous additions to the same. but they have been facilitated largely because of the vitiated atmosphere that the politicians and the political system have created in the country. 2200 crores & involves fraudulent printing & sale of stamp papers in the various parts of the country. a small businessman Moved from small town Raipur to find his future in Mumbai First job as dispatch clerk in the New India Assurance Worked with stock brokers and soon managed to get a brokers’ card Soon started his own venture: Grow More Research and Asset Management Company Ltd. People know this personality as “ The Big Bull” of Indian stock exchange After recommendations of the Big Bull demand for the stocks used to exponentially rise!!! Propounded the “Replacement Price Theory” The 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 He was alleged to have engineered the rise in the BSE stock exchange in the year 1992 8 . Father : Mr Shantilal Mehta..Some of the most famous SCAMS that have surfaced during the time are: The 1200 crores fodder scam relating to the procurement of non-existent fodder on payments from the state exchequer. The “Securities Scam” refers to a diversion of funds to the tune of Rs. INTRODUCTION: Various scams. The Scam in printing & selling of stamp papers. 5. ABOUT HARSHAD MEHTA Harshad Shantilal Mehta was born on 29 July in a Gujarati Jain family of modest means.1. Became a dream seller and a celebrity of the financial world. These may not all be attributable to the antics and bungling of politicians. This scam is of about Rs.
1992. There were 4 different aspects of this scam: Diversion of Funds Intra-day Trading Use of Ready Forward(RF) to maintain SLR Fake Bank Receipts (BR) Diversion of Funds – Diversion of funds from the banking system to brokers for financing their operations in the stock market. Taking advantages of the loopholes in the banking system. Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 Cr. On April 23. Intra-day trading – The modus operandi mainly included investing heavily in certain shares at the start of the day which led to sharp increase in the price of the stock and then cashing in at the end of the day to reap huge benefits. Some of the stocks which were highly invested in by Harshad Mehta were: ACC Apollo Tyres Reliance Tata Iron and Steel Co. OVERVIEW OF THE SCAM This scam can be categorized as a Capital Market scam in which it is done by manipulating the facts in order to attain enormous profits. with many litigations still pending against him. (TISCO) BPL Sterlite Videocon 9 . from the banks to stockbrokers from April 1991 to May 1992. journalist Sucheta Dalal in a column in The Times of India. 3. He caused the steep rise in the Stock market index in the year 1992 by bidding at a premium for many shares. exposed the dubious ways of Harshad Mehta He was later charged with 72 criminal offenses and more than 600 civil action suits were filed against him He died in 2002 of a massive heart attack in a jail in Thane.
This helped them make some profits as they could invest the money that they got by selling the bonds. Individual banks did not have any idea as to who the other party in the whole transaction was. it’s like one bank selling its securities to another with a promise of buying it back at a pre-determined price. The whole process of byying and selling the bonds was taken care of by brokers and only they knew the two parties which were involved. This obligation on the part of the banks required them to show a detailed sheet of its stock of Government bonds at the end of every day. Banks in India had to maintain a fixed ratio of their deposits in the form of Government securities/bonds which was governed by the statutory liquidity ratio (SLR).The above graph shows the rise in the Sensex during the period when Harshad Mehta was operational and putting in loads of money in the stock exchange increasing the liquidity and thus arbitrary increase in the prices of some shares. it is actually a secured loan with Government securities backing it up. READY FORWARD (RF) – MODUS OPERANDI Ready forward is actually a sort of a short term loan (typically 15 days or less) usually from one bank to another. The whole process can be described in 3 phases: 10 . Soon after the rule changed and the banks were not required to show these details at end of everyday rather they were allowed to show in once in a week i. In early 1990s.e. In essence. 4. This allowed the banks to sell their bonds in the earlier part of their week and then buy it back in the later part. Unlike other loans. Friday.
4. while the buyer gives the cheque to the broker who then makes the payment to the seller. Dispensing of securities 4. thereby reducing the interest lost on the amount. In this settlement process. That is.Normally. if a customer obtains a cheque in his own favour and deposits it into his own account. 100 crores cheque is about Rs. In other words. the broker came in handy.1. but arranged for the actual settlement to take place with the correct counter party. The broker provided contract notes for this purpose with fictitious counter parties. exceptions were being made to this norm. PAYMENT CHEQUES A broker intermediated settlement allowed the broker to lay his hands on the cheque as it went from one bank to another through him. the banks or at least some banks adopted an alternative settlement process which was similar to the process used for settling transactions in the stock market. they started trading on their own account. Privileged (corporate) customers were routinely allowed to credit account payee cheques in favour of a bank into their own accounts to avoid clearing delays.2. Settlement Process 2. When a bank wanted to conceal the fact that it was doing an RF deal. the buyer and the seller may not even know whom they have traded with. the interest loss on a clearing delay of two days for a Rs. In fact. it may take a day or two for the cheque to be cleared and for the funds to become available to the customer. it is purely a matter of banking custom that an account payee cheque is paid only to the payee mentioned on the cheque. deliveries of securities and payments are made through the broker. 11 . Payment cheques 3. and in a sense became market makers in some securities thereby imparting greater liquidity to the markets. however. During the scam. both being known only to the broker.1. 8 lakhs. SETTLEMENT PROCESS The normal settlement process in government securities is that the transacting banks make payments and deliver the securities directly to each other. well before the scam came to light. At 15% interest. As it happens. The hurdle now was to find a way of crediting the cheque to his account though it was drawn in favor of a bank and was crossed account payee. the seller hands over the securities to the broker who passes them on to the buyer. In this settlement process. There were two important reasons why the broker intermediated settlement began to be used in the government securities markets: The brokers instead of merely bringing buyers and sellers together started taking positions in the market.
This helped the brokers to get the money as soon as the transaction is made which could further be used to be channelled into the stock market. but there is a possibility that the issuer may not have the securities at all. 5. bank will sell securities it doesn’t have. Instead. Bank buys securities at lower prices when they fall in value and discharges the BR. these cheques are cleared on the same day. This will be done if the bank anticipates fall in prices.On the other hand. The practice thus emerged was that the broker would obtain a cheque drawn on the RBI favouring not himself but his bank and the bank would get the money and transfer it to the broker account on the same day. The brokers asked the banks to give the cheques in their own name claiming that they will pay to the other party on their own. This was Harshad Mehta and his associates were able to use the money of the banks which was eventually used for speculating in the stock market. securities were not moved back and forth in actuality. the borrower. In practice.e. where a lending bank would be under the 12 . when banks make payments to each other by writing cheques on their account with the RBI. borrowing bank gives a Bank Receipt (BR) instead of delivering the actual securities to the lender. Bank receipts serve three functions – It confirms the sale of securities Promises to deliver the securities to the buyer. Bank officials were bribed to accomplish this task as this was illegal on the part of the banks to let go of their money without any assurance. i. In an RF deal. DISPENSING OF SECURITIES Here the brokers used their credibility to persuade the banks to part with the cheques without actually receiving the securities with the promise that they will get the securities the next day with a 15% interest for one day. Acts as a receipt for the received money by the selling bank A BR means that the issuer holds the securities in trust for the buyer. gave the buyer of the securities a BR. who is the seller of securities. BANK RECEIPTS Another instrument used in this scam was the bank receipt (BR). Following are the reasons for a bank to issue a BR which is not backed by actual securities – A bank may also short sell securities. The bank would get the money and credit his account the same day. It states that the securities are held by the seller in trust for the buyer. 4. The practice which thus emerged was that a customer would obtain a cheque drawn on the RBI favoring not himself but his bank. Bank may do an RF deal and issue a fake BR (not backed by securities) if banks simply want an unsecured loan .3.
During the scam. 6. Without verification. Created fake BRs.impression that it’s dealing with a secured loan but in reality it’s advancing an unsecured loan. UNETHICAL ISSUES IN MEHTA SCAM Imaginary companies created. They managed to persuade little known bank s like the Bank of Karad (BOK) and the metropolitan Cooperative Bank (MCB) to issue BRs and then these BRs were used to do RF deals with other banks. The different aspects of securities transactions of a bank are carried out by different persons 7. CONTROL SYSTEMS There was a complete breakdown of the control system within the commercial banks and that of RBI. Following features are involved in the internal control system: Whenever an RF deal is done by using BRs rather than actual securities. brokers were so perfect in the art of using fake BRs and obtained unsecured loans from various banks. banks like “Vijaya Bank” issued the cheque. Caused false bull run. This requires assigning credit limit to the borrower by assessing the creditworthiness of the borrower. DISAPPEARANCE OF MONEY It is becoming increasingly clear that despite the intensive efforts by several investigating agencies. the lending bank has to contend with the possibility that it may be making an unsecured loan. or BRs not backed by any government securities. 13 . Illegally issue of BR by small bank. This way several large banks made huge unsecured loans to these banks and thus it created money for the brokers. Bought the shares of own company by himself causing Sensex up. 8. Purchased Huge amount of shares of a targeted company like ACC . lenders should have taken measures to protect themselves . At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Though. Recommendation to purchase particular shares on his own website. it would be impossible to trace all the money swindled from the banks.
1992. the situation in share market was that of utter chaos. This was a great loss to the innocent investor who had bought these shares much before the scandal was exposed. Standard Chartered and a subsidiary of RBI.000 crores in market capitalization. 9. All these shares became tainted and worthless and could not be used in the market. The scam could have been checked in time with proper policies and verifications.2 IMPACT ON THE INDIAN ECONOMY There was a lot of media coverage on the scam and the political parties left no opportunity in criticizing the government for it. Implementation of some aspects of the Narasimham Committee recommendations on the banking system had to be delayed. 100. some of them being SBI. they had traded a large number of shares during the previous year.4 RESPONSE OF THE GOVERNMENT As discussed.3 IMPACT ON THE BANKS Fake bank receipts (BR) which were an integral part of the execution of the whole scam landed the banks involved in a tight spot. The index fell from 4500 to 2500 representing a loss of Rs. The government was under immense pressure and its liberalization policies were severely criticized. April. one of the MD the State Bank of India (Suspended) 9. These BR were declared void and public money was at stake. Mahadevan. The government. 9.1 IMMEDIATE IMPACT: After the Harshad Mehta scandal was exposed. 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. CMD of the UCO Bank (Arrested and sacked) and V. Margabandhu. it failed to check them. However.9. The much talked about entry of foreign pension funds and mutual funds became more remote than ever. AFTER THE SCANDAL 9. the government was under immense pressure from media and opposition to take concrete steps to bring justice to the people and also to ensure that the loopholes in the system which caused such scam were closed so that such scams would not recur. SEBI had to postpone the sanctioning of private sector mutual funds. the major damage to the stock market did not stop here. Since the accused were active brokers in the stock markets. Some of the prominent individuals who were penalized were K. The brokers were encouraged by the banks to divert funds from the banking system to the stock market. At least ten prominent banks were involved in this. It was also believed that Harshad Mehta and his accomplices were behind framing of these policies. The RBI too stood indicted because despite knowledge about banks over-stepping the boundaries demarcating their arena of operations. In the end the government had to put the liberalization plans on hold. M. The first impact of the scam was a steep fall in the share prices. the RBI and the commercial banks are as much accountable as the brokers for the scam. As a 14 .
The brokers were encouraged by the banks to invest their funds in the stock market in place of investing in the banking system. Recover the money: Provisions of the Ordinance for attachment of property and voiding of transactions with the consequent creation of "tainted" shares were attempts in this direction Reform the system: The government's response so far. 10. the government banned RF deals and slowed down the liberalization process. To reform the system further. The RBI was also responsible for this scam because despite knowledge about banks over-stepping the boundaries demarcating their arena of operations. RBI didn’t take any action against the commercial banks. Transactions became void: The government set up a special court and promulgated an ordinance with several draconian provisions to deal with the scam. 15 . Sections (3) and (4) of the ordinance attached the properties of all individuals accused in the scam and also voided all transactions that had at any stage been routed through them after March 31. 11. all transactions done by the accused after March 31. Then a special court was set up to facilitate speedy trial.first step by the government. banning of RF deals and going slow on liberalization. Further. The special court declared an ordinance for the attached the properties of all individuals accused in the scam. ACTIONS TAKEN BY THE GOVERNMENT: Discover the guilty: This task was assigned to the Central Bureau of Investigation (CBI) and to the Joint Parliamentary Committee (JPC). it failed to reign them in. 1991 were considered void. the case was handed over to Central Bureau of Investigation and the Joint Parliamentary Committee (JPC). POLICY MEASURES The government. A special court was set up to facilitate speedy trial. RBI or government) parties not encourage the brokers to invest in the stock market. the RBI and the commercial banks were as much accountable as the brokers for this scam. 1991. The looting was done with full knowledge of the very individuals appointed by the government who were responsible to guard against such a possibility. So the Harshad Mehta’s scam could have been detected earlier if either of the above (commercial banks.
By the time he died . The government must ensure that not only the obviously guilty (the brokers) but also the not so obviously guilty (the bank executives. He died in 2002 of a massive heart attack in a jail in Thane. the bureaucrats and perhaps the politicians) are identified and brought to book. ethical framework and moral framework within which businesses make decisions . These types of investigations are not only very time consuming but also very expensive. ROLE OF SEBI (ETHICAL ISSUES) The SEBI was set up in early 1988 as a non statutory body under an administrative arrangement and was subsequently upgraded as a fully autonomous body on 12 th of April 1992 The two objective s mandated in the SEBI Act are 1. 12. 14. CONCLUSION Corporate Governance is the value framework.When large sums of money are involved. IN THE END He was later charged with 72 criminal offenses and more than 600 civil action suits were filed against him.Irregularities of all kind were so common that no suspicion aroused even by highly irregular transactions. Mehta had been convicted in only one of the many cases filed against him. with many litigations still pending against him. This is the ideal environment for a scam to germinate and grow to alarming proportions 16 . greed causes people to become unethical There was a total lack of transparency in the money market.The main motive behind punishing the offenders is more to prevent future offenders to not to try this type of scam. Orderly development of capital market 13. Investor protection 2.
org/wiki/Harshad_Mehta http://www.authorstream.in/harshad-mehta-stock-scam/ http://investmentpark.scribd.html http://www.com/doc/17227215/Harshad-Mehta-Scam http://wiki.bullrider.com/2007/02/harshad-mehta-scam-1992.com/Presentation/pratm_18-486267-harshad-mehta-andketan-parekh-scam/ http://www.slideserve.REFERENCES http://en.com/Q/Can_you_give_the_details_about_the_Harshad_Mehta_sca m http://www.blogspot.wikipedia.ppt 17 .com/PPTFiles/insights_investing_jul08_29542_32424.answers.
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