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A project report submitted in partial fulfillment of the requirements for the program PGDM(2010-2012)






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. Prashant Sipani.

Date: 20thth March, 2012

Jiteendra Singh Manoj Panjwani Nitesh Khanna Prerna Bhadani Sangeev Jha


This is to certify that project report entitled India Securities Scam by Harshad Mehtaof the subject Derivative which is submitted by Jeteendra Singh, Manoj Panjwani, itesh Khanna, Prerna Bhadani, Sangeev Jha is an authentic record of the candidates own work carried out by them under our guidance. The matter embodied in this thesis is original and has not been submitted for the award of any other degree.

Prof. Prashant Sipani (Project Guide) Date: 20thh March, 2012

We express our deep gratitude to Prof. Prashant Sipani of Jaipuria Institute of Management, Jaipur for his constant support, guidance, and motivation which helped us immensely in completing this project. The project provided us an opportunity to understand theIndias biggest securities scam that aver happened in a better manner.

Group-2 Jeetendra Singh Manoj Panjwani Nitesh Khanna Prerna Bhadani Sangeev Jha

A lot is heard in the past and till today we hear a lot about the financial markets scams. 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. These scam masters through various fraudulent activities gather big chunks of money. Our report is one such initiative to highlight a capital market scam or say securities scam in India, how it was done and the money that was involved in these scams. In this project report we have studied about one of the most infamous scams that has been unearthed The Securities SCAM. The Securities Scam refers to a diversion of funds to the tune of Rs. 3,500 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.The Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) issued fake BRs, or BRs not backed by any government securities. 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. Exploiting several loopholes in the banking system, Harshad Mehta 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. In an ever expanding ambit, the scam has engulfed top executives of large nationalized banks, foreign banks and financial institutions, brokers, bureaucrats and politicians. The functioning of the money market and the stock market has been thrown in disarray. A large number of agencies, namely, the Reserve Bank of India (RBI), the Central Bureau of Investigation (CBI), the Income Tax Department, the Directorate of Enforcement and the Joint Parliamentary Committee (JPC) are currently investigating various aspects of the scam.

S.No. Chapter Name 1 2 3 4 4.1 4.2 4.3 5 6 7 8 9 9.1 9.2 9.3 9.4 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

Various scams, scandals and stigmas have surfaced in the recent years. These may not all be attributable to the antics and bungling of politicians, but they have been facilitated largely because of the vitiated atmosphere that the politicians and the political system have created in the country.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 Scam in printing & selling of stamp papers, which is used for recording documents for registration purpose. This scam is of about Rs. 2200 crores & involves fraudulent printing & sale of stamp papers in the various parts of the country. There is the famous Bofors scam, 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. The Securities Scam refers to a diversion of funds to the tune of Rs. 5,000 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


Harshad Shantilal Mehta was born on 29 July in a Gujarati Jain family of modest means. Father : Mr Shantilal Mehta, 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. Became a dream seller and a celebrity of the financial world.. 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

On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, 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, with many litigations still pending against him.


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. 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. 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. 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. from the banks to stockbrokers from April 1991 to May 1992. He caused the steep rise in the Stock market index in the year 1992 by bidding at a premium for many shares. Some of the stocks which were highly invested in by Harshad Mehta were: ACC Apollo Tyres Reliance Tata Iron and Steel Co. (TISCO) BPL Sterlite Videocon

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.


Ready forward is actually a sort of a short term loan (typically 15 days or less) usually from one bank to another. Unlike other loans, it is actually a secured loan with Government securities backing it up. In essence, its like one bank selling its securities to another with a promise of buying it back at a pre-determined price. In early 1990s, 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). 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. 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.e. Friday. This allowed the banks to sell their bonds in the earlier part of their week and then buy it back in the later part. This helped them make some profits as they could invest the money that they got by selling the bonds. 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. Individual banks did not have any idea as to who the other party in the whole transaction was. The whole process can be described in 3 phases:

1. Settlement Process 2. Payment cheques 3. Dispensing of securities 4.1. SETTLEMENT PROCESS The normal settlement process in government securities is that the transacting banks make payments and deliver the securities directly to each other. During the scam, however, 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. In this settlement process, deliveries of securities and payments are made through the broker. That is, the seller hands over the securities to the broker who passes them on to the buyer, while the buyer gives the cheque to the broker who then makes the payment to the seller. In this settlement process, the buyer and the seller may not even know whom they have traded with, both being known only to the broker. 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. In other words, they started trading on their own account, and in a sense became market makers in some securities thereby imparting greater liquidity to the markets. When a bank wanted to conceal the fact that it was doing an RF deal, the broker came in handy. The broker provided contract notes for this purpose with fictitious counter parties, but arranged for the actual settlement to take place with the correct counter party. 4.2. 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 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. As it happens, it is purely a matter of banking custom that an account payee cheque is paid only to the payee mentioned on the cheque. In fact, exceptions were being made to this norm, well before the scam came to light. Privileged (corporate) customers were routinely allowed to credit account payee cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing the interest lost on the amount.Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it may take a day or two for the cheque to be cleared and for the funds to become available to the customer. At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 crores cheque is about Rs. 8 lakhs.


On the other hand, when banks make payments to each other by writing cheques on their account with the RBI, these cheques are cleared on the same day. The practice which thus emerged was that a customer would obtain a cheque drawn on the RBI favoring not himself but his bank. The bank would get the money and credit his account 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. 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. 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. 4.3. 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. 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. 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.

Another instrument used in this scam was the bank receipt (BR). In an RF deal, securities were not moved back and forth in actuality. Instead, the borrower, who is the seller of securities, gave the buyer of the securities a BR. In practice, 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. It states that the securities are held by the seller in trust for the buyer. 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, but there is a possibility that the issuer may not have the securities at all. 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, i.e. bank will sell securities it doesnt have. This will be done if the bank anticipates fall in prices. Bank buys securities at lower prices when they fall in value and discharges the BR. Bank may do an RF deal and issue a fake BR (not backed by securities) if banks simply want an unsecured loan , where a lending bank would be under the

impression that its dealing with a secured loan but in reality its advancing an unsecured loan. Though, lenders should have taken measures to protect themselves . During the scam, brokers were so perfect in the art of using fake BRs and obtained unsecured loans from various banks. 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. This way several large banks made huge unsecured loans to these banks and thus it created money for the brokers.

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, the lending bank has to contend with the possibility that it may be making an unsecured loan. This requires assigning credit limit to the borrower by assessing the creditworthiness of the borrower. The different aspects of securities transactions of a bank are carried out by different persons

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.


Imaginary companies created. Bought the shares of own company by himself causing Sensex up. Purchased Huge amount of shares of a targeted company like ACC . Caused false bull run. Created fake BRs, or BRs not backed by any government securities. Illegally issue of BR by small bank. Without verification, banks like Vijaya Bank issued the cheque. Recommendation to purchase particular shares on his own website.



9.1 IMMEDIATE IMPACT: After the Harshad Mehta scandal was exposed, April, 1992, the situation in share market was that of utter chaos. The first impact of the scam was a steep fall in the share prices. The index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization. However, the major damage to the stock market did not stop here. Since the accused were active brokers in the stock markets, they had traded a large number of shares during the previous year. All these shares became tainted and worthless and could not be used in the market. This was a great loss to the innocent investor who had bought these shares much before the scandal was exposed. 9.2 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. The government was under immense pressure and its liberalization policies were severely criticized. It was also believed that Harshad Mehta and his accomplices were behind framing of these policies. In the end the government had to put the liberalization plans on hold. SEBI had to postpone the sanctioning of private sector mutual funds. Implementation of some aspects of the Narasimham Committee recommendations on the banking system had to be delayed. 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. 9.3 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. These BR were declared void and public money was at stake. At least ten prominent banks were involved in this; some of them being SBI, Standard Chartered and a subsidiary of RBI. The scam could have been checked in time with proper policies and verifications. The government, the RBI and the commercial banks are as much accountable as the brokers for the scam. The brokers were encouraged by the banks to divert funds from the banking system to the stock market. The RBI too stood indicted because despite knowledge about banks over-stepping the boundaries demarcating their arena of operations, it failed to check them. Some of the prominent individuals who were penalized were K. M. Margabandhu, CMD of the UCO Bank (Arrested and sacked) and V. Mahadevan, one of the MD the State Bank of India (Suspended) 9.4 RESPONSE OF THE GOVERNMENT As discussed, 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. As a

first step by the government, the case was handed over to Central Bureau of Investigation and the Joint Parliamentary Committee (JPC). Then a special court was set up to facilitate speedy trial. The special court declared an ordinance for the attached the properties of all individuals accused in the scam. Further, all transactions done by the accused after March 31, 1991 were considered void. To reform the system further, the government banned RF deals and slowed down the liberalization process.


The government, the RBI and the commercial banks were as much accountable as the brokers for this scam. The brokers were encouraged by the banks to invest their funds in the stock market in place of investing in the banking system. The RBI was also responsible for this scam because despite knowledge about banks over-stepping the boundaries demarcating their arena of operations, it failed to reign them in. RBI didnt take any action against the commercial banks. 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 Mehtas scam could have been detected earlier if either of the above (commercial banks, RBI or government) parties not encourage the brokers to invest in the stock market.


Discover the guilty: This task was assigned to the Central Bureau of Investigation (CBI) and to the Joint Parliamentary Committee (JPC). A special court was set up to facilitate speedy trial. Transactions became void: The government set up a special court and promulgated an ordinance with several draconian provisions to deal with the scam. 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, 1991. 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, banning of RF deals and going slow on liberalization.


The main motive behind punishing the offenders is more to prevent future offenders to not to try this type of scam. The government must ensure that not only the obviously guilty (the brokers) but also the not so obviously guilty (the bank executives, the bureaucrats and perhaps the politicians) are identified and brought to book. These types of investigations are not only very time consuming but also very expensive.


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. Investor protection 2. Orderly development of capital market


He was later charged with 72 criminal offenses and more than 600 civil action suits were filed against him. By the time he died , Mehta had been convicted in only one of the many cases filed against him. He died in 2002 of a massive heart attack in a jail in Thane, with many litigations still pending against him.

Corporate Governance is the value framework, ethical framework and moral framework within which businesses make decisions .When large sums of money are involved, greed causes people to become unethical There was a total lack of transparency in the money market.Irregularities of all kind were so common that no suspicion aroused even by highly irregular transactions. This is the ideal environment for a scam to germinate and grow to alarming proportions