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Presentation on-

Harshad Mehta Scam


Guided byProf. M. Bhatia Presented byAshish Jain Rohan John Solomon

1. Introduction. 2. Main issues in scam. 3. Unethical Issues. 4. Impact of the Scam. 5. Ethical issues & Govt. measures. 6. Conclusion.

The Securities Scam


The Securities Scam referred to a diversion of funds to the tune of over 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. Harshad Mehta was an Indian Stockbroker and was 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.

Introduction
In April 1992, the first press report appeared indicating that there was a shortfall in the Government Securities held by the State Bank of India. In a little over a month, investigations revealed that this was just the tip of an iceberg which came to be called the securities scam, involving misappropriation of funds to the tune of over Rs. 3500 crores. 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 was thrown in disarray.

The Mechanics of the Scam


READY FORWARD DEAL: It is in essence a secured short term (typically 15 day) loan from a bank to another bank.

ISSUE BR

BR

BORROWER BANK
FUNDS

BROKER
FUNDS

LENDER BANK

Bank receipt
It acts as a receipt for the money received by the selling bank. Hence, the name bank receipt.
It promises to deliver the securities to the buyer. It also states that in the meantime the seller holds the securities in trust for the buyer. Harshad Mehta needed banks which issued fake 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) issues BRs. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to harshad Mehta, 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.

BORROWER BANK
BANK OF KARAD & METROPOLITAN CO-OPERATIVE BANK (MCB)

ISSUED FAKE BRS

FAKE BR

LENDER BANKS
SBI UCO STANDERED CHARTERED NHB CANARA BANK GROUP ANDHRA BANK GROUP

BROKER
HARSHAD MEHTA

FUNDS

Unethical Issues In Mehta Scam


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

IMPACT OF SCAM
Index fell from 4500 to 2500,leads to loss of Rs.100,000 crore in market. All banks & financial institution start demanding to return the funds.

Shares were tainted.


Genuine investors fell like robbed, chaotic condition in stock market. Government Liberalization policies on hold. SEBI postponed sanctioning of private sector mutual fund.

Direct effect on FDI ,as entry of foreign pension funds and mutual funds becomes rare. The Euro-issues planned by several Indian companies were delayed. Adversely affect 15 major commercial banks of India, foreign banks and NHB(national housing bank) When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof, because of his active involvement in issuing cheques to Mehta.

Government Measures and Ethical Issue


The response of any government to a scam of this kind would have three main facets: Discover and punish the guilty Recover the money Reform the system

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 12th of April 1992. The two objective s mandated in the SEBI Act are 1. investor protection 2. orderly development of capital market.

Conclusion
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.

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