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Harshad Mehta: The Big Bull Gone Wild

Mehtas Trade Mechanism


Fake BRs
issued

Bank A

Promised to pay on Day 2 &


presented BRs

Issued Govt. Bonds


taken from Bank B

Sold Govt. Bonds on


Day 1

Issued cheques favouring


Broker on Day 1

Repaid money taken


from Bank C on Day 2

Broker

Promised to pay on Day 3 & presented


BRs

Issued Govt. Bonds


taken from Bank D

Bank C

Bank D
Sold Govt. Bonds on
Day 2

Issued cheques favouring


Broker on Day 2

Excess Funds on hands


channelised towards buying
stocks

Stock Markets
Sources: topcafirms.com, BusinessToday; Note: RF Deal: Secured short term loan from one bank to another; BR: Acts as receipt for the money received by the selling Bank

Buyer of Securities

Seller of Securities

Bank B

Seller of Securities

Buyer of Securities

Bank X

Ketan Parekh: Scam led by a Pentafour Bull

Circular Trading Mechanism


D sells same
stock to KP

KP Sells stock
to Trader A

Price Rigging

Stock Price

C sells same
stock to Trader D

B sells same
stock to Trader C

A sells same stock


to Trader B

The Story Continues.


Parekh was convicted in 2008 for being involved in engineering the technology stocks scam in 1999-2001
Also convicted with one year imprisonment for the transaction he conducted in the 1992 stock scam, involving a unit of Canara Bank
Out of the Rs. 800 crore liability payable towards Madhavpura Bank, Parekh repaid 50% of the amount
Currently, he is serving a period of disqualification from trading in the Indian bourses till 2017
However, Parekh is still very much active in the stock market through Benami entities and never left the markets in the first place
As per the Intelligence Bureau Report, recently his cartel was involved in rigging share prices of many stocks
Sources: Reuters, BusinessToday, DNA; Note: Circular Trading: trade done by a group of people among themselves to rig the share price

Comparative Analysis of Both Scams

Sources: http://flame.org.in/knowledgecenter/scam.aspx

Impact on Stock Markets and Indian Economy


The immediate impact of these scams were
sharp fall in the share prices and indices
Post Harshad Mehta Scam, markets lost Rs.
0.1mn crore loss in market capitalisation
The Governments liberalization policies came
under severe criticism
Subsequently, these policies were put on hold
for a while
SEBI, the securities market regulator,
postponed sanctioning of private sector mutual
funds
The entry of much talked about foreign
pension funds and mutual funds became the
remotest possibility
The Euro-issues planned by many
Cos. Were delayed
Sources: http://www.slideshare.net/

Indian

Measures taken by SEBI against scams


Securities and Exchange Board of India (SEBI) was established in April 88
Established with an objective of protecting the rights of small investors and
regulating and developing the stock market in India
Post Mehta Scam in 1992, the GoI passed SEBI Act 1992 and conferred
statutory powers to it

Sources: icmrindia.org; Note: ALBM: Automated Lending and Borrowing Mechanism; BLESS: Borrowing and Lending of Securities Scheme

Has SEBI lived up to its purpose??!


While Mehta scam empowered SEBI to regulate markets more effectively,
several other scams forced it to ensure that markets operate transparently
and efficiently
However, post Mehta scam, several scams came to light, casting doubt on
the efficiency of SEBI as a regulatory body
Although many reforms are introduced by SEBI, there remains significant
lapses in the law implementation and enforcement
Certain areas wherein SEBI needs to
think upon and take action includes:
Bear/Bull Cartels
Insider Trading
Circular Trading
Uniform settlement cycle
A few actions taken by SEBI were
criticized of it being clueless about its
supervisory duties
Its high time that market regulators implement appropriate measures else the
ghost from past will continue haunting the Indian bourses
Sources: indianblogger.com, ismb-blogspot.in, icmrindia.org