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For
The Fin 4um
First Appearance
O April, 1992 - the first press report appeared
indicating that there was a shortfall in the
Government Securities held by the State Bank of
India.

O Investigations revealed that this was just the tip


of an iceberg which came to be called the
›  ›› involving misappropriation of
funds to the tune of over Rs. 3500 crores (about $
1.2 billion).
Stake holders
O The Bank of Karad (BOK) ,
O the Metropolitan Cooperative Bank (MCB)
O Standard Chartered Bank (lax counter party
limits)
O Reserve bank of India.
O Millions of share holders.
O Bulls and bears of the market.
Knee Jerk Reactions
O Promulgation of an ordinance and setting up of a special court to
try those accused

O The ordinance ordered attachment of property of all the accused

O Annulment of all transactions done by the accused brokers.

O the stock prices dropped by over 40%, wiping out market value to
the tune of Rs. 100,000 crores.

O postponed sanctioning of private sector mutual funds.

O Liberalisation process questioned


Agencies investigating the case
O The Reserve Bank of O The Directorate of
India (RBI), Enforcement
O The Central Bureau of O Joint Parliamentary
Investigation (CBI), Committee(JPC)
O The Income Tax
Department,
Genesis
O The Two Securities Markets ʹ Security market,
Stock market ʹ Even Himalayas have passes
O Badla trading.
O Liberalization of the Economy
O Immense pressure on the public sector to
perform - Portfolio Management Scheme
(PMS)
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O A secured short term O Provided much needed
loan from one bank to liquidity to the G-sec
another bank. markets.

O Against government O Helped banks to


securities. manage their SLR
requirements.
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O Metamorphosis of RF: O How this effected:

A The settlement process in the A brokers instead of merely


government securities market bringing buyers and sellers
became broker intermediated. together started taking
positions in the market.
A The broker through whom the
payment passed on its way from A When a bank wanted to
one bank to another found a way conceal the fact that it was
of crediting the money into his doing an RF deal, the broker
account though the  came in handy.
   was drawn in
favour of a bank.

A the brokers soon found a way to


do away with the security. ʹ
bribe, forge, ð  
ð  
O Bank Receipt serves three functions:
A The BR confirms the sale of securities.

A It acts as a receipt for the money received by the


selling bank. Hence the name ʹ bank receipt.

A 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.
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O Separation of Functions:
dealing, custody and
accounting .
O Counterparty Limits:
A Assessing the
creditworthiness of the
borrower and assigning
him a "credit limit" up to
which the bank is
prepared to lend.
Other effects
O Window Dressing Bank Balance Sheets:
A would improve the bottom line (profit) for the
bank, the loss suffered by the bank in transaction
A would not be reflected in its profit and loss
account at all.
Responses
O Over-regulation of our markets
O Understanding that artificial insulation of
closely related markets from each other is
counterproductive in the long run
Harshad Mehta
O The big bull- the pied piper.
O was accused of having
diverted funds from the MUL
O Attempted come back of ͚97.
O Died on December 31, 2001
- still a mystery.
O Bear Cartel His favorite stocks
A Hiten Dalal, included
A A.D.Narottam * ACC
* Apollo Tyres
* Reliance
* TISCO
* BPL
* Sterlite
* Videocon.