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CAPITAL MARKET SCAMS

Prepared by Purav Gudhka Ravi Prakash Ravi Kiran Rajkumar Sharma

SECURITIES SCAM

Mr. Harshad Mehta, The Big Bull, engineered The Securities Scam by diverting 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 He Intelligently used the Ready Forward Deal (RF) for the scam The Ready Forward Deal (RF) is a secured short term (typically 15 day) loan from one bank to another bank. The lending is done against Government Securities exactly the way a pawnbroker lends against jewelry

MECHANICS OF THE SCAM


Methods adopted to wonderfully engineer the Scam:

The settlement process - Deliveries of the security were done through brokers Payment Cheques - Account payee cheques in favour of a bank were credited to brokers own accounts to avoid clearing delays, thereby reducing the interest lost on the amount and thus diverting the funds to stock markets Dispensing the security - Fake Bank Receipts used (BOK & MCB), bribes to higher officials & Forging of the securities.

Breakdown of Control System which led to the scam:


Separation of functions Counter party limits

Public Debit Office (PDO) of RBI was reluctant to carry out regular audits

IMPACT OF THE SECURITIES SCAM


A loss to the tune of Rs. 100,000 crores in market capitalization. Liberalization process slowed down SEBI postponed the sanctioning of the private sector mutual funds

Euro Issues planned by several Indian Companies were delayed


Reforms in the Banking system and Regulatory System was speeded up

Latest information related to Securities Scam

In March 2011, 20 years after the scam, SBI & IT Dept managed to recover capital claims amounting to Rs. 2196 Cr our of which Rs. 1995.66 Cr were released to IT Dept & Rs199.25 Cr were released to SBI
Amount was raised by liquidation of assets of Harshad Mehta Group worth Rs4000 Cr Earlier Rs1000 Cr was disbursed to SBI and Rs500 Cr was disbursed to Standard charter Bank

KETAN PAREKH SCAM (K-10)

Ketan colluded with promoters of New Economy (ICE) shares and changed the complextion of the market by buying the stocks known as K-10 scripts such as HFCL, Satyam, Global, Zee etc. Modus Operandi- Three broking outfits and 40 brokers in Kolkata & Ahmedabad. Sources of funds- NRI & New Private Sector Banks by pledging shares as collateral In 2001 when there was a sharp fall in the share market following the fall in the NASDAQ the scam broke out

Mechanics Followed:

MMCB issued pay-orders without receiving cash payment or collateral from Mr. Parekh The Pay orders were discounted for Rs137 Cr from Bank of India which bounced

CONTD.
The Loop Holes of the system:

RBI prohibits Co-operative banks to invest in stock markets or to lend to stock brokers (MMCB funded Mr. Parekh) MMCB flouted another norm of RBI by issuing Pay order of more than Rs10 lakhs of loan against shares to Mr. Parekh BOI never cross verified before discounting the pay orders worth Rs137 Cr

Impact on Indian Market:


Sensex dropped from 6100 to 3788 upto March 30th 2001 SEBI banned all deferral products, including Badla, from all stock exchanges

Bibliography:

The Indian Financial System by Bharti V Pathak http://www.iimahd.ernet.in/~jrvarma/papers/vik18-1.pdf www.timesofindia.com