Roshankumar S PimpalkarEmail: email@example.com HARSHAD MEHTA : MAN WHO HAUNTED INDIAN STOCK MARKET
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgMehta was famous for ripping higher profits from stock marketand trading, and for his famous financial scandal, worth of5,000 crore (US$997.5 million) in Bombay Stock Exchange(BSE), of 1992. He was tried for 9 years, until he died in the late2001.Let‟s see what and how he did it.
Roshankumar S PimpalkarEmail: email@example.com THE BEGINING
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgThe banks in India have to maintain a particular amount of theirdeposits in government bonds. This ratio is called SLR(Statutory Liquidity Ratio).In the early 1990s, each bank had to submit a detailed sheet ofits balance at the end of the day and also show that there was asufficient amount invested in government bonds.
Roshankumar S Pimpalkar Email: email@example.comNow, the government decided that the banks need not showtheir details on each day, they need to do it only on Fridays.Also, there was an extra clause that said that the average %ageof bond holdings over the week needs to be above the SLR butthe daily %age need not be so.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgThat meant that banks would sell bonds in the earlier part ofthe week and then buy bonds back at the end of the week.The capital freed in the starting of the week could then beinvested.Now, at the end of the week many banks would be desperate tobuy bonds back.This is where the broker comes in.
Roshankumar S Pimpalkar Email: email@example.comThe broker knew which bank had more bonds (called „plus‟) andwhich has less than the required amount (called „short‟). Hethen acts as the middleman between the two banks.Harshad Mehta was one such broker. He worked as a middleman between many banks for a long time and gained the trustof the banks‟ senior management.
Roshankumar S PimpalkarEmail: firstname.lastname@example.org THE TRAP
Roshankumar S Pimpalkar Email: email@example.comLets say that there are two banks A (short) and B (plus). Nowwhat Harshad Mehta did was that he told the banker at A thathe was dealing with many banks and hence did not know whowould he deal in the end with. So he said that the bank shouldwrite the cheque in his name rather than the other bank (whichwas forbidden by law), so that he could make the payment towhichever bank was required.Since he was a trusted broker, the banks agreed.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgThen he took the money from A and went to B and said that hewould pay the money on the next day to B but he needed thebonds right now (for A).But he offered a 15 % return for bank B for the one dayextension. Bank B readily agreed with this since the offer wasvery lucrative
Roshankumar S Pimpalkar Email: email@example.comNow since Harshad Mehta was dealing with many banks at thesame time he could then keep some capital with him at alltimes.Example: He takes money from A on Monday, and tells B thathe‟ll pay on Tuesday, then he takes money from C on Tuesdayand tells D that he‟ll pay on Wednesday and the money he getsfrom C is paid to B and as a result he has some working capitalwith him at all times if this goes on with other banks throughoutthe week.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgMON TUE WED Money Money for D Money Money for F from C from E Money for B; promises to pay to B on tue Retains money of A for whole week as working capital
Roshankumar S Pimpalkar Email: email@example.comThe banks at that time were not allowed to invest in the equitymarkets.Harshad Mehta had very cleverly squeezed some capital out ofthe banking system.This capital he invested in the stock market and managed tostoke a massive boom.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgHe was buying shares heavily. The shares which attractedattention were those of Associated Cement Company (ACC).The price of ACC went up from Rs 200 to Rs 10,000.
Roshankumar S Pimpalkar Email: email@example.comSince he had to book profits in the end, the day he sold was theday when the market crashed.The same day Vijaya Bank chairman committed suicide byjumping from the banks‟ office roof.The chairman knew that when it would become public that hehad written cheques in the name of Mehta, he would be deadmeat.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgAnother instrument used was the Bank receipt (BR).In a ready forward deal, securities were not moved back andforth in actuality. Instead, the borrower, i.e., the seller ofsecurities, gave the buyer of the securities a BR.A BR confirms the sale of securities. It acts as a receipt for themoney received by the selling bank. Hence the name - bankreceipt.It promises to deliver the securities to the buyer.It also states that in the mean time, the seller holds thesecurities in trust of the buyer.
Roshankumar S Pimpalkar Email: email@example.comHaving figured out his scheme, Mehta needed banks whichissued 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) - came in handyfor this purpose.These banks were willing to issue BRs as and when required,for a fee.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgOnce these fake BRs were issued, they were passed on to otherbanks and the banks in turn gave money to Mehta, assumingthat they were lending against government securities whereasthis was not really the case.This money was used to drive up the prices of stocks in thestock market.When time came to return the money, the shares were sold for aprofit and the BR was retired.The money due to the bank was returned.
Roshankumar S Pimpalkar Email: email@example.comThis went on as long as the stock prices kept going up, and noone had a clue about Mehta‟s operations.
Roshankumar S PimpalkarEmail: firstname.lastname@example.org THE CONSEQUENCES
Roshankumar S Pimpalkar Email: email@example.com on March 1, 2001 came as a major shock for theGovernment of India, the stock markets and the investors alike.Once the scam was exposed lot of banks were left holding BRswhich did not have any value - the banking system had beenswindled of a whopping 4,000 crore (US$798 million).The panic run on the bourses continued and the Bombay StockExchange (BSE) President Anand Rathis resignation added tothe downfall.Rathi had to resign following allegations that he had used someprivileged information, which contributed to the crash.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgThe scam shook the investor„s confidence in the overallfunctioning of the stock markets.By the end of March 2001, at least eight people were reportedto have committed suicide and hundreds of investors weredriven to the brink of bankruptcy.
Roshankumar S Pimpalkar Email: email@example.comThis sudden crash in the stock markets prompted theSecurities Exchange Board of India (SEBI) to launch immediateinvestigations into the volatility of stock markets.SEBI also decided to inspect the books of several brokers whowere suspected of triggering the crash.Meanwhile, the Reserve Bank of India (RBI) ordered somebanks to furnish data related to their capital market exposure.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgMehta and his associates siphoned off funds from inter-banktransactions and bought shares heavily at a premium acrossmany segments, triggering a rise in the Sensex.When the scheme was exposed, banks started demanding theirmoney back, causing the collapse.He was later charged with 72 criminal offenses, and more than600 civil action suits were filed against him.
Roshankumar S Pimpalkar Email: email@example.comHe was arrested and banished from the stock market withinvestigators holding him responsible for causing a loss tovarious entities.Mehta and his brothers were arrested by the CBI on November 91992 for allegedly misappropriating more than 27 lakh shares(Approx. USD 54,000) of about 90 companies, including ACC andHindalco, through forged share transfer forms.The total value of the shares was placed at 250 crore(US$49.88 million).The two brothers have been granted temporary bail for fivedays following the death of Mehta in late 2001
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgMehta again raised a furore in 1995 when he made a publicannouncement that he had paid 1 crore (US$199,500) to thethen Congress President and Prime Minister, Mr P.V. NarasimhaRao, as donation to the party, for getting him off the scandalcase.
Roshankumar S PimpalkarEmail: email@example.com THE END OF THE DEVIL
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgMehta was under judicial custody in the Thane prison.Mehta complained of chest pain late last night and wasadmitted to the Thane civil Hospital.He died following a brief heart ailment, at the age of 47, inDecember 31,2001.
Roshankumar S Pimpalkar Email: email@example.comMehta died on with many litigation still pending against him.He had altogether 28 cases registered against him.The trial of all except one, are still continuing in various courtsin the country.
Roshankumar S Pimpalkar Email: firstname.lastname@example.orgThe Mehta scandal was portrayed in a Hindi movie “Gafla”.It was premiered in Times BFI 50th London Film Festival.
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