Report
on
Harsad Mehta Scam
Date: 30th January’14

Assignment: 1st

Teacher: Mr. Y.G Reddy

Submitted By:
Nigam Raj
BBA 2n...
Content

Biography
1992 Security scam
Exposure
BreakDown of Scam
Impact of Scam
News Paper Article (TOI)
Refrence
Biography
Harshad M Mehtawas an Indian stockbroker, well known for his wealth and for
having been charged with numerous fi...
Stock Exchange (BSE) transaction system and SEBI further introduced new rules to
cover those loopholes. He was tried for 9...
1992 Security Scam
A typical ready forward deal involved two banks brought together by a broker in
lieu of a commission. T...
Exposure
Exploiting several loopholes in the banking system, Mehta and his
associates siphoned off funds from inter-bank t...
Break Down of Scam
 The scam was made possible by a complete breakdown of the
control system both within the commercial b...
Where has all the money gone?
It is becoming increasingly clear that despite the intensive efforts by
several investigatin...
 It is becoming increasingly clear that despite the intensive
efforts by several investigating agencies, it would be
impo...
Impact of Scam
Impact of the Scam

The immediate impact of the scam was a sharp fall in the share prices. The index
fell f...
NEWS Paper Article
Date: December 31, 2001
Date: November 3, 2003
Date : febuary 5, 2011
Date: November 9,2001
Date : October 23,2010
Reference
http://en.wikipedia.org/wiki/Harshad_Mehta#The_1992_security_scam
http://articles.timesofindia.indiatimes.com/20...
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Harsad Mehta Scam

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Report on Harsad Mehta Scam, Security Scam

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Harsad Mehta Scam

  1. 1. Report on Harsad Mehta Scam Date: 30th January’14 Assignment: 1st Teacher: Mr. Y.G Reddy Submitted By: Nigam Raj BBA 2nd year
  2. 2. Content Biography 1992 Security scam Exposure BreakDown of Scam Impact of Scam News Paper Article (TOI) Refrence
  3. 3. Biography Harshad M Mehtawas an Indian stockbroker, well known for his wealth and for having been charged with numerous financial crimes that took place in 1992. Of the 27 criminal charges brought against him, he was only convicted of one, before his death at age 47 in 2001. It was alleged that Mehta engaged in a massive stock manipulation scheme financed by worthless bank receipts, which his firm brokered in "ready forward" transactions between banks. Mehta was convicted by the Bombay High Court and Supreme Court of India[2] for his part in a financial scandal valued at 4999 crore (US$800 million) which took place on the Bombay Stock Exchange (BSE). In reality he actually exposed the loopholes in the Bombay
  4. 4. Stock Exchange (BSE) transaction system and SEBI further introduced new rules to cover those loopholes. He was tried for 9 years, until he died in the late 2001. Mehta was under Criminal custody in the Thane prison. Mehta complained of chest pain late at night and was admitted to the Thane civil Hospital. He died following a brief heart ailment, at the age of 47, on 31 of December 2001. He is survived by his wife and one son.[11] He died with many litigations still pending against him. He had altogether 28 cases registered against him. The trial of all except one, are still continuing in various courts in the country. Market watchdog, Securities and Exchange Board of India, had banned him for life from stock market-related activities.
  5. 5. 1992 Security Scam A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasn’t the case in the lead-up to the scam. In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker. This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank.  The Ready Forward Deal (RF) is in essence 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.  In fact one can say that the borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan at (typically) a slightly higher price. This went on as long as the stock prices kept going up, and no one had a clue about Mehta's operations. Once the scam was exposed, though, a lot of banks were left holding BRs which did not have any value – the banking system had been swindled of a whopping 40 billion (US$640 million). When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof.[8] He knew that he would be accused if people came to know about his involvement in issuing checks to Mehta. M J Pherwani of UTI was also linked to Mehta.
  6. 6. Exposure Exploiting several loopholes in the banking system, 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. When the scheme was exposed, banks started demanding their money back, causing the collapse. He was later charged with 72 criminal offences, and more than 600 civil action suits were filed against him.[6] He was arrested and banished from the stock market with investigators holding him responsible for causing a loss to various entities. Mehta and his brothers were arrested by the CBI on 9 November 1992 for allegedly misappropriating more than 2.8 million shares (2.8 million) of about 90 companies, including ACC and Hindalco, through forged share transfer forms. The total value of the shares was placed at 2.5 billion (US$40 million)
  7. 7. Break Down of Scam  The scam was made possible by a complete breakdown of the control system both within the commercial banks as well as the control system of the RBI itself.  We shall examine these control systems to understand how these failed to function effectively and what lessons can be learnt to prevent failure of control systems in the future.  The internal control system of the commercial banks involves the following features:  Separation of Functions: The different aspects of securities transactions of a bank, namely dealing, custody and accounting are carried out by different persons.  Counterparty Limits: The moment an RF deal is done on the basis of a BR rather than actual securities, the lending bank has to contend with the possibility that the BR received may not be backed by any/adequate securities. In effect, therefore, it may be making an unsecured loan, and it must do the RF only if it is prepared to make an unsecured loan. This requires assessing the creditworthiness of the borrower and assigning him a "credit limit" up to which the bank is prepared to lend. Technically, this is known as a counterparty limit.
  8. 8. Where has all the money gone? It is becoming increasingly clear that despite the intensive efforts by several investigating agencies, it would be impossible to trace all the money swindled from the banks. At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Based on the result of investigations and reporting so far, the following appear to be the possibilities:  A large amount of the money was perhaps invested in shares. However, since the share prices have dropped steeply from the peak they reached towards end of March 1992, the important question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. In the aftermath of the scam it fell to about 2500 before recovering to around 3000 by August 1992. Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's purchases were made at low prices, so that the average cost of his portfolio corresponds to an index well below 2500 or perhaps even below 2000. Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so cannot be dismissed without a serious consideration. Whether these shares are in fact traceable is another question.
  9. 9.  It is becoming increasingly clear that despite the intensive efforts by several investigating agencies, it would be impossible to trace all the money swindled from the banks. At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Based on the result of investigations and reporting so far, the following appear to be the possibilities:  A large amount of the money was perhaps invested in shares. However, since the share prices have dropped steeply from the peak they reached towards end of March 1992, the important question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. In the aftermath of the scam it fell to about 2500 before recovering to around 3000 by August 1992. Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's purchases were made at low prices, so that the average cost of his portfolio corresponds to an index well below 2500 or perhaps even below 2000. Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so cannot be dismissed without a serious consideration. Whether these shares are in fact traceable is another question.
  10. 10. Impact of Scam Impact of the Scam The immediate impact of the scam was a sharp fall in the share prices. The index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization. Since the accused were active brokers in the stock markets, the number of shares which had passed through their hands in the last one year was colossal. All these shares became "tainted" shares, and overnight they became worthless pieces of paper as they could not be delivered in the market. Genuine investors who had bought these shares well before the scam came to light and even got them registered in their names found themselves being robbed by the government. This resulted in a chaotic situation in the market since no one was certain as to which shares were tainted and which were not. The government's liberalization policies came under severe criticism after the scam, with Harshad Mehta and others being described as the products of these policies. Bowing to the political pressures and the bad press it received during the scam, the liberalization policies were put on hold for a while by the government. The Securities Exchange Board of India (SEBI) postponed sanctioning of private sector mutual funds. The much talked about entry of foreign pension funds and mutual funds became more remote than ever. The Euro-issues planned by several Indian companies were delayed since the ability of Indian companies to raise equity capital in world markets was severely compromised.
  11. 11. NEWS Paper Article Date: December 31, 2001
  12. 12. Date: November 3, 2003
  13. 13. Date : febuary 5, 2011
  14. 14. Date: November 9,2001
  15. 15. Date : October 23,2010
  16. 16. Reference http://en.wikipedia.org/wiki/Harshad_Mehta#The_1992_security_scam http://articles.timesofindia.indiatimes.com/2010-10-23/mumbai/28221697_1_harshad-mehtasecurities-scam-sbi-caps http://articles.timesofindia.indiatimes.com/keyword/harshad-mehta http://articles.timesofindia.indiatimes.com/2001-11-09/india-business/27260665_1_mehta-brothersharshad-mehta-securities-scam http://www.scribd.com/doc/42325779/Harshad-Mehta-Case-Study http://www.scribd.com/doc/42325779/Harshad-Mehta-Case-Study
  17. 17. Thank you

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