Harshad mehta scam


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Harshad mehta scam

  3. 3. The capital market is the market for securities, where companies and govt. can raise long term funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the bond market What is Capital Market scam? It is basically fraud done in the Capital market with the investors by manipulating the facts in order to attain enormous profits. INTRODUCTION TO THE “BIG BULL OF THE TRADING FLOOR”
  4. 4. The Great Indian Scam- 1992 Who is this man- HARSHAD MEHTA? Harshad Shantilal Mehta was born in a Gujarati jain family of modest means. His father was a small businessman. His mother's name was Rasilaben Mehta. His early childhood was spent in the industrial city of Bombay. Due to indifferent health of Harshad’s father in the humid environs of Bombay, the family shifted their residence in the mid-1960s to
  5. 5. Raipur, then in Madhya Pradesh and currently the capital of Chattisgarh state. An Amul advertisement of 1999 during the conterversy over MUL saying it as "The Big Bhool" (Bhool in Hindi means Blunder) He studied at the Holy Cross High School, located at Byron Bazaar. After completing his secondary education Harshad left for Bombay. While doing odd jobs he joined Lala Lajpat Rai College for a Bachelor’s degree in Commerce. After completing his graduation, Harshad Mehta started his working life as an employee of the New India
  6. 6. Assurance Company. During this period his family relocated to Bombay and his brother Ashwin Mehta started to pursue graduation course in law at Lala Lajpat Rai College. His youngest brother Hitesh is a practising surgeon at the B.Y.L.Nair Hospital in Bombay. After his graduation Ashwin joined (ICICI) Industrial Credit and Investment Corporation of India. They had rented a small flat in Ghatkopar for living. In the late seventies every evening Harshad and Ashwin started to analyze tips generated from respective
  7. 7. offices and from cyclostyled investment letters, which had made their appearance during that time. In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to Bombay Stock Exchange (BSE) before becoming a jobber on BSE for stock broker P.D. Shukla. In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. After a while he was unable to sustain his overbought positions and decided to pay his dues by selling his house with consent of his mother Rasilaben and brother Ashwin. The next day Harshad went to his brokers and offered the papers
  8. 8. of the house as guarantee. The brokers Shah and Sheth were moved by his gesture and gave him sufficient time to overcome his position. After he came out of this big struggle for survival he became stronger and his brother quit his job to team with Harshad to start their venture GrowMore Research and Asset Management Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for the same with financial assistance from Shah and Sheth, who were Harshad's previous broker mentors.
  9. 9. He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as well as scrip-specific activities. By the end of eighties the media started projecting him as "Stock Market Success", "Story of Rags to Riches" and he too started to fuel his own publicity. He felt proud of this accomplishments and showed off his success to journalists through his mansion "Madhuli", which included a billiards room, mini theatre and
  10. 10. nine hole golf course. His brand new Toyota Lexus and a fleet of cars gave credibility to his show off. This in no time made him the nondescript broker to super star of financial world. During his heyday, in the early 1990s, Harshad Mehta commanded a large resource of funds and finances as well as personal wealth. HARSHAD MEHTA Started his career with New India Assurance Co. Quit his job in 1981 to become a sub-broker. Went bankrupt in 1982 & recovered soon to become more stronger. Went on to become one the most successful broker – The Rags
  11. 11. to Riches Story, thereby earning the nick name of “THE BIG BULL” What was the SCAM all about? Diversion of funds Use of Ready Forward (RF) to maintain SLR (Statutory Liquidity Ratio) Creative Accounting Intra-day Trading What Harshad Mehta did? – The Stock Scam In the early 1990s, the banks in India had to maintain a particular amount of their deposits in government bonds. This ratio was called SLR ( Statutory Liquidity Ratio). Each bank had to submit a detailed sheet of its balance at the end of the day and also show that there was a sufficient
  12. 12. amount invested in government bonds. Now, the government decided that the banks need not show their details on each day, they need to do it only on Fridays. Also, there was an extra clause that said that the average %age of bond holdings over the week needs to be above the SLR but the daily %age need not be so. That meant that banks would sell bonds in the earlier part of the week and then buy bonds back at the end of the week. The capital freed in the starting of the week could then be invested. Now, at the end of the week many banks would be desperate to buy bonds back. This is where the broker comes in. The broker knew which bank had more bonds (called ‘plus’) and which has
  13. 13. less than the required amount (called ‘short’). He then acts as the middleman between the two banks. Harshad Mehta was one such broker. He worked as a middle man between many banks for a long time and gained the trust of the banks’ senior management. Lets say that there are two banks A (short) and B (plus). Now what Harshad Mehta did was that he told the banker at A that he was dealing with many banks and hence did not know who would he deal in the end with. So he said that the bank should write the cheque in his name rather than the other bank (which was forbidden by law), so that he could make the payment to whichever bank was required. Since he was a trusted
  14. 14. broker, the banks agreed. Then, going back to the example of bank A and B, he took the money from A and went to B and said that he would pay the money on the next day to B but he needed the bonds right now (for A). But he offered a 15 % return for bank B for the one day extension. Bank B readily agreed with this since it was getting such a nice return. Now since Harshad Mehta was dealing with many banks at the same time he could then keep some capital with him at all times. For eg. He takes money from A on Monday, Now since Harshad Mehta was dealing with many banks at the same time he could then keep some capital with him
  15. 15. at all times. For eg. He takes money from A on Monday,and tells B that he’ll pay on Tuesday, then he takes money from C on Tuesday and tells D that he’ll pay on Wednesday and the money he gets from C is paid to B and as a result he has some working capital with him at all times if this goes on with other banks throughout the week. The banks at that time were not allowed to invest in the equity markets. Harshad Mehta had very cleverly squeezed some capital out of the banking system. This capital he invested in the stock market and managed to stoke a massive boom.
  16. 16. EFFECTS OF THE SCAM He took the price of ACC from 200 to 9000.Thats an increase of 4400%!!!The market went up like crazy and the bulls were on a mad run. Since he had to book profits in the end, the day he sold was the day when the market crashed. The same day Vijaya Bank chairman committed suicide by jumping from the top of the banks’ office. The chairman knew that when it would become public that he had written cheques in the name of Mehta, he would be dead meat. One rather unknown fact about this scam is that there was a very important player in this scam who managed to keep a very low profile. That man was
  17. 17. Nimesh Shah. He was just as involved as Harshad Mehta but he knew how keep out of the hands of the law. Nimesh Shah still deals in the stock market and is known to be a heavy player. Harshad Mehta is now dead. It is rumored that when he died, he still had 10% of ACC shares with him. INSTRUMENTS OF THE SCAM
  18. 18. the broker Mehta could manage primarily because by now he had become market maker and had started trading on his own account. To keep up a semblance of legality, he pretended to be undertaking the transactions on behalf of a bank. Another instrument used was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality How Mehta used this instruments to earn heavy profits? Having figured out his scheme, Mehta needed banks which issued fake BRs, or
  19. 19. 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 handy for this purpose. These banks were willing to issue BRs as and when required, for a fee,” the authors point out. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock
  20. 20. market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned. The game went on as long as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. 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 Rs 4,000 crore. He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in
  21. 21. shares at a premium across many segments. Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to stockbrokers between April 1991 to May 1992. Exploiting the loophole in the banking system EXPOSURE OF THE SCAM
  22. 22. On April 23, 1992, journalist Sucheta Dalal exposed Mehta's illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking system to finance his buying. The authors explain: “The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank
  23. 23. lends against government securities just as a pawnbroker lends against jeweller. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price.” It was this ready forward deal that Mehta and his accomplices used with great success to channel money from the banking system. 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
  24. 24. 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.” His favorite stocks included: • ACC • Apollo Tyres • Reliance
  25. 25. • Tata Iron and Steel Co. (TISCO) • BPL • Sterlite • Videocon. After effects of the scam When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof. He knew that he would be accused if people came to know about his involvement in issuing cheques to Mehta.
  26. 26. He was later charged with 72 criminal offences. A Special Court also sentenced Sudhir Mehta, Harshad Mehta's brother, and six others, including four bank officials, to rigorous imprisonment (RI) ranging from 1 year to 10 years on the charge of duping State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the securities scam that rocked the financial markets in 1992. The fall In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was all along
  27. 27. considered as the architect of the bull run was blamed for the crash. It transpired that he had manipulated the Indian banking systems to siphon off the funds from the banking system, and used the liquidity to build large positions in a select group of stocks. When the scam broke out, he was called upon by the banks and the financial institutions to return the funds, which in turn set into motion a chain reaction, necessitating liquidating and exiting from the positions which he had built in various stocks. The panic reaction ensued,
  28. 28. and the stock market reacted and crashed within days.He was arrested on June 5, 1992 for his role in the scam. In the wee hours of December 31, just before the year 2001 came to a close, Harshad Mehta passed away in a jail in suburban Mumbai. It was a tragic and unceremonious end to the man who was the first broker to become a mega-star of the Indian capital markets and fire the greed and imagination of every middle
  29. 29. class Indian in the early 1990s. In June 1992, when he was released after 107 days in custody, he told me "Congratulations, you have broken the story of the decade". That was Harshad again - willing to revel even in negative publicity. He made a triumphant exit from court, a la Laloo Yadav's recent jail yatra, amidst a mob of cheering and slogan- shouting investors, who wanted him back in the market, igniting another never- ending bull run. Instead, his disdain for the means the he employed to achieve his mega ambition, left behind a shattered dream and a tarnished image. He ended his days in
  30. 30. judicial custody, and will forever be known as the main architect of the Rs 50-billion scam - India's biggest securities scandal. For a few months after the scam, it almost seemed as though Harshad and his brother Ashwin would remain at center-stage and dominate events. Within weeks after his release he was hogging headlines as the first man ever to claim that he had bribed a sitting Prime Minister. That too was done in typical Harshad fashion - press conferences at the Taj and the Oberoi, high profile lawyers, an editor-turned-MP acting as emcee, the release of audiotapes and the bizarre demonstration of Rs 10 million being stuffed into a large suitcase.
  31. 31. That too fizzled out, with the Mehta brothers perjuring themselves. However, they clearly got themselves a deal to avoid further harassment by other government agencies in charge of money laundering and such offences. Did the aftermath of the investigation change Harshad's attitude to business? No way. Almost every year after 1992, Harshad Mehta has never ceased to attempt a comeback. The problem was that he never changed his formula. He failed to realize that his old magic was not working with investors anymore. At least nowhere near enough to move the market. If the Central
  32. 32. Bureau of Investigation is to be believed, Harshad was also continuously funding himself by selling part of his 1992 stock portfolio, which he had not declared to the Custodian appointed by government. In fact, it is the sale of these benami shares (shares that were held in street names when he and 19 other entities were notified by the Custodian and their assets impounded) that had put him back in police custody at the time of his death. Harshad's problem has always been his flashiness. In 1992, when I broke the story about the Rs 6 billion that he had swiped from the State Bank of India, it was his visits to the bank's headquarters in a flashy
  33. 33. Toyota Lexus that was the tip off. Those days, the Lexus had just been launched in the international market and importing it cost a neat package. 1997 saw Harshad Mehta making another big comeback attempt. This time as a new age stock market guru. He was among the first to set up his own website to dispense tips. He had also built up a network of senior media managers who gave him the publicity and commissioned him as a columnist. He also had powerful friends at the helm of the Bombay Stock Exchange with close
  34. 34. connections to the regulator. Some of the largest newspapers in the country, including the Times of India where I first wrote the story of the securities scam, were convinced that a Harshad Mehta column was sure to send circulation figures soaring. Typically, Harshad did not stop at dispensing tips. He had struck a deal to ramp up the prices of several stocks - He had managed to build up quite a speculative bubble and was again the cynosure of investor attention when India's nuclear tests caused a sudden collapse in prices and his bubble burst. Brokers who operated for Harshad Mehta
  35. 35. were then infamously bailed out at the behest of the Bombay Stock Exchange authorities by opening the trading system in the middle of the night to insert synchronized trades at manipulated prices. Investigations by the Securities and Exchange Board of India have revealed that Harshad had set up an entire network of investment companies, known as the Damayanti Group to front his market operations. That investigation led to SEBI imposing a lifetime bar against him (he had filed an appeal against the SEBI order). It is a pity that Harshad's eternal optimism and furious stream of get-rich ideas were never channeled to more productive use.
  36. 36. He not only looked defeated but sources close to him say that he was steadily running out of funds. Most of this was probably due to the realisation that with one conviction by the Special Court and another by SEBI, his dreams of coming back to the capital market had ended forever. Now it is truly over. The End of the BULL Story Lifestyle 31st December 2001 – The Death Of The Bull Forever remembered as the Architect of the Rs.50 billion Scam