This document summarizes and compares the Harshad Mehta scam from 1992 and the Ketan Parekh scam from 2001 in India. Both scams involved improperly using the banking system and stock markets to artificially inflate stock prices. The Harshad Mehta scam had a larger impact and caused the Sensex to lose Rs. 100,000 crore in market capitalization. In response, the Securities and Exchange Board of India (SEBI) was established to regulate the stock market and prevent future scams. SEBI implemented reforms like imposing margins on trades and banning improper practices, but several other scams still occurred, showing the need for stronger enforcement of regulations.

1. Harshad Mehta Scam

19. • Used to buy stock at rock bottom prices and then
push it up
• Self-made man
• Media Savvy
• Used to buy stock at rock bottom prices and then push
it up
Ketan Parekh
Harshad Mehta
Comparative Analysis of Both Scams
• Hailed from the family of stock-brokers
• Shied away from media
• Banks involved in the scam
• Banks involved in the scam
• Instruments misused were Ready Forward Deal
and Bank Receipts
• Instruments misused were Pay Order and Circular
Trading
• Promoters of Companies were involved
• Promoters of Companies were involved
• Operated through close network of brokers
• Had wider network of brokers
• Foreign banks like Citibank, Standard Chartered
and ANZ Grindlays were involved
• FIIs like Credit Suisse, First Boston and JM Morgan
Stanley were involved
• SBI suffered Rs. 600 cr loss
• Bank of India suffered Rs. 130 cr loss
• Played with “Old Economy” stocks
• Played with “New Economy” stocks
• Scam occurred inspite of presence of SEBI
• Scam occurred inspite of presence of SEBI
Sources: http://flame.org.in/knowledgecenter/scam.aspx

20. Impact on Stock Markets and Indian Economy
● The immediate impact of these scams were
sharp fall in the share prices and indices
● Post Harshad Mehta Scam, markets lost Rs.
0.1mn crore loss in market capitalisation
● The Government’s liberalization policies came
under severe criticism
● Subsequently, these policies were put on hold
for a while
● SEBI, the securities market regulator,
postponed sanctioning of private sector mutual
funds
● The entry of much talked about foreign
pension funds and mutual funds became the
remotest possibility
● The Euro-issues planned by many
Cos. Were delayed
Sources: http://www.slideshare.net/
Indian

21. Measures taken by SEBI against scams
● Securities and Exchange Board of India (SEBI) was established in April ’88
● Established with an objective of protecting the rights of small investors and
regulating and developing the stock market in India
● Post Mehta Scam in 1992, the GoI passed “SEBI Act 1992” and conferred statutory
powers to it
Measures post Mehta Scam
• Suspended brokers acting as Directors and other office bearers of BSE, for alleged insider trading
• Imposed an additional 10% volatility margin on A Group shares as well as margins on ALBM and BLESS Schemes
• Imposed volatility margins on net outstanding sale positions of FIIs, financial institutions, banks and mutual funds
• Banned naked short sales in March 2001
• Reduced the gross exposure limit for brokers to 10 times the base capital for NSE and 15 times for other stock exchanges
• Rolling settlements system made compulsory
• Allowed banks to offer collateralized lending only through BSE & NSE, to increase liquidity
• Launched trade guarantee fund to guarantee all transactions

22. Measures post KP Scam
• Trading cycle was cut short from a week to a day
• The carry-forward system in stock trading called ‘BADLA’ was banned
•
Introduced forward trading in the form of exchange-traded derivatives
• Withdrew broker control over stock exchanges

23. Action Taken By SEBI
● While Mehta scam empowered SEBI to regulate markets more effectively, several
other scams forced it to ensure that markets operate transparently and efficiently
● However, post Mehta scam, several scams came to light, casting doubt on the
efficiency of SEBI as a regulatory body
● Although many reforms are introduced by SEBI, there remains significant lapses in
the law implementation and enforcement
● Certain areas wherein SEBI needs to think upon and take action
includes:
─ Bear/Bull Cartels
─ Insider Trading
─ Circular Trading
─ Uniform settlement cycle
● A few actions taken by SEBI were criticized of it being clueless about its
supervisory duties
● Its high time that market regulators implement appropriate measures else the
ghost from past will continue haunting the Indian bourses

24. Thank You