This document provides an overview of the 1992 Harshad Mehta stock market scam in India. It describes how Harshad Mehta, a stockbroker, was able to divert billions of rupees from banks to inflate stock prices through illegal means like using fake bank receipts. This led to a massive rise and then crash in stock prices. The scam had wide-ranging impacts, including losses for banks and investors, damage to the economy, and a delay in financial reforms. It exposed loopholes in the country's banking regulations and settlement systems. The government responded by launching investigations, reforming policies, and establishing new regulatory bodies like SEBI to prevent such scams in the future.

1. Indian Institute of Management Kozhikode
BUSINESS ETHICS
HARSHAD MEHTA SCAM
SUBMITTED TO: Dr. ANANDA DAS GUPTA
SUBMITTED BY:
GROUP IV PGP/14/260 NITESH KUMAR GUPTA PGP/14/274 HEERAL BHATIA PGP/14/280
MAHTAAB KAJLA PGP/14/287 PRACHI CHAWLA PGP/14/290 RAHUL MITTAL PGP/14/313 VINNY
ARYA PGP/14/315 VISHAD DUBEY

2. 1
[BUSINESS ETHICS]
TABLE OF CONTENTS
ABOUT HARSHAD
MEHTA ..........................................................................
..................................................... 2 OVERVIEW OF THE
SCAM ...........................................................................
..................................................... 2 READY FORWARD (RF)  
MODUS
OPERANDI .......................................................................
........................... 3 SETTLEMENT
PROCESS ........................................................................
........................................................ 4 PAYMENT
CHEQUES ........................................................................
............................................................ 4 DISPENSING THE
SECURITY .......................................................................
.................................................. 4 BANK
RECEIPT ........................................................................
........................................................................ 5
CONTROL
SYSTEMS.........................................................................
............................................................ 5 DISAPPEARANCE OF
MONEY ..........................................................................
................................................. 6 AFTER THE
SCANDAL.........................................................................
.............................................................. 7 IMMEDIATE
IMPACT: ........................................................................
........................................................... 7 IMPACT ON THE
INDIAN
ECONOMY ........................................................................
..................................... 7 IMPACT ON THE
BANKS ..........................................................................
..................................................... 7 RESPONSE OF THE
GOVERNMENT .....................................................................
........................................... 8 POLICY
MEASURES .......................................................................
................................................................... 8 ACTIONS
TAKEN BY THE
GOVERNMENT: ....................................................................
.................... 8
ETHICAL
ISSUES .........................................................................
...................................................................... 9
ETHICAL
MISSHAP ........................................................................
.............................................................. 9 AVOIDANCE OF
SUCH
SCAMS...........................................................................
............................................ 9
CONCLUSION .....................................................................
........................................................................ 10
REFERENCES .....................................................................
............................................................................ 11
December 9, 2010
© Group IV | Indian Institute of Management, Kozhikode

3. ABOUT HARSHAD MEHTA
2
ABOUT HARSHAD MEHTA
Harshad Shantilal Mehta was born on 29 July in a Gujarati Jain family of modest
means. Father : Mr Shantilal Mehta, a small businessman Moved from small town
Raipur to find his future in Mumbai First job as dispatch clerk in the New India
Assurance Worked with stock brokers and soon managed to get a brokers card
Soon started his own venture : GrowMore Research and Asset Management Company
Ltd. Became a dream seller and a celebrity of the financial world.. People know
this personality as   The Big Bull  of Indian stock exchange After
recommendations of the Big Bull demand for the stocks used to exponentially
rise!!! Propounded the  Replacement Price Theory  The theory basically
argues that old companies should be valued on the basis of the amount of money
which would be required to create another such company He was alleged to have
engineered the rise in the BSE stock exchange in the year 1992 On April 23,
1992, journalist Sucheta Dalal in a column in The Times of India, exposed the
dubious ways of Harshad Mehta He was later charged with 72 criminal offenses and
more than 600 civil action suits were filed against him He died in 2002 of a
massive heart attack in a jail in Thane, with many litigations still pending
against him .
OVERVIEW OF THE SCAM
which led to a sharp increase in the price of the stock and then cashing in at
the end of the day to reap huge benefits Following two aspects shall be
explained in detail later. Use of Ready Forward (RF) to maintain SLR Fake Bank
receipts (BR)
© Group IV | Indian Institute of Management, Kozhikode
December 9, 2010
This scam can be categorized as a Capital Market scam in which it is done by
manipulating the facts in order to attain enormous profits. There were 4
different aspects of this scam: Diversion of funds - Diversion of funds from the
banking system to brokers for financing their operations in the stock market
Intra-day trading   The modus operandi mainly included investing heavily in
certain shares at the start of the day

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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
Cr. from the banks to stockbrokers from April 1991 to May 1992. He caused the
steep rise in the Stock market index in the year 1992 by bidding at a premium
for many shares. Some of the stocks which were highly invested in by Harshad
Mehta were: ACC Apollo Tyres Reliance Tata Iron and Steel Co. (TISCO) BPL
Sterlite Videocon
December 9, 2010
The above graph shows the rise in the Sensex during the period when Harshad
Mehta was operational and putting in loads of money in the stock exchange
increasing the liquidity and thus arbitrary increase in the prices of some
shares.
READY FORWARD (RF)   MODUS OPERANDI
Ready forward is actually a sort of a short term loan (typically 15 days or
less) usually from one bank to another. Unlike other loans, it is actually a
secured loan with Government securities backing it up. In essence, it s like
one bank selling its securities to another with a promise of buying it back at a
pre-determined price.
© Group IV | Indian Institute of Management, Kozhikode

5. READY FORWARD (RF)   MODUS OPERANDI
4
In early 1990s, Banks in India had to maintain a fixed ratio of their deposits
in the form of Government securities/bonds which was governed by the statutory
liquidity ratio (SLR). This obligation on the part of the banks required them to
show a detailed sheet of its stock of Government bonds at the end of every day.
Soon after the rule changed and the banks were not required to show these
details at end of everyday rather they were allowed to show in once in a week
i.e. Friday. This allowed the banks to sell their bonds in the earlier part of
their week and then buy it back in the later part. This helped them make some
profits as they could invest the money that they got by selling the bonds. The
whole process of byying and selling the bonds was taken care of by brokers and
only they knew the two parties which were involved. Individual banks did not
have any idea as to who the other party in the whole transaction was. The whole
process can be described in 3 phases: 1. Settlement Process 2. Payment cheques
3. Dispensing of securities
SETTLEMENT PROCESS
The normal settlement process usually involved the two banks exchanging the
money and the securities at the same time. This was very beautifully manipulated
by the brokers so that the money first gets into the hands of the brokers and
then they paid off the banks.
PAYMENT CHEQUES
The brokers asked the banks to give the cheques in their own name claiming that
they will pay to the other party on their own. The practice thus emerged was
that the broker would obtain a cheque drawn on the RBI favouring not himself but
his bank and the bank would get the money and transfer it to the broker account
on the same day. This helped the brokers to get the money as soon as the
transaction is made which could further be used to be channelled into the stock
market.
DISPENSING THE SECURITY
© Group IV | Indian Institute of Management, Kozhikode
December 9, 2010
Here the brokers used their credibility to persuade the banks to part with the
cheques without actually receiving the securities with the promise that they
will get the securities the next day with a 15% interest for one day. Bank
officials were bribed to accomplish this task as this was illegal on the part of
the banks to let go of their money without any assurance. This was Harshad Mehta
and his associates were able to use the money of the banks which was eventually
used for speculating in the stock market.

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BANK RECEIPT
Another instrument used in this scam was the bank receipt (BR). In an RF deal,
securities were not moved back and forth in actuality. Instead, the borrower,
who is the seller of securities, gave the buyer of the securities a BR. In
practice, borrowing bank gives a Bank Receipt (BR) instead of delivering the
actual securities to the lender. Bank receipts serve three functions   it
confirms the sale of securities promises to deliver the securities to the buyer.
It states that the securities are held by the seller in trust for the buyer.
acts as a receipt for the received money by the selling bank A BR means that the
issuer holds the securities in trust for the buyer, but there is a possibility
that the issuer may not have the securities at all. Following are the reasons
for a bank to issue a BR which is not backed by actual securities   A bank may
also short sell securities, i.e. bank will sell securities it doesn t have.
This will be done if the bank anticipates fall in prices. Bank buys securities
at lower prices when they fall in value and discharges the BR. Bank may do an RF
deal and issue a fake BR (not backed by securities) if banks simply want an
unsecured loan , where a lending bank would be under the impression that it s
dealing with a secured loan but in reality it s advancing an unsecured loan.
Though, lenders should have taken measures to protect themselves . During the
scam, brokers were so perfect in the art of using fake BRs and obtained
unsecured loans from various banks. They managed to persuade little known bank s
like the Bank of Karad (BOK) and the metropolitan Cooperative Bank (MCB) to
issue BRs and then these BRs were used to do RF deals with other banks. This way
several large banks made huge unsecured loans to these banks and thus it created
money for the brokers.
CONTROL SYSTEMS
December 9, 2010
There was a complete breakdown of the control system within the commercial banks
and that of RBI. Following features are involved in the internal control system:
Whenever an RF deal is done by using BRs rather than actual securities, the
lending bank has to contend with the possibility that it may be making an
unsecured loan. This requires assigning credit limit to the borrower by
assessing the creditworthiness of the borrower. The different aspects of
securities transactions of a bank are carried out by different persons
© Group IV | Indian Institute of Management, Kozhikode

7. DISAPPEARANCE OF MONEY
6
DISAPPEARANCE OF MONEY
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. It is well known that while
Harshad Mehta was the "big bull" in the stock market, there was an equally
powerful "bear cartel", represented by Hiten Dalal, A.D. Narottam and others,
operating in the market with money cheated out of the banks. Since the stock
prices rose steeply during the period of the scam, it is likely that a
considerable part of the money swindled by this group would have been spent on
financing the losses in the stock markets. It is rumored that a part of the
money was sent out of India through the Havala racket, converted into
dollars/pounds, and brought back as India Development Bonds. These bonds are
redeemable in dollars/pounds and the holders cannot be asked to disclose the
source of their holdings. Thus, this money is beyond the reach of any of the
investigating agencies. A part of the money must have been spent as bribes and
kickbacks to the various accomplices in the banks and possibly in the
bureaucracy and in the political system. A part of the money might have been
used to finance the losses taken by the brokers to window-dress various banks'
balance sheets. In other words, part of the money that went out of the banking
system came back to it. In sum, it appears that only a small fraction of the
funds swindled is recoverable.
December 9, 2010 © Group IV | Indian Institute of Management, Kozhikode

8. 7
[BUSINESS ETHICS]
AFTER THE SCANDAL
IMMEDIATE IMPACT:
After the Harshad Mehta scandal was exposed, April, 1992, the situation in share
market was that of utter chaos. The first impact of the scam was a steep fall in
the share prices. The index fell from 4500 to 2500 representing a loss of Rs.
100,000 crores in market capitalization. However, the major damage to the stock
market did not stop here. Since the accused were active brokers in the stock
markets, they had traded a large number of shares during the previous year. All
these shares became tainted and worthless and could not be used in the market.
This was a great loss to the innocent investor who had bought these shares much
before the scandal was exposed.
IMPACT ON THE INDIAN ECONOMY
There was a lot of media coverage on the scam and the political parties left no
opportunity in criticizing the government for it. The government was under
immense pressure and its liberalization policies were severely criticized. It
was also believed that Harshad Mehta and his accomplices were behind framing of
these policies. In the end the government had to put the liberalization plans on
hold. SEBI had to postpone the sanctioning of private sector mutual funds.
Implementation of some aspects of the Narasimham Committee recommendations on
the banking system had to be delayed. 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.
IMPACT ON THE BANKS
December 9, 2010
Fake bank receipts (BR) which were an integral part of the execution of the
whole scam landed the banks involved in a tight spot. These BR were declared
void and public money was at stake. At least ten prominent banks were involved
in this; some of them being SBI, Standard Chartered and a subsidiary of RBI. The
scam could have been checked in time with proper policies and verifications. The
government, the RBI and the commercial banks are as much accountable as the
brokers for the scam. The brokers were encouraged by the banks to divert funds
from the banking system to the stock market. The RBI too stood indicted because
despite knowledge about banks over-stepping the boundaries demarcating their
arena of operations, it failed to check them. Some of the prominent individuals
who were penalized were K. M. Margabandhu, CMD of the UCO Bank (Arrested and
sacked) and V. Mahadevan, one of the MD the State Bank of India (Suspended).
© Group IV | Indian Institute of Management, Kozhikode

9. POLICY MEASURES
8
RESPONSE OF THE GOVERNMENT
As discussed, the government was under immense pressure from media and
opposition to take concrete steps to bring justice to the people and also to
ensure that the loopholes in the system which caused such scam were closed so
that such scams would not recur. As a first step by the government, the case was
handed over to Central Bureau of Investigation and the Joint Parliamentary
Committee (JPC). Then a special court was set up to facilitate speedy trial. The
special court declared an ordinance for the attached the properties of all
individuals accused in the scam. Further, all transactions done by the accused
after March 31, 1991 were considered void. To reform the system further, the
government banned RF deals and slowed down the liberalization process.
POLICY MEASURES
The government, the RBI and the commercial banks were as much accountable as the
brokers for this scam. The brokers were encouraged by the banks to invest their
funds in the stock market in place of investing in the banking system. The RBI
was also responsible for this scam because despite knowledge about banks overstepping the boundaries demarcating their arena of operations, it failed to
reign them in. RBI didn t take any action against the commercial banks. The
looting was done with full knowledge of the very individuals appointed by the
government who were responsible to guard against such a possibility. So the
Harshad Mehta s scam could have been detected earlier if either of the above
(commercial banks, RBI or government) parties not encourage the brokers to
invest in the stock market.
ACTIONS TAKEN BY THE GOVERNMENT:
© Group IV | Indian Institute of Management, Kozhikode
December 9, 2010
Discover the guilty: This task was assigned to the Central Bureau of
Investigation (CBI) and to the Joint Parliamentary Committee (JPC). A special
court was set up to facilitate speedy trial. Transactions became void: The
government set up a special court and promulgated an ordinance with several
draconian provisions to deal with the scam. Sections (3) and (4) of the
ordinance attached the properties of all individuals accused in the scam and
also voided all transactions that had at any stage been routed through them
after March 31, 1991. Recover the money: Provisions of the Ordinance for
attachment of property and voiding of transactions with the consequent creation
of "tainted" shares were attempts in this direction

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Reform the system: The government's response so far, banning of RF deals and
going slow on liberalization The main motive behind punishing the offenders is
more to prevent future offenders to not to try this type of scam. The government
must ensure that not only the obviously guilty (the brokers) but also the not so
obviously guilty (the bank executives, the bureaucrats and perhaps the
politicians) are identified and brought to book. These types of investigations
are not only very time consuming but also very expensive.
ETHICAL ISSUES ETHICAL MISSHAP
The ethical temperature of any business depends upon : Individual s sense of
values: If large sums of money are involved, a person is often dictated by greed
and hence tends to become unethical Social values accepted in the industry i.e.
acceptance of unethical practices because they are the prevailing norm. For
example during the Harshad Mehta Scam, it was claimed that Bank receipts were
the prevailing norm and hence there was nothing unethical in using them though
they proved to be one of the main reasons causing the scam The third and the
most important reason being that there is a lack of corporate governance systems
in India. Corporate Governance is the result of the above two points, and in
addition, it s the result of public governance system. If the public
governance is weak, we cannot have good corporate governance  Scam after scam
- Harshad Mehta to Ketan Parekh, corporates get away scot free. Brokers &
bankers should be jailed. After all they pay the netas!  ----Sucheta Dalal ,
Journalist who exposed Harshad Mehta So how to avoid such scams?
AVOIDANCE OF SUCH SCAMS
Strengthen the legal and administrative framework of public governance system It
is necessary to have a strong public governance system, because even if there
are companies who follow honorable and ethical practices , if the general
environment is such that everyone is unethical because of the lack of a proper
legally enforceable system, then people are tempted to indulge in unethical
practices. But at the same time it does not mean that the money markets are
overregulated, because then even legitimate deals will be disguised. Stricter
norms for corporate governance to be set by bodies like Association of CA s a.
Bringing transparency b. Bringing accountability
© Group IV | Indian Institute of Management, Kozhikode
December 9, 2010

11. ETHICAL ISSUES
10
It is necessary for every corporate to follow the highest standards of corporate
governance. The laws for corporate governance need to be enforced as brutally as
the law for any other crime. These markets control our economy and the money of
many small investors. There is no future for an economy where the markets are
not subjected to the highest levels of accountability. Wrong-doers to be
punished severely to discourage others from committing the crime There was a
research done in India according to which a sample of people were asked that if
you are walking on a road and if you find a 1000 rupee note, will you pick it
up? 90% of the people said yes. Then the question was modified slightly and the
people were asked , what if there was a surveillance camera on the road and if
it worked only 10% of the times, will you pick up the note? This time 90% of the
people said no. In India today, the violators feel that they will not be
punished and even if they are punished they can easily get away with the whole
thing. These same people will follow world standards of transparency while
dealing with the Nasdaq or the NYSE but they violate laws in Mumbai without
thinking a second time. After the Harshad Mehta scam, very soon , there was this
Ketan Parekh scam, who followed the footsteps of Harshad Mehta just because no
example was set by punishing Harshad Mehta to deter future violators Finally it
is important to punish those directly involved (brokers) and also those
indirectly involved ( politicians, bureaucrats) because these people are the
facilitators.
CONCLUSION
Corporate Governance is the value framework, ethical framework and moral
framework within which businesses make decisions Business must harness the power
of ethics which is assuming a new level of importance and power. (James Joseph former US ambassador to SA) When large sums of money are involved, greed causes
people to become unethical. How large? That s relative.Business ethics is
relative-Prof Anand Dasgupta
© Group IV | Indian Institute of Management, Kozhikode
December 9, 2010

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REFERENCES
http://en.wikipedia.org/wiki/Harshad_Mehta http://www.bullrider.in/harshadmehta-stock-scam/ http://investmentpark.blogspot.com/2007/02/harshad-mehta-scam1992.html http://www.scribd.com/doc/17227215/Harshad-Mehta-Scam
http://wiki.answers.com/Q/Can_you_give_the_details_about_the_Harshad_Mehta_scam
http://www.authorstream.com/Presentation/pratm_18-486267-harshad-mehta-andketanparekh-scam/
http://www.slideserve.com/PPTFiles/insights_investing_jul08_29542_32424.ppt
December 9, 2010
© Group IV | Indian Institute of Management, Kozhikode