The Harshad Mehta securities scam that took place between 1991-1992 involved the diversion of Rs. 4000 crore from banks using "ready forward" deals and fake bank receipts. Harshad Mehta, a prominent stockbroker, engineered these deals to fund large-scale stock transactions. The scam had major impacts like a sharp drop in the stock market, loss of investor wealth, and delays in India's economic liberalization plans. The government established new regulatory bodies and laws in response and charged Harshad Mehta with multiple criminal offenses.

1. THE SECURITIES SCAM
THE HARSHAD MEHTA SCANDAL

2. INTRODUCTION
• Took place between April 1991 to May 1992
• Involved diversion of money worth Rs. 4000 crore from the
banking system
• Used to fund stock market transactions
• Led to changes in regulatory rules by SEBI
• Had impact on liberalization policies at the time

3. BACKGROUND ON HARSHAD MEHTA
• Worked in several brokerage firms during the 80s.
• Rose to prominence by 1990 in the Indian securities market
• For a period of year, started trading heavily in the stock market.

4. INSTRUMENTS USED - READY FORWARD
DEAL
• It is a secured short term loan (typically 15 days)
• Borrowing banks sell their securities
• They buy them back from the lending bank at the end of the
term, generally at a higher price
• Deal generally engineered by a broker
• Lending & borrowing banks need not know each other

5. INSTRUMENTS USED - BANK RECEIPTS
• Issued by the lending bank to the borrowing bank
• Confirms the transfer of securities
• Acts as a receipt for the money received by the borrowing bank
• Promises to deliver the securities to the lender
• As a assurance that the borrower holds the securities in trust of
the lender.

6. DESIGN OF THE SCAM
BANK A –
Selling Bank
BROKER X
Sells securities
on Day1

7. BANK A –
Borrowing Bank
BROKER X
Issues
securities to X
on Day1
BANK B –
Lending bank
Issues
securities to B
Day1
Issues cheque
in favour of
broker on Day1

8. BANK A –
Borrowing BankBROKER X
Issues
securities to
X on Day 2
BANK B –
Lending bank
Issues
securities to B
Day1
Issues cheque
to X on Day1
BANK D –
Lending Bank
BANK C -
Borrowing
Bank
Issues
securities to
X on Day1
Issues cheque
in favour of
broker on Day
2
Issues
securities to C
on Day2

9. BANK A –
Borrowing BankBROKER X
Issues
securities to
X on Day 2
BANK B –
Lending bank
Issues
securities to B
Day1
Issues cheque
to X on Day1
BANK D –
Lending Bank
BANK C -
Borrowing
Bank
Issues
securities to
X on Day1
Issues cheque
in favour of X
on Day 2
Issues
securities to D
on Day2
BANK Z
Issues fake
BRs
Presents BRs
on day 2
Pays A on
day 2

10. BANK A –
Borrowing BankBROKER X
Issues
securities to
X on Day 2
BANK B –
Lending bank
Issues
securities to B
Day1
Issues cheque
to X on Day1
BANK D –
Lending Bank
BANK C -
Borrowing
Bank
Issues
securities to
X on Day1
Issues cheque
in favour of X
on Day 2
Issues
securities to D
on Day2
BANK Z
Issues fake
BRs
Presents BRs
on day 2
Excess funds used to
finance stock market
transactions
Pays A on
day 2

11. EXPOSURE OF SCAM
• News report of SBI having shortage of government securities
(April 1992)
• Investigation carried out by JPC, CBI, RBI, IT department
• Misappropriation of funds found to be worth Rs. 4000 crore

12. IMPACT OF THE SCAM
• Immediate impact being drop in Sensex from 4500 to 2500
• Loss of 1,00,000 crores in market capitalization
• Government’s liberalization policies were put on hold
• Sanctioning of private sector mutual funds was postponed

13. ACTIONS TAKEN BY THE GOVERNMENT
• Mehta was charged with 72 criminal offenses
• More than 600 civil lawsuits filed against him
• Government passed the ‘SEBI Act’ in 1992 & conferred statutory
powers to it
• Rolling settlements system made compulsory
• Launched trade guarantee funds to guarantee all transactions

14. REFERENCES
• INVESTOPEDIA
• WIKIPEDIA
• SECURITIES & EXCHANGE BOARD OF INDIA
• RESERVE BANK OF INDIA