Harshad Mehta Scam

The Man who shook the Nation !

BY,Prerana KulkarniMBA 1st YearDSCE, Bangalore

DISCLAIMER• This Presentation is just to shed

some light on a ‘Unethical Scam’, No person is suggested to try imitating

or inculcating the following information for Unethical Practices !

Things you can expect to Know after this Presentation !

• Economic & Market position before the scam

• About Harshad Mehata• Modus Operandi• Impact of scam• Regulatory Actions Taken Against

Mehta• Conclusion

Economic & Market position before the scam

• Licensing system

• No permission for Liberalization, Privatization, Globalization

• Government intervention in business

• There were no permission for FII’s & FDI’s

• There was not specific act passed for SEBI by the parliament

• Open-Outcry system

• No Circuit Breakers

Harshad MehtaName: Harshad Shantilal Mehta

Born in: 29 July 1953

Died in: 31 December 2001

Profession: Stockbroker

He earned degree in Bachelor of Commerce

Started his working life as an employee of the New India Assurance Company

In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to Bombay Stock Exchange

He became a jobber on BSE for stock broker P.D. Shukla after that

In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth

He took advantages of loopholes in banking system

He triggered SENSEX in 1992 & made the scam by diverting funds of Rs.4,000 crore

Exposure of 1992 Securities Scam

On April 23, 1992, journalist Sucheta Dalal exposed Mehta's scam

She is columnist in Times Of India

Sucheta Dalal

The Instruments were used in Scam

•Mehta had used 2 instruments in this scam

1)Ready Forward Deal

2)Bank Receipts

Ready Forward Deal

A secured short-term (typically 15-day) loan from one bank to another

Bank lends against government securities

A broker usually brings together two banks for which he is paid a commission

The securities and payments were delivered through the broker in the settlement process

In such settlement the banks may not know with whom they are dealing

The process of RF

•Settlement Process

•Payment of cheques

•Dispensing of securities

Bank ReceiptsIn a RF deal securities were not moved back and forth

in actuality

The borrower, i.e. the seller of securities, gave the buyer of the securities a Bank Receipt

Bank receipts serve three functions 1) Confirms the sale of securities 2) States that the securities are held by the seller in

trust for the buyer 3) Acts as a receipt for the received money by the

selling bank

In this scam Bank of Karad & Metropolitan Co-operative Bank had issued fake BR

Modus Operandi

Borrower bankBroker

Harshad Mehta Lender bank

Issue fake BR

Funds

Impact Of Scam On Market

Impact on othersMehta had by then swindled the banks of a staggering

Rs 4,000 crore

Bribery case on P. V. Narsimha Rao

Stay on Liberalisation

Holding banks of fake BR had to face losses

BR was removed by RBI

The chairman of the vijaya bank committed suicide over

Regulatory Actions Taken Against Mehta

• He was later charged with 72 criminal offenses, and more than 600 civil action suits were filed against him

• He was arrested and banished from the stock market

• Mehta and his brothers were arrested by the CBI on November 9, 1992 for allegedly misappropriating more than 27 lakh shares of about 90 companies

Conclusion Harshad Mehta was brave stock broker. He

knew the loopholes in banking system as well as how to exploit that loopholes. His whole intension to do this was to rise in SENSEX. He was tried for 9 years and Of the 27 criminal charges brought against him, he was only convicted of one, before his death at age 47 in 2001

Thank You…!!!