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 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 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 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, ..
Continued

More on Page 2

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,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.
 Read Indian Stock Market Articles

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 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.

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Related Pages :

1. What Harshad Mehta did? – The Stock Scam

2. Satyam Scam – Indian Corporate Fraud
3. Satyam Scam – Raju & PWC
4. Healthy Stock Market Crash

{ 6 comments… read them below or add one }

Sandeep Shrivatava February 17, 2010 at 1:02 pm

It s so nice and help me to teach my students……………

satyajit February 24, 2010 at 8:35 am

very nicely written..simple and clear ..will never forget this thing for the rest of
my life… but i have read in several places that he had siphoned off money from
SBI rather SBI was in a big way involved in it .. cn u please make it clear ?

AMAN February 24, 2010 at 1:13 pm

I dont think Mr Harshad Mehta done froud with any body if he use his mind and
make profit then wt,s wrong where is govt. and Sebi that time, Govt is also
responsible for that becouse govt had a loop point for invest in bonds and they
cheqe it only weekend The banks at that time were not allowed to invest in the
equity markets why now and banks are also responsible they want more return on
 public money. Mr Harshad Mehta gave retuen to bank 15% then where he was
froud.
Mr Harshad Mehta was a gennius person he gave govt a new strategy to earn
money from public and invest in share market and no gurrantee of retuen but
Mehta gave return to bank 15%. But his fault is that he was more capble, clever,
genius & better than Govt and SEBI
I dont know all history of Mr. Mehta but he had a great mind he done that which
all person want to do high return with other money. He had done business without
own money and made large profit, companies also do that public ka paisa or loss
hua to insolvant verna profit in pocket money now all insitution do that which he
done, LIC Aviva etc all these company collect

The Crash that Shook the Nation

The 176-point1 Sensex2 crash on March 1, 2001 came
as a major shock for the Government of India, the
stock markets and the investors alike. More so, as the
Union budget tabled a day earlier had been
acclaimed for its growth initiatives and had prompted
a 177-point increase in the Sensex. This sudden crash
in the stock markets prompted the Securities
Exchange Board of India (SEBI) to launch
immediate investigations into the volatility of stock
markets. SEBI also decided to inspect the books of
several brokers who were suspected of triggering the
crash.

Meanwhile, the Reserve Bank of India (RBI) ordered

some banks to furnish data related to their capital
market exposure. This was after media reports
appeared regarding a private sector bank3 having
exceeded its prudential norms of capital exposure,
thereby contributing to the stock market volatility.
The panic run on the bourses continued and the
Bombay Stock Exchange (BSE) President Anand
Rathi's (Rathi) resignation added to the downfall.
Rathi had to resign following allegations that he had
used some privileged information, which contributed
to the crash. The scam shook the investor's
confidence in the overall functioning of the stock
markets. By the end of March 2001, at least eight
people were reported to have committed suicide and
hundreds of investors were driven to the brink of
bankruptcy.

The scam opened up the debate over banks funding capital market operations and lending
funds against collateral security. It also raised questions about the validity of dual control
of co-operative banks4. (Analysts pointed out that RBI was inspecting the accounts once
in two years, which created ample scope for violation of rules.)

The first arrest in the scam was of the noted bull,5 Ketan Parekh (KP), on March
30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports abounded as to how
KP had single handedly caused one of the biggest scams in the history of Indian financial
markets. He was charged with defrauding Bank of India (BoI) of about $30 million
among other charges. KP's arrest was followed by yet another panic run on the bourses
and the Sensex fell by 147 points. By this time, the scam had become the 'talk of the
nation,' with intensive media coverage and unprecedented public outcry.

The Man Who Trigerred the Crash

KP was a chartered accountant by profession and
used to manage a family business, NH Securities
started by his father. Known for maintaining a low
profile, KP's only dubious claim to fame was in
1992, when he was accused in the stock exchange
scam6. He was known as the 'Bombay Bull' and had
connections with movie stars, politicians and even
leading international entrepreneurs like Australian
media tycoon Kerry Packer, who partnered KP in
KPV Ventures, a $250 million venture capital fund
that invested mainly in new economy companies.
Over the years, KP built a network of companies,
mainly in Mumbai, involved in stock market
operations.

The rise of ICE (Information, Communications, and

Entertainment) stocks all over the world in early
1999 led to a rise of the Indian stock markets as well.
The dotcom boom7 contributed to the Bull Run8 led
by an upward trend in the NASDAQ9.

The companies in which KP held stakes included

Amitabh Bachchan Corporation Limited (ABCL),
Mukta Arts, Tips and Pritish Nandy
Communications. He also had stakes in HFCL,
Global Telesystems (Global), Zee Telefilms, Crest
Communications, and PentaMedia Graphics KP
selected these companies for investment with help
from his research team, which listed high growth
companies with a small capital base.
According to media reports, KP took advantage of low liquidity in these stocks, which
eventually came to be known as the 'K-10' stocks. The shares were held through KP's
company, Triumph International. In July 1999, he held around 1.2 million shares in
Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and
15% each in Zee and HFCL. The buoyant stock markets from January to July 1999
helped the K-10 stocks increase in value substantially (Refer Exhibit I for BSE Index
movements). HFCL soared by 57% while Global increased by 200%. As a result, brokers
and fund managers started investing heavily in K-10 stocks.

Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also
invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10
stocks regularly featured in the top five traded stocks in the exchanges (Refer Exhibit II
for the price movements of K-10 stocks). HFCL's traded volumes shot up from 80,000 to
1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion10. As such
huge amounts of money were being pumped into the markets, it became tough for KP to
control the movements of the scrips. Also, it was reported that the volumes got too big for
him to handle. Analysts and regulators wondered how KP had managed to buy such large
stakes.