What Was The Harshad Mehta Scam - Quora PDF

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I'lltrytoanswerthisinasimplelanguage.
Law
Let'ssaywehavethreebanksA,BandC.AndabrokerX.Andobviously,the
government.
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Fraud
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Nowthebankswanttomakeasmuchprofitastheycanbyusingthemoney
justthewaytheywant.Andthegovernmentwantstoregulatethembymaking
itcompulsoryforthemtoinvestsomeofthemoneyinGovernmentbonds.So
thegovernmentputsasimplerulethatattheendofeveryday,A,BandChave
toshowthemabalancesheetandaminimumamounthastobeinvestedin
bonds.
Thebanksdoitforsometimebuttheyaskthegovernmentforsomekindof
relaxation.Soanewrulecomeswhereyouneedtoshowthebalancesheetonly
onFridays.Theaverageamountperdayinthebondshastobeoverthefixed
amount,however,thereisnosuchlimitonthedailyamountnow.
NowXcomesintothescenario.SinceAwouldsellsomebondstoinvest
elsewhereandBmaybuysomebondsaswell,thebankswillnowhavedifferent
amountsofmoneyinvestedinbondseverydayandsomewillhavelesswhile
somewillhavemore.Butallofthemneedtohavethatminimumamounton
Friday,sothebankswithlesseramounts,i.e,Ainthiscase,wouldneedtobuy
thebondstokeepupwiththeaverage.
Whatweretheamendmentsinthelaw
afterHarshadMehta's1992scam?How
didtheseamendmentsfailtostopthe
KetanParek...
Whataresomemindblowingfactsabout
HarshadMehta?
WasCitiBankthemastermindbehindthe
HarshadMehtascam?
WasthescamdonebyHarshadMehta
reallyhelpfulinattractingthepeopleof
Indiatowardsthestockmarket?
WasHarshadMehtawrong?
Whichstrategywasappliedbythe
HarshadMehtainthesecuritiesscam?
WhataresomefactsaboutHarshad
Mehta?
Whatwasthemodusoperandiofthe
HarshadMehtascam?
WhatistheHarshadMehtastockmarket
fraudcase?
ScamsinIndia:Whatexactlywasthe
BoforsScandalandwhowerethekey
playersinvolved?
SowhatdoesAdo?ItcontactsXtogetitsomebondsfromeitherBorC.
Xisatrustedbrokerandallthebanksknowhimprettywell.SoXtellsAthat
he'llgetthebondsbutrightnowheisn'tsurethatfromwhomwillthebonds
come,BorC.Soinsteadofmakingthechequeonthebank'sname,Ashould
signthechequeforX.(Whichwasillegal,BTW).
SoAdoesthat.NowXgoestoBandaskforthebondsandusingthepowerof
trust,XtellsBthathe'llpaythemoneythenextdaytowhichBagreesbecause
healsoofferedagoodreturnonthemoney.See,bondsareimportant,money
maycomelatertoo.
Usingthistrick,Xmakessurehealwayshassomemoneywithhim.
Nowcomesparttwo.Themoneyhehad,heinvestedheavilyinthestock
markettocreateaturmoil,specificallyforafewcompanieslikeACC.The
marketsawahugerunlikeneverbeforeandsharepricesofACCandsome
otherswentoverthetops.
Onceheknewthemarketwasatapeak,hestartedprofitmakingandmarkets
crashed.Thebankpeoplewhowereinvolvedwithhimintheillegalacts
panickedandoneofthemevencommittedsuicide.
http://www.quora.com/WhatwastheHarshadMehtascam
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8/22/2015
Imagecredit:Pageonslidesharecdn.com
ThisistonotethatitwasaverysimpleexplanationwhereItriedtoavoidthe
termslikeBRandFR(ReadyForwardandBankReceipt).Foramore
detailedexplaination,youcancheckthebelowlinks.
HARSHADMEHTA'SSCAM
HarshadMehtaScam
HarshadwasanintelligentBrokerandheknewtheexactloopholeswiththe
Indianeconomyandthebankingsystem.It'sashamethatheuseditforthe
wrongreasons.
Astheaftereffectsofthisscam,aroundasumofRs4000crorewasmulcted.
Andthatisinthe90ssoyoucanimaginethevalueofsuchasumtoday.
ThethenPM,NarsimhaRaowasaccusedofBribery.
Manypeoplewerebankruptedandcommittedsuicide.
TheconceptofBankreceiptwasfinallyremovedandmanyothermeasures
weretaken.
34,320views276upvotesUpdated8Jun,2014
MoreAnswersBelow.RelatedQuestions
WhatweretheamendmentsinthelawafterHarshadMehta's1992scam?How
didtheseamendmentsfailtostoptheKetanParekh2001scam?
2/12
8/22/2015
WhataresomemindblowingfactsaboutHarshadMehta?
WasCitiBankthemastermindbehindtheHarshadMehtascam?
WasthescamdonebyHarshadMehtareallyhelpfulinattractingthepeopleof
Indiatowardsthestockmarket?
WasHarshadMehtawrong?
SaurabhKothari
HarshadShantilalMehtawasborninaGujaratiJainfamilyofmodest
means.HisearlychildhoodwasspentinMumbaiwherehisfatherwasasmall
timebusinessman.Later,thefamilymovedtoRaipurinMadhyaPradeshafter
doctorsadvisedhisfathertomovetoadrierplaceonaccountofhisindifferent
health.ButRaipurcouldnotholdbackMehtaforlongandhewasbackinthe
cityaftercompletinghisschooling,muchagainsthisfatherswishes.
MehtafirststartedworkingasadispatchclerkintheNewIndiaAssurance
Company.Overtheyears,hegotinterestedinthestockmarketsandalongwith
brotherAshwin,whobythenhadlefthisjobwiththeIndustrialCreditand
InvestmentCorporationofIndia,startedinvestingheavilyinthestockmarket.
MehtagraduallyrosetobecomeastockbrokerontheBombayStock
Exchange,whodidverywellforhimself.Athispeak,helivedalmostlikea
moviestarina15,000squarefeethouse,whichhadaswimmingpoolaswell
asagolfpatch.Healsohadatasteforflashycars,whichultimatelyledtohis
downfall.
RISEOFMEHTA
Theyearwas1990.Yearshadgonebyandthedrivingambitionsofayoung
maninthefacelesscrowdhadbeenrealised.HarshadMehtawasmaking
wavesinthestockmarket.Hehadbeenbuyingsharesheavilysincethe
beginningof1990.Theshareswhichattractedattentionwerethoseof
AssociatedCementCompany(ACC),writetheauthors.ThepriceofACCwas
biduptoRs10,000.Forthosewhoasked,Mehtahadthereplacementcost
theoryasanexplanation.Thetheorybasicallyarguesthatoldcompanies
shouldbevaluedonthebasisoftheamountofmoneywhichwouldberequired
tocreateanothersuchcompany.
Mehtawasthedarlingofthebusinessmediaandearnedthesobriquetofthe
BigBull,whowassaidtohavestartedthebullrun.But,wherewasMehta
gettinghisendlesssupplyofmoneyfrom?Nobodyhadaclue.
FRAUDCOMMITTED
Thecrucialmechanismthroughwhichthescamwaseffectedwastheready
forward(RF)deal.TheRFisinessenceasecuredshortterm(typically15
day)loanfromonebanktoanother.Crudelyput,thebanklendsagainst
governmentsecuritiesjustasapawnbrokerlendsagainstjewellery.The
borrowingbankactuallysellsthesecuritiestothelendingbankandbuysthem
backattheendoftheperiodoftheloan,typicallyataslightlyhigherprice.
ItwasthisreadyforwarddealthatHarshadMehtaandhiscroniesusedwith
greatsuccesstochannelmoneyfromthebankingsystem.
Atypicalreadyforwarddealinvolvedtwobanksbroughttogetherbyabroker
inlieuofacommission.Thebrokerhandlesneitherthecashnorthesecurities,
thoughthatwasntthecaseintheleaduptothescam.
Inthissettlementprocess,deliveriesofsecuritiesandpaymentsweremade
throughthebroker.Thatis,thesellerhandedoverthesecuritiestothebroker,
whopassedthemtothebuyer,whilethebuyergavethechequetothebroker,
whothenmadethepaymenttotheseller.
Inthissettlementprocess,thebuyerandthesellermightnotevenknowwhom
theyhadtradedwith,eitherbeingknowonlytothebroker.
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Thisthebrokerscouldmanageprimarilybecausebynowtheyhadbecome
marketmakersandhadstartedtradingontheiraccount.Tokeepupa
semblanceoflegality,theypretendedtobeundertakingthetransactionson
behalfofabank.
Anotherinstrumentusedinabigwaywasthebankreceipt(BR).Inaready
forwarddeal,securitieswerenotmovedbackandforthinactuality.Instead,
theborrower,i.e.thesellerofsecurities,gavethebuyerofthesecuritiesaBR.
aBRconfirmsthesaleofsecurities.Itactsasareceiptforthemoneyreceived
bythesellingbank.Hencethenamebankreceipt.Itpromisestodeliverthe
securitiestothebuyer.Italsostatesthatinthemeantime,thesellerholdsthe
securitiesintrustofthebuyer.
Havingfiguredthisout,Methaneededbanks,whichcouldissuefakeBRs,or
BRsnotbackedbyanygovernmentsecurities.Twosmallandlittleknown
bankstheBankofKarad(BOK)andtheMetorpolitanCooperativeBank
(MCB)cameinhandyforthispurpose.
OncethesefakeBRswereissued,theywerepassedontootherbanksandthe
banksinturngavemoneytoMehta,obviouslyassumingthattheywerelending
againstgovernmentsecuritieswhenthiswasnotreallythecase.Thismoney
wasusedtodriveupthepricesofstocksinthestockmarket.Whentimecame
toreturnthemoney,thesharesweresoldforaprofitandtheBRwasretired.
Themoneyduetothebankwasreturned.
Thegamewentonaslongasthestockpriceskeptgoingup,andnoonehada
clueaboutMehtasmodusoperandi.Oncethescamwasexposed,though,alot
ofbankswereleftholdingBRswhichdidnothaveanyvaluethebanking
systemhadbeenswindledofawhoppingRs4,000crore.
Mehtamadeabriefcomebackasastockmarketguru,givingtipsonhisown
websiteaswellasaweeklynewspapercolumn.Thistimearound,hewasin
cahootswithownersofafewcompaniesandrecommendedonlythoseshares.
Thisgame,too,didnotlastlong.
Interestingly,however,bythetimehedied,Mehtahadbeenconvictedinonly
oneofthemanycasesfiledagainsthim.
2,524views16upvotesWritten20Feb,2015AskedtoanswerbyIshaJain
AnuragParihar,Cricketer,Convival,FitnessFreak,Atheist,Ambitious
ThanksforA2A.
Itsascamof90s.Bytheyear1990,HarshadMehtabecameaprominentname
intheIndianstockmarket.Hestartedbuyingsharesheavily.Thesharesof
India'sforemostcementmanufacturerAssociatedCementCompany(ACC)
attractedhimthemostandthescamsterisknowntohavetakenthepriceof
thecementcompanyfrom200to9000(approx.)inthestockmarket
implyinga4400%riseinitsprice.ItisbelievedthatItwaslaterrevealedthat
Mehtausedthereplacementcosttheorytoexplainthereasonforthehighlevel
bidding.Thereplacementcosttheorybasicallystatesthatoldercompanies
shouldbevaluedonthebasisoftheamountofmoneythatwouldbeneededto
createanothersimilarcompany.Bythelatterhalfof1991,Mehtahadcometo
becalledtheBigBullaspeoplecreditedhimwithhavinginitiatedtheBull
Run.
Mehta,alongwithhisassociates,wasaccusedofmanipulatingtheriseinthe
BombayStockExchange(BSE)in1992.Theytookadvantageofthemany
loopholesinthebankingsystemanddrainedofffundsfrominterbank
transactions.Subsequently,theyboughthugeamountsofsharesatapremium
acrossmanyindustryverticalscausingtheSensextorisedramatically.
However,thiswasnottocontinue.TheexposureofMehta'smodusoperandi
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ledbankstostartdemandingtheirmoneyback,causingtheSensextoplunge
almostdramaticallyasithadrisen.Mehtawaslaterchargedwith72criminal
offenceswhileover600civilactionsuitswerefiledagainsthim.Significantly,
theHarshadMehtasecurityscandalalsobecametheflavorofBollywoodwith
SameerHanchate'sfilmGafla.
Mehta'sillicitmethodsofmanipulatingthestockmarketwereexposedonApril
23,1992,whenveterancolumnistSuchetaDalalwroteanarticleinIndia's
nationaldailyTheTimesofIndia.Dalalscolumnread:Thecrucial
mechanismthroughwhichthescamwaseffectedwasthereadyforward(RF)
deal.TheRFisinessenceasecuredshortterm(typically15day)loanfrom
onebanktoanother.Crudelyput,thebanklendsagainstgovernment
securitiesjustasapawnbrokerlendsagainstjewelers.Theborrowingbank
actuallysellsthesecuritiestothelendingbankandbuysthembackattheend
oftheperiodoftheloan,typicallyataslightlyhigherprice.Inaready
forwarddeal,abrokerusuallybringstogethertwobanksforwhichheispaida
commission.Althoughthebrokerdoesnothandlethecashorthesecurities,
thiswasnotthecaseinthepreludetotheMehtascam.Mehtaandhis
associatesusedthisRFdealwithgreatsuccesstochannelmoneythrough
banks.
Thesecuritiesandpaymentsweredeliveredthroughthebrokerinthe
settlementprocess.Thebrokerfunctionedasanintermediarywhoreceivedthe
securitiesfromthesellerandhandedthemovertothebuyerandhereceived
thecheckfromthebuyerandsubsequentlymadethepaymenttotheseller.
Suchasettlementprocessmeantthatboththebuyerandthesellermaynot
evenknowtheidentityoftheotherasonlythebrokerknewbothofthem.The
brokerscouldmanagethismethodexpertlyastheyhadalreadybecomemarket
makersbythenandhadstartedtradingontheiraccount.Theypretendedtobe
undertakingthetransactionsonbehalfofabanktomaintainafaadeof
legality.
Mehtaandhisassociatesusedanotherinstrumentcalledthebankreceipt
(BR).Securitieswerenottradedinrealityinareadyforwarddealbuttheseller
gavethebuyeraBRwhichisaconfirmationofthesaleofsecurities.ABRisa
receiptforthemoneyreceivedbythesellingbankandpledgestodeliverthe
securitiestothebuyer.Inthemeantime,thesecuritiesareheldinthesellers
trustbythebuyer.
Armedwiththeseschemes,allMehtaneedednowwerebankswhichwould
readilyissuefakeBRs,oroneswithouttheguaranteeofanygovernment
securities.HissearchendedwhenhefoundthattheBankofKarad(BOK),
MumbaiandtheMetropolitanCooperativeBank(MCB)twosmallandlittle
knownlenders,werewillingtocomply.ThetwobanksagreedtoissueBRsas
andwhenrequired.OncetheyissuedthefakeBRs,Mehtapassedthemonto
otherbankswhointurnlenthimmoney,underthefalseassumptionthatthey
werelendingagainstgovernmentsecurities.Mehtausedthemoneythus
securedtoenhancesharepricesinthestockmarket.Theshareswerethensold
forsignificantprofitsandtheBRretiredwhenitwastimetoreturnthemoney
tothebank.
Mehtacontinuedwithhismanipulativetactics,triggeringamassiveriseinthe
pricesofstockandtherebycreatingafeelgoodmarkettrajectory.However,
upontheexposureofthescam,severalbanksfoundtheywereholdingBRsof
novalueatall.MehtahadbythenswindledthebanksofastaggeringRs4,000
crore.ThescamcameunderscathingcriticismintheIndianParliament,
leadingtoMehta'seventualimprisonment.Thescamsexposureledtothe
deathoftheChairmanoftheVijayaBankwhoreportedlycommittedsuicide
overtheexposure.HewasguiltyofhavingissuedcheckstoMehtaandknew
thebacklashofaccusationshewouldhavetofacefromthepublic.
2,384views5upvotesWritten23JunAskedtoanswerbyPriyaGupta
Anonymous
HarshadMehta&KetanParekhScam
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HarshadMehta:thehighprofilestockbroker
HarshadShantilalMehta(19542002)wasanIndianstockbrokerwho
grabbedheadlinesforthenotoriousBSEsecurityscamof1992.Bornina
lowermiddleclassGujaratiJainfamily,Mehtaspenthisearlychildhoodin
Mumbaiwherehisfatherwasasmalltimebusinessman.Thefamilyrelocated
toRaipurinChhattisgarhafterdoctorsadvisedMehtasfathertoshifttoa
drierplaceonaccountofhishealth.
TransitionfromanordinarybrokertoBigBull
MehtastudiedinHolyCrossHigherSecondarySchool,ByronBazar,Raipur.
HequithisjobatTheNewIndiaAssuranceCompanyin1980andsoughta
newonewithBSEaffiliatedstockbrokerP.Ambalalbeforegoingontobecome
ajobberontheBSEforstockbrokerP.D.Shukla.In1981,Mehtabecamea
subbrokerforstockbrokersJ.L.ShahandNandalalSheth.Havinggained
considerableexperienceasasubbroker,heteamedupwithhisbrotherSudhir
tofloatanewventurecalledGrowMoreResearchandAssetManagement
CompanyLimited.WhentheBSEauctionedabrokerscard,theMehtaduos
companybidforitwiththefinancialsupportofJ.L.ShahandNandalal
Sheth.Anothernamethatisrumoredtohaveacrucialhandinthescamwas
NimeshShah.However,Shahcouldkeepasafedistancefromtheaccusations
andiscurrentlyknowntobeaheavyplayerintheIndianstockmarket.
Byyear1990,MehtabecameaprominentnameintheIndianstockmarket.
Hestartedbuyingsharesheavily.ThesharesofIndia'sforemostcement
manufacturerAssociatedCementCompany(ACC)attractedhimthemost
andthescamsterisknowntohavetakenthepriceofthecementcompany
from200to9000(approx.)inthestockmarketimplyinga4400%risein
itsprice.ItisbelievedthatItwaslaterrevealedthatMehtausedthe
replacementcosttheorytoexplainthereasonforthehighlevelbidding.The
replacementcosttheorybasicallystatesthatoldercompaniesshouldbevalued
onthebasisoftheamountofmoneythatwouldbeneededtocreateanother
similarcompany.Bythelatterhalfof1991,Mehtahadcometobecalledthe
BigBullaspeoplecreditedhimwithhavinginitiatedtheBullRun.
Themakingofthe1992securityscam
Mehta,alongwithhisassociates,wasaccusedofmanipulatingtheriseinthe
BombayStockExchange(BSE)in1992.Theytookadvantageofthemany
loopholesinthebankingsystemanddrainedofffundsfrominterbank
transactions.Subsequently,theyboughthugeamountsofsharesatapremium
acrossmanyindustryverticalscausingtheSensextorisedramatically.
However,thiswasnottocontinue.TheexposureofMehta'smodusoperandi
ledbankstostartdemandingtheirmoneyback,causingtheSensextoplunge
almostdramaticallyasithadrisen.Mehtawaslaterchargedwith72criminal
offenceswhileover600civilactionsuitswerefiledagainsthim.Significantly,
theHarshadMehtasecurityscandalalsobecametheflavorofBollywoodwith
SameerHanchate'sfilmGafla.
The1992securityscamanditsexposure
Mehta'sillicitmethodsofmanipulatingthestockmarketwereexposedon
April23,1992,whenveterancolumnistSuchetaDalalwroteanarticlein
India'snationaldailyTheTimesofIndia.Dalalscolumnread:Thecrucial
mechanismthroughwhichthescamwaseffectedwasthereadyforward(RF)
deal.TheRFisinessenceasecuredshortterm(typically15day)loanfrom
onebanktoanother.Crudelyput,thebanklendsagainstgovernment
securitiesjustasapawnbrokerlendsagainstjewelers.Theborrowingbank
actuallysellsthesecuritiestothelendingbankandbuysthembackattheend
oftheperiodoftheloan,typicallyataslightlyhigherprice.Inaready
forwarddeal,abrokerusuallybringstogethertwobanksforwhichheispaida
commission.Althoughthebrokerdoesnothandlethecashorthesecurities,
thiswasnotthecaseinthepreludetotheMehtascam.Mehtaandhis
associatesusedthisRFdealwithgreatsuccesstochannelmoneythrough
banks.
Thesecuritiesandpaymentsweredeliveredthroughthebrokerinthe
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settlementprocess.Thebrokerfunctionedasanintermediarywhoreceivedthe
securitiesfromthesellerandhandedthemovertothebuyerandhereceived
thecheckfromthebuyerandsubsequentlymadethepaymenttotheseller.
Suchasettlementprocessmeantthatboththebuyerandthesellermaynot
evenknowtheidentityoftheotherasonlythebrokerknewbothofthem.The
brokerscouldmanagethismethodexpertlyastheyhadalreadybecome
marketmakersbythenandhadstartedtradingontheiraccount.They
pretendedtobeundertakingthetransactionsonbehalfofabanktomaintain
afaadeoflegality.
Mehtaandhisassociatesusedanotherinstrumentcalledthebankreceipt
(BR).Securitieswerenottradedinrealityinareadyforwarddealbutthe
sellergavethebuyeraBRwhichisaconfirmationofthesaleofsecurities.A
BRisareceiptforthemoneyreceivedbythesellingbankandpledgesto
deliverthesecuritiestothebuyer.Inthemeantime,thesecuritiesareheldin
thesellerstrustbythebuyer.
Complicitlenders
Armedwiththeseschemes,allMehtaneedednowwerebankswhichwould
readilyissuefakeBRs,oroneswithouttheguaranteeofanygovernment
securities.HissearchendedwhenhefoundthattheBankofKarad(BOK),
MumbaiandtheMetropolitanCooperativeBank(MCB)twosmallandlittle
knownlenders,werewillingtocomply.ThetwobanksagreedtoissueBRsas
andwhenrequired.OncetheyissuedthefakeBRs,Mehtapassedthemonto
otherbankswhointurnlenthimmoney,underthefalseassumptionthatthey
werelendingagainstgovernmentsecurities.Mehtausedthemoneythus
securedtoenhancesharepricesinthestockmarket.Theshareswerethensold
forsignificantprofitsandtheBRretiredwhenitwastimetoreturnthemoney
tothebank.
Outcome
Mehtacontinuedwithhismanipulativetactics,triggeringamassiveriseinthe
pricesofstockandtherebycreatingafeelgoodmarkettrajectory.However,
upontheexposureofthescam,severalbanksfoundtheywereholdingBRsof
novalueatall.MehtahadbythenswindledthebanksofastaggeringRs
4,000crore.ThescamcameunderscathingcriticismintheIndian
Parliament,leadingtoMehta'seventualimprisonment.Thescamsexposure
ledtothedeathoftheChairmanoftheVijayaBankwhoreportedly
committedsuicideovertheexposure.Hewasguiltyofhavingissuedchecksto
Mehtaandknewthebacklashofaccusationshewouldhavetofacefromthe
public.
Afewyearslater,Mehtamadeabriefcomebackasastockmarketexpertand
startedprovidinginvestmenttipsonhiswebsiteandinaweeklynewspaper
column.Heworkedwiththeownersofafewcompaniesandrecommended
thesharesofthosecompaniesonly.Whenhediedin2002,Mehtahadbeen
convictedinonlyoneofthe27casesfiledagainsthim.Whatattractedthe
taxmansattentionwasMehta'sadvancetaxpaymentofRs28croreforthe
financialyear199192.Anothereyecatcherwashisextravagantlifestyle.
IT,PSBsrecoverduesnineyearsafterMehta'sdeath
NineyearsafterHarsadMehtadied,theITdepartmentandpublicsector
banks(PSBs)havesuccessfullyrecoveredasignificantportionoftheirclaims
emergingoutofthesecuritiesscamfromhisliquidatedassets.TheSupreme
CourtdirectedtheCustodianoftheattachedpropertiesandassetsofthe
HarshadMehtaGroup(HMG)inMarch2011tomakepaymentsof
Rs1,995.66croretotheITdepartmentandRs199.25croretotheStateBank
ofIndia(SBI),makingthetwoinstitutionstwooftheearliestclaimantsto
recovertheirdues.
WhiletheSBIstotalprincipalamountclaimofRs1,000crorehavebeen
largelysettled,financialinstitutionshavealsoreceivedsomemoney.However,
StandardCharteredBank,whichhadclaimedRs500crore,hasyettorecover
itsduesitwasoneofthelateclaimants.Althoughthetotalclaimoverthe
HMGisofmorethanRs20,000crore,theapexcourthassaidthatforthe
present,itwouldonlyconsiderclaimstowardstheprincipalamount.
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WhoisKetanParekh
KetanParekhisaformerstockbrokerbasedinMumbaiwhowasconvictedin
2008forbeinginvolvedinengineeringthetechnologystocksscaminIndias
stockmarketin19992001.Acharteredaccountantbytraining,Parekhcomes
fromafamilyofbrokersandiscurrentlyservingaperiodofdisqualification
fromtradingintheIndianboursestill2017.
KetanParekhhasbeenaccordedwithsobriquetssuchasthePentafourBull
andtheOneManArmybythecountrysnationalbusinessnewspapers,while
themarketsimplyreferstohimasKPorassociateshimwithhisfirmNH
Securities.Parekhisknowntohavenoreluctanceinmeetingthepress.Heis
alsoknowntohaverazorsharpforecastsonmarketdevelopments.
WhatdistinguishesKetanParekhfromthe'BigBull'lateHarshad
Mehta
Thetwohavebeencomparedbypeopletohaveoperatedtheirscamsusing
similarmeansandthattheirbackgroundsweresimilaraswell.Butthe
differencesareveryconspicuous.
Attheoutset,Mehtacamefromalowermiddleclassandmodestbackground,
whileKPsfamilyhasbeenengagedasstockbrokersforasignificanttime.Heis
alsorelatedtomanyprominentbrokers.Secondly,whenMehtawasoperating,
themarketwasstillaclosedoneandwasjustbeginningtoliberalize.Itwas
revealedlaterthatMehtaoperatedusingthemoneyofotherpeopleashislast
recourse.Further,Mehtaisknowntohaveresortedtoaggressivepublicity
campaignswhereasKPoperatesalmostclandestinely.Thelatterhasalsobeen
successfulatcreatingstoriesandsellingthemaggressivelytoinstitutional
investors.
TheMidastouch
Parekhattractedtheattentionofmarketplayersandtheykepttrackofevery
moveofParekhaseverythinghewaslayinghishandsonwasvirtuallyturning
intogold.ButthePentafourBullstillkeptalowprofile,exceptwhenhe
hostedamillenniumpartythatwasattendedbypoliticians,businessmagnates
andfilmstars.Andby19992000,asthetechnologyindustrybeganembracing
theentireworld,Indiasstockmarketsstartedshowingsignsofhyperactivity
aswellandthiswaswhenKPstruck.
Almosteveryone,frominvestmentfirmswhichweremostlycontrolledby
promotersoflistedcompaniestoforeigncorporatebodiesandcooperative
bankswereeagertoentrusttheirmoneywithParekh,which,heinturnused
toinflatestockpricesbymakinghisinterestobvious.Almostimmediately,
stocksoffirmssuchasVisualsoftwitnessedmeteoricrises,fromRs625toRs
8,448perunit,whilethoseofSonataSoftwarewereupfromRs90toRs
2,150.However,thisfraudulentschemedidnotendwithpricerigging.The
riggedupstocksneededdumpingontosomeoneintheendandKPused
financialinstitutionssuchastheUTIforthis.
Whencompaniesseektoraisemoneyfromthestockmarket,theytakethe
helpofbrokerstobacktheminraisingshareprices.KPformedanetworkof
brokersfromsmallerboursessuchastheAllahabadStockExchangeandthe
CalcuttaStockExchange.HealsousedBENAMIorsharepurchaseinthe
namesofpoorpeoplelivinginMumbaisshanties.KPalsohadlarge
borrowingsfromGlobalTrustBankandheriggedupitssharesinorderto
profitsignificantlyatthetimeofitsmergerwithUTIBank.Whiletheactual
amountthatcameintoParekh'skittyasloanfromGlobalTrustBankwas
reportedlyRs250crore,itschairmanRameshGelliisknowntohave
repeatedlyassertedthatParekhhadreceivedlessthanRs100croreinkeeping
withRBInorms.
ParekhandhisassociatesalsosecuredRs1,000croreasloanfromthe
MadhavpuraMercantileCooperativeBankdespiteRBIregulationsthatthe
maximumamountabrokercouldgetasaloanwasRs15crore.Hence,itwas
clearthatKPsmodeofoperationwastoinflatesharesofselectcompaniesin
collusionwiththeirpromoters.
LadyluckdisfavoursParekh!
Notably,adayafterthepresentationoftheUnionBudgetinFebruary2001,
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Parekhappearedtohaverunoutofluck.Ateamoftraders,ShankarSharma,
AnandRathiandNirmalBang,knownasthebearcartel,placedsellorderson
KPsfavoritestocks,thesocalledK10stocks,andcrushedtheirinflated
prices.EventheborrowingsofKPputtogethercouldnotrescuehisscrips.The
GlobalTrustBankandtheMadhavpuraCooperativeweredrivento
bankruptcyasthemoneytheyhadlentParekhwentintoanabysswithhis
reportedlyfavouriteK10stocks.
Theexposureofthedupe
AswiththeHarshadMehtascam,KetanParekh'sfraudulentpracticeswere
firstexposedbyveterancolumnistSuchetaDalal.Sucheta'scolumnread,It
wasyetanotherblackFridayforthecapitalmarket.TheBSEsensitiveindex
crashedanother147pointsandtheCentralBureauofInvestigation(CBI)
finallyendedKetanParekhstwoyeardominanceofthemarketbyarresting
himinconnectionwiththeBankofIndia(BoI)complaint.Manypeopleinthe
marketarenotsurprisedwithParekhsdownfallbecausehisspeculative
operationsweretoolarge,hewaskeepingdubiouscompany,andhewas
dealingintoomanyshadyscrips.
Whenthepricesofselectsharesstartedconstantlyrising,innocentinvestors
whohadboughtsuchsharesbelievingthatthemarketwasgenuinewere
abouttostareathugelosses.Soonafterthescamwasexposed,thepricesof
thesestockscamedowntothefractionofthevaluesatwhichtheyhadbeen
bought.Whenthescamdidactuallyburst,theriggedshareslosttheirvalues
soheavilythatquiteafewpeoplelosttheirsavings.Somebanksincluding
BankofIndiaalsolostsignificantamountsofmoney.
DalalgoesontostatethatParekh'sschemewasnotvisibletoalaymangiven
thepositivedeflectionthatmediahadmadehimaherowhilesomeofthe
biggestnationaldailieshadevenquotedhimprofuselyonthatyearsUnion
Budget.DalaladdedthatKPsarrestandtheuncannysimilarityofhis
operationstotheHarshadMehtasecuritiesscamof1992vindicatedthe
miserableinadequacyofthecountrysregulatorysystem.TheSecurities
ExchangeBoardofIndia(SEBI)andtheReserveBankofIndia(RBI)had
remainedcomplacentwhenthestockbubblewascreatedduringthelatterhalf
of1999andthrough2000whileithadnotbotheredtotakeanyaction
through2001whenitwasreadytoburst.
SEBIsdamagecontrolmeasures
SEBIinvestigationsintoParekh'smoneylaunderingaffairsrevealedthatKP
hadusedbankandpromoterfundstomanipulatethemarkets.Itthen
proceededwithpluggingthemanyloopholesinthemarket.Thetradingcycle
wascutshortfromaweektoaday.Thecarryforwardsysteminstocktrading
calledBADLAwasbannedandoperatorscouldtradeusingthismethod.
SEBIformallyintroducedforwardtradingintheformofexchangetraded
derivativestoensureawellregulatedfuturesmarket.Italsodidawaywith
brokercontroloverstockexchanges.InKPscase,theSEBIfoundprimafacie
evidencethathehadriggedpricesinthescripsofGlobalTrustBank,Zee
Telefilms,HFCL,LupinLaboratories,AftekInfosysandPadminiPolymer.
Furthermore,theinformationprovidedbytheRBItotheJointParliamentary
Committee(JPC)duringtheinvestigationrevealedthatfinancialinstitutions
suchasIndustrialDevelopmentBankofIndia(IDBIBank)andIndustrial
FinanceCorporationofIndia(IFCI)hadgivenloansofRs1,400croreto
companiesknowntobeclosetoParekh.
CriticismofSEBI
SomeoftheregulatoryactionsSEBIundertookcameunderscathingcriticism
fromsomequarterswhoaccuseditofstillbeingcluelessaboutitssupervisory
duties.Observerssaidtheregulatorstillcontinuedbelievingthatitsonly
prioritywastopreventafallinstockprices.
ItwasrumoredthatSEBIbannedshortsalesandincreasedmarginscreating
avirtualcashmarketintheprocessandsqueezedturnovertoasixthofthe
normallevel.ItalsofiredallbrokerdirectorsfromtheBombayStock
ExchangeandCalcuttaStockExchangeanddeclaredthecompletionofthree
controversialsettlementsoftheKolkataboursebyretainingasizeable
proportionofthepayoutofoperatorswhohadallegedlytiedupforcollusive
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8/22/2015
deals.Furthermore,SEBIroundedupthebearoperatorsandlaunchedan
inquiryintotheirallegedshortsales.
StringentregulatorymeasuresfollowParekhepisode
Parekh'sfraudulentoperationsmotivatedtheauthoritiestotakenecessary
stepsthathavemademadeIndia'sstockmarketsrelativelysaferinpresent
times.Hecanalsobecreditedforhavingforcedindolentpolicymakersto
bringaboutreformsinthefinancialsystem.
Anactivetrader
AccordingtoanIntelligenceBureaureport,thoughdisbarredfromtradingin
thecountrysboursesuntil2017,isstilloperatinginthemarketsthrough
conduits,vindicatingDalalStreetsbeliefthathehasneverleftthemarket.The
reportsaysthatasrecentlyasDecember2010,KPhasbeenrallyingbehind
differentstocksandplacingsomeofthematriggeduppricestolarge
institutionssuchastheLIC.Heisoperatingthroughlittleknowninvestment
firms,marketoperatorsandafollowingofloyalbrokers.KP,whowasatthe
forefrontduringthetechnologysharesledbullrunin19992000,is
apparentlyusingfrontentitiessuchasOrchidChemicals,GMR
Infrastructure,CairnIndia,DeccanChroniclesHoldings,RelianceIndustries,
PunjLloyd,IndiabullsRealEstate,PipavavShipyard,AmtekAuto,Hindustan
OilExploration,UCOBank,StateBankofIndia,EIHandJSWSteel,among
others,totradeinshares.
ThereportfurtherstatesthatKPhasbeeninstrumentalininflatingtheshare
priceofSKSMicrofinancefromRs850toRs1,100followingitslistingin
August2010.HehasalsoriggedIPOsoflittleknowncompaniesbybuyingout
50%oftheissueincollusionwithhisKolkatabasedassociates.KPandhis
associateshavealsoacquiredverylargepositionsinpetroleumcompanies
suchasONGCandHPCL,accordingtothereport.AnIBofficialhasfurther
saidthatKPandhisteamhaverevealedtotheircloseassociatesthattheyhave
insiderinformationonthegovernment'sproposaltodecontrolthesaleofgas
whichisexpectedtoraiseprofitmarginsofthesecompaniesbyabout20%.
2,473views2upvotesWritten22Jun
AbhinavKumar
Thecrucialmechanismthroughwhichthescamwaseffectedwastheready
forward(RF)deal.TheRFisinessenceasecuredshortterm(typically15day)
loanfromonebanktoanother.Crudelyput,thebanklendsagainst
governmentsecuritiesjustasapawnbrokerlendsagainstjewellery.The
borrowingbankactuallysellsthesecuritiestothelendingbankandbuysthem
backattheendoftheperiodoftheloan,typicallyataslightlyhigherprice.
ItwasthisreadyforwarddealthatHarshadMehtaandhiscroniesusedwith
greatsuccesstochannelmoneyfromthebankingsystem.
Atypicalreadyforwarddealinvolvedtwobanksbroughttogetherbyabroker
inlieuofacommission.Thebrokerhandlesneitherthecashnorthesecurities,
thoughthatwasntthecaseintheleaduptothescam.
Inthissettlementprocess,deliveriesofsecuritiesandpaymentsweremade
throughthebroker.Thatis,thesellerhandedoverthesecuritiestothebroker,
whopassedthemtothebuyer,whilethebuyergavethechequetothebroker,
whothenmadethepaymenttotheseller.
Inthissettlementprocess,thebuyerandthesellermightnotevenknowwhom
theyhadtradedwith,eitherbeingknowonlytothebroker.
Thisthebrokerscouldmanageprimarilybecausebynowtheyhadbecome
marketmakersandhadstartedtradingontheiraccount.Tokeepupa
semblanceoflegality,theypretendedtobeundertakingthetransactionson
behalfofabank.
Anotherinstrumentusedinabigwaywasthebankreceipt(BR).Inaready
forwarddeal,securitieswerenotmovedbackandforthinactuality.Instead,
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8/22/2015
theborrower,i.e.thesellerofsecurities,gavethebuyerofthesecuritiesaBR.
aBRconfirmsthesaleofsecurities.Itactsasareceiptforthemoneyreceived
bythesellingbank.Hencethenamebankreceipt.Itpromisestodeliverthe
securitiestothebuyer.Italsostatesthatinthemeantime,thesellerholdsthe
securitiesintrustofthebuyer.
Havingfiguredthisout,Methaneededbanks,whichcouldissuefakeBRs,or
BRsnotbackedbyanygovernmentsecurities.Twosmallandlittleknown
bankstheBankofKarad(BOK)andtheMetorpolitanCooperativeBank
(MCB)cameinhandyforthispurpose.
OncethesefakeBRswereissued,theywerepassedontootherbanksandthe
banksinturngavemoneytoMehta,obviouslyassumingthattheywerelending
againstgovernmentsecuritieswhenthiswasnotreallythecase.Thismoney
wasusedtodriveupthepricesofstocksinthestockmarket.Whentimecame
toreturnthemoney,thesharesweresoldforaprofitandtheBRwasretired.
Themoneyduetothebankwasreturned.
Thegamewentonaslongasthestockpriceskeptgoingup,andnoonehada
clueaboutMehtasmodusoperandi.Oncethescamwasexposed,though,alot
ofbankswereleftholdingBRswhichdidnothaveanyvaluethebanking
systemhadbeenswindledofawhoppingRs4,000crore.
Mehtamadeabriefcomebackasastockmarketguru,givingtipsonhisown
websiteaswellasaweeklynewspapercolumn.Thistimearound,hewasin
cahootswithownersofafewcompaniesandrecommendedonlythoseshares.
Thisgame,too,didnotlastlong.
Interestingly,however,bythetimehedied,Mehtahadbeenconvictedinonly
oneofthemanycasesfiledagainsthim.
5,993views10upvotesWritten15Aug,2014
Writeananswer
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