Harshad Mehta - “The Big Bull”

A 4000 CRORE SCAM

 WHO WAS HARSHAD MEHTA ?

First Job : Dispatch clerk in the New India Assurance

Company.
Worked with Stock Brokers like B. Ambalal and soon
managed to get a brokers card and work as stock
broker for stock brokers like J. L. Shah and Nandalal
Sheth.
Started his own venture : Grow More Research and
Asset Management Company Ltd.
 Became a member of BSE and started his broking
business.
 HOW IT ALL BEGAN :

• Liberalization of economy
 In June 1991, the new government accelerated the process of economic
liberalization under the auspices of the international monetary fund. The opening
up of Indian economy as a result of these measures promised an unprecedented
growth and prosperity for the private participation and various administrative
impediments were being removed.
 This was the time Harshad Mehta and his associates decided to strike.
 INSTRUMENTS USED IN THE SCAM
Ready Forward Deal (RF) :
Ready forward is a short term loan (typically 15 days or less) usually from one bank
to another. Unlike other Loans , it is actually a secures loan with government
securities backing it up.
Bank receipt (BR):
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 instead of delivering the actual securities to
the lender.
THE SCAM :
 MAJOR INVESTMENTS
Taking advantage of the loopholes in the banking system Harshad and his associates
triggered a securities scam diverting funds to the tune of Rs.4,000cr. He caused the
steeps price in the stock market in the year 1992 by binding at a premium for many
shares.
Some of the stocks which were highly invested in by Harshad Mehta :
• ACC
• Apollo tyres
• Reliance
• Tata iron and steel co.(TISCO)
• BPL
• Sterlite
• Videocon
 SENSEX PERFORMANCE :

During the Scam period, Sensex was at its peak. But as soon as the Scam was
revealed in April, the Sensex drastically fell landing all investors in great loss.
EFFECT ON SHARES
 IMMEDIATE IMPACT

The share market was under chaos.

There was steep fall in share prices.
There was great loss to the innocent investors
who had brought shares much before the scandal
was exposed.
The index fell from 4500 to 2500 representing loss
of Rs.100,000 crores in market capitalisation.
 IMPACT ON INDIAN ECONOMY
SEBI has to postpone sanctioning of private sector mutual funds.
Implementation of some aspects of the Narasimham Committee recommendation
had to be delayed.
The Euro-issues planned by several Indian
companies were delayed.
The liberalisation policy framed by the Govt.
were severely criticized.
 IMPACT ON BANKS
The BR was declared void and public money was at stake.
Prominent banks like SBI, Standard Chartered and a subsidiary of RBI were
found to be involved and they were equally accountable as much as brokers
were.
The brokers were encouraged by the banks to divert funds from the banking
system to the stock market.
 RESPONSE BY THE GOVERNMENT

Firstly, the Government handed over the case

to the Central Bureau of the Investigation and
Joint Parliamentary Committee (JPC).
RF deals were banned and liberalization policies
were slowed down.
Special courts were setup to facilitate speedy trails.
All the transactions done by the accused after March 31, 1991 were
considered void.
 REGULATORY ACTIONS AGAINST MEHTA

He was later charged with 72 criminal offences, and more than 600 civil actions suits
were filed were filed against him.
He was arrested and banished from the stock market.
Mehta and his brothers were arrested by the CBI for allegedly misappropriating more
than 27 lakh of about 90 companies.
 REFORMS IN THE SYSTEM

The main motive behind punishment to offenders is more to prevent future

offenders to not to try such Scams.
The govt. must ensure that not only the obviously guilty(the brokers) but also the
not so obviously guilty (the bank executives, the bureaucrats and the politicians )are
identified and brought to book.
 Video

• https://www.youtube.com/watch?v=fmbYeOTdCQs&t=5s
KETAN PAREKH :
Pied Piper of D-Street
Brief History :
• CA by profession, started his career as a trainee
under Harshad Mehta
• Hailing from a family of brokers, had a network
of close knitted brokers across stock exchanges
• Convicted in 2008, for involvement in the Indian
stock market manipulation scam in late 1999 to
early 2001
• Circa 1.7 billion INR was moved, SEBI
investigations revealed
• Defrauding Bank of India (BoI) of about 137
crores
K10 STOCKS : OVERVIEW :
• Identified and targeted 10 stocks
from the emerging ICE Sectors
• K-10 stock, KP Index
• Share prices of Zee Telefilms
went up from Rs. 127 to Rs. 2330,
Himachal Futuristic –Rs. 194 to Rs.
2553
Mechanisms used :
• Badla System
• Simple Borrowing System
THE OPERATION:

STOCK EXCHANGE

USED THE FUNDS TO

RIG PRICES OF K10
STOCKS

MMCB/GTB BANK OF INDIA

DISCOUNTED SUCH PAY

FAKE PAY ORDERS
ORDERS WITH BOI
THE COLLAPSE :
• ICE stocks slumped in early 2001, courtesy -
Dot Com Bubble
• Finance budget presented on February 28,
2001, had left the market unimpressed and the
panic selling that followed let to the K-10
stocks going on a freefall
• Manipulative attempts backed by heavy
borrowings to rig prices upwards failed
• MMCB defaulted on a pay order of Rs 137
crore to BOI
• News broke, and Sensex crashed by 177 points
• GoI stepped in by launching a CBI enquiry
• Parekh was arrested on March 30, 2001
 THE IMPLICATIONS :
• Parekh was banned from trading in the
financial markets for 17 years
• Short selling on all Stock Exchanges was
banned for 6 months.
• Badla system was banned
• Volatility margins on net outstanding sale
positions were imposed
• Rolling settlements system made compulsory
• Allowed banks to offer collateralized lending
only through BSE & NSE
• Withdrew broker control over stock
exchanges
THANK YOU.