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Who was Harshad Mehta? Harshad Mehta was an Indian
stockbroker and is alleged to have
engineered the rise in the BSE stoc
exchange in the year 1992.
Harshad Shantilal Mehta was born a Gujarati Jain family of
modest
means. His early childhood was sp
in Mumbai where his father was asmall-time businessman.
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Mehta first started working as a
dispatch clerk in the New IndiaAssurance Company.
Over the years, he got interested in
the stock markets and along withbrother Ashwin.
Mehta gradually rose to become a
stock broker on the Bombay StockExchange and did very well
for
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On April 23, 1992, journalist SucheDalal in a column in The
Times of
India, exposed the dubious ways o
Harshad Metha. The broker was
dipping illegally into the banking
system to finance his buying.
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How did it happen?
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Instruments Used:Ready Forward (RF) Deal
The RF is in essence a secured sh
term (typically 15-day) loan from
bank to another.
The borrowing bank sells
securities to the lending bank
buys them back at the end of
period of the loan, typically at a slig
hi her rice.
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A typical ready forward deal invotwo banks brought together
by
broker in lieu of a commission.
broker handles neither the cash
the securities, though that wasnt
case in the lead-up to the scam.
In this settlement process, delive
of securities and payments were m
through the broker.
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In this settlement process, the buand the seller might not even
k
whom they had traded with, ei
being know only to the broker.
This the brokers could man
primarily because by now they
become market makers and
started trading on their account.
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Bank Receipt (BR)
In a ready forward deal, securwere not moved back and forth
actuality. Instead, the borrower, i.e.
seller of securities, gave the buye
the securities a BR.
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a BR confirms the sale of securitie
acts as a receipt for the moreceived by the selling bank. He
the name - bank receipt. It promise
deliver the securities to the buyealso states that in the mean
time,
seller holds the securities in trus
the buyer. So if a person somehow manage
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Two small and little known banks -Bank of Karad (BOK) and
Metorpolitan Co-operative Bank (MCcame in handy for this purpose.
Thbanks were willing to issue BRs as
when required, for a fee, they were passed on to other banks
the banks in turn gave money to Meobviously assuming that they
w
lending against government securwhen this was not really the
case.
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