CHITKARA BUSINESS SCHOOL

WHAT WE LEARNT FROM

HARSHAD MEHTAANDKETAN PAREKH

LETS START WITH WHAT IS SCAM

7SCAMobtaining money by means of deception including fake personalities, fake photos, fake template letters, non-existent addresses and phone numbers, forged documents.

Capital market scam?

It is basically fraud done in the capital market with the investors by manipulating the facts in order to attain enormous profit

BOTH GAINED POPULARITY FORCapital market?The market for securities where companies and govt. can raise long term funds

It includes stock market and the bond market

INTRODUCTION TO THE big bull of the trading floor

was anIndianstockbroker.is alleged to have engineered the rise in theBSEstock exchange in 1992Exploiting several loopholes in the banking system, Mehta and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in theSensex.

HARSHAD MEHTA- story

litigations still pending against him

When the scheme was exposed, banks started demanding their money back, causing the collapse.

Mehta died in 2002 with many litigations still pending against him

Contd. his Favourate stock included The follower of the big bull

IntroductionC.A by profession comes from broking family background.Popularly known as pentafour bull.Ketan parekh is a former stock broker from Mumbai,india He was convinced in 2008,for involvement in the indian stock market manupulation scam in late 1999-2001. currently he has been debarred from trading in the indian stock exchanges till 2017The story is quit similar only the star cast has changed .In 1992 scam it was harshad mehta now its ketan parekh.

Both are big bulls

Both big bulls use to buy stocks at rock-bottom prices and push it up

HOW HARSHAD AND KETAN RELATED TO EACH OTHERAlthough both are of gujarati origin ketan parekh , his father and grandfather were also traders in the stock market but HM had no such background

In both these scams banks were involved in the HM scam was related to bankers receipt while it was pay orders in ketan parekh scam

In HM scam foreign banks including city bank,standard charter and ANZ grindlays were involved and In ketan parekh scam foreign instituional investors including credit suisse first boston and JM Morgan stainlay were invovled

in HM scam state bank of india suffered the loss of 660 crores while ketan owes around rs. 130 crore to bank of indiaThe Mechanics of the Scam3 STEPS INVOLVED

1) The settlement process in the govt securities market become broker intermediate that is delivery and payment started getting routed through a broker instead of being made directly between the transacting banks2) The broker through whom the payment passed on its way from one bank to another found a way of crediting the money into his account though the account payee cheque was drawn in favor of bank

3) While the 2 steps transformed an RF deal from a loan to a broker, it would still be a secured loan. However, the brokers soon found a way of persuading the lending bank to dispense with security for the loan or to accept worthless security

HOW HARSHAD MEHTA SCAM IS EXPOSEDOn april 23 1992 journalist sucheta dalal exposed mehtas illegal methods in TIMES OF INDIA

The crucial mechanism through which the scam was affected was ready forward(RF) deal.

Another instrument used was the bank reciept

The two main banks who were handy for this purpose were bank of Karad(BOK) and metroplitian co-operative bankOnce the scam was exposed a lot of baks were left holding BRS which did not have any value

After the scam was reveled the chairman of vijaya bank committed suicide.

Steps taken by SEBI in response to the scam Due to the alleged inside a tradingn bombay stock exchange have been suspended. In order to prevent misuse of sensitive information by broker director, stock market will be coporite soon.

SEBI has imposed an additional 10% volatility margin on all the A-group shares and additional margin stocks in automatic lending and borrowing mechanism(ALBM) and borrowing and lending of securiti scheme(BLESS)

The SEBI has also imposed volatility margins on net outstanding sale position of FIIS(financial institution,banks and mutual funds)In order to increase liquidity,SEBI has allowed banks to offer collateralized lending only through BSE and NSEOn march 8,2001, the SEBI banned short sales.In simple words,it means that all short sales have to be covered by an equal amount of long purchases.

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 hell pay on Tuesday, then he takes money from C on Tuesday and tells D that hell 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.The internal control system of the commercial bank system involves the following features 1) separation of functions:- The aspects of securities transaction of a bank, namely dealing custody and accounting are carried out by different person The SEBI has also imposed volatility margins on net outstanding sale position of FIIS(financial institution,banks and mutual funds)In order to increase liquidity,SEBI has allowed banks to offer collateralized lending only through BSE and NSEOn march 8,2001, the SEBI banned short sales.In simple words,it means that all short sales have to be covered by an equal amount of long purchases.2)Counter party limits:-The moment an RF deal is done on the basis of a BR rather than actual securities the lending bank has to contend with the possibility that the BR received may not be backed by any adequate securities OTHER ASPECTS OF THE SCAMThere are several aspects of the scam which are closely related to the security markets, but which are different from the operational aspects of the marketsChange in prices of securitiesOn each occasion the coupon rate was increased by 1/2 %.therby raising from 11.5% to 13% during this ten month periodContd.With a daily trade in volume of Rs 3000n to 4000 crores it would have been very easy to take a position(based on inside information)of Rs 500 or Rs 1000 crores without anyone suspecting anything untwo ward

Where has all the fraud money gone? Based on result of investigation and reporting so far , the following are the possibilitiesLarge amount of money invested in sharesIt is rumored that a part of money was sent to the Havalarackent , converted into dollar pounds and brought back as India development bonds

A part of money must have been spent as bribes and kick backs to the various accomplishis in the banks and possibily in the bureaucracy and in political systemA part of money might have been used to finance the losses taken by the brokers to window dress various bank balancesheetsIMPACT OF THE SCAMThe immediate impact of the scam was a sharp fall in the shares prices . The index fell from 4500 to 2500 representing a loss of Rs. 100000 crores in the market capitalization.The government liberlisation policies came under sever critism after the scam with harshad mehta Bowing to the political pressure and the bad press it received during the scam, the liberalization was put on hold for a while by the government SEBI postponed sanctioning of private sector mutual fund