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What was the Harshad Mehta scam?Please explain with a hypothecial example.

RELATED QUESTIONS

What were the amendments in the law

after Harshad Mehta's 1992 scam? How

did these amendments fail to stop the

Ketan Parek...

What are some mindblowing facts about

Harshad Mehta?

Was CitiBank the mastermind behind th

Harshad Mehta scam?

Was the scam done by Harshad Mehta

really helpful in attracting the people of

India towards the stock market?

Was Harshad Mehta wrong?

Which strategy was applied by the

Harshad Mehta in the securities scam?

What are some facts about Harshad

Mehta?

What was the modus operandi of the

Harshad Mehta scam?

What is the Harshad Mehta stock marke

fraud case?

Scams in India: What exactly was the

Bofors Scandal and who were the key

players involved?

I'll try to answer this in a simple language.

Let's say we have three banks A, B and C. And a broker X. And obviously, the

government.

Now the banks want to make as much profit as they can by using the money

just the way they want. And the government wants to regulate them by making

it compulsory for them to invest someof the money in Government bonds. So

the government puts a simple rule that at the end of every day, A,B and C have

to show them a balance sheet and a minimum amount has to be invested in

bonds.

The banks do it for some time but they ask the government for some kind of

relaxation. So a new rule comes where you need to show the balance sheet only

on Fridays. The average amount per day in the bonds has to be over the fixed

amount, however, there is no such limit on the daily amount now.

Now X comes into the scenario. Since A would sell some bonds to invest

elsewhere and B may buy some bonds as well, the bankswill now have d ifferent

amounts of money invested in bonds everyday and somewill have less while

some will have more. But all of them need to have that minimum amount on

Friday, so the banks with lesser amounts, i.e, A in this case, would need to buy

the bonds to keep up with the average.

So what does A do? It contacts X to get it some bonds from either B or C.

X is a trusted broker and all the banks know him pretty well. So X tells A that

he'll get the bonds but right now he isn't sure that from whom will the bonds

come, B or C. So instead of making the cheque on the bank's name, A should

sign the cheque for X. (Which was illegal, BTW).

So A does that. Now X goes to B and ask for the bonds and using the power of

trust, X tells B that he'll pay the money the next day to which B agrees because

he also offered a good return on the money. See, bonds are important, money

may come later too.

Using this trick, X makes sure he always has some money with him.

Now comes part two. The money he had, he invested heavily in the stock

market to create a turmoil, specifically for a few companies like ACC. The

market saw a huge run like never before and share prices of ACC and some

others went over the tops.

Once he knew the market was at a peak, he started profit making and markets

crashed. The bank people who were involved with him in the illegal acts

panicked and one of them even committed suicide.

Shubham Choudhary, Procrastinator. Writer. Freeloader. And hey, Top

Writer too.

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http://www.quora.com/What-was-the-Harshad-Mehta-scam 2

More Answers Below. Related Questions

What were the amendments in the law after Harshad Mehta's 1992 scam? How

did these amendments fail to stop the Ketan Parekh 2001 scam?

Image credit: Page on slidesharecdn.com

This is to note that it was a very simple explanation where I tried to avoid the

terms like BR andFR(Ready Forwardand Bank Receipt). For a more

detailed explaination, you can check the below links.

HARSHAD MEHTA'S SCAM

Harshad Mehta Scam

Harshad was an intelligent Broker and he knew the exact loopholes with the

Indian economy and the banking system. It's a shame that he used it for the

wrong reasons.

As the a fter effects of this scam, around a sum of Rs 4000 crore was mulcted.

And tha t is in the 90s so you can imagine the value of such a sum today.

The then PM, Narsimha Rao was accused of Bribery.

Many people were bankrupted and committed suicide.

The concept of Bank receipt was finally removed and many other measures

were taken.

34,320 views 276 upvotes Updated 8 Jun, 2014
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What are some mindblowing facts about Harshad Mehta?

Was CitiBank the mastermind behind the Harshad Mehta scam?

Was the scam done by Harshad Mehta really helpful in attracting the people of

India towards the stock market?

Was Harshad Mehta wrong?

Harshad Shantilal Mehta was born in a Gujarati Jain family of modestmeans. His early childhood was spent in Mumbai where his father was a small-

time businessman. Later, the family moved to Raipur in Madhya Pradesh after

doctors advised his father to move to a drier place on account of his indifferent

health. But Raipur could not hold back Mehta for long and he was back in the

city after completing his schooling, mu ch against his fathers wishes.

Mehta first started working as a dispatch clerk in the New India Assurance

Company. Over the years, he got interested in the stock markets and along with

brother Ashwin, who by then had left his job with the Industrial Credit and

Investment Corporation of India, started investing heavily in the stock market.

Mehta gradually rose to become a stock broker on the Bombay Stock

Exchange, who did very well for himself. At his peak, he lived almost like a

movie star in a 15,000 square feet house, which had a swimming pool as well

as a golf patch. He also had a taste for flashy cars, which ultimately led to his

downfall.

RISE OF MEHTA

The year was 1990. Years had gone by and the driving ambitions of a young

man in the faceless crowd had been realised. Harshad Mehta was making

waves in the stock market. He ha d been buying shares heavily since the

beginning of 1990. The shares which attracted attention were those of

Associated Cement C ompany (ACC) , write the a uthors. The p rice of ACC was

bid up to Rs 10,000. For those who asked, Mehta ha d the replacement cost

theory as an explanation. The theory basically argues that old companies

should be valued on the basis of the amount of money which would be requiredto create another such company.

Mehta was the darling of the business media and earned the sobriquet of the

Big Bull, who was said to have started the bull run. But, where was Mehta

getting his endless supply of money from? Nobody had a clue.

FRAUD COMMITTED

The crucial mechanism through which the scam was effected was the ready

forward (RF) deal. The RF is in essence a secured short-term (typically 15-

day) loan from one bank to another. Crudely put, the bank lends against

government securities just as a pawnbroker lends against jewellery.The

borrowing bank actually sells the securities to the lending bank and buys them

back a t the end of the period of the loan, typically at a slightly higher price.It was this ready forward deal that Harshad Mehta and his cronies used with

great success to channel money from the banking system.

A typical ready forward deal involved two banks brought together by a broker

in lieu of a commission. The broker handles neither the cash nor the securities,

though that wasnt the case in the lead-up to the scam.

In this settlement process, deliveries of securities and payments were made

through the broker. That is, the seller handed over the securities to the broker,

who pa ssed them to the buyer, while the buyer gave the cheque to the broker,

who then made the payment to the seller.

In this settlement process, the buyer and the seller might not even know whom

they had traded with, either being know only to the broker.

Saurabh Kothari
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This the brokers could manage primarily because by now they had become

market makers and had started trading on their account. To keep up a

semblance of legality, they pretended to be undertaking the transactions on

behalf of a bank.

Another instrument used in a big way was thebank receipt (BR). In a ready

forward deal, securities were not moved back and forth in actuality. Instead,

the borrower, i.e. the seller of securities, gave the buyer of the securities a BR.

a BR confirms the sale of securities. It acts as a receipt for the money receivedby the selling bank. Hence the name - bank receipt. It promises to deliver the

securities to the buyer. It also states that in the mean time, the seller holds the

securities in trust of the buyer.

Having figured this out, Metha needed banks, which could issue fake BRs, or

BRs not backed by any government securities. Two small and little known

banks - the Bank of Karad (BOK) and the Metorpolitan Co-operative Bank

(MCB) - came in handy for this purpose.

Once these fake BRs were issued, they were passed on to other banks and the

banks in turn gave money to Mehta, obviously assuming that they were lending

against government securities when this was not really the case. This money

was used to drive up the prices of stocks in the stock market. When time came

to return the money, the shares were sold for a profit and the BR was retired.

The money due to the bank was returned.

The game went on as long as the stock prices kept going up, and no one had a

clue about Mehtas modus operandi. Once the scam was exposed, though, a lot

of banks were left holding BRs which did not have any value - the banking

system had been swindled of a whopping Rs 4,000 crore.

Mehta made a brief comeback as a stock market guru, giving tips on his own

website as well as a weekly newspaper column. This time around, he was in

cahoots with owners of a few companies and recommended only those shares.

This game, too, did not last long.

Interestingly, however, by the time he died, Mehta had been convicted in only

one of the many cases filed against him.2,524 views 16 upvotes Written 20 Feb, 2015 Asked to answer by Isha Jain

Thanks for A2A.

Its a scam of 90s. By the year 1990, Harshad Mehta became a prominent name

in the Indian stock market. He started buying shares heavily. The shares of

India's foremost cement manufacturer Associated Cement Company (ACC)

attracted him the most and the scamster is known to have taken the price of

the cement company from 200 to 9000 (approx.) in the stock market

implying a 4400% rise in its price. It is believed that It was later revealed that

Mehta used the replacement cost theory to explain the reason for the high-level

bidding. The replacement cost theory basically states that older companies

should be valued on the basis of the amount of money that would be needed to

create another similar company. By the latter half of 1991, Mehta had come to

be called the Big Bull as people credited him with ha ving initiated the Bull

Run.

Mehta, along with his associates, was accused of manipulating the rise in the

Bombay Stock Exchange (BSE) in 1992. They took advantage of the many

loopholes in the banking system and drained off funds from inter-bank

transactions. Subsequently, they bought huge amounts of shares at a premium

across many industry verticals causing the Sensex to rise dramatically.

However, this was not to continue. The exposure of Mehta's modus operandi

Anurag Parihar, Cricketer, Convival, Fitness Freak, Atheist, Ambitious
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led banks to start demanding their money back, causing the Sensex to plunge

almost dramatically as it had risen. Mehta was later charged with 72 criminal

offences while over 600 civil action suits were filed against him. Significantly,

the Harshad Mehta security scandal also became the flavor of Bollywood with

Sameer Hanchate's film Gafla.

Mehta's illicit methods of manipulating the stock market were exposed on April

23, 1992, when veteran columnist Sucheta Dalal wrote an article in India's

national daily The Times of India. Dalals column read: The crucial

mechanism through which the scam was effected was the ready forward (RF)

deal. The RF is in essence a secured short-term (typically 15-day) loan fromone bank to another. Crudely put, the bank lends against government

securities just as a pawnbroker lends against jewelers. The borrowing bank

actually sells the securities to the lending bank and buys them back at the end

of the period of the loan, typically at a slightly higher price. In a ready-

forward deal, a broker usually brings together two banks for which he is paid a

commission. Although the broker does not handle the cash or the securities,

this was not the case in the prelude to the Mehta scam. Mehta and his

associates used this RF deal with great success to channel money through

banks.

The securities and payments were delivered through the broker in the

settlement process. The broker functioned as an intermediary who received the

securities from the seller and handed them over to the buyer and he received

the check from the buyer and subsequently made the payment to the seller.

Such a settlement process meant that both the buyer and the seller may not

even know the identity of the other as only the broker knew both of them. The

brokers could manage this method expertly as they had already become market

makers by then and had started trading on their account. They pretended to be

undertaking the transactions on behalf of a bank to maintain a faade of

legality.

Mehta and his associates used another instrument called the bank receipt

(BR). Securities were not traded in reality in a ready forward deal but the seller

gave the buyer a BR which is a confirmation of the sale of securities. A BR is a

receipt for the money received by the selling bank and pledges to deliver the

securities to the buyer. In the meantime, the securities are held in the sellers

trust by the buyer.

Armed with these schemes, all Mehta needed now were banks which wouldreadily issue fake BRs, or ones without the guarantee of any government

securities. His search ended when he found that the Bank of Karad (BOK),

Mumbai and the Metropolitan Co-operative Bank (MCB) two small and little

known lenders, were willing to comply. The two banks agreed to issue BRs as

and when required. Once they issued the fake BRs, Mehta passed them on to

other banks who in turn lent him money, under the false assumption that they

were lending aga inst government securities. Mehta used the money thus

secured to enhance share prices in the stock market. The shares were then sold

for significant profits and the BR retired when it was time to return the money

to the bank.

Mehta continued with his manipulative tactics, triggering a massive rise in the

prices of stock and thereby creating a feel-good market trajectory. However,

upon the exposure of the scam, several banks found they were holding BRs of

no value at all. Mehta had by then swindled the banks of a staggering Rs 4,000

crore. The scam came under scathing criticism in the Indian Parliament,

leading to Mehta's eventual imprisonment. The scams exposure led to the

death of the Chairman of the Vijaya Bank who reportedly committed suicide

over the exposure. He was guilty of having issued checks to Mehta and knew

the backlash of accusations he would have to face from the public.

2,384 views 5 upvotes Written 23 Jun Asked to answer by Priya Gupta

Harshad Mehta & Ketan Parekh Scam

Anonymous
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Harshad Mehta: the high-profile stockbroker

Harshad Shantilal Mehta (1954-2002) was an Indian stockbroker who

grabbed headlines for the notorious BSE security scam of 1992. Born in a

lower middle-class Gujarati Jain family, Mehta spent his early childhood in

Mumbai where his father was a small-time businessman. The family relocated

to Raipur in Chhattisgarh after doctors advised Mehtas father to shift to a

drier place on account of his health.

Transition from an ordinary broker to Big BullMehta studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur.

He quit his job at The New India Assurance Company in 1980 and sought a

new one with BSE-affiliated stockbroker P. Ambalal before going on to become

a jobber on the BSE for stockbroker P.D. Shukla. In 1981, Mehta became a

sub-broker for stockbrokers J.L. Shah and N andalal Sheth. Having gained

considerable experience as a sub-broker, he teamed up with his brother Sudhir

to float a new venture called Grow More Research and Asset Management

Company Limited. When the BSE auctioned a brokers card, the Mehta duos

company bid for it with the financial support of J.L. Shah and N andalal

Sheth. Another name that is rumored to have a crucial hand in the scam was

Nimesh Shah. However, Shah could keep a safe distance from the accusations

and is currently known to be a heavy player in the Indian stock market.

By year 1990, Mehta became a prominent name in the Indian stock market.

He started buying shares heavily. The shares of India's foremost cement

manufacturer Associated Cement Company (ACC) attracted him the most

and the scamster is known to have taken the price of the cement company

from 200 to 9000 (ap prox.) in the stock market implying a 4400% rise in

its price. It is believed that It was later revealed that Mehta used the

replacement cost theory to explain the reason for the high-level bidding. The

replacement cost theory basically states that older companies should be valued

on the basis of the amount of money that would be needed to create another

similar company. By the latter half of 1991, Mehta had come to be called the

Big Bull as people credited him with having initiated the Bull Run.

The making of the 1992 security scam

Mehta, along with his associates, was accused of manipulating the rise in the

Bombay Stock Exchange (BSE) in 1992. They took advantage of the manyloopholes in the banking system and drained off fund s from inter-bank

transactions. Subsequently, they bought hug e amounts of shares at a premium

across many industry verticals causing the Sensex to rise dramatically.

However, this was not to continue. The exposure of Mehta's modus operandi

led banks to start demanding their money back, causing the Sensex to plunge

almost dramatically as it had risen. Mehta was later charged with 72 criminal

offences while over 600 civil action suits were filed against him. Significantly,

the Harshad Mehta security scandal also became the flavor of Bollywood with

Sameer Hanchate's film Gafla.

The 1992 security scam and its exposure

Mehta's illicit methods of manipulating the stock market were exposed on

April 23, 1992, when veteran columnist Sucheta Dalal wrote an article in

India's national daily The Times of India. Dalals column read: The crucial

mechanism through which the scam was effected was the ready forward (RF)

deal. The RF is in essence a secured short-term (typically 15-day) loan from

one bank to another. Crudely put, the bank lends against government

securities just as a pawnbroker lends against jewelers. The borrowing bank

actually sells the securities to the lending bank and buys them back at the end

of the period of the loan, typically at a slightly higher price. In a ready-

forward deal, a broker usually brings together two banks for which he is paid a

commission. Although the broker does not handle the cash or the securities,

this was not the case in the prelude to the Mehta scam. Mehta and his

associates used this RF deal with great success to channel money through

banks.

The securities and payments were delivered through the broker in the


7/12



settlement process. The broker functioned as an intermediary who received the

securities from the seller and handed them over to the buyer and he received

the check from the buyer and subsequently made the payment to the seller.

Such a settlement process meant that both the buyer and the seller may not

even know the identity of the other as only the broker knew both of them. The

brokers could manage this method expertly as they had already become

market makers by then and had started trading on their account. They

pretended to be undertaking the transactions on behalf of a bank to maintain

a faade of legality.

Mehta and his associates used another instrument called the bank receipt

(BR). Securities were not traded in reality in a ready forward deal but theseller gave the buyer a BR which is a confirmation of the sale of securities. A

BR is a receipt for the money received by the selling bank and pledges to

deliver the securities to the buyer. In the meantime, the securities are held in

the sellers trust by the buyer.

Complicit lenders

Armed with these schemes, all Mehta needed now were banks which would

readily issue fake BRs, or ones without the guarantee of any government

securities. His search ended when he found that the Bank of Karad (BOK),

Mumbai and the Metropolitan Co-operative Bank (MCB) two small and little

known lenders, were willing to comply. The two banks agreed to issue BRs as

and when required. Once they issued the fake BRs, Mehta passed them on to

other banks who in turn lent him money, under the false assumption that they

were lending aga inst government securities. Mehta u sed the money thu s

secured to enhance share prices in the stock market. The shares were then sold

for significant profits and the BR retired when it was time to return the money

to the bank.

Outcome

Mehta continu ed with his manipulative tactics, triggering a massive rise in the

prices of stock and thereby creating a feel-good market trajectory. However,

upon the exposure of the scam, several banks found they were holding BRs of

no value at all. Mehta had by then swindled the banks of a staggering Rs

4,000 crore. The scam came under scathing criticism in the Indian

Parliament, leading to Mehta's eventual imprisonment. The scams exposure

led to the death of the Chairman of the Vijaya Bank who reportedly

committed suicide over the exposure. He was guilty of having issued checks toMehta and knew the backlash of accusations he would have to face from the

public.

A few years later, Mehta mad e a brief comeback as a stock market expert and

started providing investment tips on his website and in a weekly newspap er

column. He worked with the owners of a few companies and recommended

the shares of those companies only. When he died in 2002, Mehta had been

convicted in only one of the 27 cases filed against him. What attracted the

taxmans attention was Mehta's advance tax payment of Rs 28-crore for the

financial year 1991-92. Another eye-catcher was his extravagant lifestyle.

I-T, PSBs recover dues nine years after Mehta's death

Nine years after Harsad Mehta died, the I-T department and public sector

banks (PSBs) have successfully recovered a significant portion of their claims

emerging out of the securities scam from his liquidated assets. The Supreme

Court directed the Custodian of the attached properties and assets of the

Harshad Mehta Group (HMG) in March 2011 to make payments of

Rs1,995.66-crore to the I-T department and Rs 199.25-crore to the State Bank

of India (SBI), making the two institutions two of the earliest claimants to

recover their dues.

While the SBIs total principal amount claim of R s 1,000-crore have been

largely settled, financial institutions have also received some money. However,

Standard Chartered Bank, which had claimed Rs 500-crore, has yet to recover

its dues it was one of the late claimants. Although the total claim over the

HMG is of more than Rs 20,000-crore, the apex court has said that for the

present, it would only consider claims towards the principal amount.


8/12



Who is Ketan Parekh

Ketan Parekh is a former stockbroker based in Mumbai who was convicted in

2008 for being involved in engineering the technology stocks scam in Indias

stock market in 1999-2001. A cha rtered accountant by training, Parekh comes

from a family of brokers and is currently serving a period of disqualification

from trading in the Indian bourses till 2017.

Ketan Parekh has been accorded with sobriquets such as the Pentafour Bull

and the One Man Army by the countrys national business newspapers, while

the market simply refers to him as KP or associates him with his firm NH

Securities. Parekh is known to have no reluctance in meeting the press. He isalso known to have razor-sharp forecasts on market developments.

What distinguishes Ketan Parekh from the 'Big Bull' late Harshad

Mehta

The two have been compared by people to have operated their scams using

similar means and that their backgrounds were similar as well. But the

differences are very conspicuous.

At the outset, Mehta ca me from a lower middle-class and modest background,

while KPs family has been engaged as stockbrokers for a significant time. He is

also related to many prominent brokers. Secondly, when Mehta was operating,

the market was still a closed one and was just beginning to liberalize. It was

revealed later that Mehta operated using the money of other people as his last

recourse. Further, Mehta is known to have resorted to aggressive publicity

campaigns whereas KP operates almost clandestinely. The latter has also been

successfu l at creating stories and selling them aggressively to institutional

investors.

The Midas touch

Parekh attracted the attention of market players and they kept track of every

move of Parekh as everything he was laying his hands on was virtually turning

into gold. But the Pentafour Bull still kept a low profile, except when he

hosted a millennium party that was attended by politicians, business magnates

and film stars. And by 1999-2000, as the technolog y industry began embracing

the entire world, Indias stock markets started showing signs of hyper-activity

as well and this was when KP struck.

Almost everyone, from investment firms which were mostly controlled by

promoters of listed companies to foreign corporate bodies and coopera tivebanks were eager to entrust their money with Parekh, which, he in turn used

to inflate stock prices by making his interest obvious. Almost immediately,

stocks of firms such as Visual soft witnessed meteoric rises, from Rs 625 to Rs

8,448 per unit, while those of Sonata Software were up from Rs 90 to Rs

2,150. However, this fraudulent scheme did not end with price rigging. The

rigged-up stocks needed dumping onto someone in the end and KP used

financial institutions such as the UTI for this.

When companies seek to raise money from the stock market, they take the

help of brokers to back them in raising share prices. KP formed a network of

brokers from smaller bourses such as the Allahabad Stock Exchange and the

Calcutta Stock Exchang e. He also used BENAMI or share purchase in the

names of poor people living in Mumbais shanties. KP also had large

borrowings from Global Trust Bank and he rigged up its shares in order to

profit significantly at the time of its merger with UTI Bank. While the actual

amount that came into Parekh's kitty as loan from Global Trust Bank was

reportedly Rs 250 crore, its chairman Ramesh Gelli is known to have

repeatedly asserted that Parekh had received less than Rs 100 crore in keeping

with RBI norms.

Parekh and his associates also secured Rs 1,000-crore as loan from the

Madhavpura Mercantile Co-operative Bank despite RBI regulations that the

maximum amount a broker could get as a loan was Rs15-crore. Hence, it was

clear that KPs mode of operation was to inflate shares of select compa nies in

collusion with their promoters.

Lady luck disfavours Parekh!

Notably, a day after the presentation of the Union Budget in February 2001,


9/12



Parekh appeared to have run out of luck. A team of traders, Shankar Sharma,

Anand Rathi and Nirmal Bang, known as the bear ca rtel, placed sell orders on

KPs favorite stocks, the so called K-10 stocks, and crushed their inflated

prices. Even the borrowings of KP put together could not rescue his scrips. The

Global Trust Bank and the Madhavpura C ooperative were driven to

bankruptcy as the money they ha d lent Parekh went into an a byss with his

reportedly favourite K-10 stocks.

The exposure of the dupe

As with the Harshad Mehta scam, Ketan Parekh's fra udulent practices were

first exposed by veteran columnist Sucheta Dalal. Sucheta's column read, Itwas yet another black Friday for the capital market. The BSE sensitive index

crashed another 147 points and the Central Bureau of Investigation (CBI)

finally ended Ketan Parekhs two-year dominance of the market by arresting

him in connection with the Bank of India (BoI) complaint. Many people in the

market are not surprised with Parekhs downfall because his speculative

operations were too large, he was keeping dubious company, and he was

dealing in too many shady scrips.

When the prices of select shares started constantly rising, innocent investors

who ha d bought such shares believing that the market was genuine were

about to stare at huge losses. Soon after the scam was exposed, the prices of

these stocks came down to the fraction of the values at which they had been

bought. When the scam did actually burst, the rigged shares lost their values

so heavily that quite a few people lost their savings. Some banks including

Bank of India also lost significant amounts of money.

Dalal goes on to state that Parekh's scheme was not visible to a layman given

the positive deflection that media had made him a hero while some of the

biggest national dailies had even quoted him profusely on that years Union

Budget. Dalal add ed that KPs arrest and the uncanny similarity of his

operations to the Harshad Mehta securities scam of 1992 vindicated the

miserable inadequacy of the countrys regulatory system. The Securities

Exchang e Board of India (SEBI) and the Reserve Bank of India (RBI) had

remained complacent when the stock bubble was created during the latter half

of 1999 and through 2000 while it had not bothered to take any action

through 2001 when it was ready to burst.

SEBIs damage control measures

SEBI investigations into Parekh's money laund ering affairs revealed that KPhad used bank and promoter funds to manipulate the markets. It then

proceeded with plugging the many loopholes in the market. The trading cycle

was cut short from a week to a day. The carry-forward system in stock trading

called BADLA was banned and operators could trade using this method.

SEBI formally introduced forward trading in the form of exchange-traded

derivatives to ensure a well-regulated futures market. It also did away with

broker control over stock exchanges. I n KPs case, the SEBI found p rima facie

evidence that he had rigged prices in the scrips of Global Trust Bank, Zee

Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

Furthermore, the information provided by the RBI to the Joint Parliamentary

Committee (JPC) during the investigation revealed that financial institutions

such as Industrial Development Bank of India (IDBI Bank) and Ind ustrial

Finance Corporation of India (IFCI) had given loans of Rs 1,400 crore to

companies known to be close to Parekh.

Criticism of SEBI

Some of the regulatory actions SEBI undertook came under scathing criticism

from some quarters who accused it of still being clueless about its supervisory

duties. Observers said the regulator still continued believing that its only

priority was to prevent a fall in stock prices.

It was rumored that SEBI banned short sales and increased margins creating

a virtual cash market in the process and squeezed turnover to a sixth of the

normal level. It also fired all broker directors from the Bombay Stock

Exchang e and Calcutta Stock Exchange and declared the completion of three

controversial settlements of the Kolkata bourse by retaining a sizeable

proportion of the payout of operators who had allegedly tied-up for collusive


10/12



deals. Furthermore, SEBI rounded up the bear operators and launched an

inquiry into their alleged short sales.

Stringent regulatory measures follow Parekh episode

Parekh's fraudulent operations motivated the authorities to take necessary

steps that have made made India's stock markets relatively safer in present

times. He can also be credited for having forced indolent policy-makers to

bring about reforms in the financial system.

An active trader

According to an Intelligence Bureau report, though disbarred from trading inthe countrys bourses until 2017, is still operating in the markets through

condu its, vindicating Dalal Streets belief that he has never left the market. The

report says that as recently as December 2010, KP has been rallying behind

different stocks and placing some of them at rigged up prices to large

institutions such as the LIC. He is operating throu gh little-known investment

firms, market operators and a following of loyal brokers. KP, who was at the

forefront during the technology shares-led bull run in 1999-2000, is

apparently using front entities such as Orchid Chemicals , GMR

Infrastructure, Cairn India, Deccan Chronicles Holdings, Reliance Industries,

Punj Lloyd, Indiabulls Real Estate, Pipavav Shipyard, Amtek Auto, Hindustan

Oil Exploration, UCO Bank, State Bank of India, EIH and JSW Steel, among

others, to trade in shares.

The report further states that KP has been instrumental in inflating the share

price of SKS Microfinance from Rs850 to Rs1,100 following its listing in

August 2010. He ha s also rigged IPOs of little known companies by buying out

50% of the issue in collusion with his Kolkata-based associates. KP and his

associates have also acquired very large positions in petroleum companies

such as ONGC and HPCL, according to the report. An IB official has further

said that KP and his team have revealed to their close associates that they have

insider information on the government's proposal to decontrol the sale of gas

which is expected to raise profit margins of these companies by about 20%.

2,473 views 2 upvotes Written 22 Jun

The crucial mechanism through which the scam was effected was the readyforward (RF)deal. The RF is in essence a secured short-term (typically 15-day)

loan from one bank to another. Crudely put, the bank lends against

government securities just as a pawnbroker lends against jewellery.The

borrowing bank actually sells the securities to the lending bank and buys them

back a t the end of the period of the loan, typically at a slightly higher price.

It was this ready forward deal that Harshad Mehta and his cronies used with

great success to channel money from the banking system.

A typical ready forward deal involved two banks brought together by a broker

in lieu of a commission. The broker handles neither the cash nor the securities,

though that wasnt the case in the lead-up to the scam.

In this settlement process, deliveries of securities and payments were made

through the broker. That is, the seller handed over the securities to the broker,

who pa ssed them to the buyer, while the buyer gave the cheque to the broker,

who then made the payment to the seller.

In this settlement process, the buyer and the seller might not even know whom

they had traded with, either being know only to the broker.

This the brokers could manage primarily because by now they had become

market makers and had started trading on their account. To keep up a

semblance of legality, they pretended to be undertaking the transactions on

behalf of a bank.

Another instrument used in a big way was thebank receipt (BR) . In a ready

forward deal, securities were not moved back and forth in actuality. Instead,

Abhinav Kumar
http://www.quora.com/api/mobile_expanded_voter_list?type=answer&key=2NNRY61jvWhttp://www.quora.com/What-was-the-Harshad-Mehta-scam/answers/13469958http://www.quora.com/Abhinav-Kumar-259http://www.quora.com/Abhinav-Kumar-259


11/12



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Related Questions

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the borrower, i.e. the seller of securities, gave the buyer of the securities a BR.

a BR confirms the sale of securities. It acts as a receipt for the money received

by the selling bank. Hence the name - bank receipt. It promises to deliver the

securities to the buyer. It also states that in the mean time, the seller holds the

securities in trust of the buyer.

Having figured this out, Metha needed banks, which could issue fake BRs, or

BRs not backed by any government securities. Two small and little known

banks - the Bank of Karad (BOK) and the Metorpolitan Co-operative Bank

(MCB) - came in handy for this purpose.

Once these fake BRs were issued, they were passed on to other banks and the

banks in turn gave money to Mehta, obviously assuming that they were lending

against government securities when this was not really the case. This money

was used to drive up the prices of stocks in the stock market. When time came

to return the money, the shares were sold for a profit and the BR was retired.

The money due to the bank was returned.

The game went on as long as the stock prices kept going up, and no one had a

clue about Mehtas modus operandi. Once the scam was exposed, though, a lot

of banks were left holding BRs which did not have any value - the banking

system had been swindled of a whopping Rs 4,000 crore.

Mehta made a brief comeback as a stock market guru, giving tips on his own

website as well as a weekly newspaper column. This time around, he was in

cahoots with owners of a few companies and recommended only those shares.

This game, too, did not last long.

Interestingly, however, by the time he died, Mehta had been convicted in only

one of the many cases filed against him.

5,993 views 10 upvotes Written 15 Aug, 2014
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