A CASE STUDY ON

HARSHAD MEHTA

PRESENTED BY;AISHWARYA PT

SAIRAMRAVI TEJA

ZHOU

INTRODUCTIONHarshad Shantilal Mehta was born on 29 July 1954, at Paneli Moti, Rajkot district, in a Gujarati Jain family. His early childhood was spent in Kandivali, Mumbai, where his father was a small-time businessman.He completed his B.Com in 1976 from Lajpatrai college Mumbai and worked a number of odd jobs for the next eight years.

• After graduation, Mehta tried his hand at various jobs, often related to sales, including selling hosiery, cement, and sorting diamonds.

• Mehta started his career as a sales person in the Mumbai office of New India Assurance Company Limited (NIACL). During this time, he got interested in the share market and after a few years, resigned and joined a brokerage firm. In the early 1980s, he moved to a lower level clerical job at the brokerage firm B.Ambalal & Sons where he worked a a jobber for the broker P.D. Shukla.

• Over a period of ten years, beginning 1980, he served in positions of increasing responsibility at a series of brokerage firms.

• By 1990, he had risen to a position of prominence in the Indian securities industry, with the media (including popular magazines such as Business Today) touting him as "The Amitabh Bachchan of the Stock market".

In 1984, Mehta was able to become a member of the Bombay Stock Exchange as a broker and established his own firm called Grow More Research and Asset Management, with the financial assistance of associates, when the BSE auctioned a broker's card.He actively started to trade in 1986. Associated Cement Company (ACC) The Big Bull Fleet of cars Broader scheme, which resulted in manipulating the rise in

the Bombay Stock Exchange

How He Used The Banking System

Banks lend each other money, one such transaction was called the ready-forward agreement which is basically a bank receipt which is backed by some collateral. Mehta’s firm as a broker used these transactions between banks. It is said that he took one week (or more) to exchange a bank receipt between one bank and another bank, in the meanwhile he asked the second bank 1 week’s time as well to find a buyer.

This circulation went on with several banks and allowed him to always have collateralized backed securities from various banks which were essentially ‘in transit’. They were used as money to aggressively invest in the stock market. The ‘scam’ was essentially a regulatory failure.

Transition from an ordinary broker to ‘Big

Bull’• Mehta 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 Nandalal 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 broker’s card, the Mehta duo’s company bid for it with the financial support of J.L. Shah and Nandalal Sheth. Another name that is rumored to have a crucial hand in the scam was NimeshShah

• 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 (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 having initiated the Bull Run.

WHAT WAS THE SCAM ALL ABOUT

• Diversion of funds• Use of Ready Forward (RF) to maintain SLR (Statutory liquid ratio)

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 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 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

exposureMehta'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. Dalal’s 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.

Complicit lendersArmed 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 against 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.

Outcome • 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 scam’s 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.

• A few years later, Mehta made a brief comeback as a stock market expert and started providing investment tips on his website and in a weekly newspaper 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 taxman’s 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 SBI’s total principal amount claim of Rs 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.

SEBI’s damage control measures

SEBI investigations into Parekh's money laundering affairs revealed that KP had 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. In KP’s case, the SEBI found prima 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 Industrial Finance Corporation of India (IFCI) had given loans of Rs 1,400 crore to companies known to be close to Parekh.

CONCLUSIONHarshad Mehta was a brave stock broker. He knew the loopholes in banking system as well as to how to explicit the loopholes.

His whole intension was to raise the SENSEX.

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.

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