HARSHAD MEHTA SCAM,1992

HARSHAD MEHTA-Darling of
Business Media

Big Bull
Stock Market Guru
Stock Market Success
Story of Rags to Riches

Overview :

An Indian Stock Broker .

Indias best known scamster.
Charged with 72 criminal offences.
More than 600 civil action suits filed against
him.
Died in 2002 due to
chest pain.

History Of Harshad Mehta

Harshad Shantilal Mehta
He was born in a Gujarati Jain Family in Raipur
and his father was Shantilal Mehta and mother
was Rasilaben Mehta.
He studied at the Holy Cross High School, located
at Byron Bazaar in Raipur.
Then his family shifted to Bombay, Supporting
himself with odd jobs he completed a Bachelors
degree in Commerce in 1965 from Lala Lajpat Rai
College .

Cont(d).
He started his working life as an employee of the New India
Assurance Company.
His brother Ashwin Mehta pursued his graduation course in
law at Lala Lajpat Rai College and his youngest brother
Hitesh was a surgeon at the B.Y.L.Nair Hospital in Mumbai
.Ashwin and Hitesh were involved in Scam along with
Harshad.
In the early eighties he quit his job and sought a job with stock
broker P. Ambalal (who is affiliated to Bombay Stock
Exchange BSE ).

Cont(d)..
In 1981 he became a sub-broker for stock brokers J.L. Shah and
Nandalal Seth.
As a stock broker ,every evening Harshad and Ashwin started to
analyze tips generated from respective offices and to clearly
understand the stock market operations and they extended their
study to regular financial statements as well.
His brother quit his job to team with him to start their venture
Grow More Research and Asset Management Company
Limited.

Cont(d)
He felt proud of his accomplishments and showed off his
success to journalists through his mansion "Madhuli",15000
square feet house, which included a billiards room, mini
theatre ,swimming pool as well as a golf patch. His brand new
fleet of cars gave credibility to his show off.He lived almost
like a movie star.
During his heyday, in the early 1990s, Harshad Mehta
commanded a large resource of funds and finances as well as
personal wealth.

Mechanism of Scam:
Being hailed as a financial wizard and trusted by hundreds of players in
financial markets was quite an achievement for a man who barely scraped
through his Bachelor of Commerce with just 36%. Harshad Mehta was an
Indian stock broker and is alleged to have engineered the rise in the BSE
stock exchange in the year 1992. Mehta was making waves in the stock
market. He had been buying shares heavily since the beginning of 1990. The
shares which attracted his attention were :
ACC (Associated Cement Company)
Apollo Tyres
Reliance
Tata Iron and Steel Co. (TISCO)
BPL
Sterlite
Videocon.

Ready Forward(RF) Deal:

The crucial mechanism through which the scam was effected was
the ready forward (RF) deal. The RF is in essence a secured shortterm (typically 15-day) loan from one bank to another. The bank
lends against government securities just as a pawn broker(a person
licensed to lend money) lends against jewellery.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.
It was this ready forward deal that Harshad Mehta 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.

Settlement Process of RF Deal:

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 passed them to
the buyer, while the buyer gave the cheque to the broker,
who then made the payment to the seller.
The buyer and the seller might not even know whom they
had traded with, either being know only to the broker.
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.

Bank Receipts:
Another instrument used in a big way was the bank 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 Bank Receipt (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, Mehta 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
Metropolitan Co-operative Bank (MCB) - came in handy for this
purpose. These banks were willing to issue BRs as and when
required, for a fee.

Cont(d).
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 operation. 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 double cross of a
whopping Rs 4,000 crore.

Coupon Changes and

insider trading
During the period from September 1991 to June 1992, the
government raised the interest (Coupon) rate on its fresh
borrowing three times. The major implication of raising
interest rate on new borrowings is that it would trigger a fall in
the market prices of the old loans which are pegged at the old
(lower) interest rates. The price of the 11.5% Government
Loan 2010 dropped by 3% to 5% with each coupon rate hike.
If anyone has advance information about these changes in the
coupon rates, he could make enormous amounts of risk less
profit by short selling the old securities just before the
announcement of rate hike. Harshad Mehta make
manipulations at this side also.

Stock Market Scam

Later, firms have only to take permission of Controller of
Capital Issues (CCI) under the Capital Issues (Control) Act for
raising capital and fixing the premium on the issue price.
Harshad Mehta again with his big approach and mind
influencing premium and issue prices and make short selling
accordingly to get big benefits.
The absence of a proper regulatory framework and the
failure of SEBI to monitor and supervise the flood of IPO's
and FIIs, led to a massive scam in the primary market.
A lot of fake companies are formed which rob the money of
unsuspecting investors by making manipulations in prices of
false stocks. Harshad also was involved in formation of such
companies.

Main victims of Scam:

In April 1992, news broke that State Bank of India had asked Mehta to
return Rs.500 crores he had illegally put to work on the stock markets.

By the end of that month, he was accused of having diverted funds from
the public sector Maruti Udyog Limited (MUL) to his own accounts,
provoking a record 570-point fall in the Sensex. Considering the case of
the MUL fraud,in one operation, for example, an MUL employee handed
over 35 lakh Unit Trust of India (UTI) units, then valued at Rs.4.99 crores,
to Mehta's New Delhi manager, Mohan Khandelwal, on January 23, 1991.
The transfer was made in violation of the express orders of MUL's board of
directors.

Cont(d).

ANZ Grindlays bank's (now Standard Chartered Grindlays) Ram Narayan Popli
was another key player in the Mehta game. On one occasion in February 1991, he
diverted a Canara Bank banker's cheque worth Rs.5.05 crores favouring Grindlays
Bank to Mehta's account. On March 18 and April 24 that year, he pulled off the
same trick, this time with banker's cheques worth Rs.10.84 crores and Rs.7.62
crores. Thus, MUL was not Mehta's only victim. Both UCO Bank and ANZ
Grindlays suffered separately.

From then until June 1992, when a Parliament led to the formation of a Joint
Parliamentary Committee (JPC) to investigate the matter. While the JPC Report
soon provided a comprehensive and coherent picture of both the scale and
mechanics of the securities fraud.It was only in October 1997 the Central Bureau
of Investigation (CBI) in all filed 72 sets of charges relating to criminal offences,
while 600-odd civil cases proceeded alongside.

Exposure of Harshad Mehta:

On April 23, 1992, journalist Sucheta Dalal in a column in
The Times of India, exposed the dubious ways of Harshad
Mehta that the broker was dipping illegally into the banking
system to finance his buying.

Impact of 1992 Scam

The Harshad Mehta induced security scam, as the media sometimes termed
it, adversely affected at least 10 major commercial banks of India, a
number of foreign banks operating in India, and the National Housing
Bank, a subsidiary of the Reserve Bank of India, which is the Central Bank
of India.A number of people holding key positions in the India's financial
sector were adversely affected, which included arrest and sacking of K. M.
Margabandhu, then CMD of the UCO Bank; removal from office of V.
Mahadevan, one of the Managing Directors of Indias largest bank, the
State Bank of India.

After the Scandal:

Charismatic, ebullient and recklessly ambitious, Harshad Mehta set out to be a role model for
investors. "I thought I am like Pied Piper", he had told a newspaper in 1992, "I thought I can
sell dreams... that asset-creation is not a crime, that if you wanted to be Harshad Mehta come
to the stock market".
For a few months after the scam in June 1992 he was released after 107 days in custody
within weeks after his release he was hogging headlines as the first man ever to claim that he
had bribed a sitting Prime Minister and he had paid Rs 1 crore to the then Congress President
and Prime Minister, Mr P.V. Narasimha Rao, as donation to the party for getting him ``off the
hook.''
That too was done in typical Harshad fashion - press conferences at the Taj and the Oberoi,
high profile lawyers, the release of audiotapes and the demonstration of Rs 10 million being
stuffed into a large suitcase.He was willing to revel even in negative publicity at that point of
time.
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.

Fate of Harshad Mehta

Market watchdog, Securities and Exchange Board of India, had recently

banned him for life from stock market-related activities. Mr Mehta perhaps had
as many admirers as critics. But almost all of them admit that he caused a
``change'' in the Indian stock market, permanently.

He not only looked defeated but sources close to him say that he was steadily
running out of funds. Most of this was probably due to the realization that with
one conviction by the Special Court and another by SEBI, his dreams of
coming back to the capital market had ended forever. Now it is truly over.

His ``bull'' run, however, ended in April 1992 when the stock market scam
broke out bringing down in its wake several financial entities and causing
despair to millions of investors.. He was arrested and banished from the stock
market with investigators holding him responsible for causing a loss of more
than Rs 4,000 crore to various entities.

Cont(d)..

During his judicial custody, while he was in Thane Prison, Mumbai, he complained
of chest pain, and was moved to a hospital, where he died on31,December,2001.His
death remains a mystery. Some believe that he was murdered ruthlessly by an
underworld nexus (spanning several South Asian countries including Pakistan).

Thus came to an end the life of a man who is probably the most famous character
ever to have emerged from the Indian stock market. Harshad Mehta pulled off one
of the most audacious scams in the history of the Indian stock market.

The death at the Thane Civil Hospital of the architect of the Rs. 4,000-crore 1992
securities scandal has effected final closure on the legal proceedings against him.
He died with many litigations still pending against him and died at the age of 47
years.

REFORMS AFTER SCANDAL

SEBI was established in 1992. Before the reforms, under the

Capital Issues (Control) Act, firms were required to obtain
approval from the Controller of Capital Issues (CCI) for
raising capital and fixing the premium on the issue price.
This Act was repealed in 1992 and statutory control on
floatation and pricing of issues was abolished, subject only
to certain disclosure requirements. While SEBI enacted
certain disclosure requirements, events have shown that it
was not able to enforce them. There have been too many
cases of price rigging by companies before public issues,
managing often to fix exorbitant premia and take the
investors for a ride.

 The other half of the scam had a multitude of

small traders, chartered accountants and
businessmen, who teamed up with bankers and
investment companies to float new companies
and raise public funds. Government promise to
trace the fly-by-night operators who had duped
the shareholders and bring them to books.

 The major weaknesses of the secondary market, pre-reform,

included lack of transparency, speculative excesses and scant
regard for the interests of small investors. Large volumes of
trade were executed outside the exchanges after the trading
hours; brokers did not distinguish between personal and client
accounts; deals were not time-stamped; brokers contracts did
not clearly separate price, commission and carry-forward
charges. There was a significant amount of insider-trading. So,
the National Stock Exchange (NSE) was established with the
explicit aim of moving rapidly to nation-wide screen-based
trading. The NSE began operations in 1994 and soon acquired
a reputation for transparency.

A great deal of energy has been spent in the long-drawn

battles over badla, the century-old trading arrangement to
carry the contract forward with the help of intermediary
financiers. SEBI banned badla in December 1993 on the
ground that it suffered from many shortcomings as regards
both investor protection and systemic risk.
The latest move to introduce margin trading as an alternative
financing mechanism. the RBI has said that banks financing
margin trading must ensure that no `nexus develops between
inter-connecting broking entities/stock brokers and banks.

 In October 1995, an ordinance was passed providing for the

establishment of one or more depositories to take away the
arbitrary power of company managements to block the transfer
of shares.
The National Securities Depository Limited (NSDL)
commenced operations in October 1996 The second
depository, the Central Depository Services (India) Ltd
(CDSL), was granted certificate of registration in 1998 . Also,
over the past three years, SEBI has taken initiatives to
progressively promote dematerialized or paperless trading.
Based on a SEBI committee recommendation, the BSE and the
NSE have also allowed their brokers recently to start Internetbased trading.

 Now, the SEBI has introduced a new reform after

above scam i.e. there is a limit for securities if the
price of a particular security goes up the limit, that
security will be freezed and if goes down it should
suspend from stock exchange i.e. filtering.

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