Harshad Mehta Scandal
OBJECTIVES
1. Early Life 2. Harshad Mehta 3. How a Scam Works 4. Harshad Mehta’s Scam Operation 5. After Effects of the Scandal 6. Conclusion
EARLY LIFE
? Born in a Gujarati Jain family. ? Harshad Shantilal Mehta- Full name ? Childhood was spent in Mumbai. ? His father was a small-time businessman. ? Moved to Raipur in Madhya Pradesh.
? Was back to Mumbai after completing his schooling at Raipur. ? Became a stock broker on the BSE.
? Soon became a super star of financial world:
• A mansion "Madhuli", which included a billiards
room, mini theatre and nine hole golf course.
• Brand new Toyota Lexus and a fleet of cars.
HARSHAD MEHTA
? Indian stock broker. ? Behind the rise in the BSE stock exchange in the year 1992. ? Raised funds from inter-bank transaction and bought shares heavily at a premium.
? Triggering a rise in the Sensex, who was said to
have started the bull run. ? 72 criminal offenses and more than 600 civil action suites. ? Died in 2002 with many litigations still pending against him.
STOCK MARKET SCANDAL
Two main tools used in scam were : 1. Ready forward deal(RF) 2. Bank receipts(BR)
READY FORWARD DEAL
ISSUE BR
BR
BORROWER BANK
BROKER
FUNDS FUNDS
LENDER BANK
BORROWER BANK BANK OF KARAD & METROPOLITA N COOPERATIVE BANK (MCB)
ISSUE FAKE BRS
FAKE BR
BROKER HARSHA D MEHTA
LENDER BANKS SBI UCO STANDERED CHARTERED NHB CANARA BANK GROUP ANDHRA BANK GROUP
FUNDS
FUNDS
FUNDS RETURNED
BANK RECEIPT (BR) ? Securities were not moved in actuality, Instead the sellers, give the buyer of the securities a BR. ? It promises to deliver the securities to the buyer, it also mean that 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) . The Metropolitan Co-operative Bank (MCB)
How The Scam Began
? Banks in India had to maintain an amount of their deposits in government bonds. ? Change in regulation by Govt. ? Banks would sell bonds in the beginning of the week and buy at the end. ? This is where a broker comes in.
HARSHAD MEHTA MODE OF OPERATION
? Worked as a middleman for a long time.
? How he spread his net.
? Cost a loss of Rs.4000 crores.
IMMEDIATE IMPACT OF THE SCAM
?Sharp fall in the share prices.
?The index fell from 4500 to 2500.
TWO MAJOR REASONS
?The phenomenon of tainted shares which created panic in the market. ?The perceived slow down of the reform process which destroyed the very foundation on which the boom was based.
? The government set up a special court and
promulgated an ordinance with several draconian
provisions to deal with the scam.
?THE ACCUSED ACTIVE BROKERS ?FATE OF THE GENUINE INVESTORS
? The government's liberalization policies came under severe criticism after the scam, with Harshad Mehta and others being described as the products of these policies.
? The Securities Exchange Board of India
(SEBI) postponed sanctioning of private
sector mutual funds.
Action by The Government
? Liberalization policies were put on hold. ? Joint parliamentary committee. ? Ban on RF deals.
Certain Facts
? Harshad Mehta’s problem - Attitude to flaunt or his flashiness.
? Suicide of the chairman of Vijaya Bank.
? Escape of Nimesh Shah.
? Major banks of India got affected including Housing Bank – a subsidiary of RBI.
? Allegedly bribed former Prime Minister
P.V. Narasimha Rao.
CONCLUSION
There was a total lack of transparency in the money market. Irregularities of all kind were so common that no suspicion aroused even by highly irregular transactions. This is the ideal environment for a scam to germinate and grow to alarming
proportions.
Some Advice to Investors
? Invest, do not speculate. ? Fundamentals are the key. ? Make the right choice. ? Be Patient. ? Do not follow the herd.
? Do not put all the eggs in one basket and neither create too many. ? Timing the market is a mirage, but discipline is real.
Learnings from the scam
? Where was Mehta getting the endless supply of money from?
? The crucial mechanism through which the scam is affected is Ready forward deal ? BRs not backed by Government securities
doc_163313372.pptx
OBJECTIVES
1. Early Life 2. Harshad Mehta 3. How a Scam Works 4. Harshad Mehta’s Scam Operation 5. After Effects of the Scandal 6. Conclusion
EARLY LIFE
? Born in a Gujarati Jain family. ? Harshad Shantilal Mehta- Full name ? Childhood was spent in Mumbai. ? His father was a small-time businessman. ? Moved to Raipur in Madhya Pradesh.
? Was back to Mumbai after completing his schooling at Raipur. ? Became a stock broker on the BSE.
? Soon became a super star of financial world:
• A mansion "Madhuli", which included a billiards
room, mini theatre and nine hole golf course.
• Brand new Toyota Lexus and a fleet of cars.
HARSHAD MEHTA
? Indian stock broker. ? Behind the rise in the BSE stock exchange in the year 1992. ? Raised funds from inter-bank transaction and bought shares heavily at a premium.
? Triggering a rise in the Sensex, who was said to
have started the bull run. ? 72 criminal offenses and more than 600 civil action suites. ? Died in 2002 with many litigations still pending against him.
STOCK MARKET SCANDAL
Two main tools used in scam were : 1. Ready forward deal(RF) 2. Bank receipts(BR)
READY FORWARD DEAL
ISSUE BR
BR
BORROWER BANK
BROKER
FUNDS FUNDS
LENDER BANK
BORROWER BANK BANK OF KARAD & METROPOLITA N COOPERATIVE BANK (MCB)
ISSUE FAKE BRS
FAKE BR
BROKER HARSHA D MEHTA
LENDER BANKS SBI UCO STANDERED CHARTERED NHB CANARA BANK GROUP ANDHRA BANK GROUP
FUNDS
FUNDS
FUNDS RETURNED
BANK RECEIPT (BR) ? Securities were not moved in actuality, Instead the sellers, give the buyer of the securities a BR. ? It promises to deliver the securities to the buyer, it also mean that 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) . The Metropolitan Co-operative Bank (MCB)
How The Scam Began
? Banks in India had to maintain an amount of their deposits in government bonds. ? Change in regulation by Govt. ? Banks would sell bonds in the beginning of the week and buy at the end. ? This is where a broker comes in.
HARSHAD MEHTA MODE OF OPERATION
? Worked as a middleman for a long time.
? How he spread his net.
? Cost a loss of Rs.4000 crores.
IMMEDIATE IMPACT OF THE SCAM
?Sharp fall in the share prices.
?The index fell from 4500 to 2500.
TWO MAJOR REASONS
?The phenomenon of tainted shares which created panic in the market. ?The perceived slow down of the reform process which destroyed the very foundation on which the boom was based.
? The government set up a special court and
promulgated an ordinance with several draconian
provisions to deal with the scam.
?THE ACCUSED ACTIVE BROKERS ?FATE OF THE GENUINE INVESTORS
? The government's liberalization policies came under severe criticism after the scam, with Harshad Mehta and others being described as the products of these policies.
? The Securities Exchange Board of India
(SEBI) postponed sanctioning of private
sector mutual funds.
Action by The Government
? Liberalization policies were put on hold. ? Joint parliamentary committee. ? Ban on RF deals.
Certain Facts
? Harshad Mehta’s problem - Attitude to flaunt or his flashiness.
? Suicide of the chairman of Vijaya Bank.
? Escape of Nimesh Shah.
? Major banks of India got affected including Housing Bank – a subsidiary of RBI.
? Allegedly bribed former Prime Minister
P.V. Narasimha Rao.
CONCLUSION
There was a total lack of transparency in the money market. Irregularities of all kind were so common that no suspicion aroused even by highly irregular transactions. This is the ideal environment for a scam to germinate and grow to alarming
proportions.
Some Advice to Investors
? Invest, do not speculate. ? Fundamentals are the key. ? Make the right choice. ? Be Patient. ? Do not follow the herd.
? Do not put all the eggs in one basket and neither create too many. ? Timing the market is a mirage, but discipline is real.
Learnings from the scam
? Where was Mehta getting the endless supply of money from?
? The crucial mechanism through which the scam is affected is Ready forward deal ? BRs not backed by Government securities
doc_163313372.pptx