A

PROJECT REPORT
ON
INDIAs SECURITIES SCAM
BY
HARSHAD MEHTA

A project report submitted in partial fulfillment of the

requirements for the program PGDM(2010-2012)

SUBMITTED TO :

SUBMITTED BY :

Prof.PRASHANT SIPANI
MANOJ PANJWANI
NITESH KHANNA
PRERNA BHADANI
SANGEEV JHA

JEETENDRAA SINGH

TITLE PAGE

PROJECT REPORT
ON
INDIAS SECURITIES
SCAM
BY
HARSHAD MEHTA

DECLARATION

We hereby declare that all the work presented in the

project report entitled India Securities Scam by
Harshad Mehta of the subject Process Finance is an
authentic record of our own work carried out under the
guidance of
Prof. Prashant Sipani.

Date: 20thth March, 2012

Jiteendra Singh
Manoj Panjwani
Nitesh Khanna
Prerna Bhadani
Sangeev Jha

CERTIFICATE

This is to certify that project report entitled India

Securities Scam by Harshad Mehtaof the subject
Derivative which is submitted by Jeteendra Singh, Manoj
Panjwani, itesh Khanna, Prerna Bhadani, Sangeev
Jha is an authentic record of the candidates own work
carried out by them under our guidance. The matter
embodied in this thesis is original and has not been
submitted for the award of any other degree.

Prof. Prashant Sipani

(Project Guide)
Date: 20thh March, 2012

ACKNOWLEDGEMENT

We express our deep gratitude to Prof. Prashant Sipani

of Jaipuria Institute of Management, Jaipur for his constant
support, guidance, and motivation which helped us
immensely in completing this project. The project provided
us an opportunity to understand theIndias biggest
securities scam that aver happened in a better manner.

Group-2
Jeetendra Singh
Manoj Panjwani
Nitesh Khanna
Prerna Bhadani
Sangeev Jha

EXECUTIVE SUMMARY
A lot is heard in the past and till today we hear a lot about the financial
markets scams. Financial Market Scams are the attempts by scam masters
who indulge in crooked activities to fulfil the bellies of their own at the
stake of common man. These scam masters through various fraudulent
activities gather big chunks of money. Our report is one such initiative to
highlight a capital market scam or say securities scam in India, how it was
done and the money that was involved in these scams.
In this project report we have studied about one of the most infamous
scams that has been unearthed The Securities SCAM.
The Securities Scam refers to a diversion of funds to the tune of Rs.
3,500 crores from the banking system to various stockbrokers in a series
of transactions (primarily in Government securities) during the period April
1991 to May 1992.The Bank of Karad (BOK) and the Metropolitan Cooperative Bank (MCB) issued fake BRs, or BRs not backed by any
government securities. Using the ready forward (RF) deal which is a
secured short-term (typically 15-day) loan from one bank to another
Harshad Mehta was an Indian Stockbroker and is alleged to have
engineered the rise in the BSE stock exchange in the year 1992. Exploiting
several loopholes in the banking system, Harshad 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
the Sensex.
In an ever expanding ambit, the scam has engulfed top executives of
large nationalized banks, foreign banks and financial institutions, brokers,
bureaucrats and politicians.
The functioning of the money market and the stock market has been
thrown in disarray.
A large number of agencies, namely, the Reserve Bank of India (RBI), the
Central Bureau of Investigation (CBI), the Income Tax Department, the
Directorate of Enforcement and the Joint Parliamentary Committee (JPC)
are currently investigating various aspects of the scam.

TABLE OF CONTENT
S.No.
Chapter Name
Pg.No

1
Introduction
8

2
About Harshad Mehta
8

3
Overview Of The Scam
9

4
Ready Forward (RF) Modus Operandi
10

4.1
Settlement Process

11

4.2
Payment Cheques

11

4.3
Dispensing Of Securities

12

5
Bank Receipts
12

6
Control Systems
13

7
Disappearance Of Money
13

8
Unethical Issues In Mehta Scam
13

9
After The Scandal
14

9.1

Immediate Impact

14

9.2

Impact On The Indian Economy

14

9.3
Impact On The Bank

14

9.4
Response Of The Government

14

10
Policy Measures
15

11
Action Taken By The Government
15

12
Role Of The SEBI
16

13
In The End
16

14
Conclusion
16

References
17

1. INTRODUCTION:
Various scams, scandals and stigmas have surfaced in the recent years.
These may not all be attributable to the antics and bungling of politicians,
but they have been facilitated largely because of the vitiated atmosphere
that the politicians and the political system have created in the
country.Some of the most famous SCAMS that have surfaced during the
time are:
The 1200 crores fodder scam relating to the procurement of non-existent
fodder on payments from the state exchequer.
The Scam in printing & selling of stamp papers, which is used for
recording documents for registration purpose. This scam is of about Rs.
2200 crores & involves fraudulent printing & sale of stamp papers in the
various parts of the country.
There is the famous Bofors scam, which was about the purchase of
important defense equipment from foreign markets
The list goes on & on & moreover there are continuous additions to the
same.
The Securities Scam refers to a diversion of funds to the tune of Rs.
5,000 crores from the banking system to various stockbrokers in a series
of transactions (primarily in Government securities) during the period April
1991 to May 1992

ABOUT HARSHAD MEHTA

Harshad Shantilal Mehta was born on 29 July in a Gujarati Jain family of
modest means.
Father : Mr Shantilal Mehta, a small businessman
Moved from small town Raipur to find his future in Mumbai
First job as dispatch clerk in the New India Assurance
Worked with stock brokers and soon managed to get a brokers card
Soon started his own venture: Grow More Research and Asset
Management Company Ltd.
Became a dream seller and a celebrity of the financial world..
People know this personality as The Big Bull of Indian stock exchange
After recommendations of the Big Bull demand for the stocks used to
exponentially rise!!!
Propounded the Replacement Price Theory

The theory basically argues that old companies should be valued on the
basis of the amount of money which would be required to create another
such company
He was alleged to have engineered the rise in the BSE stock exchange in
the year 1992
8

On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India,
exposed the dubious ways of Harshad Mehta
He was later charged with 72 criminal offenses and more than 600 civil action
suits were filed against him
He died in 2002 of a massive heart attack in a jail in Thane, with many
litigations still pending against him.

OVERVIEW OF THE SCAM

This scam can be categorized as a Capital Market scam in which it is done by
manipulating the facts in order to attain enormous profits. There were 4
different aspects of this scam:
Diversion of Funds
Intra-day Trading
Use of Ready Forward(RF) to maintain SLR
Fake Bank Receipts (BR)

Diversion of Funds Diversion of funds from the banking system to brokers for
financing their operations in the stock market.
Intra-day trading The modus operandi mainly included investing heavily in
certain shares at the start of the day which led to sharp increase in the price of
the stock and then cashing in at the end of the day to reap huge benefits.
Taking advantages of the loopholes in the banking system, Harshad and his
associates triggered a securities scam diverting funds to the tune of Rs 4000
Cr. from the banks to stockbrokers from April 1991 to May 1992. He caused the
steep rise in the Stock market index in the year 1992 by bidding at a premium
for many shares.
Some of the stocks which were highly invested in by Harshad Mehta were:
ACC
Apollo Tyres
Reliance
Tata Iron and Steel Co. (TISCO)
BPL
Sterlite
Videocon

4. READY FORWARD (RF) MODUS OPERANDI

Ready forward is actually a sort of a short term loan (typically 15 days or
less) usually from one bank to another. Unlike other loans, it is actually a
secured loan with Government securities backing it up. In essence, its like
one bank selling its securities to another with a promise of buying it back
at a pre-determined price.
In early 1990s, Banks in India had to maintain a fixed ratio of their
deposits in the form of Government securities/bonds which was governed
by the statutory liquidity ratio (SLR). This obligation on the part of the
banks required them to show a detailed sheet of its stock of Government
bonds at the end of every day. Soon after the rule changed and the banks
were not required to show these details at end of everyday rather they
were allowed to show in once in a week i.e. Friday.
This allowed the banks to sell their bonds in the earlier part of their week
and then buy it back in the later part. This helped them make some profits
as they could invest the money that they got by selling the bonds. The
whole process of byying and selling the bonds was taken care of by
brokers and only they knew the two parties which were involved.
Individual banks did not have any idea as to who the other party in the
whole transaction was.

10

The whole process can be described in 3 phases:

Settlement Process
Payment cheques
Dispensing of securities
4.1. SETTLEMENT PROCESS
The normal settlement process in government securities is that the
transacting banks make payments and deliver the securities directly to
each other. During the scam, however, the banks or at least some banks
adopted an alternative settlement process which was similar to the
process used for settling transactions in the stock market.
In this settlement process, deliveries of securities and payments are made
through the broker. That is, the seller hands over the securities to the
broker who passes them on to the buyer, while the buyer gives the
cheque to the broker who then makes the payment to the seller.
In this settlement process, the buyer and the seller may not even know
whom they have traded with, both being known only to the broker.
There were two important reasons why the broker intermediated
settlement began to be used in the government securities markets:
The brokers instead of merely bringing buyers and sellers together started
taking positions in the market. In other words, they started trading on
their own account, and in a sense became market makers in some
securities thereby imparting greater liquidity to the markets.
When a bank wanted to conceal the fact that it was doing an RF deal, the
broker came in handy. The broker provided contract notes for this purpose
with fictitious counter parties, but arranged for the actual settlement to
take place with the correct counter party.
PAYMENT CHEQUES
A broker intermediated settlement allowed the broker to lay his hands on
the cheque as it went from one bank to another through him. The hurdle
now was to find a way of crediting the cheque to his account though it was
drawn in favor of a bank and was crossed account payee. As it happens, it
is purely a matter of banking custom that an account payee cheque is
paid only to the payee mentioned on the cheque. In fact, exceptions were
being made to this norm, well before the scam came to light.
Privileged (corporate) customers were routinely allowed to credit account
payee cheques in favour of a bank into their own accounts to avoid
clearing delays, thereby reducing the interest lost on the
amount.Normally, if a customer obtains a cheque in his own favour and
deposits it into his own account, it may take a day or two for the cheque
to be cleared and for the funds to become available to the customer. At
15% interest, the interest loss on a clearing delay of two days for a Rs.

100 crores cheque is about Rs. 8 lakhs.

11

On the other hand, when banks make payments to each other by writing
cheques on their account with the RBI, these cheques are cleared on the
same day.
The practice which thus emerged was that a customer would obtain a
cheque drawn on the RBI favoring not himself but his bank. The bank
would get the money and credit his account the same day.
The brokers asked the banks to give the cheques in their own name
claiming that they will pay to the other party on their own. The practice
thus emerged was that the broker would obtain a cheque drawn on the
RBI favouring not himself but his bank and the bank would get the money
and transfer it to the broker account on the same day. This helped the
brokers to get the money as soon as the transaction is made which could
further be used to be channelled into the stock market.
4.3. DISPENSING OF SECURITIES
Here the brokers used their credibility to persuade the banks to part with
the cheques without actually receiving the securities with the promise that
they will get the securities the next day with a 15% interest for one day.
Bank officials were bribed to accomplish this task as this was illegal on the
part of the banks to let go of their money without any assurance. This was
Harshad Mehta and his associates were able to use the money of the
banks which was eventually used for speculating in the stock market.

5. BANK RECEIPTS
Another instrument used in this scam was the bank receipt (BR). In an RF
deal, securities were not moved back and forth in actuality. Instead, the
borrower, who is the seller of securities, gave the buyer of the securities a
BR.
In practice, borrowing bank gives a Bank Receipt (BR) instead of delivering
the actual securities to the lender. Bank receipts serve three functions
It confirms the sale of securities
Promises to deliver the securities to the buyer. It states that the securities
are held by the seller in trust for the buyer.
Acts as a receipt for the received money by the selling bank
A BR means that the issuer holds the securities in trust for the buyer, but
there is a possibility that the issuer may not have the securities at all.
Following are the reasons for a bank to issue a BR which is not backed by
actual securities
A bank may also short sell securities, i.e. bank will sell securities it doesnt
have.

This will be done if the bank anticipates fall in prices. Bank buys securities
at lower prices when they fall in value and discharges the BR.
Bank may do an RF deal and issue a fake BR (not backed by securities) if
banks simply want an unsecured loan , where a lending bank would be
under the
12

impression that its dealing with a secured loan but in reality its
advancing an unsecured loan. Though, lenders should have taken
measures to protect themselves .
During the scam, brokers were so perfect in the art of using fake BRs and
obtained unsecured loans from various banks. They managed to persuade
little known bank s like the Bank of Karad (BOK) and the metropolitan
Cooperative Bank (MCB) to issue BRs and then these BRs were used to do
RF deals with other banks. This way several large banks made huge
unsecured loans to these banks and thus it created money for the brokers.

6. CONTROL SYSTEMS
There was a complete breakdown of the control system within the
commercial banks and that of RBI. Following features are involved in the
internal control system:
Whenever an RF deal is done by using BRs rather than actual securities,
the lending bank has to contend with the possibility that it may be making
an unsecured loan. This requires assigning credit limit to the borrower by
assessing the creditworthiness of the borrower.
The different aspects of securities transactions of a bank are carried out
by different persons

DISAPPEARANCE OF MONEY
It is becoming increasingly clear that despite the intensive efforts by
several investigating agencies, it would be impossible to trace all the
money swindled from the banks. At this stage we can only conjecture
about where the money has gone and what part of the misappropriated
amount would be recovered.

8. UNETHICAL ISSUES IN MEHTA SCAM

Imaginary companies created.
Bought the shares of own company by himself causing Sensex up.
Purchased Huge amount of shares of a targeted company like ACC .
Caused false bull run.
Created fake BRs, or BRs not backed by any government securities.
Illegally issue of BR by small bank.
Without verification, banks like Vijaya Bank issued the cheque.
Recommendation to purchase particular shares on his own website.

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9. AFTER THE SCANDAL

9.1 IMMEDIATE IMPACT:
After the Harshad Mehta scandal was exposed, April, 1992, the situation in
share market was that of utter chaos. The first impact of the scam was a
steep fall in the share prices. The index fell from 4500 to 2500
representing a loss of Rs. 100,000 crores in market capitalization.
However, the major damage to the stock market did not stop here. Since
the accused were active brokers in the stock markets, they had traded a
large number of shares during the previous year. All these shares became
tainted and worthless and could not be used in the market. This was a
great loss to the innocent investor who had bought these shares much
before the scandal was exposed.
9.2 IMPACT ON THE INDIAN ECONOMY
There was a lot of media coverage on the scam and the political parties
left no opportunity in criticizing the government for it. The government
was under immense pressure and its liberalization policies were severely
criticized. It was also believed that Harshad Mehta and his accomplices
were behind framing of these policies. In the end the government had to
put the liberalization plans on hold. SEBI had to postpone the sanctioning
of private sector mutual funds. Implementation of some aspects of the
Narasimham Committee recommendations on the banking system had to
be delayed. The much talked about entry of foreign pension funds and
mutual funds became more remote than ever. The Euro-issues planned by
several Indian companies were delayed since the ability of Indian
companies to raise equity capital in world markets was severely
compromised.
9.3 IMPACT ON THE BANKS
Fake bank receipts (BR) which were an integral part of the execution of the
whole scam landed the banks involved in a tight spot. These BR were
declared void and public money was at stake. At least ten prominent
banks were involved in this; some of them being SBI, Standard Chartered
and a subsidiary of RBI. The scam could have been checked in time with
proper policies and verifications. The government, the RBI and the
commercial banks are as much accountable as the brokers for the scam.
The brokers were encouraged by the banks to divert funds from the
banking system to the stock market. The RBI too stood indicted because
despite knowledge about banks over-stepping the boundaries
demarcating their arena of operations, it failed to check them. Some of
the prominent individuals who were penalized were K. M. Margabandhu,
CMD of the UCO Bank (Arrested and sacked) and V. Mahadevan, one of the
MD the State Bank of India (Suspended)
9.4 RESPONSE OF THE GOVERNMENT
As discussed, the government was under immense pressure from media
and opposition to take concrete steps to bring justice to the people and

also to ensure that the loopholes in the system which caused such scam
were closed so that such scams would not recur. As a
14

first step by the government, the case was handed over to Central Bureau
of Investigation and the Joint Parliamentary Committee (JPC). Then a
special court was set up to facilitate speedy trial. The special court
declared an ordinance for the attached the properties of all individuals
accused in the scam. Further, all transactions done by the accused after
March 31, 1991 were considered void. To reform the system further, the
government banned RF deals and slowed down the liberalization process.

10. POLICY MEASURES

The government, the RBI and the commercial banks were as much
accountable as the brokers for this scam. The brokers were encouraged by
the banks to invest their funds in the stock market in place of investing in
the banking system. The RBI was also responsible for this scam because
despite knowledge about banks over-stepping the boundaries
demarcating their arena of operations, it failed to reign them in. RBI didnt
take any action against the commercial banks. The looting was done with
full knowledge of the very individuals appointed by the government who
were responsible to guard against such a possibility. So the Harshad
Mehtas scam could have been detected earlier if either of the above
(commercial banks, RBI or government) parties not encourage the brokers
to invest in the stock market.

11. ACTIONS TAKEN BY THE GOVERNMENT:

Discover the guilty:
This task was assigned to the Central Bureau of Investigation (CBI) and to
the Joint Parliamentary Committee (JPC). A special court was set up to
facilitate speedy trial.
Transactions became void:
The government set up a special court and promulgated an ordinance with
several draconian provisions to deal with the scam. Sections (3) and (4) of
the ordinance attached the properties of all individuals accused in the
scam and also voided all transactions that had at any stage been routed
through them after March 31, 1991.
Recover the money:
Provisions of the Ordinance for attachment of property and voiding of
transactions with the consequent creation of "tainted" shares were
attempts in this direction
Reform the system:
The government's response so far, banning of RF deals and going slow on
liberalization.

15

The main motive behind punishing the offenders is more to prevent future
offenders to not to try this type of scam. The government must ensure
that not only the obviously guilty (the brokers) but also the not so
obviously guilty (the bank executives, the bureaucrats and perhaps the
politicians) are identified and brought to book. These types of
investigations are not only very time consuming but also very expensive.

12. ROLE OF SEBI (ETHICAL ISSUES)

The SEBI was set up in early 1988 as a non statutory body under an
administrative arrangement and was subsequently upgraded as a fully
autonomous body on 12th of April 1992
The two objective s mandated in the SEBI Act are
Investor protection
Orderly development of capital market

IN THE END
He was later charged with 72 criminal offenses and more than 600 civil
action suits were filed against him.
By the time he died , Mehta had been convicted in only one of the many
cases filed against him.
He died in 2002 of a massive heart attack in a jail in Thane, with many
litigations still pending against him.

14. CONCLUSION
Corporate Governance is the value framework, ethical framework and
moral framework within which businesses make decisions .When large
sums of money are involved, greed causes people to become unethical
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

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REFERENCES
http://en.wikipedia.org/wiki/Harshad_Mehta
http://www.bullrider.in/harshad-mehta-stock-scam/
http://investmentpark.blogspot.com/2007/02/harshad-mehta-scam1992.html
http://www.scribd.com/doc/17227215/Harshad-Mehta-Scam
http://wiki.answers.com/Q/Can_you_give_the_details_about_the_Harshad_Me
hta_sca m

http://www.authorstream.com/Presentation/pratm_18-486267-harshadmehta-and-ketan-parekh-scam/
http://www.slideserve.com/PPTFiles/insights_investing_jul08_29542_32424
.ppt

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