1. Introduction.

2. Main issues in scam.

3. Unethical Issues.
4. Impact of the Scam.
5. Ethical issues & Govt. measures.
6. Conclusion.
 The Securities Scam
• The “Securities Scam” referred to a diversion of funds to the tune of
over 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.

• Harshad Mehta was an Indian Stockbroker and was 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.
 Introduction
• In April 1992, the first press report appeared indicating that there was
a shortfall in the Government Securities held by the State Bank of
India. In a little over a month, investigations revealed that this was
just the tip of an iceberg which came to be called the securities scam,
involving misappropriation of funds to the tune of over Rs. 3500
crores.

• 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 was
thrown in disarray.
LIBERALIZATION
The Mechanics of the Scam
 The Mechanics of the Scam
 READY FORWARD DEAL: It is in essence a secured short
term (typically 15 day) loan from a bank to another bank.

ISSUE
BR
BR

BROKER
BORROWER LENDER BANK
BANK
FUNDS FUNDS
 Bank receipt
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 meantime the seller holds the securities in
trust for the buyer.
Harshad Mehta needed banks which issued fake 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)
issues BRs.
Once these fake BRs were issued, they were passed on to
other banks and the banks in turn gave money to harshad
Mehta, 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.
 ISSUED
FAKE BR
FAKE
BORROWER BRS BROKER
BANK HARSHAD
BANK OF MEHTA
KARAD
&
METROPOLITA
LENDER
N CO- BANKS
OPERATIVE
BANK (MCB)
SBI
UCO
FUNDS STANDERED
CHARTERED
NHB
CANARA BANK
GROUP
ANDHRA BANK
GROUP
Unethical Issues In Mehta Scam
 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
 T OF TA
PA C M E H
IM SHAD
HA R
C AM
S
 IMPACT OF HARSHAD
MEHTA SCAM
 Index fell from 4500 to 2500,leads to loss of Rs.100,000 crore
in market.
 All the banks and financial institution start demanding to
return the funds.
 Shares were tainted.
 Genuine investors fell like robbed, chaotic condition in the
stock market.
 Government Liberalization policies on hold.
 SEBI postponed sanctioning of private sector mutual fund
 Direct effect on FDI ,as entry of foreign pension funds and
mutual funds becomes rare.

 The Euro-issues planned by several Indian companies were

delayed.

 Adversely affect 15 major commercial banks of India, foreign

banks and NHB(national housing bank)

 When the scam was revealed, the Chairman of the Vijaya

Bank committed suicide by jumping from the office roof,
because of his active involvement in issuing cheques to
Mehta.
Government Measures and Ethical
Issue
The response of any government to a scam of
this kind would have three main facets:

• Discover and punish the guilty

• Recover the money
• Reform the system
 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
1. investor protection
2. orderly development of capital market.
 Functions of SEBI
• Securing interest of investors
• Monitor and control the performance of stock
exchange and derivatives.
• Listing and monitoring functioning of stoke
brokers and others.
• Forbid unjust or unfair trade practice in
security market.
• Undertake periodic audits.
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.