THE SCAM

1992-
HARSHAD MEHTA
 INDE
 INTRODUCTION
 1992 SCANDEL X
 ASPECTS OF SCAM
 EXPOSURE OF SCAM 1992
 IMPACT ON ECONOMY DUE TO SCAM
 IMPACT OF THE SCAM ON BANKING SYSTEM
 IMPACT RELATED TO BANKS
 CONCLUSION
 BIBLIOGRAPHY
  INTRODUCTION
• Harshad Mehta was an Indian stockbroker and
a key figure in the Indian securities scam of
1992 .
• Mehta’s involvement in the scam 1992 Indian
securities scam made him infamous as a
market manipulator.
• Born in 1954, Mehta rose to prominence in
the late 1980s and early 1990s due to his
involvement in the stock market.
• Harshad Mehta was born on 29 July 1954
Paneli Moti , Saurashtra State [now in
Gujarat ], India and was died on 31 December
2001 [aged 47] Thane, Maharashtra, India.
• The scandal exposed the loopholes in the
Indian banking system and, the Bombay Stock
Exchange [BSE]transaction system, and
consequently the SEBI introduced new rules to
cover those loopholes.
• He was trial for 9 years, until he died at the
end of 2001 from a heart attack and spent
107 days in jail.
• 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.
• He went Bankrupt in 1982 and recovered
soon to become more stronger.
• Went on to become one the most
successful broker—The Rags to Riches
Story, thereby, earning made him Rich.
• HARSHAD MEHTA Started his career
with New INDIA Assurance Co.
• He propounded the ‘Replacement Price
Theory’.
 1992 SCANDAL
The scam was the biggest money market scam ever committed in India,
amounting to approximately ₹ 5,000 crores. The main perpetrator of the scam
was a stock and money market broker Harshad Mehta. It was a systematic
stock scam using fake bank receipts and stamp paper that caused the Indian
stock market to crash. The scam exposed the inherent loopholes of the Indian
financial systems and resulted in a completely reformed system of stock
transactions, including an introduction of online security systems.
 ASPECTS OF SCAM 1992
This are the aspects on which scam is all about.
 Diversion of Funds
• Security frauds refer to the idea of diversion of funds from the banking
system to various stockholders or brokers.
• He committed a scam of over 1 billion from the banking system to buy stocks
on the Bombay Stock Exchange.
• The scope of the scam was so large that the net value of the stocks was
higher than the combined health and education budget of India.
• Diversion of Funds from the banking system to brokers for financing
their operations in the stock market by Mehta.
 Bank Funds Scam
• In the early 70's, banks in India were not allowed to invest in the equity markets. However,
they were expected to post profits and to retain a certain ratio of their assets in government
fixed interest bonds. Mehta squeezed capital out of the banking system to address this
requirement of banks and pumped this money into the share market. He promised the banks
higher rates of interest, while asking them to transfer the money into his personal account. This
resulted in stocks like ACC, which was trading in 1991 for ₹200/share, catapult to nearly
₹9,000 in just 3/M.
 Banks Receipt Scam
• Another major instrument 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. The BR serves as a receipt
from the selling bank, and also promises that the buyer will receive the securities they
have paid for at the end of the term. Having figured this out, Mehta needed banks,
which could issue fake BRs, or BRs not backed by any government securities.
 Ready Forward Deal
• The ready forward deal is a way where a single broker liaisons between two
banks. When one bank wants to sell securities, it approaches the broker. This
broker goes to another bank and tries to sell the securities and vice versa for
buying. Since Mehta was a renowned broker, he got cheques issued in his
name instead of the bank. When the bank wanted money for the securities, he
approached another bank and repeated the same process, and invested the
bank money in the stock market. Mehta used the ready forward deal &
applied it.
 Exposure of the Scam 1992.
 Harshad Mehta’s Scam was exposed by the Sucheta Dalal.
 She has exposed with the SBI employee and RBI.
 When the Scam was exposed, banks started demanding their money
back, causing the collapse.
 Mehta was later charged with 72 criminal offense & more than 600 civil
actions suits were filed against him.
 He was arrested on 9 November 1992 and banned from stock market
with investors who did scam. Total 2.8 million shares were sanctioned
by RBI.
 Mehta announced in the Jail that he had paid 10million to the PM
P.V. Narsimha Rao, as a donation, for getting him off the
scandal case.
  IMPACT ON ECONOMY DUE TO SCAM
1992

 Prelude To Economic Turmoil

• The 1992 Harshad Mehta Scam, an unprecedented
financial debacle, sent shockwaves through the Indian
economy, exposing vulnerabilities in the financial
system. The scam’s genesis lay in the exploitation of
systemic loopholes, particularly the misuse of the
banking through fraudulent practices like ‘Ready
Forward’ transactions. As Harshad Mehta manipulated
stock prices and engaged in unethical practices, the
consequences ripped far beyond the financial markets.
 Stock Market Volatility and Investor Confidence Erosion
• One of the most immediate impacts of the Harshad Mehta scam was the
extreme volatility it injected into the stock markets. The scam revealed the
susceptibility of the financial sector to fraudulent activities, leading to a
significant erosion of investor confidence. As news of the scam broke, panic
selling ensued, causing a sharp decline in stock prices. Investors, both individual
and institutional, faced substantial losses, leading to a broader crisis of
confidence in the equity markets.
 Banking Sector Repercussions and Regulatory Response
• The scam had profound implications for the banking sector, which found itself
at the epicenter of the crisis. Banks, used as instruments in Mehta's fraudulent
transactions, faced a liquidity crunch, affecting their ability to meet withdrawal
demands. This triggered a chain reaction, leading to a liquidity squeeze in the
banking system.
• In response to the crisis, the Reserve Bank of India (RBI) implemented a
series of measures to stabilize the banking sector. The central bank intervened
with liquidity support, tightened regulations, and initiated investigations into the
irregularities. The aftermath prompted a reevaluation of banking practices, with a
focus on enhancing transparency and fortifying regulatory frameworks to prevent
similar occurrences in the future.
 Broader Economic Implications and Long-Term Reforms

• The broader economic impact of the 1992 Harshad Mehta scam

extended beyond the financial sector.
• The aftermath of the scam prompted a reevaluation of the financial and
regulatory landscape in India. The Securities and Exchange Board of India
[SEBI] underwent restructuring, with a renewed emphasis on surveillance
and enforcement, leading to long-term reforms in financial markets.
 IMPACT OF THE SCAM ON BANKING SYSTEM
 IMPACT RELATED TO BANKS
• Many shares become ‘Tainted’ shares, and overnight they became worthless
pieces
of paper as they could not be delivered in the market.
• BR was removed by RBI.
• Bribery case on ‘P.V. Narsimha Rao’
• Holding banks of fake BR had to face losses.
• The chairman of the Vijaya Bank committed suicide.
• SEBI postponed sanctioning of the private mutual funds.
• Mehta had by then swindled the banks of staggering Rs 3500 crore.
• The immediate impact of the scam was a sharp fall in the share prices. The
Index
fell from 4500 to 2500 representing a loss of Rs 100,000 crores in Economy.
 CONCLUSION
 The lessons learned from the scam are manifold. The need for robust
regulatory frameworks, vigilant oversight, and a commitment to
transparency became glaringly evident. The role of corporate governance in
preserving the integrity of financial institutions.
 As we conclude our exploration of "Scam 1992: The Harshad Mehta Story,"
we find not just a gripping saga of financial intrigue but a crucible
through which India's financial systems were refined. The story, a
cautionary tale etched in the annals of financial history, beckons us to remain
vigilant, to learn from the mistakes of the past, and to continuously fortify
the foundations of trust and accountability in the ever-evolving tapestry of
global finance.
 BIBLIOGRAPHY
These are the sources from where I collected Details for the
Project,
• CHAT GPT 3.5 [https://openai.com/blog/chatgpt]
• GOOGLE [Scribd, Wikipedia, Slide-share][https://www.google.co.in/]
• E-BOOKS [https://www.ebooks.com/]
MADE BY – DEVASI
ANKITH .J.
11 - COMMERCE