THE HARSHAD MEHTA SCAM .pptx

This presentation gives you a brief information about Harshad Mehta’s scam.

1. THE HARSHAD MEHTA SCAM PRIYA SINGH - 2019307 BCOM HONOURS

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

3. How did stockbrokers come into the picture? Stockbrokers needed funds to finance their stock market trades. These brokers took up proprietary positions in stocks, or were financiers for  vyaj badla  trades. Many of them were also brokers in the money market, where corporate bonds and government securities were traded.

4. Why did banks trade in securities? For two reasons. One, to meet the RBI regulations of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). CRR, as the term implies, required banks to park a certain portion of their deposits with the RBI at zero interest. For SLR, banks had to park a certain portion of their deposits in government securities and other approved securities. The second reason was to boost their profits, which were quite low at that time.

5. What is the link between securities trades and compliance with CRR and SLR requirements? When the RBI raised CRR, some banks would find themselves short of cash. Similarly, some banks would find themselves short of securities to meet SLR requirements. This meant there both a buyer and a seller, a prerequisite for any market. But banks in need of cash could have directly borrowed from the call money market where banks lend to each other? Till 1988, the interest rate in the money market was capped at 10 percent by the Indian Banks Association. So banks with surplus cash were not keen to lend in the call market. To circumvent the IBA rule, banks devised the ‘ready forward’ mechanism, and so could lend at a rate higher than the call money rate.

6. What is a ‘ready forward’ deal? Bank A, which temporarily required cash to meet the CRR rule, would sell securities to Bank B. After a few days, Bank A would buy the securities back from Bank B at a slightly higher rate. The difference in the purchase and sale price of securities was the interest paid for borrowing the funds. This would be higher than the call money rate. Note, the coupon rate or yield on the securities had no connection to the trade, which was a pure financing deal.

7. Bank receipts are said to be at the heart of the scam? What exactly were they? This was the era of paper trading. Often, there would be a delay in the seller bank handing over the physical securities. Sometimes, the delay was because of the certificates lying at a different centre . In many cases of PSU bonds, the actual issue of certificates was delayed for several years and the holders' evidence of ownership was only an 'allotment letter'. Also, for large ready forward transactions, physical delivery could be cumbersome since the trades were to be reversed shortly. So the seller bank would issue a ‘bank receipt’ (BR) to the buyer of the securities, till such time the shares were physically handed over. Once the buyer got delivery of the securities, the BR would no longer be valid.

8. What were the rules regarding BRs? Among the main ones, BRs could not be issued for government securities, they could only be issued when PSU bonds or mutual fund units were traded. The record of government securities held by banks was maintained by the RBI’s Public Debt Office in what was known as the Securities General Ledger (SGL). When a bank wanted to sell government securities, it only had to give a SGL transfer form to the buyer. The buyer would hand the transfer form to the PDO, which would then credit the securities to the buyer’s account and debit the seller bank’s securities account. The other key rule was that BRs were valid up to a maximum of 90 days.

9. How were BRs misused? Banks started issuing BRs even for transactions in government securities though RBI rules forbade it. Banks buying securities would not insist on delivery within the 90-day limit, and this led to BRs being valid indefinitely. A bank holding a BR and yet to receive delivery of the underlying securities would trade in those securities with a third bank, and issue another BR. In effect, BRs were being issued with BRs as the underlying, instead of securities. Some banks started issuing BRs, aware that they did not have the underlying securities.

10. Was RBI aware of the misuse of BRs? Yes. Six years before the scam came to light, an RBI inspection report of October 1986 found Andhra Bank and Syndicate Bank guilty of misusing BRs. Andhra Bank had issued BRs without having the underlying securities, and Syndicate Bank had issued an SGL transfer form without having adequate balance in its government securities account. Did RBI take any steps to prevent the misuse of BRs by banks? In July 1991, as the misuse of BRs became rampant, RBI issued a circular to banks forbidding sale transactions unless they held the actual securities in their investment account. Also, all transactions put through by the banks either on an outright basis or on ready-forward basis had to reflect on the same day in their investment accounts. However, the banks ignored the circular and continued to flout the rules on BRs.

11. What was Harshad Mehta’s role in the Securities Scam? Harshad Mehta was a stock market player as well as a money market broker. He was the favored broker of State Bank of India and its subsidiaries, National Housing Bank, UCO Bank and ANZ Grindlays . While the banks were supposed to be trading securities with other banks, the funds were mostly credited to Harshad Mehta’s individual account. Harshad used the funds for his stock market operations, and peddling the replacement cost theory, sent stock prices soaring to dizzying highs.

12. The Rising Deployed over Rs.1,000 Crore, triggered the biggest bull run in the India Stock Market. Stocks Invested: ACC  –  Rs.200-Rs.9000 per share (4,400% increase) Sterlite Industries –  Rs.272-Rs.385 per share (41% increase) Videocon -Rs.51-Rs.162 per share ( 232% increase) BSE Sensex rose from 2,000 points in January 1992 to 4,467 points in April 1992 Paid tax of Rs.28 Crore in FY 1991-92, making him the highest individual taxpayer in the country during that fiscal year.

13. How did things start unravelling? Due to rampant violations in securities trading, 'holes' had developed in the investment portfolio of banks. These holes remained undetected for long because the portfolio was supported by SGL transfer forms or BRs which were either on hand or would be delivered by brokers. Few bothered to check if the SGL transfer forms or BRs were backed by securities. Books were fraudulently balanced by creating a fresh set of transactions with SGL transfer forms BRs not backed by securities.

14. What was the event that finally blew the lid off the scam? In January 1992, RBI began inspecting the books of banks for irregularities in securities transactions. In April, the RBI found a shortfall of Rs 649 crore in SBI’s investment portfolio. The bank did not have the securities it had paid its broker Harshad Mehta for. Under pressure from SBI, Harshad paid up around Rs 620 crore between April 13 and April 24. But the RBI dug deeper, and found that Harshad had paid Rs 574 crore from his Grindlay’s Bank account. Of this, Rs 489.75 crores was funded by National Housing Bank cheques drawn in favour of Grindlays Bank and credited to Harshad’s account. That appeared to be a securities transaction between NHB and Grindlays , but NHB did not have any securities to show for it. The cat was finally out of the bag.

15. Could Harshad have resolved the problem with SBI, without the RBI pinning him down? Unfortunately for Harshad, the BSE stopped trading operations on April 16, as brokers went on strike protesting against the directive from SEBI asking them to re-register and pay a higher registration fee. That prevented Harshad from being able to sell a part of his holdings and repay SBI. Under pressure from the broking community, SEBI diluted the hike on April 20.

16. Old-timers say the bear cartel, aware of Harshad’s problems, prolonged the strike by making other demands. Harshad is said to have approached a foreign bank with close ties to the bear cartel, offering a part of his holdings at a discount. But that deal did not work out. Trading finally resumed on April 27, but by then it was too late for Harshad.

17. What happened next? The discovery of the shortfall in SBI and the subsequent disclosure of the payments by NHB created a crisis in the securities market. Other brokers too were unable to hide the 'holes' in the investment portfolios of some banks by replacement deals. One after the other, fictitious deals at various banks started getting exposed. Bank of Karad and Metropolitan Co-operative Bank, which had issued BRs and SGL forms without any underlying securities, suffered massive losses and went under. By mid-May, the CBI froze Harshad Mehta’s bank accounts and seized his assets. Three weeks later, Harshad was arrested by the CBI

18. With news of the scam becoming public, and the fund flow into the stock market drying up, share prices nosedived. From a high of 4467 in the last week of April, the BSE Sensex crashed to sub-2600 by August. Harshad Mehta was later charged with 72 criminal offences. A Special Court also sentenced Sudhir Mehta, Harshad Mehta's brother, and six others, including four bank officials, to rigorous imprisonment (RI) ranging from 1 year to 10 years on the charge of duping State Bank of India to the tune of Rs 600 crore (Rs 6 billion) in connection with the securities scam that rocked the financial markets in 1992. The Chairman of the Vijaya Bank committed suicide by jumping from his office roof. He knew that he would be accused if people came to know about his involvement in issuing cheques to Mehta.

19. IMPACT OF THE SCAM A sharp fall in the share price. There was a chaotic situation in the market. The Government liberalization policies came under criticism. It received political pressure and bad press.

20. 31 st December 2001- The Death Of The Bull.  Remembered as the architect of the Rs.50 billionscam. “  Scam after scam - Harshad Mehta to Ketan Parekh,corporates get away scot free. Brokers & bankers should be jailed. After all they pay the netas! ”  ---- Sucheta Dalal   , Journalist who exposed Harshad  Mehta         END OF HARSHAD MEHTA GAME 31 st December 2001- The Death Of The Bull. Remembered as the architect of the Rs.50 billion scam. “ Scam after scam - Harshad Mehta to Ketan Parekh,corporates get away  scot free. Brokers & bankers should be jailed. After all they pay the netas ! ”  ---- SUCHETA DALAL  , Journalist who exposed Harshad  Mehta