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
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
• 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
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
• However, the banks ignored the circular and continued to flout the rules on BRs.
11. What was Harshad Mehta’s role in the Securities
• 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
13. The Rising
• Deployed over Rs.1,000 Crore, triggered the biggest bull run in the India Stock
• 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.
14. 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
15. What was the event that finally blew the lid off the
• 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.
16. 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
17. • 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.
18. 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
19. • 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
• 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.
20. 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.
21. END OF HARSHAD MEHTA GAME
• 31st 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