CHITKARA
BUSINESS
SCHOOL
SUBMITTED BY-:
KANIKA BANSAL
EKTA CHOUDHARY
MUSTAFA MOHAMMED
DIVYA SINGH
AMAN THAKUR

LETS START
WITH WHAT IS
SCAM

SCAM
 obtaining money by means of
deception including fake
personalities, fake
photos, fake template
letters, non-existent
addresses and phone
numbers, forged documents .

BOTH GAINED
POPULARITY FOR
 Capital market scam?
It is basically fraud done in
the capital market with the
investors by manipulating
the facts in order to attain
enormous profit

Capital market?
 The market for securities
where companies and govt.
can raise long term funds
 Itincludes stock market
and the bond market

INTRODUCTION TO THE
“big bull of the trading
floor”

 HARSHAD MEHTA- story
 was an Indian stockbroker.
 is alleged to have engineered the rise in
the BSE stock exchange in 1992
 Exploiting several loopholes in the
banking system, 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.

 litigations still pending against
him
 When the scheme was
exposed, banks started
demanding their money
back, causing the collapse.
 Mehta died in 2002 with many
litigations still pending against
him

Contd….
his Favourate stock
included
Tata iron
and steel reliance -ACC
company
- apolo tyres Videocon - BPL

The follower of
the big bull

Introduction
 C.A by profession comes from broking
family background.
 Popularly known as pentafour bull.
 Ketan parekh is a former stock
broker from Mumbai,india
 He was convinced in 2008,for
involvement in the indian stock
market manupulation scam in late
1999-2001. currently he has been
debarred from trading in the indian
stock exchanges till 2017

HOW HARSHAD AND KETAN
RELATED TO EACH OTHER
 The story is quit similar only the star
cast has changed .In 1992 scam it was
harshad mehta now its ketan parekh.
 Both are big bulls
 Bothbig bulls use to buy stocks at
rock-bottom prices and push it up

 Althoughboth are of gujarati origin
ketan parekh , his father and
grandfather were also traders in the
stock market but HM had no such
background
 Inboth these scams banks were involved
in the HM scam was related to bankers
receipt while it was pay orders in ketan
parekh scam

 In HM scam foreign banks including city
bank,standard charter and ANZ grindlays
were involved and In ketan parekh scam
foreign instituional investors including
credit suisse first boston and JM Morgan
stainlay were invovled
 in HM scam state bank of india suffered
the loss of 660 crores while ketan owes
around rs. 130 crore to bank of india

The Mechanics of the
Scam
 3 STEPS INVOLVED
1) The settlement process in the govt
securities market become broker
intermediate that is delivery and
payment started getting routed through
a broker instead of being made directly
between the transacting banks

2) The broker through whom the payment passed
on its way from one bank to another found a
way of crediting the money into his account
though the account payee cheque was drawn in
favor of bank
3) While the 2 steps transformed an RF deal
from a loan to a broker, it would still be a
secured loan. However, the brokers soon found
a way of persuading the lending bank to
dispense with security for the loan or to accept
worthless security

HOW HARSHAD
MEHTA SCAM IS
EXPOSED
 On april 23 1992 journalist
sucheta dalal exposed mehta‟s
illegal methods in „TIMES OF
INDIA‟
 The crucial mechanism through
which the scam was affected was
ready forward(RF) deal.

 Anotherinstrument used was the
bank reciept
 Thetwo main banks who were
handy for this purpose were bank of
Karad(BOK) and metroplitian
co-operative bank

 Once the scam was exposed a
lot of baks were left holding
BRS which did not have any
value
 Afterthe scam was reveled
the chairman of vijaya bank
committed suicide.

Steps taken by SEBI in
response to the scam
 Due to the alleged inside a tradingn bombay
stock exchange have been suspended. In
order to prevent misuse of sensitive
information by broker director, stock market
will be coporite soon.
 SEBI has imposed an additional 10%
volatility margin on all the A-group shares
and additional margin stocks in automatic
lending and borrowing mechanism(ALBM)
and borrowing and lending of securiti
scheme(BLESS)

 The SEBI has also imposed volatility
margins on net outstanding sale position
of FIIS(financial institution,banks and
mutual funds)
 In order to increase liquidity,SEBI has
allowed banks to offer collateralized
lending only through BSE and NSE
 On march 8,2001, the SEBI banned short
sales.In simple words,it means that all
short sales have to be covered by an
equal amount of long purchases.

VIDEO

 Now since Harshad Mehta was dealing with
many banks at the same time he could then
keep some capital with him at all times. For eg.
He takes money from A on Monday,and tells B
that he‟ll pay on Tuesday, then he takes money
from C on Tuesday and tells D that he‟ll pay on
Wednesday and the money he gets from C is
paid to B and as a result he has some working
capital with him at all times if this goes on
with other banks throughout the week. The
banks at that time were not allowed to invest in
the equity markets. Harshad Mehta had very
cleverly squeezed some capital out of the
banking system. This capital he invested in the
stock market and managed to stoke a massive
boom.

 The internal control system of the
commercial bank system involves the
following features
1) separation of functions:- The
aspects of securities transaction of a
bank, namely dealing custody and
accounting are carried out by
different person

 The SEBI has also imposed volatility
margins on net outstanding sale position
of FIIS(financial institution,banks and
mutual funds)
 In order to increase liquidity,SEBI has
allowed banks to offer collateralized
lending only through BSE and NSE
 On march 8,2001, the SEBI banned short
sales.In simple words,it means that all
short sales have to be covered by an
equal amount of long purchases.

 2)Counter party limits:-The moment
an RF deal is done on the basis of a
BR rather than actual securities the
lending bank has to contend with the
possibility that the BR received may
not be backed by any adequate
securities

OTHER ASPECTS OF
THE SCAM
 There are several aspects of the scam
which are closely related to the
security markets, but which are
different from the operational aspects
of the markets
 Change in prices of securities
 On each occasion the coupon rate was
increased by 1/2 %.therby raising
from 11.5% to 13% during this ten
month period

Contd….
 With a daily trade in volume of Rs
3000n to 4000 crores it would have
been very easy to take a
position(based on inside
information)of Rs 500 or Rs 1000
crores without anyone suspecting
anything untwo ward

Where has all the
fraud money gone?
Based on result of investigation and
reporting so far , the following are the
possibilities
1) Large amount of money invested in
shares
2) It is rumored that a part of money
was sent to the Havalarackent
, converted into dollar pounds and
brought back as India development
bonds

 A part of money must have been spent as bribes and
kick backs to the various accomplishis in the banks
and possibily in the bureaucracy and in political
system
 A part of money might have been used to finance the
losses taken by the brokers to window dress various
bank balancesheets

IMPACT OF THE
SCAM
 The immediate impact of the scam
was a sharp fall in the shares prices .
The index fell from 4500 to 2500
representing a loss of Rs. 100000
crores in the market capitalization.
 The government liberlisation policies
came under sever critism after the
scam with harshad mehta

 Bowing to the political pressure and
the bad press it received during the
scam, the liberalization was put on
hold for a while by the government
 SEBI postponed sanctioning of
private sector mutual fund