Harshad Mehta and Ketan Perekh

WHAT WE LEARNT

FROM
HARSHAD
MEHTA
AND
KETAN
PAREKH

LETS START
WITH WHAT IS
SCAM

SCAM
obtaining
money by means
of deception including fake
personalities, fake photos,
fake template letters, nonexistent 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
It
includes stock
market and the bond
INTRODUCTION TO THE
big bull of the trading
floor
HARSHAD MEHTA- story
was
anIndianstockbroker.
is
alleged to have engineered the rise

in theBSEstock 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
theSensex.
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
company
reliance
-ACC
- 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
Both
big bulls use to buy stocks at
Although
both are of gujarati

origin ketan parekh , his father
and grandfather were also traders
in the stock market but HM had no
such background
In
both 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 mehtas
illegal methods in TIMES OF
INDIA
The crucial mechanism

through which the scam was
affected was ready
forward(RF) deal.
Another
instrument used was the

bank reciept
The
two 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
After
the 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.
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 hell
pay on Tuesday, then he takes money from C on
Tuesday and tells D that hell 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

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WHAT WE LEARNT

It is basically fraud done

HARSHAD MEHTA- story

alleged to have engineered the rise

several loopholes in the

the scheme was

died in 2002 with

The follower of the

by profession comes from broking

known as pentafour bull.

parekh is a former stock broker

HOW HARSHAD AND KETAN

story is quit similar only the

are big bulls

big bulls use to buy stocks at

both are of gujarati

both these scams banks were

HM scam foreign banks including

HM scam state bank of india suffered

1) The settlement process in the govt

2) The broker through whom the payment

On april 23 1992 journalist

The crucial mechanism

instrument used was the

two main banks who were

the scam was exposed

the scam was reveled

Steps taken by SEBI in

Due to the alleged inside a tradingn

SEBI has imposed an additional 10%

SEBI has also imposed volatility

order to increase liquidity,SEBI has

march 8,2001, the SEBI banned

Now since Harshad Mehta was dealing with many

The internal control system of the

The SEBI has also imposed volatility

In order to increase liquidity,SEBI has

On march 8,2001, the SEBI banned

2)Counter party limits:-The

There are several aspects of the

Change in prices of securities

On each occasion the coupon rate

With a daily trade in volume of Rs

Where has all the

Large amount of money invested

It is rumored that a part of money

A part of money must have been spent as bribes

A part of money might have been used to finance

IMPACT OF THE SCAM

The immediate impact of the scam

The government liberlisation

Bowing to the political pressure

SEBI postponed sanctioning of

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