Presentation on- Harshad Mehta Scam Guided byProf. M. Bhatia Presented byAshish Jain Rohan John Solomon Ethical issues & Govt. Impact of the Scam. 5. Unethical Issues. 4. Conclusion. Main issues in scam. . 6. measures. 2. 3.1. Introduction. • Harshad Mehta was an Indian Stockbroker and was alleged to have engineered the rise in the BSE stock exchange in the year 1992.The Securities Scam • The “Securities Scam” referred to a diversion of funds to the tune of over Rs. Exploiting several loopholes in the banking system. triggering a rise in the Sensex. 3. Harshad Mehta and his associates siphoned off funds from inter bank transactions and bought shares heavily at a premium across many segments. .500 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992. . involving misappropriation of funds to the tune of over Rs. the first press report appeared indicating that there was a shortfall in the Government Securities held by the State Bank of India.Introduction • In April 1992. In a little over a month. bureaucrats and politicians. investigations revealed that this was just the tip of an iceberg which came to be called the securities scam. foreign banks and financial institutions. the scam has engulfed top executives of large nationalized banks. • The functioning of the money market and the stock market was thrown in disarray. brokers. • In an ever expanding ambit. 3500 crores. ISSUE BR BR BORROWER BANK FUNDS BROKER FUNDS LENDER BANK .The Mechanics of the Scam READY FORWARD DEAL: It is in essence a secured short term (typically 15 day) loan from a bank to another bank. It also states that in the meantime the seller holds the securities in trust for the buyer. the name – bank receipt. Hence. It promises to deliver the securities to the buyer. Harshad Mehta needed banks which issued fake BRs not backed by any government securities. .Bank receipt It acts as a receipt for the money received by the selling bank. they were passed on to other banks and the banks in turn gave money to harshad Mehta. When time came to return the money. . Two small and little known banks .the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) issues BRs. the shares were sold for a profit and the BR was retired. The money due to the bank was returned. assuming that they were lending against government securities when this was not really the case. Once these fake BRs were issued. This money was used to drive up the prices of stocks in the stock market. BORROWER BANK BANK OF KARAD & METROPOLITAN CO-OPERATIVE BANK (MCB) ISSUED FAKE BRS FAKE BR LENDER BANKS SBI UCO STANDERED CHARTERED NHB CANARA BANK GROUP ANDHRA BANK GROUP BROKER HARSHAD MEHTA FUNDS . or BRs not backed by any government securities • Illegally issue of BR by small bank • Without verification. • Recommendation to purchase particular shares on his own website .Unethical Issues In Mehta Scam • Imaginary companies created • Bought the shares of own company by himself causing Sensex up • Purchased Huge amount of shares of a targeted company like ACC . banks like “Vijaya Bank” issued the cheque. • Caused false bull run • Created fake BRs. . leads to loss of Rs.IMPACT OF SCAM Index fell from 4500 to 2500.000 crore in market. SEBI postponed sanctioning of private sector mutual fund. chaotic condition in stock market. Genuine investors fell like robbed.100. Government Liberalization policies on hold. All banks & financial institution start demanding to return the funds. . Shares were tainted. Adversely affect 15 major commercial banks of India. because of his active involvement in issuing cheques to Mehta. Direct effect on FDI . . the Chairman of the Vijaya Bank committed suicide by jumping from the office roof. foreign banks and NHB(national housing bank) When the scam was revealed.as entry of foreign pension funds and mutual funds becomes rare. The Euro-issues planned by several Indian companies were delayed. Government Measures and Ethical Issue The response of any government to a scam of this kind would have three main facets: • Discover and punish the guilty • Recover the money • Reform the system . Role of SEBI (Ethical Issues) • The SEBI was set up in early 1988 as a non statutory body under an administrative arrangement and was subsequently upgraded as a fully autonomous body on 12th of April 1992. • The two objective s mandated in the SEBI Act are 1. . orderly development of capital market. investor protection 2. . This is the ideal environment for a scam to germinate and grow to alarming proportions.Conclusion There was a total lack of transparency in the money market. Irregularities of all kind were so common that no suspicion aroused even by highly irregular transactions. Thank You… .