Harshad Mehta Scam

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About Harshad Mehta

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About Harshad Mehta• From a small town boy to mega star

of Indian stock markets

• Also known as the “Big Bull” & “Pied piper”

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Overview of the Scam• Triggered a rise in the BSE between

April 1991 to May 1992.

• Traded shares at premium

• Diverted funds of Rs 40 billion

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Diversion of funds

Banksto

Brokers

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Details of the ScamThe Ready Forward Deal• A short term secured loan• Typically for 15 days• By one bank to another• Against government securities.

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Details of the scamThe Bank Receipt• Something like IOU (I Owe You

Securities)• Confirms the sale of securities• Acts as a receipt for money received by

the selling bank• Promise to deliver the securities to the

buyer

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Impact of the Scam• Sensex fell from 4500 to 2500 loosing

100,000 crore in market capitalization

• The liberalization policies were put on hold by the government.

• Inability of Indian companies to raise capital in world markets

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Corporate reaction

• Adversely affected major banks of India

• Arrest of people holding key positions

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Remedial measures• Special court set up for the trail

• Special ordinance passed- creation of tainted shares

• Banning of RF deals.

• Various committees were set up

Implementation• Harshad Mehta arrested

• Charged with 72 criminal offences

• Prosecuted for 2 cases Use of Maruti Udyog Ltd funds to the tune

of Rs 300 million Misappropriating shares worth Rs 2.50

billion of 90 blue chip companies.

Critical appraisal

• Government, RBI & Banks as much responsible as brokers.

• Some more followers of the “Big Bull”Ketan Parekh, C.R. Bhansali

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Recommendations

• A counterparty limit is required

• Money market operations should be transparent and open.

• More fair methods for recovery of money.

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