India's Biggest Securities Scandal

7/30/2019 India's Biggest Securities Scandal

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INDIA'S BIGGEST SECURITIES

SCANDAL


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CAPITAL MARKET ?

The capital market is the market for securities,where companies and govt. can raise long term funds. It

is a market in which money is lent for periods longerthan a year. The capital market includes the stock

market and the bond market

It is basically fraud done in the Capital market with theinvestors by manipulating the facts in order to attain

enormous profits.

WHAT IS CAPITAL MARKET SCAM?


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Big bull of the trading floor

Mehta was born on 29 July 1953

in a Gujarati Jain family

He briefly worked for New India AssuranceCompany, until he decided to trade in the Stock

Market of BSE and [NSE].

ARCHITECT OF THE RS 50-BILLION SCAM

HARSHAD MEHTA


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By 1990, Mehta rose to prominence in the stock market. He wasbuying shares heavily.

The shares which attracted attention were those of AssociatedCement Company (ACC).

The price of ACC was bid up to Rs. 10,000. When asked, he usedthe replacement cost theory as an explanation.

He was alleged to have an expensive lifestyle. Through the secondhalf of 1991 Mehta had earned the nickname of the Big Bull,

because he was said to have started the bull run.Mehta made a brief comeback as a stock market guru, giving tips

on his own website as well as a weekly newspaper column.

CAREER


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HARSHAD MEHTA-

Started his career with New India Assurance Co.

Quit his job in 1981 to become a sub-broker.

acted as sub broker for stock brokers

J.L Shah and Nandalal Sheth

Went on to become one the most successful broker

The Rags to Riches Story, thereby earning the nick name of

THE BIG BULL.

His favorite stocks included

ACC Apollo Tyres Reliance Tata Iron and Steel Co. (TISCO) BPL Sterlite Videocon.

THE GREAT INDIAN SCAM-1992

WHO IS THIS MAN? :


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ordinary broker to Big BullIncreased price of the ACC cement company from 200 to 9000 4400% rise.

took advantage of the loopholes in the banking system

Bought shares for premium

Mechanisam

Ready forward deal ( RF)

bank to bank dealing

Bank receiptissued fake BR without any gaurantee

1. Bank of karad (BOK)

2. Metropolitian co-operative bank (MCB )

HOW HARSHAD MEHTA FINANCED HIS

DEAL


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Lifestyle (flashy cars & life like a celebrity) 31st December 2001The Death OfThe Bull Forever remembered as the Architect of the Rs.50 billion Scam

Mehta was under judicial custody .Had heart ailment, at the age of 47

Market watchdog, SEBI had banned him for life from stock

When the scam was revealed, the Chairman of the Vijaya Bank committedsuicide by jumping from the office roof.

He knew that he would be accused if people came to know about his involvementin issuing cheque to Mehta.

M J Pherwani of UTI also died in this scandal

Other player with him was NIMESH SHAH (STILL PLAYING )

THE END OF THE BULL STORY


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Spent on financing the stock markets losses of the

Hiten Dalal/ Narottam group

who were known to be bear operators and were sufferingheavy losses

Rumoured that part of the money was sent out of India

through the havala racket, converted into dollars

Some part must have been spent as bribes and kickbacks to the

various accomplices in the banks and possibly in thebureaucracy and the political system.

WHERE DID THE MONEY GO


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sharp fall in the share prices

The index fell from 4500 to 2500 representing a loss of

Rs. 100,000 crores in market capitalization.

All the shares became tainted shares, and overnight they becameworthless pieces of paper as they could not be delivered in the

market.

Genuine investors who had bought these shares well before thescam came to light and even got them registered in their names

found themselves being robbed by the government.

resulted in a chaotic situation in the market since no one wascertain as to which shares were tainted and which were not.

IMPACT OF THE SCAM


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]

Introduction :

C.A by profession-comes from brokingfamily background. Popularly known as thePentafour Bull Known for his K10 series of

stocks.KETAN PAREKH

Sensex crash on March 1, 2001 came as amajor shock for the Government of

India

SEBI also decided to inspect the

books of several brokers who weresuspected of triggering the crash

THE FOLLOWER OF THE BIG BULL


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former stockbroker based in Mumbai who was convicted in 2008for being involved in engineering the technology stocks scam in

Indias stock market in 1999-2001.

A chartered accountant by training, Parekh comes from a family

of brokers and is currently serving a period of disqualificationfrom trading in the Indian bourses till 2017.

The market simply refers to him as KP or associates him with

his firm NH Securities.Parekh is known to have no reluctance in meeting the press. He

is also known to have razor-sharp forecasts on marketdevelopments.

KETAN PAREKH


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He was known as the 'Bombay Bull'

Had connections with movie stars, politicians and even leadinginternational

entrepreneurs like Australian media tycoon Kerry Packer, whopartnered KP in KPV Ventures

THE FACTORS THAT HELPED THE MAN

He did not have the money to buy large stakes

Borrowed from various companies and banks

He bought shares when they were trading at low prices and saw the

prices go up in the bull market.When the price was high enough, he pledged the shares with

banks as collateral for funds.

He also borrowed from companies like HFCL.


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THE K-10 STOCKS

Amitabh Bachchan Corporation Limited (ABCL) Mukta ArtsTips Pritish Nandy Communications. HFCL Global Telesystems

(Global) Zee Telefilms Crest Communications PentaMedia

Graphics

Ketan Parekh followed Harshad Mehta's footsteps to swindlecrores of rupees from banks.

A chartered accountant he used to run a family business, NHSecurities. Ketan however had bigger plans in mind.

He targeted smaller exchanges like the Allahabad Stock Exchangeand the Calcutta Stock Exchange, and bought shares in fictitious

names.

THE K-10 STOCKS :


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THE PAY ORDER ROUTE

KP issued cheques drawn on BoI (Bank of India) to MMCB(Madhavapura Mercantile Cooperative Bank), against which MMCB

issued pay orders. The pay orders were discounted at BoI.

It was alleged that MMCB issued funds to KP without propercollateral security and even crossed its capital market exposure limits.

BoI's losses eventually amounted to well above Rs 1.2 billion.

WAYS HE FUNDED HIS SCAM


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The second route was borrowing from a MMCB branch at Mandvi (Mumbai), wheredifferent companies owned by KP and his associates had accounts.KP used around

16 such accounts, either directly or through other broker firms, to obtain funds.

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his

ambitions.Ketan along with his associates also managed to get Rs 1,000 crore

from the Madhavpura Mercantile Co-operative Bank.

According to RBI regulations, a broker is allowed a loan of only Rs 15

crore (Rs 150 million).

There was evidence of price rigging in the scrips of Global Trust Bank, ZeeTelefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

BORROWING FROM MMCB


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His mode of raising funds by offerings shares as collateral securities workedwell but..

Only till the prices of shares went up but it reversed when shares startedfalling from mar 2000. The crash was a result of fall at NASDAQ that saw afall in K-10 stock as well In next 2 months, Sensex declined by 23% and K-10

stock declined by 67%

In May 2000, the market picked up back and the prices of K-10 rise againThe prices of stock doubled like HFCL doubled from Rs 790 to Rs 1353 by

July

HOW THE SCAM BROKE OUT?


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BY Dec.2000 the NASDAQ fell back again and the KP stockswent down as the prices of stock fallingglobally KP faced

liquidity problems.

THE DOWN FALL :

Stocks held by KP and his broker were reduced to 6-7 bn from

12bn Situation worsened when KPs badla payment was nothonored and 70 CSE brokers along with top 3 brokers madedefault By mid March the value of shares went to 2.5-3 bn

THE FINAL TURN AROUND


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KPs brokers started pressuring him for payment.

SEBI tricked the regulatory norms and several other

rules were framed .

Finally KP was arrested.

AT THE END


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Operated their scams using similar means and that theirbackgrounds were similar as well. But the differences are very

conspicuous.

At the outset, Mehta came from a lower middle-class and

modest background, while KPs family has been engaged asstockbrokers for a significant time

He is also related to many prominent brokers.

Secondly, when Mehta was operating, the market was still aclosed one and was just beginning to liberalize. Mehta operated

using the money of other people as his last recourse. Further,Mehta is known to have resorted to aggressive publicity

campaigns .

whereas KP operates almost clandestinely. The latter has also

been successful at creating stories and selling themaggressively to institutional investors.

KETAN PAREKH

VS

THE 'BIG BULL' LATE HARSHAD MEHTA


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Investigations into Parekh's money laundering affairs revealed that KP hadused bank and promoter funds to manipulate the markets. It then proceededwith plugging the many loopholes in the market. The trading cycle was cut

short from a week to a day.

The carry-forward system in stock trading called BADLA was banned and

operators could trade using this method. SEBI formally introduced forwardtrading in the form of exchange-traded derivatives to ensure a well-regulatedfutures market. It also did away with broker control over stock exchanges. InKPs case, the SEBI found prima facie evidence that he had rigged prices in

the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories,

Aftek Infosys and Padmini Polymer.Furthermore, the information provided by the RBI to the Joint ParliamentaryCommittee (JPC) during the investigation revealed that financial institutionssuch as Industrial Development Bank of India (IDBI Bank) and IndustrialFinance Corporation of India (IFCI) had given loans of Rs 1,400 crore to

companies known to be close to Parekh.

SEBIS DAMAGE CONTROL MEASURES


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Some of the regulatory actions SEBI undertook came under scathing criticismfrom some quarters who accused it of still being clueless about its supervisory

duties.

Observers said the regulator still continued believing that its only priority wasto prevent a fall in stock prices.

It was rumored that SEBI banned short sales and increased margins creating avirtual cash market in the process and squeezed turnover to a sixth of the

normal level.

It also fired all broker directors from the Bombay Stock Exchange andCalcutta Stock Exchange and declared the completion of three controversial

settlements of the Kolkata bourse by retaining a sizeable proportion of thepayout of operators who had allegedly tied-up for collusive deals.

Furthermore, SEBI rounded up the bear operators and launched an inquiryinto their alleged short sales.

CRITICISM OF SEBI


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Circular trading is basically trade done by a group of peopleamong themselves to rig the share price.

For e.g. A,B,C who are holding the same share Stock A can do acircular trading by A selling to B and B selling to C and C sellingto A. By doing this they will be able to increase or decrease the

share price since the trades are executed between themselves.

This is normally done in IPO shares during listing to create theactivity in the scrip and to distribute the stocks.

CIRCULAR TRADING

D d d ll i h i hi i i


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Day traders and small investors get caught in this viciouscircular trading and lose their money.

Avoid trading in IPO listing though it goes up 30% in aday, most of the IPOs listed will come down after the

initial frenzy is over.

Another group of stocks which attracts circular traders arepenny stocks where they will be able to rig the price

constantly for couple of days and exit when the target is

achieved.

One way to identify this is use count of trades since most

of the trades will be done in Bulk quantities.


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FORWARD TRADING

An illegal activity

trader takes a position in an equity in advance

of an action which he/she knows his/her brokeragewill take that will move the equity's price in a predictable

fashion.

also called front running.


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Presented by

KiranNehil irfan

Sarath .p.o

Aparna .k. t

Jincy . k .p

Preethisnitha

India's Biggest Securities Scandal

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