Faculty of Management Sciences

& Liberal Arts

MASTER OF BUSINESS ADMINISTRATION

Harshad Mehta Scam

Submitted To: Chander Mohan Gupta

Submitted By: Neha Thakur

Session 2018-2020

Registration No. 1 8 7 1 4 0 1 1 5 3
Introduction

Harshad Shantilal Metha was a Indian stockbroker. He was born on 29th July
1954 at paneli moti,Rajkot district in gujarati in jain family,his early childhood
wad spent in Kandivali Mumbai where his father was a small time businessman
after a few year they moved to Raipur modhapara Chhattisgarh where harsad
studied in holy cross Byron bazaar higher secondary school. Harsad move to
Mumbai after his schooling for higher study and also for work he completed his
B.com in 1976 form Lala Lajpat Rai college Mumbai and worked in various
company for next eight years. Harshad started his career as a sales person in the
New India Assurance Company Limited(NIACL). He developed the interest in
Share Market and hence after quitting his job in early 1980, he joined the Stock
broker B.Ambalal. Later 1981 he worked as sub-broker to stock broker J.L.Shah
and Nandalal Sheth. After gaining of experience he started business in 1984 with
his brother, started his own firm named as Grow More Research and Asset
Management. Later, he became the member of Bombay Stock Exchange as a
broker.

In 1986, He started trading actively. He became a famous stock broker and a

number of eminent people began to invest in his firm, and utilize his services
including the then minister P.Chidambaram through Chidambaram's own shell
companies. He had the touch of midas everything he touched became gold and
thousand of gullible investors followed his lead. He was called ‘the bg bull’
What was the Harshad Mehta scam

The securities scam of 1991-1992 refers to diversion of bank funds worth Rs

4,000 crore to a group of stock broker led Harshad Mehta .These funds were then
put into the stock market selectively causing it to surge to over 4500 points.it was
first exposed by veteran journalist Sucheta Dalal in April 1992. Mehta’s illicit
methods were exposed on 23 April 1992 when sucheta wrote an article in The
Times of Indian detailing the loopholes in the banking system that had been
exploited by the stock broker. She got the tip off after she saw him pull up at the
state bank of India offices in a brand new Toyota Lexus which had just been
released internationally and costed more than Rs 40 lakh at the time

Harshad Mehta mainly used two instruments in scam

 Ready Forward Deal(RF Deal)

 Bank Receipt(BR)

Ready Forward Deal:- Harshad Mehta used technique of the Ready Forward
Deal in scam or (RF Deal) .It was the short term loan instruments for bank in
1990’s, if any bank was in Running out of funds (money) then to generate funds
they used to sell there bond or securities to other bank and in return after some
time and also pay some interest with capital to regain its bond.

(For Eg) If in case we are in need of urgent money then we go to our nearby
bank. We keep our land as a collateral to him and take the short-term loan from
him. After some days, we return the money to Bank with the decided interest and
then he returns our land. Same was the case with banks. In RF deal one bank give
short-term loan to other bank and keep government bonds to them as collateral.
In RF deal brokers used to work as mediators between this two banks. Brokers
work is to find buyers for banks and willing to sell their securities and vice-versa
find sellers for the banks which are ready to buy the securities and Harshad Mehta
was a broker, and he used to work as mediator between two banks.
There was some loopholes in this system of RF Deal using which the broker could
make lot of illegal money. Harshad was very well known with this loopholes and
using this loopholes he made the biggest scam in stock market

The process of RF

 Settlement process
 Payment of Cheques
 Dispensing of Securities

Bank Receipt Scam:-Another instrument used by a Harshad Mehta was Bank

Receipt (BR). In a ready forward deal, securities were not moved back and forth
in actuality. Instead, the borrower, buyer take a securities form the seller a BR.
The BR confirms the sale of securities. It acts as a receipt for the money received
by the selling bank. Hence the name - bank receipt. It promises to deliver the
securities to buyer it is also states that in the meantime the seller holds the
securities in trust of buyer. Having figured this out, Mehta needed banks, which
could issue fake BRs or BRs not backed by any government securities. Two small
and little banks the Bank of Karad (BOK) and Mumbai Mercantile Co-operative
Bank (MCB) came in for this purpose. Once fake BRs were issued, they were
passed to other banks and banks gave money to Harshad Mehta assuming that
they were lending against government securities when this was not really the case.
He took the price of ACC from Rs. 200 to Rs. 9,000. That was an increase of
4,400%.The stock markets were overheated and the bulls were on a mad run. This
way several large banks made huge unsecured loans to these banks and thus it
created money for the brokers Since he had to book profits in the end, the day he
sold was the day when the markets crashed.

Immediate Impact On Market :-After the Mehta's scandal was exposed in

April 1992, the situation in share market was critical. The first impact of scam
was steep fall in the share prices. The index goes down from 4500 to 2500 it
representing a loss of Rs. 100,000 crores in market. However, the major damage
to stock market did not stop. Since the accused were active brokers in the stock
markets, they had traded a large number of shares during the previous year. All
these shares became tainted and worthless and could not be used in the market
This was a great loss to innocent investor who had brought these share much
before the scam was exposed

Impact on Banks :-Fake bank receipts (BR) which were an integral part of the
execution of the whole scam landed banks involved in a tight spot. These BR
were declared void and public money was at stake. At least ten prominent banks
were involved in this some of them being SBI, Standard Chartered and a
subsidiary of RBI. The scam could have been checked in time with proper policies
and verifications. The government of RBI and the commercial banks are as much
accountable as the brokers for this type of scam. The brokers were encouraged by
banks to divert funds from the banking system to the stock market. The RBI too
stood indicted because despite knowledge about banks over-stepping the
boundaries demarcating their arena of operations, it failed to check them some of
the prominent individuals.

Literature Review
According to Sarika Mahajan, Balwinder Singh (2008) examined the empirical
relationship between volume and return and volume and volatility in light of competing
hypothesis about market structure by using daily data of sensitive index of the Bombay Stock
Exchange. The empirical relationship between return, volume and volatility has been
examined by using GARCH technique and Granger Causality Test. The study provides
evidence of positive impact of volume on return and volatility. Positive correlation between
volatility and trading volume. The study concluded that there is wide heterogeneity exists in
expectations of traders in the stock market and as a result more volume of traders are needed
to cool down the volatility in the market.
According to Satish Mittal, Sonal Jain (2009) examined whether seasonal anomalies
exist in Indian stock market or not. For analysis, the data has been collected for the period
from January 2007 to December 2008 for three indices: BSE – 200, CNX-100, CNX-500.
The results of this study shows that the anomalies do not exist in the Indian stock market and
this market can be considered as informationally efficient. In this study, there turns on
Monday are negative whereas the means returns on Friday are positive but T-test results
conclude that there is insignificant difference between the returns on Monday and other
weekdays.
According to K. Srinivasarao (2009) in his doctoral dissertation attempted to assess
the growth of Indian capital market with special reference to equity market and to make
appropriate suggestion to promote equity culture in India in general and Andhra Pradesh in
particular. This study highlights following

According to M. N. A. Anasari (1994)made a difference between the Badla

system and the future and option system, the factors which led to replacement of
Badla system and the problems and reform measures that are required to be taken
in the stock market for the production of future and options. It is concluded that,
speculation is considered essential in free market economy in so far as it helps in
price formation and provides liquidity to the market, but atthe same time it should
not be excessive which is detrimental to the interest of millions of genuine
investors. Badla system makes excessive speculation easier and excessive
volatility in share prices. Therefore, well established badla system be phased out
in favour of future and options.

According to Yarram Subha Reddy (1998) studied the efficiency of a stock

market. The operational, allocation and informational efficiency of the market are
examined and the weak form information efficiency of Bombay Stock Exchange
is analysed. It is concluded that Indian market is not efficient in weak form which
implies that profitable opportunities exist for investors to form trading decisions
based on past prices and to earn more than what is earned under a policy of buy
and hold. It implies that investors with more ready access to information on
trading prices and quantity have better opportunities for trade than other investors
who do not ready access to such information. Unequal access to information leads
to transfer resources from those with less access to those with more access, which
affects investor’s confidence. Therefore, efforts should be taken to improve not
only informational efficiency but also the operational and allocation efficiency of
the market. For this, SEBI should make efforts to create information storage and
retrieval systems to improve informational efficiency.

According to Pitabas Mohanty (1998) examined the question of whether excess

returns can be earned by forecasting EPS alone. It is concluded that, one can make
excess returns in India by forecasting the direction of movement of EPS (Earning
per Shares) and this excess return cannot be explained away by any risk measures.
In this paper P-E approach (Price – Earning) used to value the shares of a
company.

According to S. K. Santi Swarup, Ambika Verma (1998) examined the

important stock exchange reforms during the period 1992-1997 and their impact
on capital market development as perceived by intermediaries. A sample of 30
brokers from Delhi was selected and their perceptions were studied using
questionnaires and informal interviews. Thus, Indian capital market has several
positive developments during the period of reform but attaining international
standard is still a dream. The infrastructure for settlement and transfer of traded
securities has yet to touch global standards. Liquidity has been major problem in
the stock market and also is acting as a damper to the investments, regulations
and surveillance need to be made more comprehensive. The Indian regulatory
framework needs to shift its focus from corrective to prevention stage.

According to R. P. Hooda (1998) analysed investor’s behaviour in stock market.

It is found that majority of investors follow the mixed approach, safe reasonable
return combined with speculative benefits. The composition of investment in term
of the amount held in different security alternatives is characterized by highest
share of investment in fixed deposits, with equity shares being very close by.
Performance shares are the least preferred among different security alternatives
accounting for extremely low proportion of investment. Occupation wise,
agriculturists prefer to invest more with the banks. Those engaged in services
hold the highest share of their investment in fixed deposits with government
undertakings. Professional having no fixed deposits with government
undertakings. It is found that good track record as to profitability and dividend
payment is the most important factor, which greatly affects the investment
making process by the investors.

CONCLUSION:- Harshad Mehta was a brave stock broker he knew the

loopholes in banking system as well as to how to explicit the loopholes his
banking intension was to raise the sensex some of the regulatory action SEBI
undertook came under scathing criticism from some quarters who accused it of
still being clueless about its supervisory duties observation said the regulator
still continued believing that its only priority was to prevent a fall in stock
prices

THANK YOU