Harshad Mehta’s scam is one of the biggest scam of the early 90’s which shakes the whole corporate sector. Harshad Mehta was a famous notable stock broker of the era of 90’s who handle the stock market so cleverly in 1992 that he succeeded to earn a lot by simply manipulating the funds of bank .
List of Events
In the early years of 1990’s, Harshad Mehta comes into limelight of stock market
- Harshad Mehta is a Stock Broker by Profession
- Founder of Grow more Research and Asset Management company limited
- Promoter of Replacement cost Theory
- He dealing particularly in shares of Associated Cement Co. (ACC), Apollo Tyres, Reliance, Tata Iron and Steel Co. (TISCO), Bpl, Sterlite and Videocon
- Famous broker of stock exchange who swindled the price of ACC from 200 to 10,000 per shares which results into enormous increase of 4,400%
- Caused the Sensex to rise from under 3,000 points in February to over 4,500 points in mid-April
- Paid 28 crore as advance tax for the Fiscal year (F.Y.) of 1991-92
April 1992
- Virtuoso columnist of Times of India, Ms. Sucheta Dalal revealed about the dual character of Harshad Mehta
- Mehta was alleged for manipulating the banking funds to manage the finance of his stock buying
- He abused the banking financial system through Ready forward (RF) and Banking Receipt (BR)
- Banks involved in BR scam are Bank of Karad and Metropolitan Co-operative bank
- Banks suffered loss of 4,000 Cr .
- Chairman of the Vijaya Bank committed suicide (due to his involvement in issuing cheques)
November 1992
- CBI arrested Mehta and 72 Criminal and more than 600 civil suits were charged against Mehta
In 1995
- Mehta made a statement of giving bribe to the Prime Minister P.V Narsimha Rao for getting out of the scam .
31st Dec. 2001
- Mehta died in a hospital at the age of 47 years, with 27 pending cases against him
Bull’s mind of Harshad Mehta
Harshad Mehta was a member of mild Gujarati Jain family who started his career as a clerk in the New India Assurance Company. Later on he finds his interest in the stock exchange and started investing in the stock market and very soon he got job with stock broker P. Ambalal affiliated to Bombay Stock Exchange (BSE) within a short period of time Harshad became the notable broker of Stock Exchange .
It was the year of 1990’s when there was only one name popular in the market of stock exchange was Harshad Mehta. He had got that much position in stock market within a few couple of years which was not acquired by others in their lifetime . In 1990’s Indian banks were tussled for valuable gains. This was happens because of taking away of banking business by other rivals who were providing better services and results to the investors. This increasing contention and impulsion of banks to attain more benefits then the other rivals put the banks into the game plan of the brokers like Harshad Mehta . Mehta was worked as a broker with many of the banks at that time and he by taking advantages of his trustworthy position started playing a smart game. He asked bank for signing a cheque on his own name because he was not sure about with whom he was going to end the deal and on the Bank receipts he taking money from other banks .
Mehta was trying to con the banks by a scheme of RF (ready forward), it is a scheme in which one bank lends short term loan for a period of 15 days to other bank. In other words bank lends money against securities like other money lenders. The bank took the loan by selling securities to the other bank which grants loan and the borrower bank purchased the back the selling securities at higher prices in the end of loan period. In such a deal broker plays an important role by bringing close the two banks and took commission from both banks .
Harshad Mehta by applying his mind succeeded to find two banks which are ready to give fake bank receipt to him. Those banks are Metropolitan Co-operative bank and Bank of Karad. He took fake Bank receipt from these banks and produced it to other banks. By presuming that the bank’s fund was advancing against government securities bank transferred the funds to the Mehta’s account under scheme of Ready Forward (RF). He managed a smart cash balance which he used to drove the stock exchange .
Mehta illegally used the bank’s finance, because the funds which are given by bank to him for purchasing government securities, he inappropriately used such funds to invest in stock markets. Mehta manipulated the bank’s fund for his own personal gain which was handed over to him for specific purpose. Mehta earned thousands of crore by his in appropriated investments in the stock market and 50 lac shares of more than 130 companies are possessed by him alone .
Impact of Scam
In this Scam the circle of borrowing and lending was in the air. This shows the lack of ethical behaviour in the banking system, they took zero effort to cross check the brokers. One of the biggest examples is Vijaya bank who issued cheque without verification. It was an example of absolute failure of Corporate Governance and Mismanagement .The scam impacted the whole stock exchange, the market faced loss of 100,000 Cr. by sudden fall of index from 4500 to 2500 .
SEBI was setup in 1988 but SEBI has no authority to deal with the matter where involvement of Investors and Brokers. But after Harshad Mehta’s Scam Government decided to confer SEBI with powers of protecting the status of Investors . In pursuance of this government approved the SEBI Act, 1992 . This new act confers three functions to SEBI .
- Protection function: – To protect the stock markets from unethical behaviour of fraudulent investors and investors from unfair trade practices.
- Development Function: Lawful development of Stock markets
- Regulation Function: For ensuring fair trade practices regulate the transactions of the stock markets.
This scam raised the standard of SEBI from as a Regulatory Authority to the Statutory Authority as a separate legal entity.
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