Harshad Mehta Scam

Comparative Analysis of Both Scams

Sources: http://flame.org.in/knowledgecenter/scam.aspx

Har

shad

Meh

ta• Used to buy stock at rock bottom prices and then push it up

• Self-made man

• Media Savvy

• Banks involved in the scam

• Instruments misused were Ready Forward Deal and Bank Receipts

• Promoters of Companies were involved

• Operated through close network of brokers

• Foreign banks like Citibank, Standard Chartered and ANZ Grindlays were involved

• SBI suffered Rs. 600 cr loss

• Played with “Old Economy” stocks

• Scam occurred inspite of presence of SEBI

Keta

n Pa

rekh• Used to buy stock at rock bottom prices and then push

it up

• Hailed from the family of stock-brokers

• Shied away from media

• Banks involved in the scam

• Instruments misused were Pay Order and Circular Trading

• Promoters of Companies were involved

• Had wider network of brokers

• FIIs like Credit Suisse, First Boston and JM Morgan Stanley were involved

• Bank of India suffered Rs. 130 cr loss

• Played with “New Economy” stocks

• Scam occurred inspite of presence of SEBI

Impact on Stock Markets and Indian Economy

Sources: http://www.slideshare.net/

● The immediate impact of these scams were sharp fall in the share prices and indices

● Post Harshad Mehta Scam, markets lost Rs. 0.1mn crore loss in market capitalisation

● The Government’s liberalization policies came under severe criticism

● Subsequently, these policies were put on hold for a while

● SEBI, the securities market regulator, postponed sanctioning of private sector mutual funds

● The entry of much talked about foreign pension funds and mutual funds became the remotest possibility

● The Euro-issues planned by many Indian Cos. Were delayed

Measures taken by SEBI against scams● Securities and Exchange Board of India (SEBI) was established in April ’88● Established with an objective of protecting the rights of small investors and

regulating and developing the stock market in India● Post Mehta Scam in 1992, the GoI passed “SEBI Act 1992” and conferred statutory

powers to it

Measures post Mehta Scam

• Suspended brokers acting as Directors and other office bearers of BSE, for alleged insider trading

• Imposed an additional 10% volatility margin on A Group shares as well as margins on ALBM and BLESS Schemes

• Imposed volatility margins on net outstanding sale positions of FIIs, financial institutions, banks and mutual funds

• Banned naked short sales in March 2001

• Reduced the gross exposure limit for brokers to 10 times the base capital for NSE and 15 times for other stock exchanges

• Rolling settlements system made compulsory

• Allowed banks to offer collateralized lending only through BSE & NSE, to increase liquidity

• Launched trade guarantee fund to guarantee all transactions

Measures post KP Scam

• Trading cycle was cut short from a week to a day

• The carry-forward system in stock trading called ‘BADLA’ was banned

• Introduced forward trading in the form of exchange-traded derivatives

• Withdrew broker control over stock exchanges

Action Taken By SEBI● While Mehta scam empowered SEBI to regulate markets more effectively, several

other scams forced it to ensure that markets operate transparently and efficiently● However, post Mehta scam, several scams came to light, casting doubt on the

efficiency of SEBI as a regulatory body● Although many reforms are introduced by SEBI, there remains significant lapses in

the law implementation and enforcement

● Certain areas wherein SEBI needs to think upon and take action includes:─ Bear/Bull Cartels─ Insider Trading─ Circular Trading─ Uniform settlement cycle

● A few actions taken by SEBI were criticized of it being clueless about its supervisory duties

● Its high time that market regulators implement appropriate measures else the ghost from past will continue haunting the Indian bourses

Thank You