7

CHITKARA BUSINESS

SCHOOL

SUBMITTED BY-:

KANIKA BANSAL

EKTA CHOUDHARY

MUSTAFA MOHAMMED

DIVYA SINGH

AMAN THAKUR

WHAT WE LEARNT FROM

HARSHAD MEHTA

AND

KETAN PAREKH

7

LETS START WITH WHAT IS

SCAM

SCAM

obtaining money by means of deception including fake personalities, fake photos, fake template letters, non-existent addresses and phone numbers, forged documents.

Capital market scam?

It is basically fraud done in the capital market with the investors by manipulating the facts in order to attain enormous profit

BOTH GAINED POPULARITY FOR

Capital market?

The market for securities where companies and govt. can raise long term funds

It includes stock market and the bond market

INTRODUCTION TO THE “big bull of the trading floor”

was an Indian stockbroker.

 is alleged to have engineered the rise in the BSE stock exchange in 1992

 Exploiting several loopholes in the banking system, Mehta and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex.

HARSHAD MEHTA- story

litigations still pending against him

When the scheme was exposed, banks started demanding their money back, causing the collapse.

 Mehta died in 2002 with many litigations still pending against him

Contd….

his Favourate stock included

Tata iron and steel company

reliance

-ACC - apolo tyres

Videocon - BPL

The follower of the big bull

IntroductionC.A by profession comes from broking

family background.Popularly known as pentafour bull.Ketan parekh is a former stock broker

from Mumbai,india He was convinced in 2008,for

involvement in the indian stock market manupulation scam in late 1999-2001. currently he has been debarred from trading in the indian stock exchanges till 2017

The story is quit similar only the star cast has changed .In 1992 scam it was harshad mehta now its ketan parekh.

Both are big bulls

Both big bulls use to buy stocks at rock-bottom prices and push it up

HOW HARSHAD AND KETAN RELATED TO EACH OTHER

Although both are of gujarati origin ketan parekh , his father and grandfather were also traders in the stock market but HM had no such background

In both these scams banks were involved in the HM scam was related to bankers receipt while it was pay orders in ketan parekh scam

In HM scam foreign banks including city bank,standard charter and ANZ grindlays were involved and In ketan parekh scam foreign instituional investors including credit suisse first boston and JM Morgan stainlay were invovled

in HM scam state bank of india suffered the loss of 660 crores while ketan owes around rs. 130 crore to bank of india

The Mechanics of the Scam 3 STEPS INVOLVED

1) The settlement process in the govt securities market become broker intermediate that is delivery and payment started getting routed through a broker instead of being made directly between the transacting banks

2) The broker through whom the payment passed on its way from one bank to another found a way of crediting the money into his account though the account payee cheque was drawn in favor of bank

3) While the 2 steps transformed an RF deal from a loan to a broker, it would still be a secured loan. However, the brokers soon found a way of persuading the lending bank to dispense with security for the loan or to accept worthless security

HOW HARSHAD MEHTA SCAM IS EXPOSED

On april 23 1992 journalist sucheta dalal exposed mehta’s illegal methods in ‘TIMES OF INDIA’

The crucial mechanism through which the scam was affected was ready forward(RF) deal.

Another instrument used was the bank reciept

The two main banks who were handy for this purpose were bank of Karad(BOK) and metroplitian co-operative bank

Once the scam was exposed a lot of baks were left holding BRS which did not have any value

After the scam was reveled the chairman of vijaya bank committed suicide.

Steps taken by SEBI in response to the scam Due to the alleged inside a tradingn

bombay stock exchange have been suspended. In order to prevent misuse of sensitive information by broker director, stock market will be coporite soon.

SEBI has imposed an additional 10% volatility margin on all the A-group shares and additional margin stocks in automatic lending and borrowing mechanism(ALBM) and borrowing and lending of securiti scheme(BLESS)

The SEBI has also imposed volatility margins on net outstanding sale position of FIIS(financial institution,banks and mutual funds)

In order to increase liquidity,SEBI has allowed banks to offer collateralized lending only through BSE and NSE

On march 8,2001, the SEBI banned short sales.In simple words,it means that all short sales have to be covered by an equal amount of long purchases.

VIDEO

Your World At 10_ Ketan Parekh Active In The Markets - YouTube.FLV

Now since Harshad Mehta was dealing with many banks at the same time he could then keep some capital with him at all times. For eg. He takes money from A on Monday,and tells B that he’ll pay on Tuesday, then he takes money from C on Tuesday and tells D that he’ll pay on Wednesday and the money he gets from C is paid to B and as a result he has some working capital with him at all times if this goes on with other banks throughout the week. The banks at that time were not allowed to invest in the equity markets. Harshad Mehta had very cleverly squeezed some capital out of the banking system. This capital he invested in the stock market and managed to stoke a massive boom.

The internal control system of the commercial bank system involves the following features

1) separation of functions:- The aspects of securities transaction of a bank, namely dealing custody and accounting are carried out by different person

The SEBI has also imposed volatility margins on net outstanding sale position of FIIS(financial institution,banks and mutual funds)

In order to increase liquidity,SEBI has allowed banks to offer collateralized lending only through BSE and NSE

On march 8,2001, the SEBI banned short sales.In simple words,it means that all short sales have to be covered by an equal amount of long purchases.

2)Counter party limits:-The moment an RF deal is done on the basis of a BR rather than actual securities the lending bank has to contend with the possibility that the BR received may not be backed by any adequate securities

OTHER ASPECTS OF THE SCAM

There are several aspects of the scam which are closely related to the security markets, but which are different from the operational aspects of the markets

Change in prices of securities

On each occasion the coupon rate was increased by 1/2 %.therby raising from 11.5% to 13% during this ten month period

Contd….

With a daily trade in volume of Rs 3000n to 4000 crores it would have been very easy to take a position(based on inside information)of Rs 500 or Rs 1000 crores without anyone suspecting anything untwo ward

Where has all the fraud money gone?

Based on result of investigation and reporting so far , the following are the possibilities

1) Large amount of money invested in shares

2) It is rumored that a part of money was sent to the Havalarackent , converted into dollar pounds and brought back as India development bonds

A part of money must have been spent as bribes and kick backs to the various accomplishis in the banks and possibily in the bureaucracy and in political system

A part of money might have been used to finance the losses taken by the brokers to window dress various bank balancesheets

IMPACT OF THE SCAM

The immediate impact of the scam was a sharp fall in the shares prices . The index fell from 4500 to 2500 representing a loss of Rs. 100000 crores in the market capitalization.

The government liberlisation policies came under sever critism after the scam with harshad mehta

Bowing to the political pressure and the bad press it received during the scam, the liberalization was put on hold for a while by the government

SEBI postponed sanctioning of private sector mutual fund