Top 5 scams in indian stock market
Mehta cleverly squeezed capital out of the banking system to address this requirement of banks and pumped this money into the share market. He also promised the banks higher rates of interest, while asking them to transfer the money into his personal account, under the guise of buying securities for them from other banks.
At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. Mehta used this money temporarily in his account to buy shares, thus hiking up demand of certain shares of good established companies like ACC , Sterlite Industries and Videocon dramatically, selling them off, passing on a part of the proceeds to the bank and keeping the rest for himself. This resulted in stocks like ACC which was trading in for Rs. Another instrument used in a big way was the bank receipt BR.
In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i. 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 the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer.
Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed by any government securities.
Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, plainly assuming that they were lending against government securities when this was not really the case. He took the price of ACC from Rs. The stock markets were overheated and the bulls were on a mad run. Since he had to book profits in the end, the day he sold was the day when the markets crashed.
Mehta was dipping illegally into the banking system to finance his buying. Sucheta Dalal , The Times of India , . A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasn't the case in the lead-up to the scam. In this settlement process, deliveries of securities and payments were made through the broker.
That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker.
This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank. Having figured out his scheme, Mehta needed banks which issued fake BRs Not backed by any government securities.
These banks were willing to issue BRs as and when required, for a fee," the authors point out. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities when this was not really the case.
This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned. In , when Harshad Mehta scam hit the Dalal Street the stock market crash by more than 50 percent in a year. Everyone loses money especially small investors were hit badly. In the next two years from the crash, markets remain in bearish mode. On 23rd April , Suchita Dalal exposed Harshad Mehta scam and banks started demanding their money from Mehta as they come to know that the BR was fake.
The stock market reacts to the scam and crashes badly and so, Harshad also makes a huge loss. Due to his loss, he unable to pay back to the banks and later he was charged with 72 criminal offenses along with more than civil action suits were filed.
Leave a Reply Cancel reply Your email address will not be published. Iconic One Theme Powered by Wordpress. Venkitaramanan all had played a role in allowing or facilitating Mehta's rigging of the share market. 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 BSE SENSEX.
When the scheme was exposed, banks started demanding their money back, causing the collapse. He was later charged with 72 criminal offences , and more than civil action suits were filed against him.
He was arrested and banished from the stock market with investors holding him responsible for causing a loss to various entities. Mehta and his brothers were arrested by the CBI on 9 November for allegedly misappropriating more than 2. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column.
It was a 2: Shah voted to acquit him. Mehta again raised a furore on 16 June when he made a public announcement that he had paid Rupees 1 Crore to the then Congress president and prime minister, Mr P.
Narasimha Rao , as donation to the party, for getting him off the scandal case. Mehta was under Criminal custody in the Thane prison. Mehta complained of chest pain late at night and was admitted to the Thane civil Hospital. He died following a brief heart ailment, at the age of 47, on 31 December He is survived by his wife and one son.
He had altogether 28 cases registered against him. The trial of all except one, are still continuing in various courts in the country. Market watchdog, Securities and Exchange Board of India , had banned him for life from stock market-related activities.
From Wikipedia, the free encyclopedia. Sucheta Dalal reveals Mehta's Scam. The crucial mechanism through which the scam was effected was the ready forward RF deal. The RF is in essence a secured short-term typically day loan from one bank to another.
Crudely put, the bank lends against government securities just as a pawnbroker lends against jewellery. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price.
It was this ready forward deal that Mehta and his accomplices used with great success to channel money from the banking system. Retrieved 30 January Retrieved 14 October The Hindu Business Line. Retrieved 31 October Retrieved 21 May Retrieved 20 April From Pied Piper of the markets to India's best-known scamster". Debashis Basu's 'The Scam: