1. G.N. KHALSA COLLEGE.
SUB: BUSINESS ETHICS..

2. HARSHAD MEHTA SCAM.
GROUP MEMBERS ARE:
 PRABHLEEN KAUR. 01
 KAMALJIT KAUR. 06
 TARANJIT KAUR. 13
 PARMINDER KAUR. 34
 DARSHANA RANE. 35
A OVERVIEW CAP ITAL MARKET SCAM OF
HARSHAD MEHTA
WHAT IS CAPITAL MARKET ?

3. The capital market is the market for
securities, where companies and govt. can
raise long term funds. It is a market in
which money is lent for periods longer than
a year. The capital market includes the
stock market and the bond market
What is Capital Market scam?
It is basically fraud done in the Capital
market with the investors by manipulating
the facts in order to attain enormous
profits.
INTRODUCTION TO THE “BIG BULL OF THE
TRADING FLOOR”

4. The Great Indian Scam- 1992
Who is this man- HARSHAD
MEHTA?
Harshad Shantilal Mehta was born in
a Gujarati jain family of modest means. His
father was a small businessman. His
mother's name was Rasilaben Mehta. His
early childhood was spent in the industrial
city of Bombay. Due to indifferent health of
Harshad’s father in the humid environs of
Bombay, the family shifted their residence
in the mid-1960s to

5. Raipur, then in Madhya Pradesh and
currently the capital of Chattisgarh state.
An Amul advertisement of
1999 during the conterversy over MUL
saying it as "The Big Bhool" (Bhool in Hindi
means Blunder) He
studied at the Holy Cross High School,
located at Byron Bazaar. After completing
his secondary education
Harshad left for Bombay. While doing odd
jobs he joined Lala Lajpat Rai College for a
Bachelor’s degree in
Commerce.
After completing his graduation, Harshad
Mehta started his working life as an
employee of the New India

6. Assurance Company. During this period his
family relocated to Bombay and his brother
Ashwin Mehta
started to pursue graduation course in law
at Lala Lajpat Rai College. His youngest
brother Hitesh is a
practising surgeon at the B.Y.L.Nair
Hospital in Bombay. After his graduation
Ashwin joined (ICICI)
Industrial Credit and Investment
Corporation of India. They had rented a
small flat in Ghatkopar for living.
In the late seventies every evening Harshad
and Ashwin started to analyze tips
generated from respective

7. offices and from cyclostyled investment
letters, which had made their appearance
during that time.
In the early eighties he quit his job and
sought a job with stock broker P. Ambalal
affiliated to Bombay Stock
Exchange (BSE) before becoming a jobber
on BSE for stock broker P.D. Shukla.
In 1981 he became a sub-broker for stock
brokers J.L. Shah and Nandalal Sheth. After
a while he was
unable to sustain his overbought positions
and decided to pay his dues by selling his
house with consent of
his mother Rasilaben and brother Ashwin.
The next day Harshad went to his brokers
and offered the papers

8. of the house as guarantee. The brokers
Shah and Sheth were moved by his gesture
and gave him sufficient
time to overcome his position. After he
came out of this big struggle for survival he
became stronger and his
brother quit his job to team with Harshad
to start their venture GrowMore Research
and Asset Management
Company Limited. While a brokers card at
BSE was being auctioned, the company
made a bid for the same
with financial assistance from Shah and
Sheth, who were Harshad's previous broker
mentors.

9. He rose and survived the bear runs, this
earned him the nickname of the Big Bull of
the trading floor, and
his actions, actual or perceived, decided the
course of the movement of the Sensex as
well as scrip-specific
activities. By the end of eighties the media
started projecting him as "Stock Market
Success", "Story of Rags
to Riches" and he too started to fuel his
own publicity. He felt proud of this
accomplishments and showed off
his success to journalists through his
mansion "Madhuli", which included a
billiards room, mini theatre and

10. nine hole golf course. His brand new
Toyota Lexus and a fleet of cars gave
credibility to his show off. This in
no time made him the nondescript broker
to super star of financial world.
During his heyday, in the early 1990s,
Harshad Mehta commanded a large
resource of funds and finances as
well as personal wealth.
HARSHAD MEHTA Started his career with
New India Assurance Co. Quit his job in
1981 to become a sub-broker. Went
bankrupt in 1982 & recovered soon to
become more stronger. Went on to become
one the most successful broker – The Rags

11. to Riches Story, thereby earning the nick
name of “THE BIG BULL”
What was the SCAM all about?
Diversion of funds Use of Ready Forward
(RF) to maintain SLR (Statutory Liquidity
Ratio) Creative Accounting Intra-day
Trading
What Harshad Mehta did? – The Stock Scam
In the early 1990s, the banks in India had
to maintain a particular amount of their
deposits in government bonds. This ratio
was called SLR ( Statutory Liquidity Ratio).
Each bank had to submit a detailed sheet
of its balance at the end of the day and
also show that there was a sufficient

12. amount invested in government bonds.
Now, the government decided that the
banks need not show their details on each
day, they need to do it only on Fridays.
Also, there was an extra clause that said
that the average %age of bond holdings
over the week needs to be above the SLR
but the daily %age need not be so. That
meant that banks would sell bonds in the
earlier part of the week and then buy
bonds back at the end of the week. The
capital freed in the starting of the week
could then be invested. Now, at the end of
the week many banks would be desperate
to buy bonds back. This is where the broker
comes in. The broker knew which bank had
more bonds (called ‘plus’) and which has

13. less than the required amount (called
‘short’). He then acts as the middleman
between the two banks. Harshad Mehta
was one such broker. He worked as a
middle man between many banks for a
long time and gained the trust of the
banks’ senior management. Lets say that
there are two banks A (short) and B (plus).
Now what Harshad Mehta did was that he
told the banker at A that he was dealing
with many banks and hence did not know
who would he deal in the end with. So he
said that the bank should write the cheque
in his name rather than the other bank
(which was forbidden by law), so that he
could make the payment to whichever bank
was required. Since he was a trusted

14. broker, the banks agreed. Then, going back
to the example of bank A and B, he took
the money from A and went to B and said
that he would pay the money on the next
day to B but he needed the bonds right
now (for A). But he offered a 15 % return
for bank B for the one day extension. Bank
B readily agreed with this since it was
getting such a nice return. 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, Now since Harshad Mehta was
dealing with many banks at the same time
he could then keep some capital with him

15. 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.

16. EFFECTS OF THE SCAM
He took the price of ACC from 200 to
9000.Thats an increase of 4400%!!!The
market went up like crazy 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 market crashed. The same
day Vijaya Bank chairman committed
suicide by jumping from the top of the
banks’ office. The chairman knew that when
it would become public that he had written
cheques in the name of Mehta, he would
be dead meat. One rather unknown fact
about this scam is that there was a very
important player in this scam who managed
to keep a very low profile. That man was

17. Nimesh Shah. He was just as involved as
Harshad Mehta but he knew how keep out
of the hands of the law. Nimesh Shah still
deals in the stock market and is known to
be a heavy player. Harshad Mehta is now
dead. It is rumored that when he died, he
still had 10% of ACC shares with him.
INSTRUMENTS OF THE SCAM

18. the broker Mehta could manage primarily
because by now he had become market
maker and had started trading on his own
account. To keep up a semblance of
legality, he pretended to be undertaking
the transactions on behalf of a bank.
Another instrument used was the bank
receipt (BR). In a ready forward deal,
securities were not moved back and forth
in actuality
How Mehta used this instruments to earn
heavy profits?
Having figured out his scheme, Mehta
needed banks which issued fake BRs, or

19. BRs not backed by any government
securities. “Two small and little known
banks - the Bank of Karad (BOK) and the
Metropolitan Co-operative Bank (MCB) -
came in handy for this purpose. 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

20. 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.
The game went on as long as the stock
prices kept going up, and no one had a
clue about Mehta’s modus operandi. Once
the scam was exposed, though, a lot of
banks were left holding BRs which did not
have any value - the banking system had
been swindled of a whopping Rs 4,000
crore.
He triggered a rise in the Bombay Stock
Exchange in the year 1992 by trading in

21. shares at a premium across many
segments. Taking advantages of the
loopholes in the banking system, Harshad
and his associates triggered a securities
scam diverting funds to the tune of Rs
4000 crore (Rs 40 billion) from the banks to
stockbrokers between April 1991 to May
1992. Exploiting the loophole in the
banking system
EXPOSURE OF THE SCAM

22. On April 23, 1992, journalist Sucheta Dalal
exposed Mehta's illegal methods in a
column in The Times of India. Mehta was
dipping illegally into the banking system to
finance his buying. The authors explain:
“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 15-day) loan from one
bank to another. Crudely put, the bank

23. lends against government securities just as
a pawnbroker lends against jeweller. 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.
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

24. 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.”
His favorite stocks included:
• ACC
• Apollo Tyres
• Reliance

25. • Tata Iron and Steel Co. (TISCO)
• BPL
• Sterlite
• Videocon.
After effects of the scam
When the scam was revealed, the Chairman
of the Vijaya Bank committed suicide by
jumping from the office roof. He knew that
he would be accused if people came to
know about his involvement in issuing
cheques to Mehta.

26. He was later charged with 72 criminal
offences. A Special Court also sentenced
Sudhir Mehta, Harshad Mehta's brother,
and six others, including four bank officials,
to rigorous imprisonment (RI) ranging from
1 year to 10 years on the charge of duping
State Bank of India to the tune of Rs 600
crore (Rs 6 billion) in connection with the
securities scam that rocked the financial
markets in 1992.
The fall
In April 1992, the Indian stock market
crashed, and Harshad Mehta, the person
who was all along

27. considered as the architect of the bull run
was blamed for the crash. It transpired that
he had manipulated
the Indian banking systems to siphon off
the funds from the banking system, and
used the liquidity to build
large positions in a select group of stocks.
When the scam broke out, he was called
upon by the banks and
the financial institutions to return the
funds, which in turn set into motion a chain
reaction, necessitating
liquidating and exiting from the positions
which he had built in various stocks. The
panic reaction ensued,

28. and the stock market reacted and crashed
within days.He was arrested on June 5,
1992 for his role in the
scam.
In the wee hours of December 31, just
before the year 2001 came to a close,
Harshad Mehta passed away in a jail in
suburban Mumbai. It was a tragic and
unceremonious end to the man who was
the first broker to become a mega-star of
the Indian capital markets and fire the
greed and imagination of every middle

29. class Indian in the early 1990s.
In June 1992, when he was released after
107 days in custody, he told me
"Congratulations, you have broken the
story of the decade". That was Harshad
again - willing to revel even in negative
publicity. He made a triumphant exit from
court, a la Laloo Yadav's recent jail yatra,
amidst a mob of cheering and slogan-
shouting investors, who wanted him back
in the market, igniting another never-
ending bull run.
Instead, his disdain for the means the he
employed to achieve his mega ambition,
left behind a shattered dream and a
tarnished image. He ended his days in

30. judicial custody, and will forever be known
as the main architect of the Rs 50-billion
scam - India's biggest securities scandal.
For a few months after the scam, it almost
seemed as though Harshad and his brother
Ashwin would remain at center-stage and
dominate events. Within weeks after his
release he was hogging headlines as the
first man ever to claim that he had bribed a
sitting Prime Minister. That too was done in
typical Harshad fashion - press conferences
at the Taj and the Oberoi, high profile
lawyers, an editor-turned-MP acting as
emcee, the release of audiotapes and the
bizarre demonstration of Rs 10 million
being stuffed into a large suitcase.

31. That too fizzled out, with the Mehta
brothers perjuring themselves. However,
they clearly got themselves a deal to avoid
further harassment by other government
agencies in charge of money laundering
and such offences. Did the aftermath of the
investigation change Harshad's attitude to
business? No way.
Almost every year after 1992, Harshad
Mehta has never ceased to attempt a
comeback. The problem was that he never
changed his formula. He failed to realize
that his old magic was not working with
investors anymore. At least nowhere near
enough to move the market. If the Central

32. Bureau of Investigation is to be believed,
Harshad was also continuously funding
himself by selling part of his 1992 stock
portfolio, which he had not declared to the
Custodian appointed by government. In
fact, it is the sale of these benami shares
(shares that were held in street names
when he and 19 other entities were notified
by the Custodian and their assets
impounded) that had put him back in
police custody at the time of his death.
Harshad's problem has always been his
flashiness. In 1992, when I broke the story
about the Rs 6 billion that he had swiped
from the State Bank of India, it was his
visits to the bank's headquarters in a flashy

33. Toyota Lexus that was the tip off. Those
days, the Lexus had just been launched in
the international market and importing it
cost a neat package.
1997 saw Harshad Mehta making another
big comeback attempt. This time as a new
age stock market guru. He was among the
first to set up his own website to dispense
tips. He had also built up a network of
senior media managers who gave him the
publicity and commissioned him as a
columnist.
He also had powerful friends at the helm of
the Bombay Stock Exchange with close

34. connections to the regulator. Some of the
largest newspapers in the country,
including the Times of India where I first
wrote the story of the securities scam, were
convinced that a Harshad Mehta column
was sure to send circulation figures soaring.
Typically, Harshad did not stop at
dispensing tips. He had struck a deal to
ramp up the prices of several stocks - He
had managed to build up quite a
speculative bubble and was again the
cynosure of investor attention when India's
nuclear tests caused a sudden collapse in
prices and his bubble burst.
Brokers who operated for Harshad Mehta

35. were then infamously bailed out at the
behest of the Bombay Stock Exchange
authorities by opening the trading system
in the middle of the night to insert
synchronized trades at manipulated prices.
Investigations by the Securities and
Exchange Board of India have revealed that
Harshad had set up an entire network of
investment companies, known as the
Damayanti Group to front his market
operations. That investigation led to SEBI
imposing a lifetime bar against him (he had
filed an appeal against the SEBI order).
It is a pity that Harshad's eternal optimism
and furious stream of get-rich ideas were
never channeled to more productive use.

36. He not only looked defeated but sources
close to him say that he was steadily
running out of funds. Most of this was
probably due to the realisation that with
one conviction by the Special Court and
another by SEBI, his dreams of coming back
to the capital market had ended forever.
Now it is truly over.
The End of the BULL Story Lifestyle
31st December 2001 – The Death Of The
Bull Forever remembered as the Architect
of the Rs.50 billion Scam