Harshad Mehta Scam
Case 3: Harshad Mehta scam:
Harshad Mehta was an Indian stockbroker and is alleged to have engineered the rise in the BSE stock exchange in the year 1992. Exploiting several loopholes in the banking system, Harshad 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. When the scheme was exposed, the banks started demanding the money back, causing the collapse. He was later charged with 72 criminal offenses and more than 600 civil action suits were filed against him. He died in 2002 with many litigations still pending against him.
3.1 Ready Forward Deal (RF):
• The crucial mechanism through which the scam was effected was the Ready Forward deal. • The Ready Forward Deal (RF) is in essence a secured short term (typically 15 day) loan from one bank to another bank. The lending is done against Government Securities exactly the way a pawnbroker lends against jewelry. • In fact one can say that the borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan at (typically) a slightly higher price. • It was this RF deal that Harshad Mehta and his associates used with great success to channel money from banking system. 3.2 The Mechanics of the Scam: As explained above, a ready forward deal is, in substance, a secured loan from one bank to another. To make the scam possible , the RF had to undergo a complete change. In other words it practically had to become an unsecured loan to broker.
This was wonderfully engineered by the brokers. To give a better understanding of the mechanism, the whole process has been segregated into 3 different parts.
1. The settlement process
2. Payment cheques
3. Dispensing the security
1. The settlement Process: ▪ The normal settlement process in government securities is that the transacting banks make payments and
Harshad Mehta was an Indian stockbroker and is alleged to have engineered the rise in the BSE stock exchange in the year 1992. Exploiting several loopholes in the banking system, Harshad 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. When the scheme was exposed, the banks started demanding the money back, causing the collapse. He was later charged with 72 criminal offenses and more than 600 civil action suits were filed against him. He died in 2002 with many litigations still pending against him.
3.1 Ready Forward Deal (RF):
• The crucial mechanism through which the scam was effected was the Ready Forward deal. • The Ready Forward Deal (RF) is in essence a secured short term (typically 15 day) loan from one bank to another bank. The lending is done against Government Securities exactly the way a pawnbroker lends against jewelry. • In fact one can say that the borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan at (typically) a slightly higher price. • It was this RF deal that Harshad Mehta and his associates used with great success to channel money from banking system. 3.2 The Mechanics of the Scam: As explained above, a ready forward deal is, in substance, a secured loan from one bank to another. To make the scam possible , the RF had to undergo a complete change. In other words it practically had to become an unsecured loan to broker.
This was wonderfully engineered by the brokers. To give a better understanding of the mechanism, the whole process has been segregated into 3 different parts.
1. The settlement process
2. Payment cheques
3. Dispensing the security
1. The settlement Process: ▪ The normal settlement process in government securities is that the transacting banks make payments and