FINANCIAL SCAMS

Appurva Rekhi

THE CAPITAL MARKET

A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds.

MAN BEHIND THE SCAM :HARSHAD MEHTA

Diversion of funds from the banking system (in particular the inter-bank market in government securities) to brokers for financing their operations in the stock market.
Use of Ready Forward(RF) to maintain SLR(Statutory Liquidity Ratio).

CAPITAL MARKET SCAM

LIBERALIZATION OF THE ECONOMY

Opening up of Indian economy resulted in unprecedented growth in private corporate sector
Anticipating the good things stock market started booming- the Bombay stock exchange rose tremendously

This was the time harshad mehta decided to strike

THE READY FORWARD DEAL (RF)

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. 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. 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 a broker.

RF DEAL DURING THE SCAM

The Settlement process.
Payment of Cheques. Dispensing the security.

BRS ISSUED WITHOUT BACKING OF SECURITIES

During the scam, the brokers perfected the art of using fake BRs to obtain unsecured loans from the banking system. They persuaded some small and little known banks the Bank of Karad (BOK) and the Metropolitan Cooperative Bank (MCB) - to issue BRs as and when required.

BREAKDOWN OF THE CONTROL SYSTEM

Separations of functions Counterparty Limits

IMPACT OF THE SCAM

The index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization. Since the accused were active brokers in the stock markets, the number of shares which had passed through their hands in the last one year was colossal. Criticism for Governments liberalization policies.

MARKET AT THE TIME OF HARSHAD MEHTA SCAM

CHANGES AFTER THE SCAM

More exclusivity to the government securities market (that constitutes 90% of the bond market).
Not all can trade on the exchange, the central bank acts as the depository, and while a retail window exits for individuals and provident funds to buy gilts, it's yet to take off. No broker can be member of the government bond exchange the way it can be a member of a stock exchange to buy or sell equities on behalf of clients.

THANK YOU!
Any Questions?