1992 stock exchange scam

8/11/2019 1992 stock exchange scam

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By,

SIDDHARTHA MISHRA

SHAHBAZ KHAN

VINEET

VISHAL SINGH


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The scam is in essence a

diversion of funds from the

banking system (inparticular the inter-bank

market in

government securities) tobrokers for financing their

operations in the stock

market.

Capital Market Scam


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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 Government Securities MarketStock Market

CAPITAL MARKET


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Characteristics

Government Securities

Market Stock Market

1

Securities Government Securities,

PSU Bonds,

Units Of Unit Trust Of India

Corporate Securities

(Shares And

Debentures)

2 Trading Volume Rs. 3000-4000 /day Rs. 50-200 /day

3 Market Capitalization Rs. 100,000 crore Rs. 250,000 crore

4 No. Of Transactions 250 ler day 50,000 per day

5

Players Banks,

Financial Institutions

Individuals,

Companies,

Financial Institutions

6Intermediaries About A dozen Brokers Approved

By RBI

About 500 brokers in

the BSE

7Finance Money Market (Formal Market) Badla Finance (Informal

Market)

8 Cost Of Finance 18-20% 35-40%

Comparison Of Two Markets


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The Ready Forward Deal:-The crucial mechanism through which the scam was effected was the ready forward(RF) deal. The RF deal is in essence a secured short term (typically 15 days) loan from

one bank to another bank against government securities.

TWO PURPOSES:-

1. Like repo markets around the world, the RF deal provides the much needed

liquidity to the government securities markets.

2. It is an important tool in the hands of the banks to manage their Statutory

Liquidity Ratio (SLR) requirements. Banks in India are required to maintain 38.5 percent of their demand and time liabilities (DTL) in government securities and

certain approved securities which are collectively known as SLR securities.

Liberalization of The Economy


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The settlement process by broker

Crediting the money in their account routed

through them ( A/c payee cheque )

Dispensing the security

The mechanics of the scam


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Original way to alternate settlement process

Why where they introduced ? Started trading on their own account and

became market makers/business assistance

Brokers provided contract notes and arrangedfor actual settlement by arranging correct

counter party

Settlement process


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Normal process and loss of interest

Privileged corporate customer advantage

Account payee cheque


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Fake B/R were made

Banks were accepting worthless security

Dispensing the security


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Instrument used was the Bank receipt (BR). In a ready forward deal, securities

were not moved back and forth in actuality. Instead, the borrower, i.e., the seller of

securities, gave the buyer of the securities a BR. As the authors write, a 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.

Complicit lenders- Armed with these schemes, all Mehta needed now were banks

which would readily issue fake BRs, or ones without the guarantee of any

government securities. His search ended when he found that the Bank of Karad

(BOK), Mumbai and the Metropolitan Co-operative Bank (MCB) two small andlittle known lenders, were willing to comply. The two banks agreed to issue BRs

as and when required. Once they issued the fake BRs, Mehta passed them on to

other banks who in turn lent him money, under the false assumption that they were

lending against government securities.

Instrument of Fraud


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Mehta used the money thus secured to enhance share prices in the stock

market. The shares were then sold for significant profits and the BR retired

when it was time to return the money to the bank.

Outcome- Mehta continued with his manipulative tactics, triggering a

massive rise in the prices of stock and thereby creating a feel-good market

trajectory. However, upon the exposure of the scam, several banks found

they were holding BRs of no value at all. Mehta had by then swindled the

banks of a staggering Rs 4,000 crore. The scam came under scathingcriticism in the Indian Parliament, leading to Mehta's eventual imprisonment.

The scams exposure led to the death of the Chairman of the Vijaya Bank

who reportedly committed suicide over the exposure. He was guilty of

having issued checks to Mehta and knew the backlash of accusations he

would have to face from the public


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A) The bank sells the securities trading at a discount to a broker

at face value or at a price which is much higher than the

prevailing market prices. The broker incurs a huge loss in this

transaction as he will have to resell the securities to some

other bank at market prices.

B) The bank then buys some other securities from the same

broker at prices well above market prices. The broker,

therefore, makes a huge profit in the second transactionwhich compensates him for the loss incurred in transaction.

Window Dressing Bank Balance Sheets


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1) Till February 1992, the Bombay Sensitive Index was below

2000; thereafter, it rose sharply to peak at 4500 by the end

of March 1992.

2) It is rumored the Indian money converted in

todollars/pounds, and brought back as India Development

Bonds.

Where has All the Money Gone?


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1) Discover and Punish the Guilty. This task has beenentrusted

to the Central Bureau of InvestigationCB1) and to the Joint

Parliamentary Committee(JPC). A special court has also been

set up to facilitate speedy trial.

2) Recover the Money.

The provisions of the ordinance for attachment of property

and voiding of transactions with the consequent creation of.

"tainted" shares were attempts in this direction.

Policy Responses Required


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Reform the System.

The government's response so far has consisted ofmeasures like banning of RF deals and going slow on

liberalization.


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THANK YOU!!!

1992 stock exchange scam

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