Harshad Mehta: “The Big Bull” Gone Wild…

Mehta’s Trade Mechanism

Broker

Bank XFake BRs

issuedBank A

Issued Govt. Bonds taken from Bank B

Issued cheques favouring Broker on Day 1

Bank B

Promised to pay on Day 2 & presented BRs

Sold Govt. Bonds on Day 1

Repaid money taken from Bank C on Day 2

Bank C

Issued cheques favouring Broker on Day 2

Issued Govt. Bonds taken from Bank D

Bank D

Promised to pay on Day 3 & presented BRs

Sold Govt. Bonds on Day 2

Stock Markets

Excess Funds on hands channelised towards buying

stocks

Seller of S

ecuritiesB

uyer of SecuritiesS

elle

r of

Sec

uriti

esB

uyer

of S

ecur

ities

Sources: topcafirms.com, BusinessToday; Note: RF Deal: Secured short term loan from one bank to another; BR: Acts as receipt for the money received by the selling Bank

Ketan Parekh: Scam led by a “Pentafour Bull”

Sources: Reuters, BusinessToday, DNA; Note: Circular Trading:  trade done by a group of people among themselves to rig the share price

The Story Continues….• Parekh was convicted in 2008 for being involved in engineering the technology stocks scam in 1999-2001• Also convicted with one year imprisonment for the transaction he conducted in the 1992 stock scam, involving a unit of Canara Bank• Out of the Rs. 800 crore liability payable towards Madhavpura Bank, Parekh repaid 50% of the amount• Currently, he is serving a period of disqualification from trading in the Indian bourses till 2017• However, Parekh is still very much active in the stock market through “Benami” entities and never left the markets in the first place• As per the Intelligence Bureau Report, recently his cartel was involved in rigging share prices of many stocks

Circular Trading Mechanism

KP Sells stock to Trader A

A sells same stock to Trader BB sells same

stock to Trader CC sells same

stock to Trader D

D sells same stock to KP

Stock Price

Price Rigging

Comparative Analysis of Both Scams

Sources: http://flame.org.in/knowledgecenter/scam.aspx

Impact on Stock Markets and Indian Economy

Sources: http://www.slideshare.net/

● The immediate impact of these scams were sharp fall in the share prices and indices

● Post Harshad Mehta Scam, markets lost Rs. 0.1mn crore loss in market capitalisation

● The Government’s liberalization policies came under severe criticism

● Subsequently, these policies were put on hold for a while

● SEBI, the securities market regulator, postponed sanctioning of private sector mutual funds

● The entry of much talked about foreign pension funds and mutual funds became the remotest possibility

● The Euro-issues planned by many Indian Cos. Were delayed

Measures taken by SEBI against scams

Sources: icmrindia.org; Note: ALBM: Automated Lending and Borrowing Mechanism; BLESS: Borrowing and Lending of Securities Scheme

● Securities and Exchange Board of India (SEBI) was established in April ’88

● Established with an objective of protecting the rights of small investors and regulating and developing the stock market in India

● Post Mehta Scam in 1992, the GoI passed “SEBI Act 1992” and conferred statutory powers to it

Has SEBI lived up to its purpose??!

Sources: indianblogger.com, ismb-blogspot.in, icmrindia.org

● While Mehta scam empowered SEBI to regulate markets more effectively, several other scams forced it to ensure that markets operate transparently and efficiently

● However, post Mehta scam, several scams came to light, casting doubt on the efficiency of SEBI as a regulatory body

● Although many reforms are introduced by SEBI, there remains significant lapses in the law implementation and enforcement

● Certain areas wherein SEBI needs to think upon and take action includes:

─ Bear/Bull Cartels

─ Insider Trading

─ Circular Trading

─ Uniform settlement cycle

● A few actions taken by SEBI were criticized of it being clueless about its supervisory duties

● Its high time that market regulators implement appropriate measures else the ghost from past will continue haunting the Indian bourses