RESEARCH METHODOLOGY IN BUSINESS RESEARCH ON STOCK MARKET SCAMS

INDEX
PROJECT FORMAT Introduction Background History of Bombay Stock Exchange Evolution of Stock Exchanges in India Companies in the SENSEX Introduction to the Securities SCAM Liberalization of the Economy The Ready Forward Deal (RF) The Mechanics of the Scam The Settlement Process Breakdown of the Control System Other Aspects of the Scam Impact of the Scam IPO scam in India Top 12 Scams Scams In The Past Impact on Financial Institution THE MAJOR STOCK MARKET SCAMES Bibliography

INTRODUCTION:
The scam is in essence a diversion of funds to the tune of over Rs. 3500 crores from the banking system to brokers for financing their operations in the stock market.

Various scams, scandals and stigmas have surfaced in the recent years. These may not all be attributable to the antics and bungling of politicians, but they have been facilitated largely because of the vitiated atmosphere that the politicians and the political system have created in the country. Some of the most famous SCAMS that have surfaced during the time are: The 1200 corers fodder scam relating to the procurement of non-existent fodder on payments from the state exchequer. The Scam in printing & selling of stamp papers, which is used for recording documents for registration purpose. This scam is of about Rs. 2200 corers & involves fraudulent printing & sale of stamp papers in the various parts of the country. There is the famous Bofors scam, which was about the purchase of important defense equipment from foreign markets The list goes on & on & moreover there are continuous additions to the same.

BACKGROUND HISTORY OF THE BOMBAY STOCK EXCHANGE: Growth of Capital Markets in India: Origins of trading- East India company Post independence- Capital issues control act Only nationalized companies allowed to raise capital The securities contract regulation ACT 1956 Only stock exchanges recognized by the government of India permitted to function Foreign exchange regulations ACT 1973

Evolution of Stock Exchanges in India:

Stock exchange Bombay stock exchange Calcutta stock exchange Madras stock exchange Bengal share and stock exchange Ltd. Year of incorporation 1894 1908 1920 1937

Indian stock exchange Ltd. Uttar Pradesh stock exchange Nagpur stock exchange Hyderabad stock exchange Ltd. Bangalore stock exchange National stock exchange

1938 1940 1940 1944 1963 1992

Historically Speaking:
Started in 1850 in front of Town-Hall in Bombay currently known as Horniman circle Formed in 1875 as Bombay Stock Exchange In 1986 launched its first stock index named SENSEX with base year 1978-79 Non-profit association & evolved as the premier stock exchange

Oldest stock exchange of Asia Accounts for 75% of listed capital & 75% of shares in terms of market capitalization

Its turnover is 1/3rd of the total turnover in securities in India. BSE SENSEX The 'BSE SENSEX' is a value-weighted index composed of 30 stocks and was started on January 1, 1986. The Sensex is regarded as the pulse of the domestic stock markets in India. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around fifty per cent of the market capitalization of the BSE. The base value of the sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79. At regular intervals, the Bombay Stock Exchange (BSE) authorities review and modify its composition to be sure it reflects current market conditions. The index is calculated based on a free float capitalization method; a variation of the market cap method. Instead of using a company's outstanding shares it uses its float, or shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by promoters, government and strategic investors.[2] Initially, the index was calculated based on the full market capitalization method. However this was shifted to the free float method with effect from September 1, 2003. Globally, the free float market capitalization is regarded as the industry best practice. As per free float capitalization methodology, the level of index at any point of time reflects the free float market value of 30 component stocks relative to a base period. The Market Capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This Market capitalization is multiplied by a free float factor to determine the free float market capitalization. Free float factor is also referred

as adjustment factor. Free float factor represent the percentage of shares that are readily available for trading. The Calculation of Sensex involves dividing the free float market capitalization of 30 companies in the index by a number called Index divisor.The Divisor is the only link to original base period value of the Sensex. It keeps the index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips, etc. The index has increased by over ten times from June 1990 to the present. Using information from April 1979 onwards, the long-run rate of return on the BSE Sensex works out to be 18.6% per annum, which translates to roughly 9% per annum after compensating for inflation.[3]

Companies in the Sensex

List of BSE Sensex companies provides the full list of companies that have been part of the BSE Sensex since its inception in 1986 (baselined to 1979). (as of Feb 26, 2010) Lifetime highest 3 rises in history (highest rise was in 2009 when second time upa government won the election)
Code Name Sector Adj. Factor Weight in Index(%)

500410 ACC 500103 BHEL 532454 Bharti Airtel 532868 DLF Universal Limited 500300 Grasim Industries 500010 HDFC 500180 HDFC Bank 500182 Hero Honda Motors Ltd. 500440 Hindalco Industries Ltd. 500696 Hindustan Lever Limited 532174 ICICI Bank 500209 Infosys

Housing Related Capital Goods Telecom Housing related Diversified Finance Finance Transport Equipments Metal,Metal Products & Mining FMCG Finance Information Technology

0.55 0.35 0.35 0.25 0.75 0.90 0.85 0.50 0.7 0.50 1.00 0.85

0.77 3.26 3 1.02 1.5 5.21 5.03 1.43 1.75 2.08 7.86 10.26

500875 ITC Limited 532532 Jaiprakash Associates 500510 Larsen & Toubro Mahindra & Mahindra 500520 Limited 532500 Maruti Suzuki NIIT Technologies 532555 NTPC NIIT 500312 ONGC 532712 Reliance Communications 500325 Reliance Industries 500390 Reliance Infrastructure 500112 State Bank of India 500900 Sterlite Industries Sun Pharmaceutical Industries 532540 Tata Consultancy Services 500570 Tata Motors 500400 Tata Power 524715 500470 Tata Steel 507685 Wipro

FMCG Housing Related Capital Goods Transport Equipments Transport Equipments Information Technology Power Information Technology Oil & Gas Telecom Oil & Gas Power
Finance

0.70 0.55 0.90 0.75 0.50 0.15 0.15 0.15 0.20 0.35 0.50 0.65 0.45 0.45 0.40 0.25 0.55 0.70 0.70 0.20

4.99 1.25 6.85 1.71 1.71 2.03 2.03 2.03 3.87 0.92 12.94 1.19 4.57 2.39 1.03 3.61 1.66 1.63 2.88 1.61

Metal, Metal Products, and Mining Healthcare Information Technology Transport Equipments Power Metal, Metal Products & Mining Information Technology

DLF replaced Dr. Reddy's Lab on November 19, 2007. Jaiprakash Associates Ltd replaced Bajaj Auto Ltd on March 14, 2008. Sterlite Industries replaced Ambuja Cements on July 28, 2008. Tata Power Company replaced Cipla Ltd. on July 28, 2008. Sun Pharmaceutical Industries replaced Satyam Computer Services on January 8, 2009 Hero Honda Motors Ltd. replaced Ranbaxy on June 29, 2009 Cipla to replace Sun Pharma from May 3, 2010.
Grasim replaced JSPL in 2010

Introduction to the Securities SCAM:

 One of the most infamous scams that has been unearthed The Securities SCAM. The Securities Scam refers to a diversion of funds to the tune of Rs. 3,500 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992.

In April 1992, the first press report appeared indicating that there was a shortfall in the Government Securities held by the State Bank of India. In a little over a month, investigations revealed that this was just the tip of an iceberg which came to be called the securities scam, involving misappropriation of funds to the tune of over Rs. 3500 crores. In an ever expanding ambit, the scam has engulfed top executives of large nationalized banks, foreign banks and financial institutions, brokers, bureaucrats and politicians. The functioning of the money market and the stock market has been thrown in disarray. A large number of agencies, namely, the Reserve Bank of India (RBI), the Central Bureau of Investigation (CBI), the Income Tax Department, the Directorate of Enforcement and the Joint Parliamentary Committee (JPC) are currently investigating various aspects of the scam. he scam was in essence a 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. A clear understanding of the government securities market and the stock (Corporate securities) markets is a prerequisite for understanding the scam.

Liberalization of the Economy: After assuming office in June 1991, the new government accelerated the process of economic liberalization under the auspices of the International Monetary Fund (IMF). The opening up of the Indian economy as a result of these measures promised an unprecedented growth and prosperity for the private corporate sector as new sectors of the economy were being allowed private participation and various administrative impediments were being removed. Anticipating the good tidings for the private sector, the stock market started booming - the Bombay Stock Exchange Sensitive Index (Sensex) rose tremendously. Heavy margins imposed by the Bombay Stock Exchange on settlement trading added to the funds requirement. Even the PSUs were under pressure to perform including the nationalized banks. This was the time Harshad Mehta and his associates 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 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.

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 a broker. This was wonderfully engineered by the Brokers. To give a better understanding of the mechanism, the whole process has been segregated into three different parts viz. The settlement process. Payment Cheques. Dispensing the security. The Settlement Process: The normal settlement process in government securities is that the transacting banks make payments and deliver the securities directly to each other. During the scam, however, the banks or at least some banks adopted an alternative settlement process which was similar to the process used for settling transactions in the stock market. In this settlement process, deliveries of securities and payments are made through the broker. That is, the seller hands over the securities to the broker who passes them on to the buyer, while the buyer gives the cheque to the broker who then makes the payment to the seller. In this settlement process, the buyer and the seller may not even know whom they have traded with, both being known only to the broker. There were two important reasons why the broker intermediated settlement began to be used in the government securities markets: The brokers instead of merely bringing buyers and sellers together started taking positions in the market. In other words, they started trading on their own account, and in a sense became market makers in some securities thereby imparting greater liquidity to the markets. When a bank wanted to conceal the fact that it was doing an RF deal, the broker came in handy. The broker provided contract notes for this purpose

with fictitious counter parties, but arranged for the actual settlement to take place with the correct counter party.

Payment Cheques: A broker intermediated settlement allowed the broker to lay his hands on the cheque as it went from one bank to another through him. The hurdle now was to find a way of crediting the cheque to his account though it was drawn in favor of a bank and was crossed account payee. As it happens, it is purely a matter of banking custom that an account payee cheque is paid only to the payee mentioned on the cheque. In fact, exceptions were being made to this norm, well before the scam came to light. Privileged (corporate) customers were routinely allowed to credit account payee cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing the interest lost on the amount. Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it may take a day or two for the cheque to be cleared and for the funds to become available to the customer. At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 crores cheque is about Rs. 8 lakhs. On the other hand, when banks make payments to each other by writing cheques on their account with the RBI, these cheques are cleared on the same day. The practice which thus emerged was that a customer would obtain a cheque drawn on the RBI favoring not himself but his bank. The bank would get the money and credit his account the same day. This was the practice which the brokers in the money market exploited to their benefit.

Dispensing the Security:

The brokers thus found a way of getting hold of the cheques as they went from one bank to another and crediting the amounts to their accounts. This effectively transformed an RF into a loan to a broker rather than to a bank. But this, by itself, would not have led to the scam because the RF after all is a secured loan, and a secured loan to a broker is still secured. What was necessary now was to find a way of eliminating the security itself! There are three routes adopted for this purpose: 1. Some banks (or rather their officials) were persuaded to part with cheques without actually receiving securities in return. A simple explanation of this is that the officials concerned were bribed and/or negligent. A more intriguing possibility is that the banks' senior/top management were aware of this and turned a Nelson's eye to it to benefit from higher returns the brokers could offer by diverting the funds to the stock market. One must recognize that as long as the scam lasted, the banks benefited from such an arrangement. The management of banks might have been sorely tempted to adopt this route to higher profitability. 2. The second route was to replace the actual securities by a worthless piece of paper a fake Bank Receipt (BR). This is discussed in greater detail in the next section. 3. The third method was simply to forge the securities themselves. In many cases, PSU bonds were represented only by allotment letters rather than certificates on security paper. And it is easier to forge an allotment letter for Rs. 100 crores worth of securities than it is to forge a 100 rupee note! Outright forgery of this kind however accounted for only a very small part of the total funds misappropriated.

Bank Receipt: In an RF deal, as we have discussed it so far, the borrowing bank delivers the actual securities to the lender and takes them back on repayment of the loan. In practice, however, this is not usually done. Instead, the borrower gives a Bank Receipt (BR) which serves three functions: The 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 meantime the seller holds the securities in trust for the buyer.

In short, a BR is something like an IOU (I owe you securities!), and the use of the BR de facto converts an RF deal into an unsecured loan. The lending bank no longer has the securities; it has only the borrower's assurance that the borrower has the securities which can/will be delivered if/when the need arises.

BRs Issued without Backing of Securities: As stated earlier, a BR is supposed to imply that the issuer actually has the securities and holds them in trust for the buyer. But in reality the issuer may not have the securities at all. There are two reasons why a bank may issue a BR, which is not backed by actual securities: 1. A bank may short sell securities, that is, it sells securities it does not have. This would be done if the bank thinks that the prices of these securities would decrease. Since this would be an outright sale (not an RF!), the bank issues a BR. When the securities do fall in value, the bank buys them at lower prices and discharges the BR by delivering the securities sold. Short selling in some form is an integral part of most bond markets in the world. It can be argued that some amount of shortselling subject to some degree of regulation is a desirable feature of a bond market. In our opinion, an outright sale using a BR, which is not backed by securities, is not harmful per se though it violates the RBI guidelines. 2. The second reason is that the bank may simply want an unsecured loan. It may then do an RF deal issuing a "fake" BR which is a BR without any securities to back them. The lending bank would be under a mistaken impression that it is making a secured loan when it is actually advancing an unsecured loan. Obviously, lenders should have taken measures to protect themselves from such a possibility (This aspect will be

examined later when we discuss the banks' control system in general and counterparty limits in particular.) 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. These BRs could then be used to do RF deals with other banks. The cheques in favour of BOK were, of course, credited into the brokers' accounts. In effect, several large banks made huge unsecured loans to the BOK/MCB which in turn made the money available to the brokers.

Breakdown of the Control System: The scam was made possible by a complete breakdown of the control system both within the commercial banks as well as the control system of the RBI itself. We shall examine these control systems to understand how these failed to function effectively and what lessons can be learnt to prevent failure of control systems in the future. The internal control system of the commercial banks involves the following features: Separation of Functions: The different aspects of securities transactions of a bank, namely dealing, custody and accounting are carried out by different persons. Counterparty Limits: The moment an RF deal is done on the basis of a BR rather than actual securities, the lending bank has to contend with the possibility that the BR received may not be backed by any/adequate securities. In effect, therefore, it may be making an unsecured loan, and it must do the RF only if it is prepared to make an unsecured loan. This requires assessing the creditworthiness of the borrower and assigning him a "credit limit" up to which the bank is prepared to lend. Technically, this is known as a counterparty limit.

Other Aspects of the Scam: There are several aspects of the scam which are closely related to the securities markets, but which are different from the operational aspect of the markets. These pertain to information that can cause significant changes in the prices of securities as well as the information supplied by the commercial banks on their financial performance. On each occasion the coupon rate was increased by 1/2%, thereby raising the coupon rate from 11.5% to 13% during this ten month period. The major implication of raising interest rate on new borrowings is that it would trigger a fall in the market prices of the old loans which are pegged at the old (lower) interest rates. The price of the 11.5% Government Loan 2010 dropped by 3% to 5% with each coupon rate hike. If anyone has advance information about these changes in the coupon rates, he could make enormous amounts of riskless profit by short selling the old securities just before the announcement of rate hike and buying back (covering his position) after the prices have fallen. Somebody who took a short position of Rs. 500 crores before the coupon hike of September 1991 could have made a profit of Rs. 15 crores, practically overnight! Since several persons in the Finance Ministry and the RBI are likely to be aware of the impending hike in the coupon rate, the chance of leakage of this all important information is always there. There have been several allegations in this regard. However, it will probably be very difficult to prove with any degree of certainty that there was insider trading based on information about coupon rate changes, because of the size of the market. With a daily trading volume of Rs. 3000 - 4000 crores, it would have been very easy for anyone to take a position (based on inside information) of Rs. 500 or even Rs. 1000 crores without anyone suspecting anything untoward.

Where has all the money gone? : It is becoming increasingly clear that despite the intensive efforts by several investigating agencies, it would be impossible to trace all the money swindled from the banks. At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Based on the result of investigations and reporting so far, the following appear to be the possibilities: A large amount of the money was perhaps invested in shares. However, since the share prices have dropped steeply from the peak they reached towards end of March 1992, the important question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. In the aftermath of the scam it fell to about 2500 before recovering to around 3000 by August 1992. Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's purchases were made at low prices, so that the average cost of his portfolio corresponds to an index well below 2500 or perhaps even below 2000. Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so cannot be dismissed without a serious consideration. Whether these shares are in fact traceable is another question. It is well known that while Harshad Mehta was the "big bull" in the stock market, there was an equally powerful "bear cartel", represented by Hiten Dalal, A.D. Narottam and others, operating in the market with money cheated out of the banks. Since the stock prices rose steeply during the period of the scam, it is likely that a considerable part of the money swindled by this group would have been spent on financing the losses in the stock markets. It is rumored that a part of the money was sent out of India through the Havala racket, converted into dollars/pounds, and brought back as India Development Bonds. These bonds are redeemable in dollars/pounds and the holders cannot be asked to disclose the source of their holdings. Thus, this money is beyond the reach of any of the investigating agencies.

 A part of the money must have been spent as bribes and kickbacks to the various accomplices in the banks and possibly in the bureaucracy and in the political system. As stated earlier, a part of the money might have been used to finance the losses taken by the brokers to window-dress various banks' balance sheets. In other words, part of the money that went out of the banking system came back to it. In sum, it appears that only a small fraction of the funds swindled is recoverable.

Impact of the Scam: The immediate impact of the scam was a sharp fall in the share prices. 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. All these shares became "tainted" shares, and overnight they became worthless pieces of paper as they could not be delivered in the market. Genuine investors who had bought these shares well before the scam came to light and even got them registered in their names found themselves being robbed by the government. This resulted in a chaotic situation in the market since no one was certain as to which shares were tainted and which were not. The government's liberalization policies came under severe criticism after the scam, with Harshad Mehta and others being described as the products of these policies. Bowing to the political pressures and the bad press it received during the scam, the liberalization policies were put on hold for a while by the government. The Securities Exchange Board of India (SEBI) postponed sanctioning of private sector mutual funds. The much talked about entry of foreign pension funds and mutual funds became more remote than ever. The Euro-issues planned by several Indian companies were delayed since the ability of Indian companies to raise equity capital in world markets was severely compromised.

IPO scam in India:

The Securities and Exchange Board of India (SEBI), the capital market watchdog, Thursday cracked down on some of the top brokerage firms and banks for their alleged involvement in an initial public offering (IPO) scam. SEBI conducted investigations in respect of all the IPOs from January 2003 to December 2005. The findings of investigations, prima facie, revealed violations of serious nature by several key operators, their financiers, concerned depository participants and the depositories. In its order, SEBI has barred brokerage firms like Karvy Stockbroking and IndiaBulls from the market. It has also directed HDFC Bank and IDBI Bank not to open new demat accounts for share transactions. SEBI's Order fallout: 24 entities banned from primary and secondary market, including Indiabulls, Karvy Securities Quasi-judicial proceedings against Karvy DP and Pratik DP, banned from the market 12 DPs cant open fresh demat accounts, including HDFC Bank, IDBI Bank, Central Bank, ING Vysya Bank, IL&FS and Motilal Oswal; 15 more under scrutiny, including ICICI Bank, Citibank, Stanchart 85 Financiers barred from the market. SEBI said certain entities had cornered shares reserved for retail applicants in the name of fictitious entities in the initial public offerings of Yes Bank and Infrastructure Development Finance Company (IDFC). Each of the fictitious application was of small value so as to be eligible for allotment under the retail category, it added. After the allotment, these fictitious beneficiaries transferred these shares to their principals who in turn transferred the shares to their financiers. The financiers in turn sold most of these shares on the first day of listing, thereby realizing the windfall gain of the price difference between IPO price and the listing price.

TOP 12 SCAMES:
Here are the top 12 scams since 1995: The Emulex Press Release Hoax. In the summer of 2000, Mark Jakob, a former employee of Internet Wire, sent out a fake press release stating that Emulex was under investigation by the SEC, that its CEO was resigning and that it was restating its previous quarter earnings to a loss. Mark Jakob, now a student at El Camino Community College, used his connections and knowledge of Internet Wire to fudge the press release through the standard screening procedures. The stock tumbled as low as $43 from the previous day's close of $113.06 before quickly recovering. Jakob ended up profiting almost $250k from the scam. He was quickly caught, sentenced to 44 months in jail and had to forfeit his gains, plus pay an extra $103k in fines. Market Maker Gouging. February, 2004. Top market makers agree with regulators to pay a $240 million dollar penalty for trading abuses, including trading ahead of customers and other violations including "interpositioning." Market makers involved in this settlement included LaBranche & Company, Fleet Specialist and Leeds & Kellogg. None of these names sound too significant until you see the names of the companies that own them: FleetBoston, Goldmans Sachs and Bear Stearns. These market makers took advantage of the antiquated system of trading on the NYSE and exploited their customers for their own benefit. CEO Compensation: CEO's of publicly traded companies making tens of millions of dollars per year in compensation. Fired company officials with only six months of service at a company walking away with millions of dollars in compensation. As shareholders in these companies, this is OUR money that they are pilfering. Eventually, CEO compensation will become a big issue. Tyco.

For a time, Tyco was a darling of Wall Street, as was company officer Dennis Kozlowski. Along with CFO Mark Swartz and CLO Mark Belnick, the three pilfered hundreds of millions of dollars from the company and its shareholders by issuing themselves unauthorized loans and unauthorized stock sales. These three were addicted to their extravagant lifestyle, and used these ill-gotten funds to fuel their lifestyles. Eventually they were caught and convicted to 25 years in jail. The main victims in all of this were the shareholders, that saw their shares plunge over 80% in just a few short weeks. Centennial Technologies. Traded as high as $55.00 on the New York Stock Exchange, but the entire company was built on smoke and mirrors in the form of forged company documents. The company reported millions of dollars in sales of PC memory cards, when in fact they were shipping fruit baskets to their customers and falsifying sales invoices. Eventually the SEC caught up with them and found that the company had overstated earnings by $40 million dollars. Supposed profits turned into losses and the company went up in smoke. Day-Trading Chat Rooms. In the late '90s, Daytrading was a huge business. Most people followed the stock market religiously, and quite a few people decided to dip their toes into the water and try trading on their own. Most people, intoxicated by the allure of easy money trading high-flying Internet stocks, started to day-trade. Buy a high-flying Internet stock in the morning, sell it in the evening for a quick five digit gain. Chat rooms such as Tokyo Joe and Anthony Elgindy's room quickly became very popular, and they charged an arm and a leg for their day-trading recommendations. When the dot-com bubble popped, these daytrading chat rooms quickly lost their appeal, and in some cases, their operators were either fined and sanctioned by the SEC or sent to jail for trading infractions. Bre-X. Was purported to own the richest gold mine ever, containing over 200 million ounces of gold in Indonesia. At its peak, Bre-X had a capitalization of over $4 billion dollars. Can you see the pattern here? The entire gold mine story was bogus, and the stock price evaporated overnight. Core samples were falsified,

and the Busang site in Indonesia turned out to be worthless. In 1997, the stock completely collapsed, and thousands lost their investments in the company. Worldcom. Was a giant company, which made the "book-cooking" seem even more unbelievable. I mean, how could such a massive company make such stupid mistakes? The company recorded operating expenses as investments in the company, which grossly exaggerated total profits. In 2001, the company reported a profit of $1.3 billion dollars, which was completely bogus. The stock, which was an 800 pound gorilla at one time and a seemingly bulletproof investment, tumbled from $60 to pennies per share. Because of mutual fund and index fund exposure, tens of thousands of people lost money due to the Worldcom hoax, plus tens of thousands of people lost their jobs. Healthsouth. Another case of a company engaging in deception to make their earnings reports seem much better than they actually were. CEO Richard Scrushy instructed employees to inflate revenues and overstate income. The scandal eventually came to light when CFO William Owens, now working with the FBI, recorded Scrushy talking about the deception on tape. Scrushy also sold shares of the company just before a major loss was announced. The stock was crushed when the allegations came to light, trading from $20 down to pennies in just one trading session. The Pattern Daytrader Rule. A ridiculously stupid rule instituted by the SEC once the Internet bubble had popped. Big brokers were getting their heads handed to them by companies such as E-Trade and Ameritrade, and since these big brokers sit on the boards of the NYSE and NASDAQ, they proposed the "Pattern Daytrader Rule." The PDT is meant to neuter small-time daytraders and make it very difficult for them to trade their own money how they see fit. Basically, you are not allowed to daytrade more than 3 times in 5 days if you have less than $25,000 in your account. Forget the fact that it's your money. Forget the fact that you could be profitable on every trade. The SEC instituted this rule to "protect people from themselves." BS. The big brokers implemented this rule to protect their retail trading business, and they slid this rule in when no one was paying any

attention. Enron. Was once one of the top 10 biggest companies in the United States. Through the elaborate usage of shell companies and offshore companies, Enron cooked its books to hide debt and multiply their earnings. Not only they do this to make their earnings reports look better, but certain company officials also enriched themselves personally. Enron was a huge mess, taking down accounting firms and sending multiple people to jail in the process. The stock price fell from $90 down to pennies a share, and many people lost their retirement savings. Dot Com Boom 1.0 A massive fraud that was perpetrated on the public. Everyone had their hands dirty; big brokerages upgrading and pushing dot com stocks on their customers while privately calling the companies worthless in internal memos; big brokerages again for underwriting companies that they knew had no chance of ever making money just so they could bank their huge underwriting fees; big brokerages again for upgrading these POS stocks so that they could earn more fees underwriting the worthless companies' secondary offerings; big brokerages once again for allowing their analysts to issue outlandish price targets with no real justification; television stations such as CNBC for breathlessly hyping Internet stocks; the government for not giving the SEC the proper resources to investigate all of the shenanigans that were taking place at the time, and the media in general for not having the intestinal fortitude to critically analyze the dot com bubble for fear of alienating their readers. The extent of the fraud was far-reaching and millions lost money, and many thousands lost their life savings.

UTI scam
Of all the recent encounters of the Indian public with the much-celebrated forces of the market, the Unit Trusts US-64 debacle is the worst. Its gravity far exceeds the stock market downswing of the mid-1990s, which wiped out Rs. 20,000 crores in savings. The debacle is part of the economic slowdown which has eliminated one million jobs and also burst the information technology (IT) bubble. This has tragically led to suicides by investors. And then suspension of trading in US-64made the hapless investors more dejected at the sinking of this super-safe

public sector instrument that had delivered a regular return since 1964. There is a larger lesson in the US-64 debacle for policies towards public savings and public sector undertakings (PSUs). The US-64 crisis is rooted in plain mismanagement. US-64 was launched as a steady income fund. Logically, it should have invested in debt, especially low-risk fixed-income government bonds. Instead, its managers increasingly invested in equities, with high-risk speculative returns. In the late 98 s UTI was politicised with other financial institutions (FIs) such as LIC and GIC, and made to invest in certain favoured scrips. By the mid-1990s, equities exceeded debt in its portfolio. The FIs were also used to boost the market artificially as an endorsement of controversial economic policies. In the past couple of years, UTI made downright imprudent but heavy investments in stocks from Ketan Parekhs favourite K-10 portfolio, such as Himachal Futuristic, Global Tele and DSQ. These technology investments took place despite indications that the technology boom had ended. US-64 lost half its Rs. 30,000 crore portfolio value within a year. UTI sank Rs. 3,400 crores in just six out of a portfolio of 44 scrips. This eroded by 60 percent. Early that year, US-6 s net asset value plunged below par (Rs. ). But it was repurchasing US-64 above Rs. 14! Today, its NAV stands at Rs. 8.30 a massive loss for 13 million unit-holders.It is inconceivable that UTI made these fateful investment decisions on its own. According to insiders, the Finance Ministry substantially influenced them: all major decisions need high-level political approval. Indeed, collusion between the FIs, and shady operators like Harshad Mehta, was central to the Securities Scam of 1992. The Joint Parliamentary Committees report documents this. In recent months, the Finance Ministry became desperate to reverse the post-Budget market downturn. UTIs misinvestment now coincided with the global technology meltdown. US-64 crashed. UTI chairman resigned. Although culpable, he was probably a scapegoat too. The Ministry has kept a close watch on UTI, especially since 1999.The US-64 debacle, then, is not just a UTI scam. It is a governance scam involving mismanagement by a government frustrated at the failure of its macroeconomic calculations. This should have ensured the Finance Ministers exit in any democracy which respects parliamentary norms. There are larger lessons in the UTI debacle. If a well-established, and until recently well-managed, institution like UTI cannot safeguard public savings, then we should not allow the most precious of such savings pensions to be put at risk. Such risky investment is banned in many selfavowedly capitalist European economies. In India, the argument acquires greater force given the poorly regulated, extremely volatile, stock market where a dozen brokers control 90 percent of trade. Yet, there is a proposal by the Finance Ministry to privatize pensions and provident funds. Basically, the government, deplorably, wants to get rid of its annual pension obligation of Rs. 22,000 crores.

Scams In The Past:

In 2007, SEBI accuses 16 entities along with promoters of Atlanta of price manipulation A group of operators, in 2007, rigs shares of Nissan Copper, which got listed in December 2006 In 2006, Roopalben Panchal and her associate Deepak Panchal created forged identities and opened D-Mat accounts The 176-point Sensex crash on March 1, 2001 by ketan parekh

Harshad Mehta scam in 1997 wiped off Rs 4,200 crore from the market

Impact on financial institution

Ketan Parekh was threatening to sue the Bank of India for defamation, because it complained about the bouncing of Rs 1.3-billion pay orders issued to the broker by the Madhavpura Mercantile Cooperative Bank. He seemed to suggest there is nothing more that the authorities would be able to pin against him. At last investigations by the Central Bureau of Investigation and the Securities and Exchange Board of India reveal that the sheer magnitude of money moved around by Parekh or available to him for his market manipulation was a staggering Rs 64 billion. Money abroad The CBI called a press conference to announce it had unearthed a Swiss bank account in which Parekh was listed as the beneficiary. The Bureau claimed there was $ 80 million (Rs 3.4 billion) in the account, which has since been frozen. In the past, CBI announcements were usually followed up with a quick arrest, this time it has gone silent. New Overseas Corporate Bodies The Securities and Exchange Board of Indias preliminary investigation in May revealed that Rs 29 billion was transferred out of the country through five Overseas Corporate Bodies between March 1999 to March 2001. These OCBs had together invested just Rs 7.77 billion in the Indian market but remitted a whopping Rs 36.77 billion out of the country. This direct flight of capital occurred through European Investments, Far East Investments, Wakefield Holding, Brentfield Holdings and Kensington Investment. Three of these companies have a paid up capital of just $ 10. SEBI says the pattern of investments and transactions through these accounts shows a clear misuse of the OCB/Foreign Institutional Investor route. They seem to be used as a channel to repatriate profits earned through stock price manipulation. Many of these OCBs were subaccounts of Credit Suisse First Boston whose brokerage operations have been suspended. But there were other FIIs too. Strangely, SEBI has not yet placed any restrictions on them so far. All it has done is to request the Mauritius Offshore Business Activities Authority to give details in respect of actual beneficiaries, source and utilisation of funds of OCBs and sub-accounts mentioned in its preliminary report.

In answer to a Joint Parliamentary Committee query, Sebi now admits to have unearthed six more OCBs, where there is evidence that Parekhs companies may have used them for cornering and parking of stocks. Dossier Stock Inc, Greenfield Investments Ltd, AOM Investments Ltd, Symphony Holdings Ltd, Almel Investments (Mauritius) Ltd, and Delgrada Ltd. However, since there was no other specific query about further repatriation of funds, SEBI is silent about other flight of capital through the OCB window. However, it does admit there are clear inter-linkages between the OCBs and that some of them have issued participatory notes abroad to route funds to India. It also says Parekhs entities have conducted many of their trading transactions. In its preliminary investigation report, SEBI unearthed a transfer of nearly Rs 11 billion to Calcutta brokers, most of whom have had their businesses suspended because of payment defaults. In an answer to a JPC query, SEBI now says Parekh had sent over Rs 27 billion to Calcutta brokers between January 2000 to March 2001. This suggests that as soon as the infotech, communication and entertainment stock-led boom began to lose momentum, Parekh shrewdly began to move his speculative activities to the unofficial market in Calcutta in order to avoid detection. SEBI says it is investigating the source of these funds and how they were utilised. Ketan Parekhs stock holding The process of ferreting out information on his portfolio is slow and tedious because SEBI has to depend on third party sources such as banks, depositories and stock exchanges and because Ketan Parekh is not co-operating with the investigation. Yet, three of the companies identified by SEBI where he held over five per cent are Aftek Infosys, Shonkh Technologies and Global Trust Bank. According to SEBI, these companies had omitted to inform stock exchanges about his holding having crossed five per cent. It is not quite clear if the broker continues to hold these shares and what would be the value of this holding. If one were to simply add up the amounts mentioned in SEBIs various reports, the size of Parekhs manipulations is far bigger than the Rs -odd billion securities scam of 1992. Yet, unlike the previous scam, this one is absurdly simple and brazen in its execution. Sebi says that Rs 27 billion was sent by Ketan to Calcutta brokers; Rs 29 billion vanished overseas, Rs 3.4 billion ($ 80 million) was in a Swiss bank account; Rs 7 billion went to him from Himachal Futuristic; Rs 5.15 billion from the Zee Group and Rs 2.56 billion directly from the Global Trust Bank.

NEDUNGADI BANK: After the Ketan Parekh bubble burst in 2001, the RBI suddenly swung into action and began to go through Nedungadis books with a toothcomb. Punjab National Bank took over the bank that was up for sale after RBI initiated the move to weed out the broker promoter Rajendra Bhantia from the bank. GLOBAL TRUST BANK: Ramesh Gellis search for high returns took the new generation private bank to the stock market, where its involvement in the speculative activities associated with the Ketan Parekh scam and its high exposure soon resulted in substantial losses. The banks promoters attempted to merge the entity with the UTI

Bank, and in the process the share price was rigged so that the promoters could make a profit despite the mess in the the bank. It was clear that unless some drastic measures were taken, the bank was heading for closure. This led to the exit of Ramesh Gelli in 2001. Eventually, Oriental Bank of Commerce (OBC) took over the troubled bank. CO-OP BANKS: The saga of failed co-operative banks is continuing. The collapse of Madhavpura Mercantile Co-operative Bank after Ketan Parekh used the bank to fund his stock market rigging was the high point. As per the RBI data, the accumulated losses of cooperative banking sector has touched Rs 1598 crore an alarming rise of 241 per cent. The gross non-performing assets were Rs 5053 crore enough to fund a worldclass airport.

While the latest fraud may not be on the scale of the scams involving Harshad Mehta (around Rs.5,000 crores) or Ketan Parekh (Rs.800 crores), what is alarming is that this time the scammers tentacles have spread to the Public Provident Fund (PPF) the repository of the savings of millions of ordinary Indians. More than Rs.9 crores is missing from the Seamens Provident Fund, which has 26,500 members. Worse still, the regulatory authorities admitted that they were aware of the mess and gave various excuses for not having taken timely action. Global Trust Bank Global Trust Bank was on the verge of getting merged with UTI Bank to become one formidable entity in the Indian banking sector, when the Great Crash of March 2001 occurred, and along with stock prices, the marriage too came unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs 6,198.85 crore as on 31 March 2000.) The report was believed to have noted that there was evidence that Parekh was involved in manipulating the stock prices of GTB prior to the merger announcement on 20 January 2001, and a swap ratio of 2.5 shares of UTI Bank for 1 share of GTB, two days later. State Bank of India However, this time, SBIs losses are restricted to about Rs crore, lent against pay orders issued by Ahmedabad based Classic Co-operative Bank. According to bank analysts polled by Capital Market, this is loose change for the bank of its size. Bank of India Of the five banks hit by pay order defaults, Bank of India has unfortunately been the worst hit. It cashed Rs 137-crore fictitious pay orders issued by the Ahmedabad based Madhavpura Bank to arrested broker Ketan Parekh. The banking sector is estimated to have taken a hit of more than Rs 1,000 crore due to the pay order scam indulged in by many Gujarat co-operative banks. It was Bank of Indias complaint to Central Bureau of Investigation that resulted in Parekhs arrest on 30 March 2001. Bombay Stock Exchange

The Bombay Stock Exchange witnessed one of the worst bear runs leading to a 177-point crash on 2 March 2001. On 23 May, the BSE announced the launch of trading in index options in the first week of June, based on the Europian style. For this purpose, the exchange has joined hands with the Chicago Mercantile Exchange to adopt its system of calculating margin requirements and managing risk, known as Standard Portfolio Analysis of Risk (SPAN). Calcutta Stock Exchange In fact the 177-point crash on 2 March 2001 was triggered by the payment crisis at Lyons Range (CSE) and Dalal Street (BSE). While investors were still trying to digest the shortfall of Rs 100 crore for the settlement ended 1 March on the CSE, the market was gripped with rumours of a fresh payment crisis on CSE for the following settlement ended 8 March. Although the CSE authorities denied the payment crisis initially, Sebi went ahead and suspended 40 brokers on CSE. Co-operative banks It is now estimated that exposure to co-operative banks is going to cost the banking sector above Rs 1,000 crore. To stem the losses, nationalized banks and money market intermediaries have reportedly stopped dealing with co-operative banks. The National Stock Exchange, too, has decided not to accept fresh bank guarantees and renewals from 5 private banks as a precautionary measure in the wake of the pay order scam. Unit Trust of India As on June 2000, UTI was believed to have a total investment of Rs 5,000 crore in K-10 stocks (10 New Economy stocks backed by arrested broker Ketan Parekh), which today stands at less than one-fifth of its value. Another fallout of the crash was that UTI-promoted UTI Banks merger with Global Trust Bank was called off by the latter, stung by allegations of price manipulation to get a better swap ratio with UTI Bank (2.25 shares of UTI Bank for 1 share of GTB) .

THE MAJOR SCAMES:

STOCK MARKET Ketan Parekh

Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do share-brokerage based family. He was involved in the shares scam of the year 2000/01. The study by SEBI found that the flow of funds originating from Ketan Parekh, when paired with securities market transactions of connected clients leads to the possibility that these trades were executed to confuse the funds trail and to integrate the money originating from the banned stock broker into the system of banking. Ketans possible involvement was found by SEBI during its investigation into professed manipulative trading in the scripts of Cals Refineries Limited, Confidence Petroleum India Limited, Bang Overseas Limited, Shree Precoated Steels Limited and Temptation Foods Limited. Earlier, SEBI had Ketan and 17 other entities from participating in the market following a study into purchase sale and dealing in the shares of companies like HFCL, Zee Telefilms, Adani Exports, Ranbaxy and Aftek Infosys between October 1999 and March 2001. In its time order, SEBI banned 26 entities and persons, including Maruti Securities Limited and asked them to reply in days time. The government had set up the Joint Parliamentary Committee (JPC) to study the securities scam that hit the stock market during the year 19992001.

According to SEBI, the starting point was routine market surveillance that revealed set trades in five scripts. It also had information from the IT department on Ketan Parekhs source of funds which trailed back to certain entities. SEBIs investigation showed that these entities built up large volumes in the five scripts chosen for investigation; strangely enough, they often made losses on their transactions, but continued to trade. SEBI has opinion that these independently incurred losses have a secondary motive that needs to be separately investigated by the appropriate agency. It seems to have specific concerns relating to money laundering to the enforcement and IT investigators. SEBI also found that the connected entities or fronts used by Ketan for his transactions often sold shares without having them in their possession. They subsequently obtained the shares in time for delivery through off-market transactions through other connected entities within the circle of operators.

The Ketan Parekh Scam

Money borrowed is diverted to fund the co-brokers at Kolkata Stock Exchange for price manipulation

Stock Brokers of Kolkata Stock Exchange

Discounted the pay orders presented by KP and the pay orders worth INR 137 cr bounced

MMCB

Took pay orders from MMCB without paying money

Ketan Parekh

Got the pay orders discounted with Bank of India

Bank of India

Stock Market Activities

Diverted the amount of pay orders from Bank of India to rig the share prices of K-10 scrips

Evidence of Ketan Parekhs massive market activities was his ability to pay back well over Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which had collapsed and caused thousands of depositors to lose money when he pump off Rs880 crore to fund his market misbehavior in the year 1999-2000. SEBIs team led by Mr. S.Raman (chief general manager) must be congratulated for breaking this seemingly impenetrable system; but let us recognise that this is only the tip of the market manipulation. Ketan Parekh is not the only manipulator to use this system; there are plenty of

others doing it too. Also, the number of scrips in which Ketan has traded is substantially higher than the five that were investigated by SEBI. One of the best kept secrets is the action taken against those involved in the scam of 2000, which led to large-scale losses, the drop of two banks, Madhavpura Merc-antile Cooperative Bank (MMCB) and Global Trust Bank (GTB) and split the giant Unit Trust of India (UTI) into two, after pushing it to the brink of a collapse. Whether the BSE directors had used their recourse to price sensitive information or not for transactions in the market, having had direct access to the data was in direct violation of SEBI rules, observes Oommen A. Ninan. When the Sensex crossed the dizzy 5000 mark in October 1999, Bombay Stock Exchange (BSE) brokers literally took to the terrace of Jeejebhoy Towers and released balloons. The celebration also marked their bullish sentimentalism and showed lack of market prudence that what goes up has to come down; that the market is driven by its own dynamics. The built up position of Mr. Parekh in certain equities known as `K , in the normal circumstances, would not have had any major impact on the market. With the elected directors, including the BSE president, having had recourse to the price sensitive information relating to outstanding positions, purchases and sales by leading operators it is to be seen whether they have used this advantage to depress the prices. The Securities and Exchange Board of India (SEBI) investigation will reveal it in the next few days. Factors that helped KP: FUND RAISING Formed a network of brokers from exchanges like the ASE and the CSE Purchase share in the name of poor people living in the shanty towns of Mumbai Rs crore loan from Global Trust Bank, though Global Trusts Chairman Ramesh Gelli Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank IDBI Bank and IFCI had extended loans of Rs 1,400-odd crore to companies known to be close to Ketan Parekh KP borrowed money from various companies like HFCL and banks. The excitement indicated on Budget day by a sharp rise in the Sensex was rather on the high side. There is actually nothing much in the Budget to promote savings. On the contrary, savings have been discouraged by a drop in interest rates. It is now very doubtful whether demutualization or corporatisation of broker-driven exchanges is the answer. The experience of some of the stock exchanges like the London Stock Exchange, the Australian Stock Exchange, the Nasdaq, etc. Is to be fully ascertained.

Assuming that the brokers are kept away from the management of stock exchanges, restarting their role only to their trading rights, what is the guarantee that a new management will act in an objective manner. There has been a flow of money from banks to capital market in recent months. Private sector banks are prominent among them, including the Global Trust Bank (GTB). However, a reversal of banks exposure to capital market recommended by the RBI-SEBI committee in September last year is not a solution. What is essential is that the banks should have expertise in judging the risk of the business as well as the organisational ability to administer such schemes. Moreover, the prima facie evidence in price rigging of GTB shares raises doubts over the regulators surveillance mechanism. The RBI was aware of some unusual price movements in GTB share prices in November last year itself and the SEBI took another three months to inform the RBI that it had found evidence of price rigging in GTB share prices. The true measure of regulatory competence is the ability of the regulators to take quick corrective action. Further, the GTBs loan to Mr. Parekh without collateral is another issue that raises questions on the RBIs role as a regulator. Regulation and supervision and the quality of on and off-site supervision of the RBI and the SEBI should be strengthened and they should be delinked from the Finance Ministry with more autonomy and powers. The regulator should continuously monitor the investment pattern so that any undue change in a particular stream, like the broker position, could be identified and immediate investigation conducted. The Government also should strengthen the investment institutions to facilitate longterm investments. Flow of money to the capital market from the lending institutions should be more transparent so that undue concentration of lending on particular scrip is avoided. The financial crisis in Asia in 1997 has led to a fundamental re- think about the way in which financial markets should be governed. While other Asian countries are converging towards an international set of governance best practices, India is still lagging behind in terms of quality and speed of implementation. In a globalize economy, countries which fail to base the financial liberalization on strengthened economic policies and institutional structures are bound to suffer financial crisis.

Harshad Mehta

Harshad Shantilal Mehta was born on 29 July in a Gujarati Jain family of modest means. His early childhood was spent in Mumbai (Kandivali) where his father was a small-time businessman. Later, the family moved to Raipur in Chattisgarh after doctors advised his father to move to a drier place on account of his indifferent health. He studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur, but Raipur could not hold back Mehta for long and he was back in the city after completing his schooling.

Stock Market Scandal

Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and had an expensive lifestyle. He lived in a 15,000 square feet (1,400 m2) apartment, which had a swimming pool as well as a golf patch. By 1990 Harshad Mehta had risen to prominence in the stock market. He had been buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid up to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation. The theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company. Through the second half of 99 Mehta had earned the sobriquet of the Big Bull, who was said to have started the bull run. On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, exposed the dubious ways of Harshad Metha. The broker 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 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. Factors that helped Harshad: Fund raising Channeled money from the banking system. The Bank of Karad (BOK) and the Metorpolitan Co-operative Bank (MCB) issued fake BRs, or BRs not backed by any government securities Using the ready forward (RF) deal which is a secured short-term (typically 15day) loan from one bank to another Modus operandi was similar to that of ketans

It was this ready forward deal that Harshad Mehta and his cronies 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 wasnt the case in the lead-up to the scam. In this settlement process, deliveries 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. This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank. Another instrument used in a big way 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. Having figured this out, Mehta needed banks, which issue fake BRs, or 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, obviously 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 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 Mehtas 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. When the scam was finally revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof because he knew that if

people come to know about his involvement in issuing cheques to Harshad Mehta, people would accuse him. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. This time around, he was in cahoots with owners of a few companies and recommended only those shares. This game, too, did not last long.[1] Interestingly, by the time he died, Mehta had been convicted in only one of the many cases filed against him. Till now, the real story behind the entire scam is unknown. The recent Hindi movie 'Gafla' showed this scam in a different perspective.[2]

BIBLIOGRAPHY
Internet web sites: www.google.com www.slide share.com www.wikipedia.com www.bmsparadies .com Indian Economy- Magazines.