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Essay on the bank scam of 1992

His early childhood was spent in Mumbai where his father was a small-time businessman. Later, the family moved to Raipur in Madhya Pradesh after doctors advised his father to move to a drier place on account of his indifferent health. Mehta first started working as a dispatch clerk in the New India Assurance Company.

  • Some of the family members — all housewives — bear outstanding income tax claims as high as Rs 21 crore between 1990 and 1994;
  • No prizes for guessing what happened next.

Over the years, he got interested in the stock markets and along with brother Ashwin, who by then had left his job with the Industrial Credit and Investment Corporation of India, started investing heavily in the stock market. Mehta gradually rose to become a stock broker on the Bombay Stock Exchange, who did very well for himself. At his peak, he lived almost like a movie star in a 15,000 square feet house, which had a swimming pool as well as a golf patch.

He also had a taste for flashy cars, which ultimately led to his downfall. Years had gone by and the driving ambitions of a young man in the faceless crowd had been realised. Harshad Mehta was making waves in the stock market.

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He had been buying shares heavily since the beginning of 1990. 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. But, where was Mehta getting his endless supply of money from?

Nobody had a clue.

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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 jewellery…. 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.

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.

In this settlement process, deliveries of securities and payments were made through the broker.

The Harshad Mehta case: Where time has overtaken justice by a mile

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 know only to the broker.

  • It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system;
  • Mehta siphoned off around Rs 1,000 crore from the banking system to buy stocks on the Bombay Stock Exchange;
  • All these failures, and the more recent ones,are somewhat puzzling as banking regulations have only got even more stringent over time;
  • The lending is done against government securities;
  • 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 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.

  • The hitherto stable bank came to a swift close;
  • Harshad Mehta was making waves in the stock market;
  • You can buy our tablet version from Magzter.

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, Metha needed banks, which could issue fake BRs, or BRs not backed by any government securities.

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.

  1. Within the newly licensed banks of 1990s, Global Trust Bank played a major role in the 2001 stock market scam. Then, as the civil war ended, the euphoria in the Indian cotton market turned to panic.
  2. You can buy our tablet version from Magzter. In the interim, Ashwin Mehta managed to get a law.
  3. Hence the name - bank receipt.
  4. 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.
  5. Secondly, Ashwin Mehta has time and again contested the asset valuation reports presented by the custodian. In the period between April 1991 and April 1992, the Sensex went into a frenzy and returned 274 percent, moving from 1,194 points to 4,467.

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. 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. 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.

Economic Milestone: Stock Market Scam (1992)

This game, too, did not last long. Interestingly, however, by the time he died, Mehta had been convicted in only one of the many cases filed against him. According to sources, Mr Mehta complained of chest pain late night and was admitted to the civil hospital where he breathed his last around 12.