Stock broker scams

Also see Ketan Parekh and Rakesh Jhunjhunwala Harshad Mehta was an Indian stockbrokerwell known for his wealth and for having been charged with numerous financial crimes that took place in Of the 27 criminal charges brought against him, he was only convicted of four, before his death at age 47 in It was alleged that Mehta engaged in a massive stock manipulation scheme financed by worthless bank receipts, which his firm brokered in " ready forward " transactions between banks.

The scandal scams the loopholes in the Indian banking systemBombay Stock Exchange BSE transaction system stock SEBI further introduced new rules to cover those loopholes. His early childhood was spent in Kandivali, Mumbaiwhere his father was a small-time businessman. A cricket enthusiast, Mehta did not show any special promise in school and came to Bombay after his schooling for studies and to find work.

Mehta started his career as a sales person in the Mumbai office of New India Assurance Company Limited NIACL. During this time, he got interested in the share market and after a few years, resigned and joined a brokerage firm.

By stock, he had risen to a position of prominence in the Indian securities industry, with the media including popular magazines such as Business Today touting stock as "The Amitabh Bachchan of the Stock market". It was at this time that he began trading heavily in the shares of Associated Cement Company ACC.

The price of shares in the cement company eventually rose from Rs to nearly due broker a massive spate of buying from a set of brokers including Mehta. He was covered in a cover page article of a number stock publications including the popular Economic magazine Business today, in an article titled "Raging Bull". His flashy lifestyle of a sea facing 15,000 feet penthouse in the tony area of Worli complete with a mini golf course and swimming pool, his fleet of a fleet of cars including a Toyota LexusCorolla Starlet, Toyota Sera were flashed in publications.

These further exemplified broker image at a time when these were rarities even for the rich people of India. The scheme was financed by supposedly collateralised bank receipts, which were in fact uncollateralised. However, they were expected to post profits and to retain a certain ratio threshold of their assests in government fixed interest bonds.

Mehta cleverly squeezed capital out of the banking system to address this requirement of banks and pumped this money into the share stock. He also promised the banks higher rates of interest, while asking them to transfer the money into his personal account, under the guise of stock securities for them from other banks.

At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. Mehta used this money temporarily in his account to buy shares, thus hiking up demand of certain shares of good established companies like ACC broker, Sterlite Industries and Videocon dramatically, selling them off, passing on a part of the proceeds to the bank and keeping the rest for himself.

This resulted in stocks like ACC which was trading in for Rs share to nearly Rs in just 3 months. In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i. 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 mean time, the seller holds the securities in trust of the buyer.

Having figured this out, Mehta needed banks, stock could issue fake BRs, or BRs broker backed by any government securities. Two small and little known banks - the Bank of Karad BOK and the Mumbai Mercantile Co-operative Bank MCB - came in handy for this purpose. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, plainly assuming that they were lending against government securities when this was not really the case.

He took the price of ACC from Rs to Rs. The stock markets were overheated and the bulls were on a mad run. Since he had to book profits scams the end, stock day he sold was the day when the markets crashed. Mehta was dipping illegally into the banking scams to finance his buying.

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. Scams 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 broker at the end of the period of the loan, typically at a slightly higher price.

It was this ready forward deal that Mehta and his accomplices used with great success to channel money from the banking system. A typical ready forward deal involved two scams brought together by a broker in lieu of a commission. 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 broker 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 scams 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 was the Bank receipt BR. As the authors write, a BR "confirms the sale of securities. Hence the name — bank receipt. These broker 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, 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. He knew that he would be scams if people came to know about his involvement in issuing cheques to Mehta. M J Pherwani of UTI was also linked to Mehta. When the scheme was exposed, banks started demanding their money back, causing the collapse. He was later charged with criminal offencesand more than civil action suits were filed against him.

Mehta and his brothers were arrested by the CBI on 9 November for allegedly misappropriating more than million shares million of about 90 companies, including ACC and Hindalcothrough forged share transfer forms. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. It was a majority judgement.

Agrawal and Justice Arijit Pasayat upheld his conviction, Justice M. Shah voted to acquit him. Narasimha Raoas donation to the party, for getting him off the scandal case. Mehta complained of chest pain late at night and was admitted to the Thane civil Hospital.

He died following a brief heart scams, at the age of 47, on 31 December He is survived by his wife and one son. He had altogether 28 cases registered against him. The trial of all except one, are still broker in various courts in the country. Market watchdog, Securities and Exchange Board of Indiahad banned him for life from stock market-related activities. By using this site, you agree to the Terms of Use and Privacy Policy.