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Scam 1992 - Intro N Overview

Harshad Mehta orchestrated a massive stock market scam in 1992 in India. He exploited loopholes in the banking system to manipulate share prices without proper collateral by using fraudulent bank receipts. Mehta used money from several banks to artificially inflate stock prices without backing, at one point raising the price of ACC cement shares from Rs. 200 to Rs. 9,000. He defrauded the State Bank of India of Rs. 5 billion and was later imprisoned for other market manipulation scams, shaking confidence in the Indian stock market.

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Kamsiddha Khandekar
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51 views

Scam 1992 - Intro N Overview

Harshad Mehta orchestrated a massive stock market scam in 1992 in India. He exploited loopholes in the banking system to manipulate share prices without proper collateral by using fraudulent bank receipts. Mehta used money from several banks to artificially inflate stock prices without backing, at one point raising the price of ACC cement shares from Rs. 200 to Rs. 9,000. He defrauded the State Bank of India of Rs. 5 billion and was later imprisoned for other market manipulation scams, shaking confidence in the Indian stock market.

Uploaded by

Kamsiddha Khandekar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Scam 1992-

1. About Harshad Mehta

The name which can not be forgotten- Harshad Mehta, was notoriously known for the Scam
he did in 1992, which shook the entire country. Harshad Mehta was born in a Gujrati-Jain
family and worked as a broker in the stock market to get the break of his life. The stock
market in the early time was not as active as it is nowadays. Many investors were afraid to
put their life-saving money in the market because of its volatility.

2. Overview of the Scam-

The Scam was infamous as the man who did not have money to buy stocks made a pretty good
amount from the stock market. First, it was hard to believe that he found the loopholes in the
banking system of the 7th largest in the world. But none of less, he was the man who manipulated
the stock market by just being a broker.

The Scam happened in 1992, making it considerable disruptions in the stock market. The RBI rules
stated that stockbrokers could not borrow money from banks for market activities, and sharemarket
required massive amounts. RBI has increased the Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR). CRR's main objective was to keep some portion of deposits to RBI with zero interest, and
SLRs were to invest some amounts in government securities. To meet the expectations of RBI banks,
banks started using the 'Ready forward deal' where banks were selling securities to other banks for
short cash term goals. And the difference was used as interest between the purchase and sale price
of securities. Bank receipts were the main problem of the Scam, as paper trading was the only
option during that time.

Seller banks are always delayed while selling the securities because sometimes securities lie in
different centers. Physical handling of delivery would sometimes take years, so the bank receipts
were given to the buyer of securities till that time. But the Bank Receipts (BR) were only allowed to
issue PSU bonds or Mutual funds, but the BRs were unethically given to government securities.
Leading to which people accepted BRs like currencies. BRs had an expiratory of 90 days when banks
started issuing BRs without expecting their delivery, leading to their indefinite validity. With its
misleading awareness, some banks also started giving BRs without having securities. RBI also found
the irregularities six years ago with Andhra bank and syndicate bank before the Scam came to light.
The RBI later shared the circular, but the banks ignored them and continued their activities. Brokers
were a mediator between banks and securities, and sometimes brokers used to compensate for
losses of banks when RBI used to increase the interest rates for banks.

Harshad Mehta was a famous broker for seven banks; he then used banks' money and manipulated
the price without any backing. Once a time, he manipulated the share price from 200 to 9000 in ACC
cement. He also duped the State Bank of India for nearly 5 billion by creating SGL. In 1997, Harshad
Mehta and three others were imprisoned for the Maruti Udyog ltd scam of 380 million. Again in
2001, he was found guilty of missing 2.7 million shares in 90 blue chip companies.
References-

https://www.cnbctv18.com/market/scam-1992-harshad-mehta-scam-explained-7417101.htm

https://blog.ipleaders.in/all-about-the-harshad-mehta-scam/#:~:text=Harshad%20and%20his
%20investors%20used,a%20large%20number%20of%20shares.

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