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Capital Markets

Harshad Mehta and Ketan

Parekh Scams,

Mechanics and Precautions

taken by SEBI

Submitted by

Immanuel Peter P301412CMG370

Harikrishna Ramineni P301412CMG417

Prasanna Narayanan P301412CMG401

Sreedev Nair P301412CMG456

Shankeranand P301412CMG442

Subramaniam

Submitted to

Prof. Ruzbeh Bodhanwala

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Agenda

Capital Market Scams

1992 Scams vs 2001 Scams

Harshad Mehta Scam

Post ScamMeasures Taken

Ketan Parekh Scam

Precautions taken by SEBI

Conclusion

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Capital Market Scams

Post Economic Liberalisation era witnessed scams with cyclical regularity

Grey market activities, insider trading & price rigging are recurring ailments.

Series of events viz., Harshad Mehta Scam (1992), M.S. Shoes Scam (1995),CRB capital markets scam (1997), price rigging in BPL, Videocon, Sterlite (1998),sacking of BSE presidents namely J.C. Parekh (1998) and Anand Rathi (2001),

Ketan Parekh Scam (2001) rocked the stock market.

Common ploys of scamsters are price manipulation, price rigging, insider trading,cartels and nexus among bankers, brokers, politicians and promoters

Consequences of scams: Retail/ small investors have lost their hard-earned savings

BSE Remained closed for a month in 1992 securities scam

Post 1992 scam, loss of Rs. 0.1 million crore loss in market capitalization

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1992 Scam Vs 2001 Scam

Scamster Harshad Mehta Ketan Parekh

Known as 'Big Bull' (he initiated Bull Run) 'KP' or 'Bombay Bull'

Exposed on April 1992 March 2001

Scam

Diversion of funds from banks to

stock brokers, by Ready Forwards

(15 day interbank loan) deal and

Issue of fake Bank Receipts

without guarantee of any G-Secs

Colluded with promoters of new

economy stocks. Misuse of pay orders

and defrauding Bank of India; also,

misused funds of new private sector

banks and cooperative banks.

Ally in scam Bank of Karad (BOK) &Metropolitan Co-op Bank (MCB)

Madhavapura Mercantile Co-op Bank(MMCB) & Global Trust Bank

Scam worth Swindled Rs. 4000 crore Rs. 2000 billion lost

SEBI

ChairmanShri. G V Ramkrishna Shri. D R Mehta

Action Taken

Permanently debarred under

Section 11 and 11B of SEBI Act Barred from trading till 2017.

Key Initiatives

Repos were banned by RBI

Introduction of mark to market margin,

additional volatility margin, circuit

breaker system

Banned BADLA (Carry Forward)

Trading; however it later resumed

& banned post KP scam.

All deferral product including badla

were permanently banned from all

stock exchanges

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Harshad Mehta Scam

Used banks money into share trading and then push prices of stocks.

Aids in raising the SENSEX by 1500 points in 15 days; market capitalisation in1992 was 50% of GDP (versus less than 20% of GDP in 1991)

Instruments misused were Ready Forward Deal and Bank Receipts. Promoters of Companies operated through close network of brokers.

Foreign banks that were involved in scam like Citibank, Standard Chartered, etc.

SBI suffered Rs. 600 cr loss as he manipulated with Old Economy stocks.

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Post ScamMeasures Taken

GoI passed SEBIAct 1992and conferred statutory powers to SEBI.

GoI setup a National Stock Exchange (NSE) in 1994 mainly to bring transparency in themarkets; hence, Indiasfirst screen based Trading was launched on November 1994.

Instead of trading membership being confined to a group of brokers, NSE ensured thatanyone who was qualified and met minimum financial requirements was allowed to trade.

BSE online trading system (BOLT) replaced the open cry system in March 1995 and laterbrought screen based trading only in May 1997.

Repos were banned by RBI after Harshad Mehta scam.

SEBI bans BADLA trading in December, 1993; however, was legalized again in 1996 andfinally banned on July 2001.

SEBI brought in withdrawal of broker's control over Stock Exchange.

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Ketan Parekh Scam

Adopted price rigging practice involving private banks and mutual funds.

Badla system was used as funding mechanism.

Misuse of pay orders - Colluded with chairman of MMCB bank to issue pay orders;later BOI discounted and 137 crore rupees worth pay orders bounced.

Colluded with promoters of new economy stocks, known as K-10 stocks and mademutual funds, FIIs to help KP scrip high. Created bull run from May- Nov 1999.

Scam occurred inspite of presence of SEBI.

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Precautions taken by SEBI

All deferral products including the carry forward system or the Badla system

which was made legalized in 1996 (after the initial ban of 1993) was againbanned by SEBI in July 2001.

SEBI formally introduced forward trading in the form of exchange-tradedderivatives to ensure well regulated futures market.

SEBI got rid of the brokerscontrol over stock exchanges.

The trading cycle was cut short from a week to a day by SEBI.

SEBI issued circular on index based market wide circuit breaker in

compulsory rolling settlement.

Besides, market wide index based circuit filter, individual scrip based pricebands of 20% either way was introduced.

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Other Precautions taken by SEBI

Additional 10% deposit margin was imposed on outstanding net sales

Limit of application of additional volatility margins was lowered from 80% to60%

SEBI imposed restriction on short sales for 6 months.

Suspended all broker member directors of BSEsgoverning board.

SEBI banned trading by all stock exchange presidents, vice-presidents andtreasurers

SEBI allowed banks for collateralized lending only through BSE and NSE.

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Conclusion

To ensure an orderly development of the capital market for higher

economic growth, the cycle of scams needs to be broken.

Unless, the enforcement of laws is strengthened and special courts arecreated for dispensing speedy justice nothing much will change.

Both banking system (RBI) and capital market (SEBI) have to be proactiveinstead of reactive. Now, SEBI improved in showing zero tolerance towardsprice manipulation, insider trading, misuse of office, etc.

To get rid of the blame Investors weep, regulator sleeps, SEBI shouldremember the old saying, Thosewho dontlearn lessons from history are

condemned to repeat the same.Better learn than suffer again.

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References

The Indian Financial System3rdEditionBharati V. Pathak

http://www.sebi.gov.in/cms/sebi_data/attachdocs/132212290133

8.pdf

http://www.sebi.gov.in/sebiweb/home/list/1/7/0/0/Circulars

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

http://en.wikipedia.org/wiki/Badla_(stock_trading)

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Thank you