Major scams of India since its independence - By Satbir Singh Bedi

The following are the major scams of India since its independence:

Mundhra Scandal

The Mundhra scandal involved then finance minister T T Krishnamachari, who

pressured the government-owned Life Insurance Corporation of India into bailing out

Haridas Mundhra, a Calcutta-based industrialist, by buying shares worth Rs 1.24 crore

in six companies owned by him. LIC did so dutifully, bypassing its own investment

committee. Mundhra was swindling the companies and, simultaneously, rigging up

their stock prices to camouflage his fraud. TTK, as the FM was popularly known, least

expected that this shady deal would be exposed by the PM’s own son-in-law. 

Although Feroze Gandhi belonged to the ruling party, he did not hesitate to speak out

against the government because he argued that corruption in high places was a

betrayal of the ideals of the newly independent nation. To be fair to Pandit Nehru, he

quickly appointed a one-man commission headed by Justice Mahommedali Currim

Chagla, one of the most respected legal luminaries of the time. 

The speedy and transparent manner in which Chagla conducted the inquiry—it was all

over, and the guilty were punished, in less than two years—ought to have been a

model for all such probes. All its hearings were public and the proceedings were aired

on loudspeakers. Mundhra was sentenced to 22 years in prison, and TTK lost his job. 

Fodder Scam 

Fodder Scam is a scam related to Animal Husbandry Department of Government of

Bihar in which irregularities of nearly Rs 950 crores (US $ 210 million) were detected.

The scam was unearthed in 1996 during the regime of chief minister Lalu Prasad

Yadav, but it goes back to 1980s and is believed to have started during tenure of

Jagannath Mishra   Lalu had ordered probe into these massive irregularities in accounts

by constituting a committee. However motives of these people were questioned by a

Public Interest Litigation and Supreme Court of India handed over the case to CBI.

Many people who were in this probe committee themselves became accused. Charges

were filed against Yadav too and later on Mishra was also framed. 

CBI filed 69 different cases related to this scam 31 of which has been in Jharkhand and

remaining in Bihar. The charges were framed under: Sections 420 and 120 (b) of the

Indian Penal Code and Section 13 (b) of the Prevention of Corruption Act. There are a

total of 76 accused, of whom three have died and three turned state witnesses.

It was only after Special Investigation Team(SIT) under U N Biswas was constituted that

investigation started at a brisk rate. Soon many heads started rolling and Yadav and

members of his party had to loose their ministerial berths both at centre and state

facing corruption charges.

Bofors Scandal

The Bofors Scandal was a major corruption scandal in India in the 1980s; the then

Prime Minister Rajiv Gandhi and several others were accused of receiving kickbacks

from Bofors AB for winning a bid to supply India's 155 mm field howitzer. The scale of

the corruption was far worse than any that India had seen before, and directly led to

the defeat of Gandhi's

ruling Indian National Congress party in the November 1989 general elections.

The case came to light during Vishwanath Pratap Singh's tenure as defence minister.

The name of the middleman associated with the scandal was Ottavio Quattrocchi, an

Italian businessman who represented the petrochemicals firm Snamprogetti.

Quattrocchi was close to the family of Prime Minister Rajiv Gandhi and emerged as a

powerful broker in the '80s between big business and the Indian government.   

Even while the case was being investigated, Rajiv Gandhi was assassinated on May 21,

1991 for an unrelated cause.

In 1997, the Swiss banks released some 500 documents after years of legal wrangling

and the Central Bureau of Investigation filed a case against Quattrocchi, Win Chadha,

also naming Rajiv Gandhi, the defence secretary and a number of others. Several

attempts to

extradite Quattrocchi failed.

Meanwhile February 5, 2004 the Delhi High Court quashed the charges of bribery

against Rajiv Gandhi and others, but the case is still being tried on charges of cheating,

causing wrongful loss to the Government, etc. Win Chadha also died. 

On May 31, 2005, the High court of Delhi dismissed the Bofors case allegations against

the British business brothers, Shrichand, Gopichand and Prakash Hinduja.

In December 2005, the Mr B. Datta, the additional solicitor general of India, acting on

behalf of the Indian Government and the CBI, requested the British Government that

two British bank accounts of Ottavio Quattrocchi be de-frozen on the grounds of

insufficient evidence to link these accounts to the Bofors payoff. The two accounts,

containing € 3 million and $1 million, had been frozen in 2003 by a high court order by

request of the Indian government.

The accounts were de-frozen on January 11, 2006. On January 16, the Indian Supreme

Court directed the Indian government to ensure that Ottavio Quattrocchi did not

withdraw money from the two bank accounts in London. The CBI (Central Bureau Of

Investigation), the Indian Federal law enforcement agency, on January 23, 2006

admitted that roughly Rs 21 crore, about USD $4.6 million, in the two accounts have

already been withdrawn. The British Government released the funds based on a

request by the Indian Government. At the

time a Congress-led alliance was in power, and Sonia Gandhi, as President of the

Congress Party, faced   considerable criticism for this sudden volte face by the Indian

government.

However, on January 16, 2006, CBI claimed in an affidavit filed before the Supreme

court that they were still pursuing extradition orders for Quattrocchi. The Interpol, at

the request of the CBI, has a long standing red corner notice to arrest Quattrocchi.

Quattrocchi was detained in Argentina on 6 February 2007, but the news of his

detention was released by the CBI only on 23 February, stoking claims that it may have

been suppressed by the ruling Congress government because of state elections. 

Quattrocchi has been released by Argentinian police. 

Security Scam

In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who

was all along considered as the architect of the bull run was blamed for the crash. It

transpired that he had manipulated the Indian banking systems to siphon off the funds

from the banking system, and used the liquidity to build large positions in a select

group of stocks. When the

scam broke out, he was called upon by the banks and the financial institutions to

return the funds, which in turn set into motion a chain reaction, necessitating

liquidating and exiting from the positions which he had built in various stocks. The

panic reaction ensued, and the stock market reacted and crashed within days.He was

arrested on June 5, 1992 for his role in the scam.

As an aftermath of the shockwaves which engulfed the Indian financial sector, a

number of people holding key positions in the India's financial sector were adversely

affected, which included arrest and sacking of K. M. Margabandhu, then CMD of the

UCO Bank; removal from office of V. Mahadevan, one of the Managing Directors of

India’s largest bank, the State Bank of India.

The Central Bureau of Investigation which is India’s premier investigative agency, was

entrusted with the   task of deciphering the modus operandi and the ramifications of

the scam. Harshad Mehta was arrested and investigations continued for a decade.

During his judicial custody, while he was in Thane Prison, Mumbai, he complained of

chest pain, and was moved to a hospital, where he died on 31st December 2001.

Lakhubhai Pathak cheating scandal

Lakhubhai Pathak, an Indian businessman living in England alleged that Chandraswami

and K.N. Aggarwal alias Mamaji, along with Mr. Rao, cheated him out of $100,000.00.

The amount was given for an express promise for allowing supplies of paper pulp in

India, and Pathak alleged that he spent an additional $30,000.00 entertaining

Chandraswami and his secretary. Rao and Chandraswami were acquitted of the

charges in 2003, due to lack of evidence. Despite this, it remained a large black mark

on Rao's administration.

Hawala Scandal

The Hawala scandal or hawala scam was an Indian political scandal involving payments

allegedly received by politicians through hawala brokers, the Jain brothers. It was a

US$18 million dollar bribery scandal that implicated some of the country's leading

politicians. There were also alleged connections with payments being channelled to

militants in Kashmir. Those accused included L. K. Advani who was then Leader of

opposition. He and others were acquitted in 1997 and 1998, partly because the hawala

records (including diaries) were judged in court to be inadequate as the main evidence.

The failure of this prosecution by the Central Bureau of Investigation was widely

criticised.

Lavalin Scandal

The Kerala State Electricity Board (KSEB) signed an MoU with Lavalin in August 1995.

Under the provisions of the MoU, the funds for the renovation were to be arranged by

SNC Lavalin from the Export Development Corporation (EDC), Canada, and the

Canadian International Development Agency (CIDA). The Board did   so, ignoring the

CEA's recommendation that immediate replacement of the generating units at the

Pallivasal power station was not called for as the plant was in fairly good condition. The

Board undertook a

feasibility study on the proposal only in September 1995, by a retired Chief Engineer of

the KSEB, who later became a consultant to Lavalin.Based on the consultant's report

and further

discussions, the Board signed contracts with Lavalin to provide technical services for

management, engineering, procurement and construction supervision in February

1996, to ensure completion of the projects within three years. The consultancy

agreements were

converted into fixed price contracts for supply of machinery and techincial services as

part of the renovation at a cost of 67.94M Canadian dollars (Rs.169.03 crores) in

February 1997. During this period Pinarai Vijayan was the Minister for Electricity.

The CAG has found that Lavalin was only a consultant intermediary and not the original

equipment manufacturer and that the supply of goods and services was made by other

firms at much higher cost leading to excess expenditure. According to the CAG, the

absence

of due professional care in negotiating the foreign loan proved to be detrimental to the

financial interests of the Board. The Board also could not ensure quality of renovation

work in the absence of technology transfer and training of its engineers. Owing to

various technical defects in the equipment, the generation of power could not be

maintained even at the pre-renovation level and the Board had to spend on repairs.

According to the CAG, failure to exclude fee for technical consultancy from fixed price

contracts resulted in avoidable payment of Rs.20.31 crores, and failure to negotiate

and exclude the exposure fee from the loan agreement resulted in avoidable payment

of Rs.9.48 crores and future liability of Rs.2.21 crores.In the opinion of the CAG, there

was also an avoidable payment of Rs.1.20 crores as commitment fee despite there

being committed but unavailed advance. The CAG found that the Government did not

receive Rs.89.32 crores out of the grant of Rs.98.30 crores that was promised for the

Malabar Cancer Centre.

On 16th January 2007, Kerala High Cour odrdered a CBI enquiry into the scandal

Ketan Parekh Scandal

Companies when raising money from the stock market rope in brokers to back them in

raising the share price. Ketan Parekh formed a network of brokers from smaller

exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange. Ketan

also used benami or share purchase in the name of poor people living in the shanty

towns of Mumbai. Ketan's rise to fame occurred at the same time as the worldwide dot-

com boom (1999-2000) and he relied primarily on the shares of ten companies for his

dealings (now known infamously as the K-10 scrips).

Ketan had large borrowings from Global Trust Bank, whose shares he was ramping up

(so that he could get a good deal at the time of its merger with UTI Bank) –he got Rs

250 crore loan from Global Trust Bank, though Global Trust’s chairman Ramesh Gelli

(who was later

asked to quit) repeatedly said that lending to Ketan was less than Rs 100 crore in

keeping with Reserve Bank of India norms. Ketan and his associates got another Rs

1,000 crore from the Madhavpura Mercantile Co-operative Bank despite the fact that

RBI regulations ruled that the maximum a broker could have got as a loan was Rs 15

crore.

Thus, Ketan’s modus operandi was clearly to ramp up shares of select firms in collusion

with the promoters – ironically, during the Ketan clean up, SEBI concluded a 3-year old

case where Harshad Mehta colluded with the managements of BPL, Sterlite and

Videocon to ramp up their shares with money provided by these managements – and

to get funding from them to do this. In the current Ketan case, SEBI has found prima

facie evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL,

Lupin Laboratories, Aftek Infosys and Padmini Polymer.

Now with the prices of select shares constantly going up,thanks largely to this

rigging,innocent investors who bought such shares thinking the market as

genuine,were at loss. Soon after discovery of this scam,the prices of these stocks came

down to the fraction of the values at which they were bought. The scam burst and the

rigged shares came down so heavily that quite a few people in India lost their savings.

Some banks including Bank of India lost money heavily.

At this time a group of traders (known as the bear cartel-Shankar Sharma, Anand

Rathi, Nirmal Bang) relied on the global meltdown of stocks to make their profits. Bears

sell stocks at high prices and buyback at low prices. At the time of the year 2000

Financial Budget this cartel placed sell orders on the K-10 stocks and crushed their

inflated prices. All the borrowing of Ketan’s could not rescue his scrips. The Global

Trust Bank and the Madhavpura Cooperative went bust because the money they had

lent to Ketan had sunk

with his K-10 stocks..

The information which was furnished by the Reserve Bank of India to the Joint

Parliamentary Committee (JPC),during the investigation of the scam revealed that

Financial institutions Industrial Development Bank of India (IDBI Bank) and Industrial

Finance Corporation of India (IFCI) had extended loans of Rs 1,400-odd crore to

companies known to be close to

broker Ketan Parekh.

Ketan Parekh was later arrested on December-2,2002 in kolkata.

Barak Missile Scandal

The Barak Missile Scandal is a case of defence corruption relating to the purchase of

Barak Missile Systems by India from Israel. The case is currently   under investigation

by the Central Bureau of Investigation, and several people including the Samata Party

ex-treasurer R.K. Jain have been arrested. Others named in the First Information Report

include politicians George Fernandes and Jaya Jaitly, and arms dealer and ex-naval

officer Suresh Nanda, who is the son of retired chief of naval staff S.M. Nanda.

The Barak missile system (jointly developed by Israel Aircraft Industries (IAI) and

RAFAEL Armament Development Authority of Israel) employs vertically launched

missiles to counter anti-ship sea-skimming missiles and attacks by aircraft. On October

23, 2000, contracts had been signed by the Indian government to procure seven Barak

systems at a total cost $199.50 millions and 200 missiles at a cost of $69.13 millions.

This was done despite objections raised by several groups, including members of the

team that had originally visited Israel to observe the missile performance, and APJ

Abdul Kalam, then heading the Defence Research Development Organization. Though

some of the objections are of a procedural nature, the Navy Chief of Staff Sushil Kumar

is currently under investigation as to why these objections were not considered.

The Tehelka exposé

In 2001 a sting operation conducted by Tehelka, alleged that 15 defence deals made

by the government had involved some sort of kickback and the Barak deal was one of

them.

The NDA government set up a commission to investigate the matter. The UPA

government, currently in power, has rejected the part-report by the commission and

the whole matter is now being investigated by the Central Bureau of Investigation

(CBI).

The CBI lodged an First Information Report (FIR) on October 9, 2006 and claims that

George Fernandes the Indian defence minister at that time, and the Former Chief of

the Indian Navy, Admiral Sushil Kumar were involved. The FIR notes that the Indian

Defence 

Research & Development Organization had sought to block the import of the Barak

system right until the end.

The FIR restates R.K. Jain's admission to Tehelka.com that 3 per cent of this cost went

to Fernandes and Jaya Jaitley as commission, while he himself was given 0.5 per cent.

These commissions were paid to them by Suresh Nanda, the middleman in the deal,

according to

the Tehelka tapes. 

Due to the scandal which emanated when the allegations first surfaced, George

Fernandes had to resign his post as the defence minister, although he was later

reinstated. In early 2006, R.K. Jain was arrested in the case.

Telgi Fake Stamp Scam

Telgi was arrested in 1991 by Mumbai police for fraud. During his subsequent prison

sentence, he reportedly learned the art of forgery from an expert. He was released

and, in 1994, acquired a stamp paper licence from the Government of India. He began

printing fake stamp paper. He appointed 300 people as agents who sold the fakes to

bulk purchasers, including banks, FIs, insurance companies, and share-broking firms.

His monthly profits have been estimated as being in the neighbourhood of Rs 202 crore

(US $20 million). 

On 17 January 2006, Telgi and several associates were sentenced to ten years'

rigorous imprisonment. On June 28, 2007 Telgi was sentenced to rigorous

imprisonment for 13 years and fined a whopping Rs 202 crore on various counts in one

of the main cases of the scandal. 

Food for Oil Programme Scandal

The Then External Affairs Minister, Natwar Singh was removed from the post on

November 7, 2005 (though retaining a cabinet role as minister without portfolio)

following a controversy over his alleged involvement in the United Nations Iraqi Oil for

Food scandal. The Independent Inquiry Committee under Paul   Volcker had reported

on October 27, 2005 that he and his son Jagat Singh were non-contractual beneficiaries

of the Oil for food programme. Allegedly, they along with Jagat Singh's childhood friend

and distant relation Andaleeb Sehgal were associated with a company called Hamdan

Exports, which acted as an intermediary for illegal sales of oil to a Swiss firm named

Masefield AG. Allegedly, in return, Masefield had to pay kickbacks, (termed

"surcharges") partly to Saddam Hussain's regime and partly to Natwar Singh and

others. It was alleged that such surcharges were Hussain's way of securing support

from politicians around the world and that this influenced Natwar Singh to lobby

against US policies in Iraq (in particular, US sanctions on Saddam Hussein). This

controversy got murkier when Anil Mathrani, then Indian Ambassador to Croatia, and a

close aide to Natwar Singh alleged that Natwar Singh had used an official visit to Iraq

to procure oil coupons for Jagat Singh from Saddam's regime. The Congress party

distanced itself from him and on December 6, 2005, he resigned from the cabinet 

On August 8, Natwar Singh was suspended from the primary membership of Congress

Party for moving privilege motion against Prime Minister Manmohan Singh on the issue

of leakage of Justice Pathak Committee report. 

Mid Day Meal Scam

In January 2006, the Delhi Police unearthed a scam in the Mid-Day Meal Scheme. In

December 2005, the police had seized eight truckloads (2,760 sacks) of rice meant for

primary schoolchildren being carried from Food Corporation of India (FCI) godowns in

Bulandshahr District of UP to North Delhi. When the police detained the trucks, the

drivers claimed that the rice was being brought all the way to Delhi to be cleaned at a

factory. However, according to the guidelines, the rice has to be taken directly from FCI

godown to

the school or village concerned. Later it was found that the rice was being siphoned off

by a UP-based NGO, Bharatiya Manav Kalyan Parishad (BMKP), in connivance with the

government officials. 

In November 2006, the residents of Pembong village under the Mim tea estate (around

30 km from Darjeeling), accused a group of teachers of embezzling mid-day meals. In a

written complaint, the residents claimed that students at the primary school had not

got midday meal for the past 18 months. 

In December 2006, The Times of India reported a scam involving government schools

that siphon off foodgrains under the mid-day meal scheme by faking attendance. The

modus operandi of the schools was simple -- the attendance register would exaggerate

the number of students enrolled in the class. The additional students would not exist --

they were "enrolled" to get additional foodgrains which were pocketed by the school

staff. The scam was exposed, when P Asha Kumari, an assistant teacher at the

government model primary school, Jakkur, in Yelahanka acted as a whistleblower. She

informed the Lok Ayukta,

who conducted a probe and indicted four persons for misappropriation. The

whistleblower was harassed by the school staff and requested a transfer. She was

transferred to a government primary school at Cholanayakahalli, where she again

found the same modus

operandi being used to siphon off the foodgrains. She again complained to the Lok

Ayukta, who issued notice to the school.

It may be seen from the details given above that all the major scams were perpetrated

in India by scamesters with the help of politicians and bureaucrats. These are, of

course, only some of the scams. There have been many other scams and if we add up

the sums involved in each scam, the total, in my opinion would be sufficient to wipe

out the fiscal deficit of the Union Government. Had these scams not occured in India,

there may have been no hardship for the common man as enough funds would have

been available for sanitation, cleanliness, nutrition, health care and education etc. The

desired infrastructure would also have come up and India would have been one of the

most prosperous country in the world. However, due to the greed of the scamesters,

politicians and bureaucrats, we are still a poor country because most of the 75% of our

population living in the villages is poor. We cannot fill up the

gap between India(Urban India) and Bharat (rural India) till we get rid of all scamesters,

corrupt politicians and their willing more faithful than the King servants, the

bureaucrats.

Satbir Singh Bedi

10 years of financial scams  

It terms of reform and development, the Indian capital market and financial sector have been the fastest to grab every opportunity presented by the paradigm shift in India’s economic policy. Their furious developmental activities have put the two top Indian bourses almost on par with the best in the world, in terms of their structure, systems and regulation. But for all the development efforts, the capital market remains seriously flawed because three key ingredients are still missing. They are adequate supervision, strict accountability, and appropriate punishment.As a result, the markets have remained shallow and stunted and have lurched from one financial scandal to another over the last decade. Every policy change in the liberalisation process was pounced upon by unscrupulous companies, who aided by a retinue of investment bankers and consultants diverted thousands of crores of rupees to themselves. In the process, retail investors have been the biggest losers and the effect of their disenchantment is visible in the slow growth of India’s investor population. China has over 25 million investors, while India, with all its rapid development and its 130- year old stock exchange culture has only 19 million investors.A simple roll-call of the scams of the last decade tells the story of why Indian investors are so frustrated.·       The Securities Scam of 1992: This was the mother of all Indian financial scandals. It exposed the utter

lawlessness and absence of supervision in the money markets; it allowed funds to be transferred with impunity from banks and corporate houses into the equity markets; and saw thousands of crores of bank funds to move in and out of brokers’ bank accounts in what was later claimed as a “accepted market practice”. A Special Court under a separate act of parliament was set up and over 70 cases were filed by the CBI but not a single scamster has been finally convicted by the excruciatingly slow judicial system. Instead, their repeated attempts to re-enter the market with the same bag of tricks have caused further losses to investors. More significantly, the Reserve Bank of India which was guilty of gross negligence and was discovered to have deliberately buried supervision reports was let off scot-free with just a couple of officials reprimanded.

·       The IPO bubble: The entry of Foreign Institutional investors led to a massive bull run, which saw the secondary market recover from the scam even though badla was banned. Soon thereafter, the Control over Capital Issues was abolished with a one-line order and it opened the floodgates for a massive scam in the primary market (or Initial public offerings). This scam had two parts – the first was perpetrated by existing companies which ramped up their prices in order to raise money at hugely inflated premia to fund greenfield projects and mindless diversifications, most of which have either failed to take off or are languishing. The other half of the scam had a multitude of small traders, chartered accountants and businessmen, who teamed up with bankers and investment bankers to float new companies and raise public funds. The botched up M. S. Shoes case, exemplifies the first type of scam while the second type, which caused losses of several thousand crores of rupees is known as the vanishing companies scandal. The IPO bubble which lasted three years from 1993 to 96 finally burst when prices of listed companies began to crash. So huge was investors’ disappointment that the primary market remained dead for the next two years, almost until the beginning of 1999.

·        Preferential Allotment rip-off: This was an offshoot of the rampant price rigging on the secondary market. Apart from raising fresh funds, promoters of Indian companies who thought that prices would never come down, quickly orchestrated general body clearances to allot shares to themselves on a preferential basis and at a substantial discount to the market. Multinational companies such as Colgate and Castrol started the trend and it led to a benefit of nearly Rs 5000 crores (in relation to market prices at that time) to retail investors before the Securities and Exchange Board of India (SEBI) put in place a set of rules to block the practice. A public interest litigation filed at that time drags on in court.

·       CRB’s house of cards: Chain Roop Bhansali’s (CRB) cardboard empire is only the biggest and most audacious of many that were built and disappeared in the new ‘liberalised’ milieu of the mid-1990s. His Rs 1000 crore financial conglomerate comprised of a mutual fund, fixed deposit collection (with hefty cash kick backs), a merchant bank (he even lobbied hard to head the Association of Merchant Bankers of India) and a provisional banking license. Many of these licenses required adequate scrutiny by SEBI and the RBI, and that fact that they passed muster is another reflection of supervisory lethargy. Armed with these and favourable credit ratings and audit reports, CRB created a pyramid based on high cost financing which finally collapsed. The winner: C. R. Bhansali, who, after a brief spot of trouble with the authorities moved on to the dotcom business and the regulators who were never held accountable. The losers: millions of small investors who lost through fixed deposits or the mutual fund. The CRB collapse caused a run on other finance companies causing a huge systemic problem and further losses to investors.

·       Plantation companies’ puffery: These followed the same strategy as vanishing companies, and since they were subject to no regulation, could get away with wild profit projections. They positioned themselves as part

mutual fund, part IPO and promised the most incredible returns – over 1000 per cent at least in seven years. High profile television campaigns, full-page advertisments and glossy brochures had the investors flocking for more. Almost all these project, with barely any exception have vanished. The cost: Rs 8000 crores plus.

·       Mutual Funds disaster: The biggest post-liberalisation joke on investors is the suggestion that small investors should invest in the market through Mutual Funds. Yet, over the decade, a string of government owned mutual funds have failed to earn enough to pay the returns ‘assured’ to investors. Starting with the scam-hit Canstar scheme, most mutual funds had to be bailed out by their sponsor banks, or parent institutions. The came the big bail out of Unit Trust of India. Since UTI is set up under its own act, it was the tax- payers who paid for the Rs 4800 crore bailout in 1999. Just three years later, it was back buying recklessly into the Ketan Parekh manipulated scrips and suffering big losses in the process. The record of the private mutual funds has also been patchy – after hitting a purple patch in 1999-2000, many of the sector specific funds are down in the dumps. It will be a long time indeed before small investors consider mutual funds a reasonably safe investment.

·       The 1998 collapse: What could be a bigger indicator of the ineffectiveness of the regulatory system and the moral bankruptcy in the country than the return of Harshad Mehta? In 1998, the scamster, who was the villain of 1992, made a comeback by floating a website to hand out stock tips and writing columns in several newspapers who were told that his column would push up their circulation figures. His relentless rigging of BPL, Videocon and Sterlite shares ended with the inevitable collapse and a cover up operation involving an illegal opening of the trading system in the middle of the night by the Bombay Stock Exchange officials. It cost the BSE President and Executive Director their jobs, but the broker and the companies have got away so far.

·       The K-10 gimmick: This too is already on the way to be hushed up even before it is fully investigated. Though everybody knows this as a Ketan Parekh scandal, but if one examines the selective leak of the SEBI investigation report to the media, it would seem as though only three operators caused the problem by hammering down prices. The government promised stringent action not only against Ketan Parekh and the brokers who hammered down prices, but also the regulators who slept over their job and companies/banks which colluded with them to divert funds to the market. Yet, within a month, the pressure for action is off and the momentum has been lost.

A decade later we seem to have come a full circle. The Ketan Parekh led scandal has been considered big enough to warrant the setting up of another Joint Parliamentary Committee. And the fact that the second JPC has been spending its first few weeks action (not) taken on the previous JPC report says it all about supervision, regulation and accountability.

Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and lived almost like

a movie star in a 15,000 square feet (1,400 m2) apartment, 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. The year was

1990. 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. He had been buying shares heavily

since the beginning of 1990. 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 1991, Mehta was the darling of the business media and earned the

sobriquet of the ‘Big Bull’, who was said to have started the bull run. But, where was Mehta getting his

endless supply of money from? Nobody had a clue.

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.”

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 wasn’t 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 Mehta’s

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]

arshad 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.

[edit]Stock Market Scandal