A look back into Dalal Street’s worst Scams including Harshad Mehta and many more

Harshad Mehta financial fraud

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A scam is fraudulent activity by an individual or organization to deceive other people in order to obtain money or something else of value.

It is important to note that the individuals committing these frauds appear as honest and trustworthy in order to deceive clients or in some cases produce fake identities or documents to prove the validity of their claims.

India has seen its fair share of financial scams, which have shaken Dalal Street over the last 3 decades as a result, causing a lot of distress among the people of India with the most famous one being that of Harshad Mehta.

However, our Securities Exchange Board of India (SEBI) has been regularly tweaking the regulation in order to avoid such scams to happen in the future.

It is important to understand the largest scams that have happened in Dalal Street over the last few decades:

Harshad Mehta Case

Harshad Mehta was a member of Bombay Stock Exchange (BSE) as a broker and established his firm GrowMore Research and Asset Management when BSE auctioned broker cards.

Harshad Mehta also started trading heavily in a number of companies but most importantly in Associated Cement Company (ACC) whose price eventually rose from a meager Rs.200 to a mighty Rs. 9000 as a result of a heavy spate of buying from Mehta’s company.

He was named ‘The Big Bull’ of the stock market by the media and due to his flashy lifestyle and a fleet of swanky cars.

His lifestyle caught up with him, leading to increased attention from the media and the authorities and it was soon revealed that Mehta was at the heart of two of the biggest frauds in the history of the stock market in India.

Here is a detailed look at how he was able to make it all happen:

Stamp Paper Scam

The Rs 2200 crore scam involved fraudulent printing and sale of stamp papers in various parts of India.

In the early 1990s banks were not allowed to invest in the stock markets but had to allocate a percentage of their assets in fixed income bonds.

Harshad Mehta was cleverly able to squeeze the money out of the banks and pumped that money in the stock markets.

This led to the price of the shares like Videocon, ACC, and Sterlite soaring to an unexpectedly high and in order to gain a profit he sold them passing a part of the proceeds to the banks and keeping the rest for himself.

Bank Receipt Scam

Bank Receipts as the name suggests are receipts/summary of the transactions between banks and other parties with whom they have transacted.

In this case, Harshad Mehta went on to issue a large number of fake BRs or BRs which were not backed by the government securities.

Once these BRs were issued, they were given to other banks who assumed that they were backed by Government Securities which was not the case.

As a result, the money was invested in the stock markets which in turn drove the stock prices to insanely high levels, and because he had to book profits, in the end, they were sold off causing the markets to crash.

Ketan Parikh Case

One of the accomplices of Harshad Mehta in his many scams also started off his stint in the stock market under his firm GrowMore Research and Asset Management.

He was one of the accused in some of the scams GrowMore was involved in but was never convicted in them.

Unlike Mehta, he had a low-key, down-to-earth lifestyle thus avoiding the unwanted attention from media and regulatory authorities during the investigations of the scams.

However, this wasn’t going to be the case for long as he started to show off his wealth by throwing lavish parties for Bollywood celebrities, industrialists and media personalities alike.

He was known to have invested heavily in stocks related to IT, media, and communication and propagated them.

As cover stories emerged in the financial media of his malpractices related to the stock market, scrutiny shifted to his activities leading to his arrest on 30 March 2001.

From Harshad Mehta to Nirav Modi, the common elements in all the frauds were the same: the use of fake papers.

Stock Market crash in 2001

Parekh who was later found guilty of artificially rigging the stock prices of unknown companies to unexpectedly high levels as a result of circular trading which is a type of securities fraud that can take place in stock markets, causing price manipulation and often related to pump and dump schemes.

Circular trading occurs when identical sell orders are entered at the same time with the same number of shares and the same price.

However, this caught the eye of the bear cartels of Mumbai and other authorities like RBI and the NDA who demanded a thorough investigation into this issue. As a result of this, two things happened.

Firstly, they found Parekh and his ring of traders responsible of circular trading which jacked up the prices of unknown companies to very high levels which eventually caused the stock market to crash.

Secondly, Parekh was accused and found guilty of conducting fraudulent transactions with a unit of Canara Bank in 1992 and also banned from trading in the Indian Securities market.

CRB Case

Chain Roop Bhansali (CRB) was an obscure Chartered Accountant from Jaipur who specialized in creating shell companies by cooking up balance sheets and accounts and then selling them to crooked businessmen who would hide their black money from the public’s eye.

In 1994, Bhansali launched Arihant Mangal fund and, amazingly, raised something around Rs 230 crore when funds with far better pedigrees could not raise even half the amount.

It is now revealed that of this amount, only Rs 6.25 crore came from small investors.

Where did the rest come from? 

For that, take a look at CRB Arihant’s investment pattern. Eighty percent of its corpus was in just 65 scrips while the remaining 20 percent was distributed over 289 scrips.

And around 30 of the 65 scrips on which Bhansali has been so bullish are in unquoted securities.

What almost definitely happened was that Bhansali rounded up his pals in a quid pro quo deal.

They routed their money into Bhansali’s mutual fund, which routed it back to them by buying shares in their companies from them.

The next step was to setup a bank which could manage these shady shares and reroute money from Mr. Bhansali’s promoters, all the while having a large share of public savings to play with.

It has also been observed that he might have exerted some influence to make RBI approve his bank which despite his constant efforts to mobilize his clients’ funds did not materialize due to RBI noticing his activities which was also preceded by his reputation of being a serial fraud.

As a result, SEBI which had been a bystander till now, in this case, acknowledged that irregularities and canceled all licenses which had been issued to CRBs mutual fund which was immediately shut down and barred from launching any new products in the future.

SBI who had funded CRB’s venture till now, woke up and also refused more funding but Only when the un pre-funded payouts hit a staggering Rs 60 crore.

Satyam Scam

Satyam was one of the biggest Computer services company in the 2000s having built a good reputation for itself thanks to its chairman Ramalinga Raju.

However, as the company became a major player in the stock market there were reports doing the rounds that its owners had been manipulating the company’s book to show increased sales, profits and margins to influence the investors into buying the shares of the company.

When quizzed about these reports the company’s board blamed the promoters who misrepresented facts without the connivance of the auditors and some executive board members.

Independent directors, it seems, were kept in the dark about the actual books of accounts.

The role of external third party auditors, who were tasked to ensure that no financial bungling is undertaken to carry out promoters’ interest or hide facts, have also been brought to question.

As a result, Ramalinga Raju and 9 other accomplices were found guilty of the Satyam Scam and had several charges filed against them.

NSEL Scam

NSEL, India’s first electronic commodity spot exchange that was established in view of the then Prime Minister’s vision to create a “single market” across the country for both manufactured and agricultural produce.

SEBI’s verdict on NSEL Scam

However, this scam relates to the payment default case registered against almost 300 brokers, investors, and defaulters.

Investors were attracted by offering fixed returns on paired contracts in commodities. And it was lately, found out the stocks were missing.

The NSEL is a company promoted by Financial Technologies India Ltd and the NAFE. Jignesh Shah along with Shreekant Javalgekar were accused of the scam.

SEBI’s main allegations against the brokers were that they had made false representations of assured and risk-free returns to clients, telling them that paired trades were backed by collateral in the form of commodities in warehouses.

It also alleged that these brokers had manipulated client code modifications. They engaged in trades without the permission of clients.

They also allowed clients to execute trades despite debit balances in their accounts. The regulator said they had also not segregated funds between client accounts and their own, thus violating rules.

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