Case 3: Harshad Mehta scam:
Harshad Mehta was an Of india stockbroker and is alleged to include engineered the rise in the BSE stock exchange in the year 1992. Exploiting several loopholes inside the banking system, Harshad great associates siphoned off cash from inter-bank transactions and bought stocks heavily for a premium around many portions, triggering an increase in the Sensex. When the plan was uncovered, the banking companies started strenuous the money again, causing the collapse. Having been later billed with 72 criminal offenses and more than 600 case suits had been filed against him. He died in 2002 with many litigations continue to pending against him.
a few. 1 Ready Forward Deal (RF):
• The crucial mechanism by which the fraud was impacted was the Prepared Forward package. • The Ready Forwards Deal (RF) is in fact a secured short term (typically 15 day) loan from one bank to another bank. The lending is performed against Govt Securities exactly the way a pawnbroker lends against jewelry. • In fact one can admit the borrowing bank in fact sells the securities for the lending financial institution and acquires them back again at the end of the period of the money at (typically) a slightly higher price. • It was this RF package that Harshad Mehta great associates used with great achievement to channel money by banking system. 3. a couple of The Technicians of the Rip-off:
Because explained over, a ready forward deal can be, in substance, a properly secured loan in one bank to another. To make the fraud possible, the RF was required to undergo a whole change. Quite simply it almost had to become an unsecured financial loan to broker.
This was beautifully engineered by the brokers. To offer a better understanding of the mechanism, the whole procedure has been segregated into 3 different parts. 1 ) The settlement process
installment payments on your Payment cheques
3. Dispensing the security
1 ) The pay out Process:
▪ The normal arrangement process in government investments is that the transacting banks make payments and deliver the investments directly to the other person.
▪ Throughout the scam, yet , the financial institutions or at least a few banks adopted an alternative arrangement process which has been similar to the method used for moving transactions in the stock market.
▪ Through this settlement method, deliveries of securities and payments are made throughout the broker. That may be, the seller gives you the securities to the broker who goes them to the buyer, while the buyer gives the cheque for the broker who then makes the payment to the vendor.
▪ From this settlement method, the buyer and the seller might not know which they have bought and sold with, both equally being well-known only to the broker.
▪ There were two important reasons why the broker intermediated negotiation began to be found in the government investments markets.
▪ The brokers instead of merely delivering buyers and sellers jointly started taking positions in the market. In other words, that they started trading on their own account, and in an expression became market makers in a few securities thereby imparting greater liquidity for the markets.
▪ Every time a bank wished to conceal the very fact that it was performing an RF deal, the broker arrived handy. The broker provided contract remarks for this purpose with fictitious counter-top parties, but arranged intended for the actual arrangement to take place with the correct counter-top party.
2 . Payment Cheques:
▪ A broker intermediated settlement allowed the broker to place his practical the check as it proceeded to go from one financial institution to another through him. The hurdle today was to discover a way of crediting the cheque to his account though it was used favor of a bank and was entered account remuneration.
▪ As it happens, it is solely a matter of banking customized that an accounts payee talon is paid out only to the payee pointed out on the check. In fact , exclusions were being built to this usual, well before the scam came to light.
▪ Privileged (corporate) customers had been routinely allowed to credit bank account payee cheques in favour of a...