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Corporate

Governanc
e
Assignmen
t
Nitish Bansal

B.Com (P)
Roll No - 21423776
HARSHAD MEHTA CASE (The Big Bull)

He was known as the ‘Big Bull’. However his bull run did not last for long.

He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in
shares at a premium across many segments.

Taking advantages of the loopholes in the banking system, Harshad and his
associates triggered a securities scam diverting funds to the tune of Rs 4000 crore
from the banks to stockbrokers between April 1991 to May 1992.

Harshad worked with New India Assurance Company before he moved ahead to
try his luck in the stock market. Mehta soon mastered the tricks of the trade and
set out on a dangerous game plan. Mehta has siphoned huge sums of money from
several banks and millions of investors were conned in the process. His scam was
exposed, the markets crashed and he was arrested and banned for life from
trading in stock markets.

He was later charged with 72 criminal offences. A special court also sentenced
Sudhir Mehta, Harshad Mehta’s brother, and six others, including four bank
officials, to rigorous imprisonment ranging from 1 year to 10 years on the charge
of duping State Bank of India to the tune of Rs 600 crore in connection with the
securities scam that rocked the financial markets in 1992. He died in 2002 with
many litigations still pending against him.
In Depth
The 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. The bank lends against government securities just as a
pawnbroker lends against jewellery. 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 this 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 know only to the broker.

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.

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, Metha needed banks, which could 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.

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 duped of a whopping Rs 4,000 crore.

Interestingly by the time he died, Mehta had been convicted in only one of the
many cases filed against him.

In Layman’s Terms
Imagine a gold jeweller also is a pawn broker. Now a guy called Mehta pawns a
gold necklace for 30 days and the pawn broker gives him Rs.25000.He invests it
in stock market and earns around Rs.45000.But the necklace which he pawned
was a fake one. Since he has earned Rs.20000 profit, after 25 days he returns
back some Rs.27000 (with interest) to the pawn broker who gives him back the
necklace.
After two months, he again pawns it for 30 days and is given Rs.26000.This time
also, he invests this money in stock market. But unfortunately, stock market
crashes and he loses all his money. So, this time he cannot take back that fake
necklace and runs away. The pawn broker, obviously after 30 days would sell the
necklace thinking he can earn some profit. But then he realises that it was a fake
one and he has been duped.
This is what, more or less happened in Harshad Mehta Scam.
Corporate Governance
What is Corporate Governance?

 As per James D Wolfensohn “Corporate Governance is about


promoting corporate fairness, transparency and accountability.”
 In other words Corporate governance is a relationship among
stakeholders that is used to determine and control the strategic
direction and performance of organizations.
 If management is about running the business, Corporate
governance is about seeing that it is run properly.

Why Corporate Governance?

 Better excess to external Finance


 Lower Costs Of Capital
 Improved Company Performance
 Higher firm valuation and Share Performance
 Reduced Risk Of Corporate Crisis and Scandals

Corporate Governance Parties

 Shareholders – Those that own the company


 Directors – Guardians of the company’s assets
 Manager – Who uses the company’s assets
Corporate Governance Pillars

 Accountability – means that management is accountable to the


board and ensure that board is accountable to the
shareholders.
 Fairness – protecting shareholders right and treat all
shareholders equitably
 Transparency - ensure timely, accurate disclosure on material
matters including financial situation, performance, ownership
and corporate governance.
 Independence – procedures and structures are in place so as to
minimise or avoid completely conflicts of interest

When a man says he approves of something in principle, it means he


hasn’t the slightest intention of carrying it out in practice.

- Otto Van Bismarck

Mechanisms

 The Companies Act


 SEBI
 Capital Market
 Statutory Audit
 Nominee on Company Boards
Objectives

 Economic Efficiency
 Employees Participation
 Code of Conduct
 Balance
 Setting Standards
 Standard of Living
 Transparency

Important Concepts

 Insider Trading – It refers to trading on price sensitive


information by companies employees or individuals closely
connected with the firm.
 Whistle Blowing - It is an attempt by a member or an ex
member of an organisation to disclose wrong doing in or by the
organisation.
Other Cases of Frauds
 Ramalinga Raju (The Biggest IT Scamster)
 Ketan Parekh (The follower Of the Big Bull)
 C R Bhansali
 Sanjay Aggarwal ( Finance Portal )
 Sohin Dahiya (The Cobblers Scam)
 Dinesh Dalmia
 Abdul Karim Telgi ( The Fake Stamp Racket )
 Virendra Rastogi ( The Money Market Fraud )

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