14-12-2012, 05:36 PM
The Securities SCAM
Securities SCAM[.ppt (Size: 615.5 KB / Downloads: 36)
SCAMS
Various scams, scandals and stigmas have surfaced in the recent years. These may not all be attributable to the antics and bungling of politicians, but they have been facilitated largely because of the vitiated atmosphere that the politicians and the political system have created in the country.
Some of the most famous SCAMS that have surfaced during the time are:
The 1200 crores fodder scam relating to the procurement of non-existent fodder on payments from the state exchequer.
The Scam in printing & selling of stamp papers, which is used for recording documents for registration purpose. This scam is of about Rs. 2200 crores & involves fraudulent printing & sale of stamp papers in the various parts of the country.
There is the famous Bofors scam, which was about the purchase of important defense equipment from foreign markets
The list goes on & on & moreover there are continuous additions to the same.
Introduction to the Securities SCAM
But we are here to talk about one of the most infamous scams that has been unearthed “The Securities SCAM”.
The “Securities Scam” refers to a diversion of funds to the tune of Rs. 3,500 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992.
Harshad Mehta was an Indian Stockbroker and is alleged to have engineered the rise in the BSE stock exchange in the year 1992. Exploiting several loopholes in the banking system, Harshad Mehta and his associates siphoned off funds from inter bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex.
The Two Securities Market
The scam was in essence a diversion of funds from the banking system (in particular the inter-bank market in government securities) to brokers for financing their operations in the stock market. A clear understanding of the government securities market and the stock (Corporate securities) markets is a prerequisite for understanding the scam.
Liberalization of the Economy
After assuming office in June 1991, the new government accelerated the process of economic liberalization under the auspices of the International Monetary Fund (IMF). The opening up of the Indian economy as a result of these measures promised an unprecedented growth and prosperity for the private corporate sector as new sectors of the economy were being allowed private participation and various administrative impediments were being removed.
Anticipating the good tidings for the private sector, the stock market started booming - the Bombay Stock Exchange Sensitive Index (Sensex) rose tremendously.
Heavy margins imposed by the Bombay Stock Exchange on settlement trading added to the funds requirement. Even the PSUs were under pressure to perform including the nationalized banks.
This was the time Harshad Mehta and his associates decided to strike.
The Settlement Process
The normal settlement process in government securities is that the transacting banks make payments and deliver the securities directly to each other.
During the scam, however, the banks or at least some banks adopted an alternative settlement process which was similar to the process used for settling transactions in the stock market.
In this settlement process, deliveries of securities and payments are made through the broker. That is, the seller hands over the securities to the broker who passes them on to the buyer, while the buyer gives the cheque to the broker who then makes the payment to the seller.
In this settlement process, the buyer and the seller may not even know whom they have traded with, both being known only to the broker.
Payment Cheques
A broker intermediated settlement allowed the broker to lay his hands on the cheque as it went from one bank to another through him. The hurdle now was to find a way of crediting the cheque to his account though it was drawn in favor of a bank and was crossed account payee.
As it happens, it is purely a matter of banking custom that an account payee cheque is paid only to the payee mentioned on the cheque. In fact, exceptions were being made to this norm, well before the scam came to light.
Privileged (corporate) customers were routinely allowed to credit account payee cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing the interest lost on the amount.
Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it may take a day or two for the cheque to be cleared and for the funds to become available to the customer. At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 crores cheque is about Rs. 8 lakhs.