Stock Market

Top 3 Biggest Stock Market Scams in India that you should know

There have been many Stock Market Scams in India but in this article, we will discuss some of the biggest scams. The word “Scam” means any strategy, method, or scheme that is used to cheat some individual or organization financially.

The Indian stock market has consistently rewarded disciplined investors and nurtured the growth of the Indian economy in the past and will continue to do so in the coming decades.

But wherever there is light, shadow is inevitable.

The journey of the Indian stock market has not been smooth and it was full of bumps and roadblocks. And these Stock Market Scams in India have been a major setback to the economy.

The Indian Stock Market has witnessed some of the biggest scams and has managed to stay afloat in the face of adversaries.

But what was the reason behind these scams?

The answer is quite simple, greed.

 Greed is the mother of all evil. The individuals and organizations involved in these scams incessantly flouted norms and bypassed regulations. And eventually succumbed to their lust for money and power.

These Stock market scams involved huge amounts of money, upwards of $10 billion and when these scams were uncovered, they had severe effects on the economy as well as the Stock Market.

Anyone with the slightest idea of the stock market must know about these scams. These scams changed the entire structure of the Indian securities market. These scams also played a huge role in the modeling of new policies and schemes by the regulators to avoid such events in the future.

So here is a list of the three Biggest Stock Market Scams in Indian that shook the nation to its core.

Let’s take a look…

 

1. The Harshad Mehta Scam

The Harshad Mehta Scam is one of the biggest and most controversial Stock Market Scams in India. And thanks to the blockbuster TV show Scam 1992’ it has sprung into the limelight once again. Scam 1992 is the story of the rise and fall of Harshad Mehta and is one of the highest-rated TV shows in the world

There are many good movies and TV shows on the Stock Market, but Scam 1992 tops the list.

Check out the best movies on the stock market for every investor.

But this scam was not entirely a Harshad Mehta scam, the amount of money involved in this scam was so great that it was impossible for one man to execute alone.

Harshad Mehta Scam- Biggest Stock Market Scam In India

 

PSU banks, Private banks, International banks, NBFCs, and Stockbrokers, all of them were responsible for this scam. They flooded the stock market with money from the banks to artificially pump the index. 

Yes, Harshad Mehta was an integral part of the scam but he was not the only one. Let us dive into some revealing details of the scam that will help you connect the dots.

The roots of the scam go way back into the early 80s when Indian banks were facing difficulties in earning profits. The reasons were the harsh regulations of RBI on financial institutions.

The CRR (Cash Reserve Ratio) and SLR ( Statutory Liquidity Ratio) combined were at 63.5%. Which meant the banks had to keep 63.5% of all their deposits with the RBI either as cash or as securities.

To know more about such terms in detail then you can check our Stock Market Courses. 

CRR and SLR can be simply thought of as a fee banks have to pay to the RBI to continue operations in the country.

What happened?

The banks had marginal funds left with them for commercial lending as they had to pledge some funds for Priority Sector Lending apart from the CRR and SLR. So the banks started breaking some rules to make profits and stay afloat and one of them was trading in the stock market.

Harshad Mehta and other stockbrokers exploited the desperate banks. They channeled bank funds into the stock market making Sensex jump more than four times in 13 months. 

At the heart of one of the biggest Stock Market Scams in India were BRs (Bank Receipts). BRs were issued by banks as a guarantee to pay securities to the buyer bank within the next 90 days. Banks that needed securities to fulfill the SLR requirements bought securities from banks that needed cash to fulfill the CRR requirements.

The underlying securities were rarely delivered to the buyer because these transactions were reversed in few days.

As a result, some banks started using bank receipts as securities even though they did not have the securities with them and this led to the misuse of BRs.

The banks and brokers had a close relationship as the banks needed brokers to deal in the stock market. The brokers used their position to act as middlemen between two banks. They used the funds of banks to earn profits in the stock markets and returned the capital to the banks.

Harshad Mehta was a favored broker of SBI and its subsidiary banks. And this meant Harshad Mehta had access to huge amounts of funds which he used to inflate the markets and earn huge profits.

How was the scam uncovered?

Taking note of the unusual movements of the market, RBI started checking the books of the banks for irregularities in the first month of 1992. In April 1992, RBI found that SBI did not have securities worth Rs 649 crore. The payment for these securities was already done to their broker Harshad Mehta.

When the matter came to light SBI drew a lot of heat from RBI. And under the pressure of RBI, SBI asked Harshad Mehta to either deliver the securities or refund the amount. Harshad returned Rs. 620 crores to SBI.

But on further investigation, it was found that, of the Rs. 620 crores that Harshad had returned to the bank, Rs. 470 crores was the money issued by Punjab Housing Bank in the name of Grindlays bank for the purchase of securities. But Grindlays bank did not have the securities worth Rs. 470 crores.

The scam was finally discovered and Harshad Mehta was at the center of the scam.

Impact of the scam:

Once the irregularities were discovered and came to light, other banks and financial institutions could not hide the holes. This led to a chain reaction revealing one event after another and a crisis in the stock market. The Sensex crashed more than 1800 points within a week and all the stockbrokers and investors were stuck.

2. The Ketan Parekh Scam

Ketan Parekh was a trainee under Harshad Mehta. He learned the skills of trading from the big bull of the stock market and also inherited his love for money. Ketan Parekh was involved in a similar scam in the stock market that shook the entire country.

Both Harshad Mehta and Ketan Parekh used Financial Instruments to manipulate the markets. While Harshad used BRs Ketan used Pay orders to route bank funds into the securities market.

The Ketan Parekh Scam

 

A pay order is a prepaid contract issued by the bank on behalf of the customer to pay a certain amount to an individual or entity in the same city. The terms of a pay order are non-negotiable.

Ketan Parekh artificially pumped the stock prices of 10 companies along with their promoters and took their valuations to new heights. These stocks are popularly known as the K-10 stocks.

K-10 stocks include HFCL, Zee entertainment, Mukta Arts, Tips, Pentamedia graphics, GTL, and others. 

How was Ketan Parekh Different?

Ketan Parekh did something very clever to hide the unusual growth of these 10 companies. He timed his actions exactly with the dot com bubble. A bubble that was the result of the adoption of the internet across all sectors.

Ketan was very cautious. To avoid being caught he concentrated almost all of his trading activities on the Calcutta Stock Exchange. He executed all trades through other brokers and paid them a commission for executing trades on his behalf.

Ketan used to drive the prices of the K-10 stocks higher and used these stocks as capital to acquire loans from banks. Although there was a cap on the amount banks could lend to companies (Rs. 15 crores), Ketan managed to get loans of Rs. 800 crores by bribing the bank officials. 

He then used this money to extend the bull run and drive the overvalued stocks even higher. But things took a turn for the worse when the bear cartel started targeting the K-10 stocks. The stock prices began to crumble and Ketan could not get his hands on more funds as he had lost his capital.

An intensive investigation into the matter revealed that Ketan Parekh was the mastermind. He was barred from trading in the Indian Stock Market for 15 years.

The scam was estimated to be worth Rs 40,000 crore. 

The Effects of the Scam

RBI investigated many companies for insider trading and circular trading and barred them from participating in the stock market. Further Investigation revealed that Ketan Parekh had also misappropriated funds overseas to inflate stock prices in India.

3. Satyam Computers Scam

Satyam computers Ltd. was the fourth largest IT company in India with a valuation of over $1 billion. A premise that was entirely based on a lie. The founder of the company Mr. Ramalinga Raju had overstated the revenues, profits, and the number of employees of the company.

He created false documents on his personal computer to meet the analyst estimates. This event marked the inception of one of the biggest Stock Market Scams in India.

The fundamentals of the company appeared to be strong. Therefore,  people started investing money into the stock, raising the stock price by more than 200%. Mr. Ramalinga liquidated the majority of his stake in the company at inflated prices. 

Satyam Computers scam

 

Mr. Ramalinga used to withdraw millions of dollars as salary on behalf of the false employees. He used all the funds he had accumulated overtime to enter the booming Real Estate sector in Hyderabad.

Mr. Ramalinga Raju established a real estate company in 2005 named Maytas, with the help of his brother. Mr. Ramalinga had some insider information on the metro project and its routes in Hyderabad. Through his company, Mr. Ramalinga started acquiring land on metro routes to later sell it off and earn profits.

But all his plans were foiled by the recession in 2008. The real estate sector was hit the hardest.

The Aftermath of the Recession

After the recession hit, some anonymous emails were sent to the directors of Satyam Computers Ltd. exposing the scam. The emails claimed that almost $1 Billion worth of loans and cash reserves of the company did not exist. When Mr. Ramalinga was confronted with the fact, he said that there was no truth in the emails.

To fill the enormous gap of around $1 Billion Mr. Ramalinga suggested a merger between Satyam Computers Ltd. and Maytas. Because this would explain where all the money went. But the plan was heavily opposed by the shareholders and directors of the company.

And as a last resort, Mr. Ramalinga confessed to overstating the revenues and profits of the company by more than Rs 7500 crores in 2009.

Evidently, greed played a major part in all these scams and forced the perpetrators to push the boundaries of the law to fulfill their objectives.

We hope that this article helped you gain some insight into the biggest Stock Market Scams in India.

Did we miss something?

Do let us know in the comments below!

 

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