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SVKMS NMIMS
SCHOOL OF LAW

A PROJCT SUBMITTD ON

ROLE OF MEDIA IN THE SECURITIES SCAM (HARSHAD MEHTA SCAM)

IN COMPLIANC TO TH PARTIAL FULFILLMNT OF TH MARKING

SCHM FOR TRIMSTR IV 2014-15, IN TH SUBJCT OF JOURNALISM
AND MASS COMMUNICATION-I

SUBMITTD TO FACULTY
MR. JOYANTO MUKHRJEE FOR VALUATION

SUBMITTD BY:-KHUSHIL SHAH

ROLL NO: - A052
COURS: - B.A. LL.B. (hons.)
DAT: - 13TH SEPTEMBER, 2014
TIM: - 12:00

RCIVD BY: - ..
ON DAT: - ..
TIM: - .

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INDEX

SERIAL

TOPIC NAME

PAGE NUMBER

RESEARCH METHODLOGY

INTRODUCTION

THE SCAM AND THE ROLE OF MEDIA

INTERVIEWS AND MOVIE REVIEWS

16

SUGGESTION

20

BIBLIOGRAPHY

21

NUMBER

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CHAPTER 1: RESEARCH METHODOLOGY

Relevance of the topic:The term "securities scam" refers to a diversion of funds to the tune of over Rs. 3500 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. The scam has for several
months become a permanent feature of the front pages of the newspapers. Despite the massive
media coverage of the scam, most readers found it hard to understand it particularly when they
were confronted with secret terms and abbreviations like ready forward, double ready forward,
BR etc. Nevertheless an understanding of the scam is a prerequisite for any meaningful
examination of policy substitutes to improve the running of the fiscal system.

Objective of the study1. The objective of making this project is to study and research that how did the scam
occur and what are the main reasons following the scam.
Research questions
The research is mainly based on these questions:1. Who was Harshad Mehta?
2. Explain his early days and his dream as a common man to become the Big Bull
3. What was the scam focused on?
4. How did the brokers play an important role and became market makers?
5. How did the scam break? Who was Sucheta Dalal?
6. What are the suggestions for this topic?

Limitation of the project:1. The project fails to conduct a primary research through examination, interviews and
surveys due to lack of time and vague understanding.
2.

The research of the project limits to books, internet and varied interviews of
professionals.

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CHAPTER 2: INTRODUCTION
Harshad Mehta was born on 29th July in a small Gujarati Jain Family. His fathers name was
Shantilal Mehta and his mothers name was Rasilaben Mehta. His parents were fond of him
and was their dear child. His father was a small time businessman and had earned enough
money for the family to survive. No one from his family had high hopes of opening a big
venture but this child was very passionate from his childhood of creating wonders and earn a
lot of money.
During his early childhood his father was advised by the doctors to move to a drier place on
the account of indifferent health. So this small Jain family moved to Raipur. He studied in the
S.S Kalbadi Higher Secondary School in Raipur. But his fate was with him and after
completing his schooling, he returned to Mumbai to make his career and fulfil his dreams. He
graduated in Commerce. Over a period of ten years beginning from 1980 he served in positions
of increasing responsibility at a series of brokerage firms.
He joined his first job as a dispatch clerk in New India Insurance Company. But his main view
and aim in life was to do something big. He was very much interested in stock markets and
trading. This made him very inquisitive to view each and every company and do their analysis.
He had learnt a lot of methods of predicting future share prices of Companies. In the early
eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to BSE before
becoming a jobber on BSE for stock broker P.D. Shukla. In 1981 he became a sub-broker for
stock brokers J.L. Shah and Nandalal Sheth. He during this time had started earning handful of
money and had always targeted of doing something better than what he had.1
During that time he had sustained a huge mental loss by losing his father. Once he was unable
to sustain his overbought positions and decided to pay his dues by selling his house with the
consent of his mother Rasilaben and brother Ashwin. The next day he went to his brokers and
offered the papers of the house as guarantee. The brokers were this moved by his gesture and
gave him sufficient time to overcome his position.
After he escaped this big struggle for survival he became stronger to face more and more
difficulties in life and even his brother has quit his job to team up with him and open a company

http://www.mudraa.com/trading/42864/0/harshad-mehta-a-short-biographical-sketch-js.html

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named Grow More Research and Asser Management Company Limited. This company was
basically acting as a financial advising company when it has started but as time passed he
became a broker and had started dealing in Shares.2

ibid

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CHAPTER 3: THE SCAM AND THE ROLE OF MEDIA

One of the scam, The Harshad Mehta Scam or Securities Scam involves common man in it.
We saw so many scam, in which politicians and government were involved but in this so called
Bull Run, common man and above all, a Commerce graduate and a Chartered Accountant,
Harshad Mehta is involved. We must appreciate him because he gave competition to corrupt
politician. We should be thankful to him because after the scam, Securities and Exchange
Board of India (SEBI) stick their rules and regulations and many corporate changes were
incorporated.
Who is the master mind behind this?
Man who haunted Indian Stock Market. Common man. He was died in after 13 years of his
allegations in the jail because of heart attack. He was mastermind behind the whole scam. The
scam which amounts to Rs. 4,000 Crores which involved a common man and above that, a
Chartered Accountant. Apart from 27 allegations on him only 4 have been proved.
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 ambiguities in the banking system,
Harshad Mehta and his associates drew off funds from interbank transactions and bought shares
heavily at a premium across many segments, triggering a rise in the Sensex.3
What is this scam actually?
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.
In April 1992, the first press report appeared indicating that there was a deficit in the
Government Securities held by the State Bank of India. In a little over a month, investigations
revealed that this was just the tip of an iceberg which came to be called the securities scam,
involving misappropriation of funds to the tune of over Rs. 3,500-4,000 crores.
In an ever expanding sphere, the scam has engulfed top executives of large nationalized banks,
foreign banks and financial institutions, brokers, bureaucrats and politicians.4

3
4

http://bhavinpathak.wordpress.com/2013/07/07/harshad-mehta-scam/
http://www.bullrider.in/indian-stock-market-scam/

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The functioning of the money market and the stock market had been thrown in confusion. A
large number of agencies, namely, the Reserve Bank of India (RBI), the Central Bureau of
Investigation (CBI), the Income Tax Department, the Directorate of Enforcement and the Joint
Parliamentary Committee (JPC) are currently investigating various aspects of the scam. 5
The Two Security Market:
The scam was in essence a diversion of funds from the banking system (in particular the interbank 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 in Indian economy:
After assuming office in June 1991, the new government accelerated the process of economic
liberalization under the backings of the International Monetary Fund (IMF). The opening up
of the Indian economy as a result of these measures promised an extraordinary growth and
prosperity for the private corporate sector as new sectors of the economy were being allowed
private participation and various administrative obstacles were being removed. Anticipating
the good notifications 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.6
The Ready Forward (RF) Deal:
The Ready Forward Deal (RF) is in essence a secured short term (typically 15 day) loan from
one bank to another bank. The lending is done against Government Securities exactly the way
a pawnbroker lends against jewellery. In fact one can say that the borrowing bank actually sells
the securities to the lending bank and buys them back at the end of the period of the loan at a
slightly higher price.7

ibid
http://www.moneycontrol.com/news/market-news/sebi@25-greater-powers-afterharshad-mehtascam_877447.html
7
ibid
6

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Mechanism of this scam:

To make the scam possible, the RF had to undergo a complete change. In other words it
practically had to become an unsecured loan. This was wonderfully engineered by the Brokers.
To give a better understanding of the mechanism, the whole process has been separated into
three different parts (in other words) the broker. This was wonderfully plotted by the Brokers.
To give a better understanding of the mechanism, the whole process has been segregated into
three different parts:
(a) The settlement process.
(b) Payment Cheques.
(c) Dispensing the security.8
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 a substitute 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. There were two important reasons why the broker
intermediated settlement began to be used in the government securities markets:
(a) The brokers instead of merely bringing buyers and sellers together started taking
positions in the market. In other words, they started trading on their own account, and
in a sense became market makers in some securities thereby divulging greater liquidity
to the markets.
(b) When a bank wanted to hide the fact that it was doing an RF deal, the broker came in
handy. The broker provided contract notes for this purpose with false counter parties,
but arranged for the actual settlement to take place with the correct counter party.9

8
9

http://www.iimahd.ernet.in/~jrvarma/papers/vik18-1.pdf
http://flame.org.in/knowledgecenter/scam.aspx

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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 favour 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 rule, well
before the scam came to light.
Privileged 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. On the other hand, when banks make payments to each
other by writing cheques on their account with the RBI, these cheques are cleared on the same
day.
The practice which thus developed was that a customer would obtain a cheque drawn on the
RBI favouring not himself but his bank. The bank would get the money and credit his account
the same day. This was the practice which the brokers in the money market exploited to their
benefit.
Dispensing the securities
The brokers thus found a way of getting hold of the cheques as they went from one bank to
another and crediting the amounts to their accounts. This effectively transformed an RF into a
loan to a broker rather than to a bank. But this, by itself, would not have led to the scam because
the RF after all is a secured loan, and a secured loan to a broker is still secured. What was
necessary now was to find a way of eliminating the security itself!
There are three routes adopted for this purpose
Some banks (or rather their officials) were influenced to part with cheques without actually
receiving securities in return. A simple explanation of this is that the officials concerned were
bribed and negligent. A more interesting possibility is that the banks top management were

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aware of this and did not pay any attention to it to benefit from higher returns the brokers could
offer by diverting the funds to the stock market. One must recognize that as long as the scam
lasted, the banks benefited from such an arrangement. The management of banks might have
been greatly tempted to adopt this route to higher profitability.
The second route was to replace the actual securities by a worthless piece of paper a fake
Bank Receipt (BR).
The third method was simply to forge the securities themselves. In many cases, PSU bonds
were represented only by allotment letters rather than certificates on security paper. And it is
easier to forge an allotment letter for Rs. 100 crores worth of securities than it is to forge a 100
rupee note. Absolute forgery of this kind however accounted for only a very small part of the
total funds misappropriated.
Bank Receipt
In an RF deal, the borrowing bank delivers the actual securities to the lender and takes them
back on repayment of the loan. In practice, however, this is not usually done. Instead, the
borrower gives a Bank Receipt (BR) which serves three functions:
(a) The BR confirms the sale of securities.
(b) It acts as a receipt for the money received by the selling bank. Hence the name bank
receipt.
(c) It promises to deliver the securities to the buyer. It also states that in the meantime the
seller holds the securities in trust for the buyer.
In short, a BR is something like owing something to other person, and the use of the BR by
fact converts an RF deal into an unsecured loan. The lending bank no longer has the securities;
it has only the borrowers assurance that the borrower has the securities which can/will be
delivered if/when the need arises.10
Bank Receipts issued without Backing of Securities
As stated earlier, a BR is supposed to imply that the issuer actually has the securities and holds
them in trust for the buyer. But in reality the issuer may not have the securities at all. There are
two reasons why a bank may issue a BR, which is not backed by actual securities:

10

http://www.bullrider.in/indian-stock-market-scam/

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(a) A bank may short sell securities, that is, it sells securities it does not have. This would
be done if the bank thinks that the prices of these securities would decrease. Since this
would be an outright sale (not an RF), the bank issues a BR. When the securities do fall
in value, the bank buys them at lower prices and discharges the BR by delivering the
securities sold. Short selling in some form is an integral part of most bond markets in
the world. It can be argued that some amount of short selling subject to some degree of
regulation is a desirable feature of a bond market. An complete sale using a BR, which
is not backed by securities, is not harmful per se though it violates the RBI guidelines.
(b) The second reason is that the bank may simply want an unsecured loan. It may then do
an RF deal issuing a fake BR which is a BR without any securities to back them. The
lending bank would be under a mistaken impression that it is making a secured loan
when it is actually advancing an unsecured loan. Obviously, lenders should have taken
measures to protect themselves from such a possibility.
During the scam, the brokers perfected the art of using fake BRs to obtain unsecured loans
from the banking system. They persuaded some small and little known banks the Bank of
Karad (BOK) and the Metropolitan Cooperative Bank (MCB) to issue BRs as and when
required. These BRs could then be used to do RF deals with other banks. The cheques in favour
of BOK were, of course, credited into the brokers accounts. In effect, several large banks made
huge unsecured loans to the BOK/MCB which in turn made the money available to the brokers.
Breakdown of Control System
The scam was made possible by a complete breakdown of the control system both within the
commercial banks as well as the control system of the RBI itself. The internal control system
of the commercial banks involves the following features:
Separation of Functions: The different aspects of securities transactions of a bank, namely
dealing, custody and accounting are carried out by different persons.
Counter-party Limits: The moment an RF deal is done on the basis of a BR rather than actual
securities, the lending bank has to contend with the possibility that the BR received may not be
backed by any/adequate securities. In effect, therefore, it may be making an unsecured loan,
and it must do the RF only if it is prepared to make an unsecured loan. This requires assessing
the creditworthiness of the borrower and assigning him a credit limit up to which the bank is
prepared to lend. Technically, this is known as a counter-party limit.

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Other aspects of the Scam: Somebody who took a short position of Rs. 500 crores before the
coupon hike of September 1991 could have made a profit of Rs. 15 crores. Since several
persons in the Finance Ministry and the RBI are likely to be aware of the future hike in the
coupon rate, the chance of leakage of this all important information is always there. There have
been several allegations in this regard. However, it was probably very difficult to prove with
any degree of certainty that there was insider trading based on information about coupon rate
changes, because of the size of the market. With a daily trading volume of Rs. 3000 4000
crores, it would have been very easy for anyone to take a position (based on inside information)
of Rs. 500 or even Rs. 1000 crores without anyone suspecting anything untoward.
The Bull Run: Bull is always a stock market mascot. The reason behind this, never trust a bull,
it can do anything at any time. On the same contrary, one should never trust on share market.
But Bull Run literally means, high rise in the price of share. In Hindi, we always refer the word
Teji and that means Bull Run. Harshad Mehta, at that time, was a bull operator.11
Where has all the money gone?
It is becoming increasingly clear that despite the rigorous efforts by several investigating
agencies, it would be impossible to trace all the money defrauded from the banks. At this stage
we can only guess about where the money has gone and what part of the misappropriated
amount would be recovered. Based on the result of investigations and reporting so far, the
following appear to be the possibilities:
A large amount of the money was perhaps invested in shares. However, since the share prices
have dropped sharply from the peak they reached towards end of March 1992, the important
question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index
was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. After the
busting of the scam it fell to about 2500 before recovering to around 3000 by August 1992.
Going by newspaper reports, it appears likely that the bulk of Harshad Mehtas purchases were
made at low prices, so that the average cost of his portfolio corresponds to an index well below
2500 or perhaps even below 2000. Therefore, Mehtas claim that he can clear all his dues if he
were allowed to do so cannot be dismissed without a serious consideration. Whether these
shares are in fact traceable is another question.

11

http://flame.org.in/knowledgecenter/scam.aspx

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It is well known that while Harshad Mehta was the big bull in the stock market, there was
an equally powerful bear cartel, represented by Hiten Dalal, A.D. Narottam and others,
operating in the market with money cheated out of the banks. Since the stock prices rose steeply
during the period of the scam, it is likely that a considerable part of the money swindled by this
group would have been spent on financing the losses in the stock markets.
It is rumoured that a part of the money was sent out of India through the Havala racket,
converted into dollars, and brought back as India Development Bonds. These bonds are
redeemable in dollars and the holders cannot be asked to disclose the source of their holdings.
Thus, this money is beyond the reach of any of the investigating agencies. A part of the money
must have been spent as bribes and sweeteners to the various accomplices in the banks and
possibly in the bureaucracy and in the political system.
A part of the money might have been used to finance the losses taken by the brokers to windowdress various banks balance sheets. In other words, part of the money that went out of the
banking system came back to it. In sum, it appears that only a small fraction of the funds
defrauded are recoverable.
Impact of the Scam
The immediate impact of the scam was a sharp fall in the share prices. The index fell from
4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization.
Since the accused were active brokers in the stock markets, the number of shares which had
passed through their hands in the last one year were massive. All these shares became tainted
shares, and overnight they became worthless pieces of paper as they could not be delivered in
the market. Genuine investors who had bought these shares well before the scam came to light
and even got them registered in their names found themselves being robbed by the government.
This resulted in a chaotic situation in the market since no one was certain as to which shares
were tainted and which were not. The governments liberalization policies came under severe
criticism after the scam, with Harshad Mehta and others being described as the products of
these policies. Bowing to the political pressures and the bad press it received during the scam,
the liberalization policies were put on hold for a while by the government. The Securities
Exchange Board of India (SEBI) postponed authorizing of private sector mutual funds. The
much talked about entry of foreign pension funds and mutual funds became more remote than

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ever. The Euro-issues planned by several Indian companies were delayed since the ability of
Indian companies to raise equity capital in world markets was severely compromised.12
Who exposed the scam actually?
Sucheta Dalal reveals Mehtas Scam. On 23 April 1992, journalist Sucheta Dalal exposed
Mehtas illegal methods in a column in The Times of India. Mehta was dipping illegally into
the banking system to finance his buying.
The crucial 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.
Loosely put, 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 Mehta and his accomplices used with great success to channel money from
the banking system. - Sucheta Dalal13
What happened with Harshad Mehta after he convicted in the Scam?
Exploiting several loopholes in the banking system, Mehta and his associates drew off funds
from inter-bank transactions and bought shares heavily at a premium across many segments,
triggering a rise in the Sensex. When the scheme was exposed, banks started demanding their
money back, causing the collapse. He was later charged with 72 criminal offences, and more
than 600 civil action suits were filed against him.
He was arrested and expelled from the stock market with investigators holding him responsible
for causing a loss to various entities. Mehta and his brothers were arrested by the CBI on 9
November 1992 for allegedly misappropriating more than 2.8 million shares (2.8 million) of
about 90 companies, including ACC and Hindalco, through forged share transfer forms. The
total value of the shares was placed at Rs. 2.5 billion (US$43 million). The one of the allegation
on Harshad Mehta was, to raise the price of share fraudulently, in his bull run, he rise the price
of ACC share from Rs. 200 to Rs. 9,000. Mehta made a brief comeback as a stock market guru,
giving tips on his own website as well as a weekly newspaper column. However, in September
1999, Bombay High Court convicted and sentenced him to five years rigorous
imprisonment and a fine of Rs. 25,000 (US$430). On 14 January 2003, Supreme Court of

12
13

http://www.iimahd.ernet.in/publications/data/00001055jrvarma.pdf
http://www.suchetadalal.com/?id=b4132238-f733-9004-492e822841a8&base=sub_sections_content&f

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India confirmed High Courts judgement. It was a 2:1 majority judgement. While Justice B.N.
Agrawal and Justice Arijit Pasayat upheld his conviction, Justice M.B. Shah voted
to acquit him.14
Allegation of bribe to Prime Minister of India
Mehta again raised a disturbance in 1995 when he made a public announcement that he had
paid Rs. 10 million (US$170,000) to the then Congress president and prime minister, Mr P.V.
Narasimha Rao, as donation to the party, for getting him off the scandal case.15
The End of the Big Bull:
A Gujju Jain business man, came Mumbai for earning money became the baap of the stock
market once, saw the heights and fallen down. He was having hobby of purchasing royal cars
and he was having a bungalow in Mumbais posh area named Madhuli. The common man
who haunted the stock market very badly was earlier a sub-broker of Sheth Dhanlal, he served
there as a trainee and then he became owner of his own firm. By profession he was Chartered
Accountant, but used his skills and knowledge in wrong path. Of the 27 criminal charges
brought against him, he was only convicted of one, before his death at age 47 in 2001.16

14

http://www.wikileaks-forum.com/corruptionanti-corruption/124/harshad-mehta-scam-broke-20-years-agowhat-has-changed/10939/
15
http://www.outlookindia.com/printarticle.aspx?269749
16
http://www.mudraa.com/trading/42864/0/harshad-mehta-a-short-biographical-sketch-js.html

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CHAPTER 4: INTERVIEWS AND MOVIE REVIEWS

If they had only listened to Harshad Mehta, no one would have lost any money
By 2002 India will be one of the two biggest and strongest markets
As the Sensex defies all laws of gravity, Harshad Mehta, capital market genius, explains how
the future lies with brain capital and companies ready to experiment with new ideas, not bricks
and mortar. He argues that, in this new environment, creation of wealth is infinitely more
important than old-fashioned notions of profitability. Pritish Nandy interviewed Mehta on 26th
October 1999.
Did you in your wildest dreams imagine the stock market reaching such new heights?
Yes I did. In fact, I wrote a small article on this a long time back. People may have forgotten it
but I tried to explain in that article how the financial revolution in India started in 1978. I
described how the entire country would be transformed during the next 25 years. Starting 1978.
Why 25 years? Why starting 1978?
In 1978, for the first time, various FERA companies like Colgate and Castrol were made to
dilute their holdings and come to the market. Prior to that year there was virtually no market
worth describing. This was also the year when Reliance came out with its first issue. This
brought in a new culture and lent a new shape to the market. We saw, for the first time, a new
breed of investors entering the market. We were, at that time, 50 to 60 years behind the global
markets.
But that was a long time ago? Surely we have changed a great deal since then!
Certainly. Since then, in fact, all the global markets have done exceedingly well. They have
transformed with such breakneck speed that it is almost unbelievable. The Indian market too
has changed and, by 2002, India will be on par with the best markets in the world. In terms of
infrastructure, systems, people and financial reforms.

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That means during these 25 years, from 1978 to 2002, when the world markets will have
travelled 25 years (at remarkable, unthinkable speed) we would have done even better and
actually travelled 85! At a pace such as this, how can we even anticipate what will happen the
next day? Our only problem is that our systems remain somewhat out of sync. More than 95
per cent of our existing systems were meant for yesterday. Barely 4.5 per cent can cope with
today's needs while only 0.5 per cent are capable of anticipating tomorrow's demands.
What has changed since 1978?
Many things. I would break these 25 years into four parts. Between 1978 to 1985 was the period
of infancy. It was still a speculators' market and things were very gradually, very slowly
changing. There were only two institutions around: UTI and LIC. They were also not
particularly active in the market. It was in 1983 that a new class of merchant bankers came in
who made all the difference. The next phase started in end 1984 with Rajiv Gandhi who
introduced the first wave of liberalisation. This lasted till 1991. The importance of the capital
market changed overnight. With the liberalisation of industry, the stock market came in as a
vital link between savings and productivity. Till then, we had a distorted system where all the
money was going to the banks. Out of which 62 per cent went towards funding the government
and out of the balance 38 per cent, 25 per cent was going towards priority sectors. So there was
hardly any money available to enhance productivity. The little money that was left over
invariably went towards sustaining the profitability of the banks. So the banks found it very
difficult to give money to industry and wait for productivity to increase. So they went in for
trading. It was the safest activity for them. So productivity languished even as 36 banks and
four institutions controlled the entire industrial growth of the country. The economy was
fractured. On one hand, we had the highest savings rate. On the other, there was no money for
production. It was a terrible gap that the capital market finally bridged when it created a direct
link between savings and industrial productivity. These years formed the period of
liberalisation. We saw 23 markets coming up from only two. It was a complete transformation
of the scene.
The third phase?
1992 to 1997 was the period of globalisation. People who had never heard of W I Carr and
Meryl Lynch were suddenly exposed to global players, global trends. The capital market began

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to find many new players and even the government started getting interested in it because it
saw the huge inflow of foreign exchange that it attracted.
And now we are in the fourth phase, I presume?
That's right. We are in the fourth and last phase. It is like building a house. Even when 80 per
cent of the house is ready, no one has any idea of what it is going to look like. The last 20 per
cent is the most crucial. It completes the entire dream. We are in that phase now. The period
from 1998 to 2002 is the period of transformation. You will now see the rooms, the windows,
the colours, the finish, the magical transformation of the marketplace. The pace will be even
more breakneck now.
The first 20 years went towards changing the culture, the attitude, and the mind-sets. The last
five years will see the complete transformation of the market, its maturity, and its shining
brilliance.
What will the market be like in 2002?
If will be one of the two biggest markets in the world and possibly the strongest. I had earlier
predicted that it would transact over Rs 300 billion per day. Now I think it could be even more.
Amazing things have taken shape, quietly but strongly. Attitudes have altered; mind-sets have
changed. Now anything is possible.
The foreign players have come in, in a big way and even though they may not have made the
kind of profits they expected to, they have realised the huge potential of our market. The day
they make successful killings, the market will explode. It may sound very radical when I say
this but the Indian capital market is all set to see a boom the likes of which we can never
anticipate. The signs are all there. Everyone is moving away from profitability towards wealth
creation. Brain capital is acquiring more and more importance than all this bricks and mortar
stuff. In fact, you have been saying this for a while now, in your columns. You have described
it as the value of the intangibles.
The importance of ideas, talent, creativity. These will become the most valuable in the capital
market of the future. They will drive the future of Indian industry, break open new frontiers
and challenge the entire thinking process which has till now dominated our investment

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decisions. I do not entirely accept your point of view that tangible assets will be of no value in
the future...
I did not say that. I said that the value of intangibles will always be infinitely more than
the value of the tangible assets that our banks and institutions currently give so much
more importance to. But tangible assets will also have a role to play...
Yes, brain capital will be recognised for what it actually is. The ultimate creator of wealth. A
value enhancer. And the future eventually lies with those who are brave enough to see it.

MOVIE REVIE: GAFLA

The dominance of experimental cinema has conceptualized many undiscovered plots, themes
and subjects. 'Gafla' is a breed apart and holds the honour to be the first of its kind. The words
"Ghotala", "Ghapla" or "Gafla" have been making headlines for almost a decade or more with
infamous names like Harshad Mehta, Ketan Parikh etc. These words and names may sound
familiar in the present context but the unfaithful and dishonest mind-sets of such offensive
deceiving acts are yet to be discovered. 'Gafla' tries to unravel the journey of such overambitious dream merchants that have led to financial disasters in country's equity market.
The film tries to draw a line between "conspiracy" and "scam" through the introspection and
intervention of celluloid intellect. 'Gafla' meaning "scam" can be described as the illegal act.
The film is microscopic view of share and stock market scams where the film unravels the
hidden truth of the influential, corrupt and the mighty criminals. Despite the fact the film holds
a noble concept the film fails to discover many hidden facts.
The Mehta scandal was portrayed in the Hindi movie, Gafla. It was premiered in Times BFI
50th London Film Festival on 18 Oct 2006.
It is a very small movie according to the other Bollywood movies. This movie is double sided
and one can gain as well as lose from the same. As less publicity was done for this movie the
viewership was very less. But during my research I came through this 2 hour movie and
watched it. This should be a must watch for every person who is working in this industry as
well as those who are intending to enter into share markets.17

17

http://www.smashits.com/everything-has-a-value-but/movie-review-5768.html

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CHAPTER 5: SUGGESTION
It is clear that the government, the RBI and the commercial banks are as much accountable as
the brokers for the scam. The brokers were encouraged and abetted by the banks to divert funds
from the banking system to the stock market. The RBI too stands indicted because despite
knowledge about banks over-stepping the boundaries demarcating their arena of operations, it
failed to reign them in. The looting was done with active connivance and sometimes full
knowledge of the very individuals who were supposed to guard against such a possibility. What
has been the response of the government so far and what needs to be done to ensure that such
scams do not recur in the future? The response of any government to a scam of this kind would
have three main faces:
1. Discover and punish the guilty. This task has been entrusted to the Central Bureau of
Investigation (CBI) and to the Joint Parliamentary Committee (JPC). A special court has also
been set up to facilitate speedy trial.
2. Recover the money. The draconian provisions of the Ordinance for attachment of property
and voiding of transactions with the consequent creation of "tainted" shares were attempts in
this direction.
3. Reform the system. The government's response so far has consisted of measures like banning
of RF deals and going slow on liberalization.
There cannot be two opinions on the need for identifying and punishing the guilty. The
principal objective behind punishing the offenders is more to deter future offenders. However,
the government must ensure that not only the obviously guilty (the brokers) but also the not so
obviously guilty (the bank executives, the bureaucrats and perhaps the politicians) are
identified and brought to book. Investigations of this kind are necessarily time consuming and
expensive, but they have to be gone through so that the credibility of the system is restored. A
rule of thumb which is often quoted throughout the world is that investigation of any fraud will
cost as much as the magnitude of the fraud itself. One can, therefore, expect the real costs of
the scam investigation to be of the order of a couple of thousand crores at least.

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CHAPTER 6: BIBLIOGRAPHY
Websites referred:1. http://www.mudraa.com/
2. http://bhavinpathak.wordpress.com/
3. http://www.bullrider.in/
4. http://www.moneycontrol.com/
5. http://www.iimahd.ernet.in/
6. http://flame.org.in/knowledgecenter/
7. http://www.bullrider.in/indian-stock-market-scam/
8. http://flame.org.in/knowledgecenter/
9. http://www.iimahd.ernet.in/
10. http://www.suchetadalal.com/
11. http://www.wikileaks-forum.com/
12. http://www.outlookindia.com/
13. http://www.mudraa.com/
14. http://www.smashits.com/
15. http://rediff.com/

Books referred:1. The Scam by Sucheta Dalal and Debashish Basu

Movie Reviewed:1. Gafla released in 2006 by Sameer Hanchante