Top 3 Stock Market Scam In India

 1. Harshad Mehta Scam (1992 Scam)

Also Popularly known as 1992 Scam. Harshad Mehta son of Shantilal Mehta, a stockbroker who later on started his firm GrowMore Reserch and Asset Managemet Comapny in 1984 with his younger brother Ashwin Mehta. 

During the Liberalization and entry of foreign bank players the banks were in pressure to maintain good profits. So They had to compulsorily maintain a fixed percentage in government fixed-income securities with the RBI, known as the Statutory Liquidity Ratio (SLR). Also, they were not allowed to invest in the stock markets. So Their surplus capital was sitting idealy.

 So than these banks decided to loan their excess capital to banks who could not maintain the desired SLR in exchange for interest. The banks would lend money to each other via Ready Forward Deals (RFDs). A RFD is a secured short-term loan from one bank to another against a collateral, i.e. the government bonds.

Instead of actually transferring the bonds, and going through the paperwork, the banks would simply issue Bank Receipts  i.e (BR). With Bank Receipts, the actual government securities weren’t transferred, but the possession was transferred for the short-term buying and selling right was facilitated.

Brokers, like Harshad Mehta, acted as intermediaries between the two banks. The banks would issue the bank receipts in the name of the broker and then the broker would lend the money to the other bank. The lending and the borrowing banks remained unknown to each other.

While doing this Harshad Mehta discovered a loophole in the banking system which would make him earn money and the king of Indian stock markets. Since he had become a prominent name in the stock markets by then, people started calling him Amitabh Bachchan of Bse, Big Bull etc , he convinced banks to issue him cheques in his own name for buying and selling the BRs.

In a normal RFD deal, only two banks are involved, but in Harshad Mehta’s RFD deals, he involved multiple banks. In addition to this, he also convinced bank officials to create fake bank receipts, which had no collateral. So, basically, he raised crores of money against fake bank receipts.

He used to cashed all these cheques and used the funds to inflate the stock prices. Because of this malpractice, He inflated the stock price of ACC Ltd from Rs 200/share to Rs 9,000/share in just 3 months. and Sensex moved upwards at a fast pace and reached 4,500 points in no time. Whenever it was time to repay the bank, he would simply sell the stocks at a high price and repay the principal back to the banks. In the off chance that he could not sell his shares, he would approach the third bank and divert their funds to the first bank.  

Due to this, malpractices the stock markets started rising and a bullish atmosphere was created. Even retail investors got attracted and pumped in their hard-earned money. But, since these stock prices were artificially inflated without any fundamental growth prospects, the markets soon fell. It is Estimated that During the period from April 1991 to May 1992, around five thousand crore rupees were diverted by Harshad Mehta from the Indian banking sector to the Bombay stock exchange. 

After the fraud was revealed by the Journalist Sucheta Dalal, as result, due to lack of fundamental factors, the stock prices crashed and Harshad Mehta was no longer in the position to repay these RFD loans to the banks.

The entire 1992 scam was discovered and he was sentenced to 9 years in jail, in 2001 he died due to cardiac attack. 

2. Ketan Parekh Scam 

After the Harshad Mehta Scam, the Second biggest Scam was Ketan Parekh Scam.

Ketan Parekh a Chartered Accountant was a trainee under Harshad Mehta. Ketan was also Known as Bombay Bull. He used Pay Orders to scam the Indian banks. He deployed ‘pump and dump’ strategies to inflate the prices of selected stocks, known as the K-10 stocks. In which he Selected 10 Stocks. He also applied the concept of circular trading for inflating their stock prices. Even the promoters of these K-10 companies paid him to inflate their stock prices.

At that time, RBI allowed banks to give a maximum loan of 15 Crores to companies, but by bribing the bank officials, he borrowed 800 crores from the MMCB (Madhavpura Mercantile Co-op Bank) and Rs 100 crores from the GTB (Global Trust Bank) without any collateral.

However when there was a crash in Sensex by 176 points due to DotCom bubble burst in 2001-2002, all the K-10 stocks witnessed massive fall in the stock prices. He was unable to sell the stocks or raise any new funds because the MMCB (Madhavpura Mercantile Co-op Bank) and GTB (Global Trust Bank) were close to being bankrupt. As the banks were unable to repay its depositors, RBI launched an investigation into their operations which unearthed the fraud.

Ketan Parekh, having learnt from the best Harshad Mehta, he took all necessary precautions, like timing the investment during the DotCom bubble and using the Calcutta Stock Exchange and Allahabad Stock Exchange instead of the BSE, but he was nevertheless caught.

He was barred from stock market trading till 2017. It is estimated that the scam was close to Rs 40,000 Crores.

3. The Satyam Scam 

After the Harshad Mehta & Ketan Parekh Scam Satyam Scam was 3rd in India history. 

Satyam computers Service Limited, a Hyderabad based IT company was founded in 1987 by Mr. Ramalinga Raju. It was India’s fastest growing IT company and was listed on the BSE in 1992 and on the NYSE in 2001.

The Company was doing well in its field but the Company promoters were greedy, Mr. Raju had a insider news about proposed metro route in Hyderabad. Mr. Raju Started Maytas infrastructure and Maytas properties and started buying land around the proposed metro route. But he was Short of money to buy all the Land, So he used his Smart Brain and He then decided to inflate the stock prices by raising fake sale invoices, and also manipulated bank statements to show higher cash reserves.

All this led to a rise in Satyam’s stock price. He and the promoters then decided to sell their stake at the inflated stock prices and use the money to buy properties around the metro route. Satyam promoters reduced their stake from 24% in 1999 to 2% in 2008.

But the recession of 2008 hit them hard. With real estate prices falling, he was unable to sell the land at a profit. Also, the gap between the real revenue and fake revenue increased to such proportions that he had to reveal his fraud. The Scam was Carried between 2003 to 2008 the scam was estimated around Rs. 5000 cr.

Mr Raju confessed to SEBI about the fake invoices, receipts, cash and price manipulations. As expected the stock prices fell and In April 2009, Raju and nine others involved in the fraud were sentenced to jail by the honorable court. 

Later on Satyam was acquired by Mahindra Group and renamed as Mahindra Satyam and subsequently merged with Tech Mahindra in 2013.