Let's say we have three banks A, B and C. And a broker X.

And obviously, the

government.
Now the banks want to make as much profit as they can by using the money just the way
they want. And the government wants to regulate them by making it compulsory for
them to invest some of the money in Government bonds. So the government puts a
simple rule that at the end of every day, A,B and C have to show them a balance sheet
and a minimum amount has to be invested in bonds.
The banks do it for some time but they ask the government for some kind of relaxation.
So a new rule comes where you need to show the balance sheet only on Fridays. The
average amount per day in the bonds has to be over the fixed amount, however, there is
no such limit on the daily amount now.
Now X comes into the scenario. Since A would sell some bonds to invest elsewhere and B
may buy some bonds as well, the banks will now have different amounts of money
invested in bonds everyday and some will have less while some will have more. But all of
them need to have that minimum amount on Friday, so the banks with lesser amounts,
i.e, A in this case, would need to buy the bonds to keep up with the average.
So what does A do? It contacts X to get it some bonds from either B or C.
X is a trusted broker and all the banks know him pretty well. So X tells A that he'll get the
bonds but right now he isn't sure that from whom will the bonds come, B or C. So instead
of making the cheque on the bank's name, A should sign the cheque for X. (Which was
illegal, BTW).
So A does that. Now X goes to B and ask for the bonds and using the power of trust, X
tells B that he'll pay the money the next day to which B agrees because he also offered a
good return on the money. See, bonds are important, money may come later too.
Using this trick, X makes sure he always has some money with him.
Now comes part two. The money he had, he invested heavily in the stock market to
create a turmoil, specifically for a few companies like ACC. The market saw a huge run
like never before and share prices of ACC and some others went over the tops.
Once he knew the market was at a peak, he started profit making and markets crashed.
The bank people who were involved with him in the illegal acts panicked and one of them
even committed suicide.

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This is to note that it was a very simple explanation where I tried to avoid the terms
likeBR and FR (Ready Forward and Bank Receipt). For a more detailed
explaination, you can check the below links.
HARSHAD MEHTA'S SCAM
Harshad Mehta Scam
Harshad was an intelligent Broker and he knew the exact loopholes with the Indian
economy and the banking system. It's a shame that he used it for the wrong reasons.

As the after effects of this scam, around a sum of Rs 4000 crore was mulcted. And that is
in the 90s so you can imagine the value of such a sum today.
The then PM, Narsimha Rao was accused of Bribery.
Many people were bankrupted and committed suicide.
The concept of Bank receipt was finally removed and many other measures were taken.
Updated Jun 8, 2014 View Upvotes

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Anish Varghese
7.6k Views

I will give you a simple example.

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 foe 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 is a fake one and he has been duped.
This is what, more or less happened in Harshad Mehta Scan
Written Nov 18 View Upvotes

Abhinav Kumar
16.1k Views

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. Crudely 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 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 wasnt
the case in the lead-up to the 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.
This the brokers could manage primarily because by now they had become market
makers and had started trading on their account. To keep up a semblance of legality,
they pretended to be undertaking the transactions on behalf of a bank.
Another instrument used in a big way was thebank 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 Metorpolitan 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
Mehtas 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 swindled of a
whopping Rs 4,000 crore.
Mehta made a brief comeback as a stock market guru, giving tips on his own website as
well as a weekly newspaper column. This time around, he was in cahoots with owners of
a few companies and recommended only those shares. This game, too, did not last long.
Interestingly, however, by the time he died, Mehta had been convicted in only one of the
many cases filed against him.
Written Aug 15, 2014 View Upvotes

Anurag Parihar, Cricketer, Convivial, Fitness Freak, Atheist, Ambitious

12k Views

Thanks for A2A.

Its a scam of 90s. By the year 1990, Harshad Mehta became a prominent name in the
Indian stock market. He started buying shares heavily. The shares of India's foremost
cement manufacturer Associated Cement Company (ACC) attracted him the most and
the scamster is known to have taken the price of the cement company from 200 to 9000
(approx.) in the stock market implying a 4400% rise in its price. It is believed that It
was later revealed that Mehta used the replacement cost theory to explain the reason for
the high-level bidding. The replacement cost theory basically states that older companies
should be valued on the basis of the amount of money that would be needed to create
another similar company. By the latter half of 1991, Mehta had come to be called the Big
Bull as people credited him with having initiated the Bull Run.
Mehta, along with his associates, was accused of manipulating the rise in the Bombay
Stock Exchange (BSE) in 1992. They took advantage of the many loopholes in the
banking system and drained off funds from inter-bank transactions. Subsequently, they
bought huge amounts of shares at a premium across many industry verticals causing the
Sensex to rise dramatically. However, this was not to continue. The exposure of Mehta's

modus operandi led banks to start demanding their money back, causing the Sensex to
plunge almost dramatically as it had risen. Mehta was later charged with 72 criminal
offences while over 600 civil action suits were filed against him. Significantly, the
Harshad Mehta security scandal also became the flavor of Bollywood with Sameer
Hanchate's film Gafla.
Mehta's illicit methods of manipulating the stock market were exposed on April 23, 1992,
when veteran columnist Sucheta Dalal wrote an article in India's national daily The
Times of India. Dalals column read: 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. Crudely put, the bank lends against
government securities just as a pawnbroker lends against jewelers. 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. In a ready-forward deal, a broker
usually brings together two banks for which he is paid a commission. Although the
broker does not handle the cash or the securities, this was not the case in the prelude to
the Mehta scam. Mehta and his associates used this RF deal with great success to
channel money through banks.
The securities and payments were delivered through the broker in the settlement
process. The broker functioned as an intermediary who received the securities from the
seller and handed them over to the buyer; and he received the check from the buyer and
subsequently made the payment to the seller. Such a settlement process meant that both
the buyer and the seller may not even know the identity of the other as only the broker
knew both of them. The brokers could manage this method expertly as they had already
become market makers by then and had started trading on their account. They
pretended to be undertaking the transactions on behalf of a bank to maintain a faade of
legality.
Mehta and his associates used another instrument called the bank receipt (BR).
Securities were not traded in reality in a ready forward deal but the seller gave the buyer
a BR which is a confirmation of the sale of securities. A BR is a receipt for the money
received by the selling bank and pledges to deliver the securities to the buyer. In the
meantime, the securities are held in the sellers trust by the buyer.
Armed with these schemes, all Mehta needed now were banks which would readily issue
fake BRs, or ones without the guarantee of any government securities. His search ended
when he found that the Bank of Karad (BOK), Mumbai and the Metropolitan Cooperative Bank (MCB) two small and little known lenders, were willing to comply. The
two banks agreed to issue BRs as and when required. Once they issued the fake BRs,
Mehta passed them on to other banks who in turn lent him money, under the false
assumption that they were lending against government securities. Mehta used the money
thus secured to enhance share prices in the stock market. The shares were then sold for
significant profits and the BR retired when it was time to return the money to the bank.
Mehta continued with his manipulative tactics, triggering a massive rise in the prices of

stock and thereby creating a feel-good market trajectory. However, upon the exposure of
the scam, several banks found they were holding BRs of no value at all. Mehta had by
then swindled the banks of a staggering Rs 4,000 crore. The scam came under scathing
criticism in the Indian Parliament, leading to Mehta's eventual imprisonment. The
scams exposure led to the death of the Chairman of the Vijaya Bank who reportedly
committed suicide over the exposure. He was guilty of having issued checks to Mehta
and knew the backlash of accusations he would have to face from the public.
Written Jun 23, 2015 View Upvotes Answer requested by Priya Gupta