Thanks to this theory gaining acceptance in the market, the share price of cement major ACC rallied from Rs 300 to Rs 10,000 in less than two years. However, the banks ignored the circular and continued to flout the rules on BRs. According to … Also, all transactions put through by the banks either on an outright basis or on ready-forward basis had to reflect on the same day in their investment accounts. The discovery of the shortfall in SBI and the subsequent disclosure of the payments by NHB created a crisis in the securities market. Patel, 55, who took over as the 24th Governor of the central bank on September 5, 2016, had the shortest tenure since 1992. On the eve of December 10, 2018, a day before the polling results of five states are declared, Reserve Bank of India (RBI) Governor Urjit Patel stepped down from his post, citing personal reasons. This was the era of paper trading. While the series has been praised for its largely accurate portrayal of the events that transpired -- down to a fleeting mention of the fiscal deficit in the Budget 1986 speech, as is shown when a character is watching it on TV -- there are only so many details that it can capture given the scope of the medium. Last year, the RBI had in an RTI query, revealed that the Modi-led government had given less than two and a half hours to give its opinion on demonetisation of 2016. This was possible because every bank dealing in securities had their favoured set of brokers, for whom they were willing to bypass rules. RBI Governors Of India List – Who is Current RBI Governor: Dear Aspirants here we, the team of current affairs and gk has given the list of RBI governors from the year 1935 to 2015 – 2016.The first RBI governor of India was Sir Osborne A. Smith. How did the PMS arrangement help banks and brokers? Many big brokers were badla financiers as well. Secondly, PSUs were given permission to transact with foreign banks only in January 1992. This wall of money fuelled massive speculation in stocks between April 1991 and May 1992, and caused a near fourfold jump in the BSE Sensex. But buyers had the option to roll over their position to the next settlement cycle, if they could find somebody to finance it. Stockbrokers needed funds to finance their stock market trades. If you have any related query, feel free to let … Prime Minister Office appoints RBI Governor of India for a period of three years on the recommendation of the Finance Minister. “The continuance of real sector problems, partly policy-driven in the most recent period such as demonetization, has aggravated the banking situation,” said … (PTI) ... India to wear 1992 WC jersey in Aus ODIs, Dhawan tweets photo in new kit. The cat was finally out of the bag. The Governor of Reserve Bank of India is the Chief Executive Officer of the Central Bank of India and the Ex-officio Chairman of its Central Board of Directors. [11] Four foreign banks—Standard Chartered, ANZ Grindlays, Bank of America and Citibank—accounted for 56 percent of all securities transactions by banks between April 1991 and May 1992. For two reasons. In a surprise reply, the bankers' bank has refused to give the names of its Governors when the stock market was rattled and thousands of crores were ripped off in the scam spearheaded by late Harshad Mehta. To square up their short positions, they had buy shares in the open market, which further fuelled the rally, and cost them more money. Some foreign banks like Citibank were found to be short-selling government securities, which meant that it sold securities not owned, in violation of RBI rules. After a few days, Bank A would buy the securities back from Bank B at a slightly higher rate. Tenure of Dr. Manmohan Singh as RBI Governor saw amendment of RBI Act and set up of Urban Banks Department in RBI. What exactly is the replacement cost theory, and Harshad’s version of it? Bank receipts are said to be at the heart of the scam? The very first officeholder of the Reserve Bank of India was the British banker named Osborne Smith. The rules clearly said that ready forward transactions could be done only between banks and that too for government securities. Earlier, he served as Finance Secretary in the Ministry of Finance, from 1985 to 1989. Trading finally resumed on April 27, but by then it was too late for Harshad. How did brokers access funds from the banks? When a bank wanted to sell government securities, it only had to give a SGL transfer form to the buyer. Similarly, some banks would find themselves short of securities to meet SLR requirements. [8], Venkitaramanan served as Governor of the Reserve Bank of India from 22 December 1990 to 21 December 1992. ... who steered the RBI from December 1992 to November 1997. The buyer would hand the transfer form to the PDO, which would then credit the securities to the buyer’s account and debit the seller bank’s securities account. The JPC report said, “ANZ Grindlays, Citibank, American Express Bank, Bank of America and SCB have not only been the major players in the scam but have initiated the entire process of the scam.”. Nifty could see resistance at 13,150 zone: IIFL's Anu Jain, Asian shares grind lower amid vaccine doubts, economic concern, Oil prices slip in cautious trade ahead of OPEC+ meet, Rupee slumps 35 paise to 74.76 against US dollar, of the fiscal deficit in the Budget 1986 speech. Banks lent the funds to the brokers in the guise of ready forward transactions. There were two violations here. Bank A, which temporarily required cash to meet the CRR rule, would sell securities to Bank B. Many banks flouted the RBI guidelines on bill discounting, and advanced funds to corporates and NBFCs even though the bills were not genuine or did not conform to RBI rules. So the banks would temporarily park some of the loss-making bonds with brokers, to minimize the blow to their profits. Venkitaramanan has published three books, Indian Economy: Reviews And Commentaries - Vol I, Indian Economy: Reviews And Commentaries - Vol II, and Indian Economy: Reviews And Commentaries - Vol III. One after the other, fictitious deals at various banks started getting exposed. NEW DELHI: Reserve Bank of India does not have any information about its chiefs when the securities scam involving Harshad Mehta took place in 1992. The funds raised through PMS schemes would be loaned to brokers, and even corporates, in the guise of ready forward transactions. That appeared to be a securities transaction between NHB and Grindlays, but NHB did not have any securities to show for it. RBI acts as a parent body for all other commercial banks in India, In India, Rupee currency notes which are issued by the Reserve Bank of India (RBI), bear the governor’s signature. Also, for large ready forward transactions, physical delivery could be cumbersome since the trades were to be reversed shortly. Indian Rupee currency notes, issued by the Reserve Bank of India, bear the governor's signature. What was the reason for banks’ profits being low? That could be yet another lasting contribution of Raghuram Rajan, the current governor. Among the main ones, BRs could not be issued for government securities, they could only be issued when PSU bonds or mutual fund units were traded. That left banks—both public sector and private sector--with little funds for commercial lending. RN Malhotra (1985-1990) RN Malhotra is know for several developments in Indian Money Markets and introduction of new instruments. With news of the scam becoming public, and the fund flow into the stock market drying up, share prices nosedived. Other brokers too were unable to hide the 'holes' in the investment portfolios of some banks by replacement deals. Ghosh had the shortest stint as RBI governor, from January 15, 1985 to February 4, 1985, which was a stop-gap arrangement while Ghosh was serving as a deputy governor and waiting to hand over charge to the 17th RBI Governor R N Malhotra. The brokers would absorb losses on some transaction and would be compensated for those in some other trades. Venkitaramanan is seen by many as a brilliant crisis manager of the balance of payments crisis in India in the late 1980s and early 1990s. RBI Governor on seeing fishy transaction in Harshad's SBI account ask the bank to keep a close eye on his fund movements. Having handed over the funds to banks, the PSUs never bothered to check where their money was being invested. A bank holding a BR and yet to receive delivery of the underlying securities would trade in those securities with a third bank, and issue another BR. Harshad in his safeguarding attempt tries to sweep the 500 crores off the books. Patel, 55, who took over as the 24th Governor of the central bank on September 5, 2016, had the shortest tenure since 1992. Since its establishment in 1935 by the Government of India, the RBI has been headed by twenty-five governors. Yes. What is the link between securities trades and compliance with CRR and SLR requirements? CRR, as the term implies, required banks to park a certain portion of their deposits with the RBI at zero interest. India’s foreign exchange situation was quite fragile in the late 80s and early 90s. RBI Governor on seeing fishy transaction in Harshad's SBI account ask the bank to keep a close eye on his fund movements. Government rules said that PSUs could only invest in government securities, public sector bonds and treasury bills. Some banks started issuing BRs, aware that they did not have the underlying securities. His daughter Girija Vaidyanathan â a 1981, Tamil Nadu cadre Indian Administrative Service officer â served as the Chief Secretary of Tamil Nadu. One, to meet the RBI regulations of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). This would be higher than the call money rate. The record of government securities held by banks was maintained by the RBI’s Public Debt Office in what was known as the Securities General Ledger (SGL). Thanks to the banking funds at his disposal, Harshad was able to carry forward his buy positions, and push prices even higher. “It is an economic crisis.” ... Dr. Urjit R. Patel assumed charge as the twenty-fourth Governor of the Reserve Bank of India effective September 4, 2016 after serving as Deputy Governor since January 2013. In effect, BRs were being issued with BRs as the underlying, instead of securities. C Rangarajan (1992-97) was an RBI insider. Why then did the RBI not take action against foreign banks? Books were fraudulently balanced by creating a fresh set of transactions with SGL transfer forms BRs not backed by securities. Naturally, they were in a precarious position and faced ruin if share prices rose further. Three weeks later, Harshad was arrested by the CBI. Urjit Patel: He was the RBI governor who was the first to state "personal reasons" as the driving factor in his decision to step down from the post. Under pressure from SBI, Harshad paid up around Rs 620 crore between April 13 and April 24. Tenure: Sept. 4, 2013 – Sept. 4, 2016 Widely seen as one of the most charismatic RBI governors ever, Rajan is an alumni of the Indian Institute of Technology (IIT). In some cases, the returns from the PMS schemes were lower than the interest that the PSUs had to pay on the bonds. But that deal did not work out. What was Harshad Mehta’s role in the Securities Scam? [4][5] His timely and decisive action laid the ground work for India salvaging the crisis, at a time when India's foreign-exchange reserves had almost depleted. Replacement cost is the cash that a firm needs to replace an old asset at the current market price. At its core, what was the Securities Scam 1992 about? 22-12-1992 to 21-11-1997. In July 1991, as the misuse of BRs became rampant, RBI issued a circular to banks forbidding sale transactions unless they held the actual securities in their investment account. “The continuance of real sector problems, partly policy-driven in the most recent period such as demonetization, has aggravated the banking situation,” said Chakravarthy Rangarajan, who headed the RBI during 1992-97. Could Harshad have resolved the problem with SBI, without the RBI pinning him down? For instance, when the RBI hiked interest rates, the value of the bonds held by banks would decline, and this would affect their profits. The RBI Governors are appointed by the government of India for a fixed time period and not elected. What was the event that finally blew the lid off the scam? Many of them were also brokers in the money market, where corporate bonds and government securities were traded. Banks offering PMS were not supposed to guarantee returns, but there was an unwritten understanding between the PSUs and the banks, on the expected rate of return. This earned either no interest or interest way below market rates. [9] He was posted with the Government of India and with the state of Tamilnadu at various times. Both the volume and the involvement of individuals and the institutions were various and stupendous. In 2018, he became the first RBI governor to resign due to personal reasons and held the post for the shortest term since 1992. Limited period offer. Brokers and banks got help from public sector undertakings (PSUs), which were looking for avenues to deploy their temporary surpluses. He took over on September 5, 2016, had the shortest tenure since the year 1992. He was hand-picked by the BJP-led government after his predecessor Raghuram Rajan was denied a second term. A lesser-known aspect is the irregularities in bill discounting by banks. Sir James Braid Taylor ( 1st July 1937 – 17th February 1943) Sir James Braid Taylor, the successor … Available on Web and Android. Also, there was a cap on the interest rate that banks could offer its depositors. So banks with surplus cash were not keen to lend in the call market. Around 40 percent of the remaining deposits was earmarked for priority sector lending. He served for a period of 2 years, from 1990 to 1992. [5][4][11], After retirement, Venkitaramanan served as the Chairman of Ashok Leyland Investment Services Ltd., New Tirupur Area Development Corporation Ltd. and Ashok Leyland Finance Ltd.[8] He also served in the boards of Reliance Industries Limited, SPIC, Piramal Healthcare Ltd, Tamil Nadu Water Investment Co. Ltd and Housing Development Finance Corp. Ltd.[8]. What exactly were they? Stringent RBI regulations restricted them from borrowing from banks, the cheapest source of funds. This was to do with banks’ trading in debt securities. A professional banker, he served for over 20 years with the Bank of New South Wales and 10 years with the Commonwealth Bank of Australia before coming to India in 1926 as a Managing Governor of the Imperial Bank of India. [11] His decisive actions helped India tide over the crisis. Section 8 (4) of the RBI Act explains the term of the Governor and Deputy Governors. A Ghosh (January-February, 1985) A Ghosh served as interim governor for short period. In January 1992, RBI began inspecting the books of banks for irregularities in securities transactions. The bank did not have the securities it had paid its broker Harshad Mehta for. Here's a detailed FAQ that takes an in-depth look at the Securities Scam 1992. And when they were not financing other traders, the brokers would need funds to roll over their positions, if the market was in an uptrend. Often, there would be a delay in the seller bank handing over the physical securities. The brokers would then play the stock market with the funds, earn profits and return the money to the bank. But the beneficiaries of these transactions were the brokers. Why were banks willing to accommodate brokers? By mid-May, the CBI froze Harshad Mehta’s bank accounts and seized his assets. [3], Venkitaramanan is seen by many as a brilliant crisis manager of the balance of payments crisis in India in the late 1980s and early 1990s. Clearly, the money from the banking system was flooding the stock market and driving stock prices higher. Urjit Patel resigns as RBI Governor citing personal reasons. It embraces among others foreign banks, financial and other public/private sector corporations, the principal stock exchanges, select brokers, and persons occupying high offices. (Express Photo by Tashi Tobgyal) Backing a second term for RBI Governor Raghuram Rajan, leading Indian-American economist at Princeton University Avinash Dixit said the apex bank chief should have “full operational independence” when it comes to … The 'routing' banks purchased securities in their own name or sold securities in their own name without indicating that they were acting for the brokers. The Janakiraman Committee estimated the size of the scam at Rs 4024 crore. The rest were financing deals. By the time the committee completed its interim report, however, the Congress lost power in the 1989 elections. Funds for capex being diverted to PMS schemes delayed certain PSU projects because the PMS schemes had a lock-in clause of one year. The difference in the purchase and sale price of securities was the interest paid for borrowing the funds. At the time of his appointment as RBI Governor, India was in the midst of a balance of payments crisis, with fast-depleting foreign exchange reserves. And yet, Patel served the shortest tenure as an RBI governor since 1992. In violation of rules, PSUs started taking positions in the securities market through the portfolio management services (PMS) schemes run by banks. Did RBI take any steps to prevent the misuse of BRs by banks? Use code SUPERPRO. Old-timers say the bear cartel, aware of Harshad’s problems, prolonged the strike by making other demands. He was the favoured broker of State Bank of India and its subsidiaries, National Housing Bank, UCO Bank and ANZ Grindlays. So brokers found it profitable to access funds from the banking system and use it for their stock market operations. He served for a period of 2 years, from 1990 to 1992. He had been deputy governor since 1982 and, as governor… The special scrutiny conducted by RBI in 1989 and 1990 revealed gross irregularities in the PMS operations by the foreign banks and non-compliance of RBI circulars. Dr. C Rangarajan was a professional economist. If the banks were to directly lend to brokers and corporates, RBI guidelines would apply. A group of brokers, mainly rivals of Harshad, had short sold many shares, convinced that the exuberance in the stock market was not supported by fundamentals and that the rally would not sustain. So when Bank A bought securities from Bank B, the cheque would be made out in the name of Bank B. S Venkitaramanan was the eighteenth Governor of the Reserve Bank of India. Four ex-RBI governors including Raghuram Rajan, YV Reddy warn of NPAs delaying recovery. A few of these violations were noticed by the Ministry of Finance as early as 1986, according to an MoF representative’s statement to the JPC. While the banks were supposed to be trading securities with other banks, the funds were mostly credited to Harshad Mehta’s individual account. Once the buyer got delivery of the securities, the BR would no longer be valid. For SLR, banks had to park a certain portion of their deposits in government securities and other approved securities. Harshad is said to have approached a foreign bank with close ties to the bear cartel, offering a part of his holdings at a discount. Harshad Mehta was a stock market player as well as a money market broker. Of this, Rs 489.75 crores was funded by National Housing Bank cheques drawn in favour of Grindlays Bank and credited to Harshad’s account. In the 80s, banks had to park 63.5 percent of their deposits with RBI, in cash or specified securities to comply with the CRR and SLR requirements. [8], Venkitaramanan was a member of the Indian Administrative Service. He also served the Government of Karnataka as adviser. In short, certain banks acted as 'routing' banks for brokers. [12], Government Model Boys Higher Secondary School Attingal, "In fact: RBI head and crisis manager during 1991 BOP turmoil", "AIADMK's pick of no-nonsense Girija Vaidhyanathan as Chief Secretary surprises many", "Urjit Patel resigns: From Osborne Smith to Shaktikanta Das, here's a list of the men who have held the top post at Mint Street", "5 things you need to know about new Chief Secretary of Tamil Nadu Girija Vaidyanathan | Latest News & Updates at Daily News & Analysis", https://en.wikipedia.org/w/index.php?title=S._Venkitaramanan&oldid=981992368, Articles with dead external links from March 2019, All Wikipedia articles written in Indian English, Creative Commons Attribution-ShareAlike License, This page was last edited on 5 October 2020, at 15:58. Under pressure from the broking community, SEBI diluted the hike on April 20. [10], He served as Finance Secretary in the Ministry of Finance, Government of India for a period of four years from 1985 to 1989. But the RBI dug deeper, and found that Harshad had paid Rs 574 crore from his Grindlay’s Bank account. All rights reserved. Brokers found a workaround built on trading in government securities, colluding with banks, circumventing RBI rules, getting their hands on bank funds and diverting it to the stock market. And, C. D. Deshmukh was the very first Indian Governor of the RBI.. Benegal Rama Rau is the longest-serving Governor for 2754 days term (over 7 years) and Amitav Ghosh is the shortest-serving for 20 days term.. That’s it. There was a close nexus between some banks and some brokers, which allowed the brokers to have unauthorized access to banks’ funds, as well as put through transactions not always authorized by the banks. Was there any other dimension as well to the Securities Scam? During the same period, the BSE Sensex rallied from around 1200 to a record high of 4467. Brokers helped banks meet regulatory requirements and also earn profits on their securities transactions. However, in many instances, the funds would be credited to the individual accounts of brokers. Reserve Bank of India's (RBI) Governor for 21 days, Amitabha Ghosh, passed away on Tuesday at the age of 90. Bank of Karad and Metropolitan Co-operative Bank, which had issued BRs and SGL forms without any underlying securities, suffered massive losses and went under. After handing over the charge, … In Harshad’s view, a manufacturing company’s stock market value should be equal to the investment required to set up a similar capacity. The second reason was to boost their profits, which were quite low at that time. How did PSU firms get sucked into shady dealings in the securities market? The financier would charge an interest, which was higher than the rates in the bond markets, as well as the deposit rates offered by banks. A similar spike was witnessed in many other stocks as well. [4][5], Venkitaramanan was born in Nagercoil,[6] in present-day Kanyakumari District of Tamilnadu, to a Tamil Iyer family. What was the extent of PSUs’ involvement in the securities market? So far 24 people have worked as RBI Governor of India. Many PMS schemes promised handsome returns. Where securities were not readily available, they even issued their own BRs. According to him, the note ban was "an economic crisis". Few bothered to check if the SGL transfer forms or BRs were backed by securities. These brokers took up proprietary positions in stocks, or were financiers for vyaj badla trades. Till 1988, the interest rate in the money market was capped at 10 percent by the Indian Banks Association. In addition, brokers also accommodated banks by temporarily taking losses off their books. The irregularities in securities transactions of the banks and financial companies known as securities scam, which came to light in the second quarter of 1992 is unprecedented in many respects. The Reserve Bank of India or RBI was established in 1935 by the British Government. Reserve Bank of India was established in the year 1935 by the British Government. The Present Governor of RBI is Shaktikanta Das,he took charge on 12th December 2018 and acting till date. The current and 25th RBI Governor is Shaktikanta Das. "The continuance of real sector problems, partly policy-driven in the most recent period such as demonetisation, has aggravated the banking situation," says Rangarajan, who steered the RBI from December 1992 to November 1997. ©TV18 Broadcast Limited. This meant there both a buyer and a seller, a prerequisite for any market. The corporates often use the funds to buy shares of group companies. That prevented Harshad from being able to sell a part of his holdings and repay SBI. By: PTI | New Delhi | June 5, 2016 1:00:14 pm. If denied extension, Raghuram Rajan will be the first RBI Governor since 1992 to not have a five-year term. [6], He completed his master's degree in Physics from University College Thiruvananthapuram, Kerala[7] and also earned a master's degree in Industrial Administration from Carnegie Mellon University, Pittsburg, USA. To circumvent the IBA rule, banks devised the ‘ready forward’ mechanism, and so could lend at a rate higher than the call money rate. He was hand-picked by the BJP-led government after his predecessor Raghuram Rajan was denied a second-term. So bank deposits were not the first choice for corporates with surplus funds. In many cases of PSU bonds, the actual issue of certificates was delayed for several years and the holders' evidence of ownership was only an 'allotment letter'. Conclusion. The Governor of the Reserve Bank of India is the chief executive officer of India's central bank and the ex-officio chair of its Central Board of Directors. The continuous rise in prices bled Harshad’s rivals financially. Back in the 80s, stock market trades were settled once in two weeks. The other key rule was that BRs were valid up to a maximum of 90 days. They found a loophole in the banking system that was there for everyone to see. The securities scandal of 1992, with Harshad Mehta as its main player, is back in collective consciousness nearly three decades after it was perpetrated, thanks to Sony LIV's popular web series Scam 1992. In April, the RBI found a shortfall of Rs 649 crore in SBI’s investment portfolio. Harshad used the funds for his stock market operations, and peddling the replacement cost theory, sent stock prices soaring to dizzying highs. Of these, barely 5 percent of the deals by value involved outright purchases or sales of securities. They exploited it to the hilt. Due to rampant violations in securities trading, 'holes' had developed in the investment portfolio of banks. It was a classic ‘you-scratch-my-back-I-scratch-yours’ arrangement between banks and brokers. Urjit Patel, 55, who took over as the 24th Governor of the central bank on September 5, 2016, had the shortest tenure since the year 1992. Between April 1990 and December 1992, PSUs invested around Rs 36,000 crore in the portfolio management services (PMS) schemes run by foreign banks and NBFC arms of nationalized banks. These holes remained undetected for long because the portfolio was supported by SGL transfer forms or BRs which were either on hand or would be delivered by brokers. Prior to his appointment as the Governor, he held charge as Deputy Governor for over a decade. Sometimes the large public issues made by the PSUs did not find enough takers. His timely and decisive action laid the ground work for India … Reserve Bank of India (RBI) Governor Shaktikanta Das said he will isolate himself and will continue to work. Sir Osborne Smith was the first Governor of the Reserve Bank. As the government gradually withdrew budgetary support, PSUs started raising huge sums from the bond markets even when they did not have any capital expenditure plans. Why then did the RBI not take action against foreign banks? So the seller bank would issue a ‘bank receipt’ (BR) to the buyer of the securities, till such time the shares were physically handed over. He is a retired IAS officer who worked with various departments of Indian Government including Revenue, Economic Affairs and Finance Ministry.