National Pawnbrokers Association Presents: Fill & Download for Free

Yes, the Military Lending Act does affect Pawn Shop owners and customers. Below is an elaborate explanationHistory of the Military Lending ActPassed originally in 2006, the intention of the Military Lending Act was to protect consumers, particularly those with low income, from what legislators consider to be “predatory” interest rates and other potentially “exploitative” lending practices. Since then, the MLA has been updated with newer forms of legislation.Despite what the name would suggest, the Act is not limited in scope to active United States military personnel. It also has provisions which affect various aspects of lending and credit policy for other citizens and residents of the United States, more generally. In total, the Act impacts more than five million Americans.Primarily, the bill’s purpose was to make standard at the federal level certain lending caps which had already been ratified and enforced at the local level. Specifically, the MLA is a federal bill which emulates the 36% interest cap passed in states like Arizona for consumer loans, though a few exceptions to that rule do exist. To put that another way, a maximum of three percent interest can be placed on a given loan per month.Beyond that, the Military Lending Act adds additional regulations on credit insurance fees and premiums, general finance charges, products which had been added on to a line of credit, and fees associated with an application, as well as assorted finance charges.Under the Act, a creditor is legally prohibited from charging a penalty if a customer pays back a loan, either in whole or in part. Furthermore, a creditor is not allowed to require a customer to create a voluntary military allotment to secure a loan. In short, the MLA is a regulatory bill intended to shield consumers from substantially high interest rates, as well as other lending practices which would put certain consumers at a considerable financial disadvantage were they to engage in select borrowing transactions.The parts of the Act which are pertinent to military personnel specify that the MLA reinstates and extends certain protections granted to servicemen and women under the 2016 Servicemen Civil Relief Act. Under the privileges granted by the aforementioned bill as well as the MLA, American members of the armed forces, as well as commissioned officers of the Public Health Service and National Oceanic and Atmospheric Administration, are not required to submit to mandatory arbitration. Further, the aforementioned individuals cannot be sued while involved in military service nor for a year following their service over a loan.It is worth noting that the MLA also extends its provisions to the families of service members as well.Curiously, unlike other regulatory bills, this act in part has been influenced and updated by the Department of Defense rather than other often used regulatory agencies. According to the National Consumer Law Center:‘”New DoD rules announced on July 21, 2015, dramatically expand the MLA’s coverage to almost all forms of credit within the Truth in Lending Act’s scope, other than residential mortgages and purchase money loans, so that this wider range of creditors will be prohibited from charging more than 36% interest or requiring consumers to submit their disputes to arbitration. Notably, MLA coverage is expanded to include credit cards and other forms of [open-end] credit, and creditor attempts to structure credit to evade the prior MLA definition of “consumer credit” will be thwarted.'”This means that loans, including those given by pawnbrokers, have and will be affected for the foreseeable future. Consequently, pawn shop owners should take note of these developments.Advocates for and Against the MLAThough hardly a recent point of advocacy, various left-wing consumer advocacy groups, such as the Center for Responsible Lending, have been arguing for more stringent financial regulations as well as an increase in enforcement of existing regulations. Said proponents argue that regulations like the Military Lending Act, protect consumers from what is perceived to be exploitative lending practices which may lead to the levy of unmanageable loans which would most negatively affect poor people.On the contrary, small government activists, as well as financial service advocacy groups, believe that these regulations are unneeded rule additions, if not an overreach of the role of the federal government. Further, those groups fear that added regulatory pressure will disrupt business interactions and ultimately hurt both pawnbrokers and the customers they serve.How Does The MLA Effect Pawnshop Customers?As previously mentioned, those who are military members that use the services of pawn shops are subject to certain legal protections that regulate pawn loans. In practice, this means that the interest on a loan cannot exceed three percent per month.Furthermore, all of the other protections of MLA and related legislation affect you as well. Keep in mind; this bill applies both nationwide and throughout all US territories and military bases. Consequently, whether or not a pawn shop you frequent is located on or near a military base is irrelevant. The effects of the Military Lending Act still fully apply.As a customer, all you will need when applying for a loan through a pawnbroker is to provide identification and your Social Security number. The employees at the pawn shop which you are using will do all of the rest.Given the way the MLA is structured and currently being enforced, a pawnbroker will ask for identification and check your Social Security number even if you are not an active military member or a dependent of one.Finally, since the MLA is apart of a series of financial regulatory bills passed relatively recently, this Act falls under the direct enforcement of the Consumer Financial Protection Bureau. Any misapplication of the MLA or any other existing financial regulation should be reported to the CFPB.How Does the MLA Effect Pawnshop Owners?Since the Military Lending Act updates the effects of the Military Annual Percentage Rate (MAPR) which affect all loans and credit transactions, every form of pawn transaction is included. Further, it is worth reiterating that not only does this law affect military personnel, their dependents are included as well.Legally speaking, dependents are defined as members of one’s immediate family who are fiscally reliant on the voluntary financial provisions of another individual. In practice, this means most often that an individuals spouse and children are dependents. By extension, the MLA affects them as well so pawn shop owners should be prepared to address and service them as mandated by law.To easily and uniformly do this, pawnbrokers should ask all of their customers every time they ask for a loan to verify their identity for their Social Security number and cross check that with the Defense Power Data Center (DPDC) or from a nationwide credit reporting agency. This robust database will determine whether or not a customer is subject to “covered borrowed” status and thus eligible for the benefits of the MLA.Fortunately, if your firm has access to the DPDC or similar credit reporting agency, the customer identity check is fairly quick. Information required to verify identity should only include a check on the customer’s legal name, address, and date of birth, along with a proper match of those vital statistics to the correct Social Security number.Just because the verification process is simple, does not mean that it is something to be taken lightly. Being in a state of non-compliance with the MLA bears serious legal repercussions.What If a Pawnbroker Is Out of Compliance with the MLA?Remember, failure to comply with the regulations mandated by the Military Lending Act is associated with severe legal repercussions. Violations can result in a voided pawn ticket, result in legal claims against an offending pawnbroker owner in the form of civil liability. Said legal action could lead to fines of $500 per violation, along with punitive damages, attorneys’ fees, and legal action initiation costs included. Also, offenders of the MLA may face additional federal fines and/or up to an entire year in federal prison.Consequently, it is highly recommended that any pawnbroker possess the necessary computer software equipment able to access the DPDC or other reputable credit reporting agency, and follow through with identity verification protocols in accordance with the MLA.Given the attitudes of the previous presidential administration, plus actions taken by independently operating enforcement agencies, pawnbrokers are under scrutiny and will be targeted if the MLA is not followed.Aside from updating your pawnbroker software as needed, pawn shop owners can refer to the National Pawnbrokers Association. The NPA has compiled the most up-to-date information on the specifics of the MLA and aims to partner with all other pawnbrokers out of mutual protection.As a result, the NPA is also accepting new members. To join, call the NPA at (817) 337-8830 or visit their website at NationalPawnbrokers.org/join/.Is There Any Good Pawnbroker Software Updated to Work Within the Structure of the MLA?Obviously, operating a business within the financial industry is difficult, particularly so if you operate a business within the regulatory regime of the United States. What’s even more difficult is dealing with the financial and cultural scrutiny of managing a pawnbroker firm or similar establishment without running afoul of any number of regulatory hurdles, let alone the myriad general business obstacles which constantly present themselves.Fortunately, PawnMaster is the premier software which has been designed to take as much stress off of running a pawnbroker as possible. Being a product of Data Age Business Systems Inc., PawnMaster has been designed to be the leading pawnbroker software service provider since it was first conceived and coded by Randy Peffly and Tom Streng in 1988.Though their commitment to quality has remained a constant, Data Age Business System Inc.’s PawnMaster software has evolved extensively over the past three decades.PawnMaster Classic is a Windows-based pawnbroker management system which need not be dependent on cloud support, though the system is compatible with cloud computing storage technology. Designed to be the all-in-one pawnbroker tool, this software provides virtually every service a pawn shop owner may need.This variation of the software allows the user to easily monitor run-of-the-mill transaction operations as well as to overview and manage a business’s inventory. A related function also acts as a checkout feature, making PawnMaster a holistic pawnbroker software service.Furthermore, with built-in marketing tools and analytic observational reporting, PawnMaster Classic can track what is and is not selling. Further, this system features layaway, pawn-buy-sell-consign, programmable price guide, employee time clock, and even multi-store management tools.Other tools provided by PawnMaster Classic include the recording of repair transaction details. Repairs which have been dispatched are easy to track as they are addressed and record when completed. The system’s business intelligence software contains hundreds of individual reports to provide pawnbrokers with the maximum amount of information to best drive their business forward.Finally, given the potentially precarious nature of pawn shop management PawnMaster Classic even includes a jewelry weight measurement program as well as a police reporting system.Moving on, the PawnMaster Ignite software system is an entirely cloud-based, Amazon Web Services-powered solution which has been the result of years of studying the pawnbroker industry and refined through customer feedback. PawnMaster Ignite incorporates all of the features of its predecessor but also comes with the support of redundant data centers, allows for secure access to personal data, receives consistent software updates, and features a customizable interface. Plus, with this service, you are protected from program failures and have peace of mind due to consistent software updates.Like PawnMaster Classic, Ignite is intuitive and easy-to-use, while also being simple to maintain or scale.This means that the relatively new financial regulations provided the Military Lending Act, or any other new financial constraint, need not be a concern. The PawnMaster system can handle whatever regulatory challenge you may face. In fact, since PawnMaster’s was designed to be the best pawnbroker software on the market, the system features a portal, specially designed to identify active military members who would benefit from the MLA.I own a San Diego Pawn Shop and enjoy blogging about Pawn Loans and any anything related to the industry. Check out our blog to learn more and I really hope this answer was helpful.Omar Anza

Harshad Mehta & Ketan Parekh ScamHarshad Mehta: the high-profile stockbrokerHarshad Shantilal Mehta (1954-2002) was an Indian stockbroker who grabbed headlines for the notorious BSE security scam of 1992. Born in a lower middle-class Gujarati Jain family, Mehta spent his early childhood in Mumbai where his father was a small-time businessman. The family relocated to Raipur in Chhattisgarh after doctors advised Mehta’s father to shift to a drier place on account of his health.Transition from an ordinary broker to ‘Big Bull’Mehta studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur. He quit his job at The New India Assurance Company in 1980 and sought a new one with BSE-affiliated stockbroker P. Ambalal before going on to become a jobber on the BSE for stockbroker P.D. Shukla. In 1981, Mehta became a sub-broker for stockbrokers J.L. Shah and Nandalal Sheth. Having gained considerable experience as a sub-broker, he teamed up with his brother Sudhir to float a new venture called Grow More Research and Asset Management Company Limited. When the BSE auctioned a broker’s card, the Mehta duo’s company bid for it with the financial support of J.L. Shah and Nandalal Sheth. Another name that is rumored to have a crucial hand in the scam was Nimesh Shah. However, Shah could keep a safe distance from the accusations and is currently known to be a heavy player in the Indian stock market.By year 1990, 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.The making of the 1992 security scamMehta, 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.The 1992 security scam and its exposureMehta'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. Dalal’s 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 façade 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 seller’s trust by the buyer.Complicit lendersArmed 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 Co-operative 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.OutcomeMehta 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 scam’s 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.A few years later, Mehta made a brief comeback as a stock market expert and started providing investment tips on his website and in a weekly newspaper column. He worked with the owners of a few companies and recommended the shares of those companies only. When he died in 2002, Mehta had been convicted in only one of the 27 cases filed against him. What attracted the taxman’s attention was Mehta's advance tax payment of Rs 28-crore for the financial year 1991-92. Another eye-catcher was his extravagant lifestyle.I-T, PSBs recover dues nine years after Mehta's deathNine years after Harsad Mehta died, the I-T department and public sector banks (PSBs) have successfully recovered a significant portion of their claims emerging out of the securities scam from his liquidated assets. The Supreme Court directed the Custodian of the attached properties and assets of the Harshad Mehta Group (HMG) in March 2011 to make payments of Rs1,995.66-crore to the I-T department and Rs 199.25-crore to the State Bank of India (SBI), making the two institutions two of the earliest claimants to recover their dues.While the SBI’s total principal amount claim of Rs 1,000-crore have been largely settled, financial institutions have also received some money. However, Standard Chartered Bank, which had claimed Rs 500-crore, has yet to recover its dues it was one of the late claimants. Although the total claim over the HMG is of more than Rs 20,000-crore, the apex court has said that for the present, it would only consider claims towards the principal amount.Who is Ketan ParekhKetan Parekh is a former stockbroker based in Mumbai who was convicted in 2008 for being involved in engineering the technology stocks scam in India’s stock market in 1999-2001. A chartered accountant by training, Parekh comes from a family of brokers and is currently serving a period of disqualification from trading in the Indian bourses till 2017.Ketan Parekh has been accorded with sobriquets such as the Pentafour Bull and the One Man Army by the country’s national business newspapers, while the market simply refers to him as ‘KP’ or associates him with his firm NH Securities. Parekh is known to have no reluctance in meeting the press. He is also known to have razor-sharp forecasts on market developments.What distinguishes Ketan Parekh from the 'Big Bull' late Harshad MehtaThe two have been compared by people to have operated their scams using similar means and that their backgrounds were similar as well. But the differences are very conspicuous.At the outset, Mehta came from a lower middle-class and modest background, while KP’s family has been engaged as stockbrokers for a significant time. He is also related to many prominent brokers. Secondly, when Mehta was operating, the market was still a closed one and was just beginning to liberalize. It was revealed later that Mehta operated using the money of other people as his last recourse. Further, Mehta is known to have resorted to aggressive publicity campaigns whereas KP operates almost clandestinely. The latter has also been successful at creating stories and selling them aggressively to institutional investors.The Midas touchParekh attracted the attention of market players and they kept track of every move of Parekh as everything he was laying his hands on was virtually turning into gold. But the Pentafour Bull still kept a low profile, except when he hosted a millennium party that was attended by politicians, business magnates and film stars. And by 1999-2000, as the technology industry began embracing the entire world, India’s stock markets started showing signs of hyper-activity as well and this was when KP struck.Almost everyone, from investment firms which were mostly controlled by promoters of listed companies to foreign corporate bodies and cooperative banks were eager to entrust their money with Parekh, which, he in turn used to inflate stock prices by making his interest obvious. Almost immediately, stocks of firms such as Visual soft witnessed meteoric rises, from Rs 625 to Rs 8,448 per unit, while those of Sonata Software were up from Rs 90 to Rs 2,150. However, this fraudulent scheme did not end with price rigging. The rigged-up stocks needed dumping onto someone in the end and KP used financial institutions such as the UTI for this.When companies seek to raise money from the stock market, they take the help of brokers to back them in raising share prices. KP formed a network of brokers from smaller bourses such as the Allahabad Stock Exchange and the Calcutta Stock Exchange. He also used ‘BENAMI’ or share purchase in the names of poor people living in Mumbai’s shanties. KP also had large borrowings from Global Trust Bank and he rigged up its shares in order to profit significantly at the time of its merger with UTI Bank. While the actual amount that came into Parekh's kitty as loan from Global Trust Bank was reportedly Rs 250 crore, its chairman Ramesh Gelli is known to have repeatedly asserted that Parekh had received less than Rs 100 crore in keeping with RBI norms.Parekh and his associates also secured Rs 1,000-crore as loan from the Madhavpura Mercantile Co-operative Bank despite RBI regulations that the maximum amount a broker could get as a loan was Rs15-crore. Hence, it was clear that KP’s mode of operation was to inflate shares of select companies in collusion with their promoters.Lady luck disfavours Parekh!Notably, a day after the presentation of the Union Budget in February 2001, Parekh appeared to have run out of luck. A team of traders, Shankar Sharma, Anand Rathi and Nirmal Bang, known as the bear cartel, placed sell orders on KP’s favorite stocks, the so called K-10 stocks, and crushed their inflated prices. Even the borrowings of KP put together could not rescue his scrips. The Global Trust Bank and the Madhavpura Cooperative were driven to bankruptcy as the money they had lent Parekh went into an abyss with his reportedly favourite K-10 stocks.The exposure of the dupeAs with the Harshad Mehta scam, Ketan Parekh's fraudulent practices were first exposed by veteran columnist Sucheta Dalal. Sucheta's column read, “It was yet another black Friday for the capital market. The BSE sensitive index crashed another 147 points and the Central Bureau of Investigation (CBI) finally ended Ketan Parekh’s two-year dominance of the market by arresting him in connection with the Bank of India (BoI) complaint. Many people in the market are not surprised with Parekh’s downfall because his speculative operations were too large, he was keeping dubious company, and he was dealing in too many shady scrips.”When the prices of select shares started constantly rising, innocent investors who had bought such shares believing that the market was genuine were about to stare at huge losses. Soon after the scam was exposed, the prices of these stocks came down to the fraction of the values at which they had been bought. When the scam did actually burst, the rigged shares lost their values so heavily that quite a few people lost their savings. Some banks including Bank of India also lost significant amounts of money.Dalal goes on to state that Parekh's scheme was not visible to a layman given the positive deflection that media had made him a hero while some of the biggest national dailies had even quoted him profusely on that year’s Union Budget. Dalal added that KP’s arrest and the uncanny similarity of his operations to the Harshad Mehta securities scam of 1992 vindicated the miserable inadequacy of the country’s regulatory system. The Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) had remained complacent when the stock bubble was created during the latter half of 1999 and through 2000 while it had not bothered to take any action through 2001 when it was ready to burst.SEBI’s damage control measuresSEBI investigations into Parekh's money laundering affairs revealed that KP had used bank and promoter funds to manipulate the markets. It then proceeded with plugging the many loopholes in the market. The trading cycle was cut short from a week to a day. The carry-forward system in stock trading called ‘BADLA’ was banned and operators could trade using this method. SEBI formally introduced forward trading in the form of exchange-traded derivatives to ensure a well-regulated futures market. It also did away with broker control over stock exchanges. In KP’s case, the SEBI found prima facie evidence that he had rigged prices in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.Furthermore, the information provided by the RBI to the Joint Parliamentary Committee (JPC) during the investigation revealed that financial institutions such as Industrial Development Bank of India (IDBI Bank) and Industrial Finance Corporation of India (IFCI) had given loans of Rs 1,400 crore to companies known to be close to Parekh.Criticism of SEBISome of the regulatory actions SEBI undertook came under scathing criticism from some quarters who accused it of still being clueless about its supervisory duties. Observers said the regulator still continued believing that its only priority was to prevent a fall in stock prices.It was rumored that SEBI banned short sales and increased margins creating a virtual cash market in the process and squeezed turnover to a sixth of the normal level. It also fired all broker directors from the Bombay Stock Exchange and Calcutta Stock Exchange and declared the completion of three controversial settlements of the Kolkata bourse by retaining a sizeable proportion of the payout of operators who had allegedly tied-up for collusive deals. Furthermore, SEBI rounded up the bear operators and launched an inquiry into their alleged short sales.Stringent regulatory measures follow Parekh episodeParekh's fraudulent operations motivated the authorities to take necessary steps that have made made India's stock markets relatively safer in present times. He can also be credited for having forced indolent policy-makers to bring about reforms in the financial system.An active traderAccording to an Intelligence Bureau report, though disbarred from trading in the country’s bourses until 2017, is still operating in the markets through conduits, vindicating Dalal Street’s belief that he has never left the market. The report says that as recently as December 2010, KP has been rallying behind different stocks and placing some of them at rigged up prices to large institutions such as the LIC. He is operating through little-known investment firms, market operators and a following of loyal brokers. KP, who was at the forefront during the technology shares-led bull run in 1999-2000, is apparently using front entities such as Orchid Chemicals , GMR Infrastructure, Cairn India, Deccan Chronicles Holdings, Reliance Industries, Punj Lloyd, Indiabulls Real Estate, Pipavav Shipyard, Amtek Auto, Hindustan Oil Exploration, UCO Bank, State Bank of India, EIH and JSW Steel, among others, to trade in shares.The report further states that KP has been instrumental in inflating the share price of SKS Microfinance from Rs850 to Rs1,100 following its listing in August 2010. He has also rigged IPOs of little known companies by buying out 50% of the issue in collusion with his Kolkata-based associates. KP and his associates have also acquired very large positions in petroleum companies such as ONGC and HPCL, according to the report. An IB official has further said that KP and his team have revealed to their close associates that they have insider information on the government's proposal to decontrol the sale of gas which is expected to raise profit margins of these companies by about 20%.

Harshad Mehta & Ketan Parekh Scam :Harshad Mehta : the high-profile stockbrokerHarshad Shantilal Mehta (1954-2002) was an Indian stockbroker who grabbed headlines for the notorious BSE security scam of 1992. Born in a lower middle-class Gujarati Jain family, Mehta spent his early childhood in Mumbai where his father was a small-time businessman. The family relocated to Raipur in Chhattisgarh after doctors advised Mehta’s father to shift to a drier place on account of his health.Transition from an ordinary broker to ‘Big Bull’Mehta studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur. He quit his job at The New India Assurance Company in 1980 and sought a new one with BSE-affiliated stockbroker P. Ambalal before going on to become a jobber on the BSE for stockbroker P.D. Shukla. In 1981, Mehta became a sub-broker for stockbrokers J.L. Shah and Nandalal Sheth. Having gained considerable experience as a sub-broker, he teamed up with his brother Sudhir to float a new venture called Grow More Research and Asset Management Company Limited. When the BSE auctioned a broker’s card, the Mehta duo’s company bid for it with the financial support of J.L. Shah and Nandalal Sheth. Another name that is rumored to have a crucial hand in the scam was Nimesh Shah. However, Shah could keep a safe distance from the accusations and is currently known to be a heavy player in the Indian stock market.By year 1990, 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.The making of the 1992 security scamMehta, 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.The 1992 security scam and its exposureMehta'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. Dalal’s 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 façade 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 seller’s trust by the buyer.Complicit lendersArmed 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 Co-operative 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.OutcomeMehta 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 scam’s 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.A few years later, Mehta made a brief comeback as a stock market expert and started providing investment tips on his website and in a weekly newspaper column. He worked with the owners of a few companies and recommended the shares of those companies only. When he died in 2002, Mehta had been convicted in only one of the 27 cases filed against him. What attracted the taxman’s attention was Mehta's advance tax payment of Rs 28-crore for the financial year 1991-92. Another eye-catcher was his extravagant lifestyle.I-T, PSBs recover dues nine years after Mehta's deathNine years after Harsad Mehta died, the I-T department and public sector banks (PSBs) have successfully recovered a significant portion of their claims emerging out of the securities scam from his liquidated assets. The Supreme Court directed the Custodian of the attached properties and assets of the Harshad Mehta Group (HMG) in March 2011 to make payments of Rs1,995.66-crore to the I-T department and Rs 199.25-crore to the State Bank of India (SBI), making the two institutions two of the earliest claimants to recover their dues.While the SBI’s total principal amount claim of Rs 1,000-crore have been largely settled, financial institutions have also received some money. However, Standard Chartered Bank, which had claimed Rs 500-crore, has yet to recover its dues it was one of the late claimants. Although the total claim over the HMG is of more than Rs 20,000-crore, the apex court has said that for the present, it would only consider claims towards the principal amount.Who is Ketan ParekhKetan Parekh is a former stockbroker based in Mumbai who was convicted in 2008 for being involved in engineering the technology stocks scam in India’s stock market in 1999-2001. A chartered accountant by training, Parekh comes from a family of brokers and is currently serving a period of disqualification from trading in the Indian bourses till 2017.Ketan Parekh has been accorded with sobriquets such as the Pentafour Bull and the One Man Army by the country’s national business newspapers, while the market simply refers to him as ‘KP’ or associates him with his firm NH Securities. Parekh is known to have no reluctance in meeting the press. He is also known to have razor-sharp forecasts on market developments.What distinguishes Ketan Parekh from the 'Big Bull' late Harshad MehtaThe two have been compared by people to have operated their scams using similar means and that their backgrounds were similar as well. But the differences are very conspicuous.At the outset, Mehta came from a lower middle-class and modest background, while KP’s family has been engaged as stockbrokers for a significant time. He is also related to many prominent brokers. Secondly, when Mehta was operating, the market was still a closed one and was just beginning to liberalize. It was revealed later that Mehta operated using the money of other people as his last recourse. Further, Mehta is known to have resorted to aggressive publicity campaigns whereas KP operates almost clandestinely. The latter has also been successful at creating stories and selling them aggressively to institutional investors.The Midas touchParekh attracted the attention of market players and they kept track of every move of Parekh as everything he was laying his hands on was virtually turning into gold. But the Pentafour Bull still kept a low profile, except when he hosted a millennium party that was attended by politicians, business magnates and film stars. And by 1999-2000, as the technology industry began embracing the entire world, India’s stock markets started showing signs of hyper-activity as well and this was when KP struck.Almost everyone, from investment firms which were mostly controlled by promoters of listed companies to foreign corporate bodies and cooperative banks were eager to entrust their money with Parekh, which, he in turn used to inflate stock prices by making his interest obvious. Almost immediately, stocks of firms such as Visual soft witnessed meteoric rises, from Rs 625 to Rs 8,448 per unit, while those of Sonata Software were up from Rs 90 to Rs 2,150. However, this fraudulent scheme did not end with price rigging. The rigged-up stocks needed dumping onto someone in the end and KP used financial institutions such as the UTI for this.When companies seek to raise money from the stock market, they take the help of brokers to back them in raising share prices. KP formed a network of brokers from smaller bourses such as the Allahabad Stock Exchange and the Calcutta Stock Exchange. He also used ‘BENAMI’ or share purchase in the names of poor people living in Mumbai’s shanties. KP also had large borrowings from Global Trust Bank and he rigged up its shares in order to profit significantly at the time of its merger with UTI Bank. While the actual amount that came into Parekh's kitty as loan from Global Trust Bank was reportedly Rs 250 crore, its chairman Ramesh Gelli is known to have repeatedly asserted that Parekh had received less than Rs 100 crore in keeping with RBI norms.Parekh and his associates also secured Rs 1,000-crore as loan from the Madhavpura Mercantile Co-operative Bank despite RBI regulations that the maximum amount a broker could get as a loan was Rs15-crore. Hence, it was clear that KP’s mode of operation was to inflate shares of select companies in collusion with their promoters.Lady luck disfavours Parekh!Notably, a day after the presentation of the Union Budget in February 2001, Parekh appeared to have run out of luck. A team of traders, Shankar Sharma, Anand Rathi and Nirmal Bang, known as the bear cartel, placed sell orders on KP’s favorite stocks, the so called K-10 stocks, and crushed their inflated prices. Even the borrowings of KP put together could not rescue his scrips. The Global Trust Bank and the Madhavpura Cooperative were driven to bankruptcy as the money they had lent Parekh went into an abyss with his reportedly favourite K-10 stocks.The exposure of the dupeAs with the Harshad Mehta scam, Ketan Parekh's fraudulent practices were first exposed by veteran columnist Sucheta Dalal. Sucheta's column read, “It was yet another black Friday for the capital market. The BSE sensitive index crashed another 147 points and the Central Bureau of Investigation (CBI) finally ended Ketan Parekh’s two-year dominance of the market by arresting him in connection with the Bank of India (BoI) complaint. Many people in the market are not surprised with Parekh’s downfall because his speculative operations were too large, he was keeping dubious company, and he was dealing in too many shady scrips.”When the prices of select shares started constantly rising, innocent investors who had bought such shares believing that the market was genuine were about to stare at huge losses. Soon after the scam was exposed, the prices of these stocks came down to the fraction of the values at which they had been bought. When the scam did actually burst, the rigged shares lost their values so heavily that quite a few people lost their savings. Some banks including Bank of India also lost significant amounts of money.Dalal goes on to state that Parekh's scheme was not visible to a layman given the positive deflection that media had made him a hero while some of the biggest national dailies had even quoted him profusely on that year’s Union Budget. Dalal added that KP’s arrest and the uncanny similarity of his operations to the Harshad Mehta securities scam of 1992 vindicated the miserable inadequacy of the country’s regulatory system. The Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) had remained complacent when the stock bubble was created during the latter half of 1999 and through 2000 while it had not bothered to take any action through 2001 when it was ready to burst.SEBI’s damage control measuresSEBI investigations into Parekh's money laundering affairs revealed that KP had used bank and promoter funds to manipulate the markets. It then proceeded with plugging the many loopholes in the market. The trading cycle was cut short from a week to a day. The carry-forward system in stock trading called ‘BADLA’ was banned and operators could trade using this method. SEBI formally introduced forward trading in the form of exchange-traded derivatives to ensure a well-regulated futures market. It also did away with broker control over stock exchanges. In KP’s case, the SEBI found prima facie evidence that he had rigged prices in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.Furthermore, the information provided by the RBI to the Joint Parliamentary Committee (JPC) during the investigation revealed that financial institutions such as Industrial Development Bank of India (IDBI Bank) and Industrial Finance Corporation of India (IFCI) had given loans of Rs 1,400 crore to companies known to be close to Parekh.Criticism of SEBISome of the regulatory actions SEBI undertook came under scathing criticism from some quarters who accused it of still being clueless about its supervisory duties. Observers said the regulator still continued believing that its only priority was to prevent a fall in stock prices.It was rumored that SEBI banned short sales and increased margins creating a virtual cash market in the process and squeezed turnover to a sixth of the normal level. It also fired all broker directors from the Bombay Stock Exchange and Calcutta Stock Exchange and declared the completion of three controversial settlements of the Kolkata bourse by retaining a sizeable proportion of the payout of operators who had allegedly tied-up for collusive deals. Furthermore, SEBI rounded up the bear operators and launched an inquiry into their alleged short sales.Stringent regulatory measures follow Parekh episodeParekh's fraudulent operations motivated the authorities to take necessary steps that have made made India's stock markets relatively safer in present times. He can also be credited for having forced indolent policy-makers to bring about reforms in the financial system.An active traderAccording to an Intelligence Bureau report, though disbarred from trading in the country’s bourses until 2017, is still operating in the markets through conduits, vindicating Dalal Street’s belief that he has never left the market. The report says that as recently as December 2010, KP has been rallying behind different stocks and placing some of them at rigged up prices to large institutions such as the LIC. He is operating through little-known investment firms, market operators and a following of loyal brokers. KP, who was at the forefront during the technology shares-led bull run in 1999-2000, is apparently using front entities such as Orchid Chemicals , GMR Infrastructure, Cairn India, Deccan Chronicles Holdings, Reliance Industries, Punj Lloyd, Indiabulls Real Estate, Pipavav Shipyard, Amtek Auto, Hindustan Oil Exploration, UCO Bank, State Bank of India, EIH and JSW Steel, among others, to trade in shares.The report further states that KP has been instrumental in inflating the share price of SKS Microfinance from Rs850 to Rs1,100 following its listing in August 2010. He has also rigged IPOs of little known companies by buying out 50% of the issue in collusion with his Kolkata-based associates. KP and his associates have also acquired very large positions in petroleum companies such as ONGC and HPCL, according to the report. An IB official has further said that KP and his team have revealed to their close associates that they have insider information on the government's proposal to decontrol the sale of gas which is expected to raise profit margins of these companies by about 20%.