The Sales Event In Which The Buyer Is Participating Closes: Fill & Download for Free

HARSHAD MEHTA SCAM :This was one of the best engineered financial scam the country has witnessed.To understand the complete story :It requires the complete understanding of the whole mechanism, plotted very cleverly by a broker.A basic knowledge is required to understand the financial terms used ahead in order to catch the whole scenario.It is a long read. Go on and comprehend. It is indeed a very interesting story where there were faults in the system itself.I found this report from one of the projects by the students of IIMA. Here is the simplified version to read so that even a layman can grasp and correlate the chain of events happening around in the plot.The term "Securities Scam" refers to a diversion of funds to the tune of over Rs. 3500 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992.The scam has for several months become a permanent feature of the front pages of the newspapers. Despite the massive media coverage of the scam, most readers found it hard to understand it particularly when they were confronted with difficult terms and acronyms like ready forward, double ready forward, SGL, PDO, BR, PMS etc.In April 1992, the first press report appeared indicating that there was a shortfall inthe Government Securities held by the State Bank of India. In a little over a month, investigations revealed that this was just the tip of an iceberg which came to be called the securities scam, involving misappropriation of funds to the tune of over Rs. 3500 crores ( about $ 1.2 billion). In an ever expanding ambit, the scam has engulfed top executives of large nationalised banks, foreign banks and financial institutions, brokers, bureaucrats and politicians. The functioning of the money market and the stock market has been thrown in disarray. The scam has generated such immense public interest that it has become a permanent feature on the front pages of newspapers.The scam was in essence a diversion of funds from the banking system (in particular the inter-bank market in government securities) to brokers for financing their operations in the stock market.A clear understanding of the government securities market and the stock (corporate securities) markets is a prerequisite for understanding the scam. A brief comparative description of these two markets is as follows:It is quite clear therefore that there were enormous profits to be had for anybody who could find a way of breaching the artificial wall separating the two markets and arbitrage between them. That in essence was what the scam was all about.To understand the motivation of different players involved in such diversion, it is necessary to examine the changes in the economic environment that preceded the discovery of the scam, and how these changes were affecting the the principal players in both markets.1. LIBERALISATION OF THE ECONOMY .After assuming office in June 1991, the new government accelerated the process of economic liberalisation under the auspices of the International Monetary Fund (IMF).The opening up of the Indian economy as a result of these measures promised an unprecedented growth and prosperity for the private corporate sector as new sectors of the economy were being allowed private participation and various administrative impediments were being removed. Anticipating the good tidings for the private sector, the stock market started booming - the Bombay Stock Exchange Sensitive Index (SENSEX) rose from around 1000 in February 1991 to a peak of 4500 in March 1992 just before the scam came to light. This meant an enormous increase in the scale of finance required by operators in the stock market. Heavy margins imposed by the Bombay Stock Exchange on settlement trading added to the funds requirement.At the same time, the new free market philosophy confronted the public sector with new challenges. There was immense pressure on the public sector to perform - to perform in financial terms. The nationalised banks too were under the same pressure to improve their bottom line. The proposed increase in capital adequacy requirement (mandated by the Narasimham Committee report) added to the pressure on the banks.Another innovation in the banking sector in the period preceding the scam was the Portfolio Management Scheme (PMS).PMS was simply a deposit which was not subject to interest rate ceilings or to reserve requirements. The scheme was designed to permit deployment of large amounts of surplus cash available with several public sector undertakings (PSUs) particularly in the oil sector. A large part of this surplus cash resulted from borrowings in the international markets (by PSUs, at the instance of the government) to bolster the country's precarious foreign exchange reserves.An intense competition developed among the banks for these funds as they were unfettered by reserve requirements.To compete for PMS funds from the PSUs as well as to enhance their own profitability, banks were forced to look for higher returns. This was happening at the same time when there was a growing need for funds in the informal money market to finance stock market operations at very high rates of interest. The time was therefore most appropriate for somebody to find innovative ways of diverting funds from the banking system to the stock market. Brokers who were operating in both the markets were ideally placed to do this, and thus the scam was born.2. THE READY FORWARD DEAL :(Don’t worry about the complex terms, read and understand , it’s simple.)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 bank. The lending is done against government securities, exactly the way a pawnbroker lends against jewellery or other valuables.In form, however, the RF is not a loan at all. The borrowing bank (Bank 2) actually sells the securities to the lending bank (Bank 1) and buys them back at the end of the period of the loan at (typically) a slightly higher price. The price difference represents the interest on the loanThe RF in India serves two main purposes:• Like repo markets around the world the RF deals provide much needed liquidity to the government securities markets.• The RF deals are an important tool in the hands of the banks to manage their Statutory Liquidity Ratio (SLR) requirements. Banks in India were required to maintain 38.5% of their Demand and Time Liabilities (DTL) in government securities and certain approved securities which are collectively known as SLR securities.RF helps in managing this requirement in two ways :A bank which has a temporary surge in DTL may not want to buy SLR securities outright and then sell them when the DTL comes back to normal. Instead it can do an RF deal whereby it effectively borrows the securities from a bank which has surplus SLR securities. An RF in SLR securities can thus be seen either as lending of money or as borrowing of securities.An RF deal is not legally a loan. The amount borrowed by a bank under RF is not regarded as a part of the bank's liabilities. Therefore it is not a part of its DTL, and does not attract the SLR requirement. Had the bank borrowed outright, it would have had to maintain 38.5% of the borrowing in SLR securities.The Mechanics of the Scam As explained above, a ready forward deal is, in substance, a secured loan from one bank to another. To make the scam possible, the RF had to undergo a complete metamorphosis: it had to become an unsecured loan to a broker. How was this transformation brought about? The three crucial steps to effect the metamorphosis were:• The settlement process in the government securities market became broker intermediated, that is, delivery and payments started getting routed through a broker instead of being made directly between the transacting banks.• The broker through whom the payment passed on its way from one bank to another found a way of crediting the money into his account though the account payee cheque was drawn in favour of a bank.• While the above two steps transformed an RF deal from a loan to a bank into a loan to a broker, it would still be a secured loan. However, the brokers soon found a way of persuading the lending bank to dispense with security for the loan or to accept worthless security.Now elaboration on each of these steps is required , in order to clearly understand the modus operandi used in the scam.3. SETTLEMENT PROCESSThe normal settlement process in government securities is that the transacting banks make payments and deliver the securities directly to each other.The broker's only function is to bring the buyer and seller together and help them negotiate the terms, for which he earns a commission from both the parties. He does not handle either the cash or the securities.During the scam, however, the banks or at least some banks adopted an alternative settlement process which was similar to the process used for settling transactions in the stock market.In this settlement process, deliveries of securities and payments are made through the broker. That is, the seller hands over the securities to the broker who passes them on to the buyer, while the buyer gives the cheque to the broker who then makes the payment to the seller. In this settlement process, the buyer and the seller may not even know whom they have traded with, both being known only to the broker.There were two important reasons why the broker intermediated settlement began to be used in the government securities markets:The brokers instead of merely bringing buyers and sellers together started taking positions in the market. In other words, they started trading on their own account, and in a sense became market makers in some securities thereby imparting greater liquidity to the markets.When a bank wanted to conceal the fact that it was doing an RF deal, the broker came in handy. The broker provided contract notes for this purpose with fictitious counterparties, but arranged for the actual settlement to take place with the correct counterparty.4. ACCOUNT PAYEE CHEQUESA broker intermediated settlement allowed the broker to lay his hands on the cheque as it went from one bank to another through him.The hurdle now was to find a way of crediting the cheque to his account though it was drawn in favour of a bank and was crossed account payee.As it happens, it is purely a matter of banking custom, that an account payee cheque is paid only to the payee mentioned on the cheque.In fact, exceptions were being made to this norm, well before the scam came to light. Privileged (corporate) customers were routinely allowed to credit account payee cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing the interest lost on the amount.Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it may take a day or two for the cheque to be cleared and for the funds to become available to the customer. At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 crore cheque is about Rs. 8 lacs.On the other hand, when banks make payments to each other by writing cheques on their account with the RBI, these cheques are cleared on the same day.The practice which thus emerged was that a customer would obtain a cheque drawn on the RBI favouring not himself but his bank. The bank would get the money and credit his account the same day. This was the practice which the brokers in the money market exploited to their benefit.5. DISPENSING WITH THE SECURITY.The brokers thus found a way of getting hold of the cheques as they went from one bank to another and crediting the amounts to their accounts.This effectively transformed an RF Into a loan to a broker rather than to a bank. But this, by itself, would not have led to the scam because the RF after all is a secured loan, and a secured loan to a broker is still secured. What was necessary now was to find a way of eliminating the security itself!Three routes adopted for this purpose were:Some banks (or rather their officials) were persuaded to part with cheques without actually receiving securities in return. A simple explanation of this is that the officials concerned were bribed and/or negligent. A more intriguing possibility is that the banks' senior/top management were aware of this and turned a Nelson's eye to it to benefit from higher returns the brokers could offer by diverting the funds to the stock market. One must recognise that as long as the scam lasted, the banks benefited from such an arrangement. The management of banks might have been sorely tempted to adopt this route to higher profitability.The second route was to replace the actual securities by a worthless piece of paper - a fake Bank Receipt (BR). This is discussed in greater detail in the next section.The third method was simply to forge the securities themselves. In many cases, PSU bonds were represented only by allotment letters rather than certificates on security paper. And it is easier to forge an allotment letter for Rs. 100 crores worth of securities than it is to forge a 100 rupee note! Outright forgery of this kind however accounted for only a very small part of the total funds misappropriated.6. BANK RECEIPTIn an RF deal, as we have discussed it so far, the borrowing bank delivers the actual securities to the lender and takes them back on repayment of the loan. In practice, however, this is not usually done. Instead, the borrower gives a Bank Receipt (BR) which serves three functions:The 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 meantime the seller holds the securities in trust for the buyer.In short, a BR is something like an IOU (I owe you securities!), and the use of the BR de facto converts an RF deal into an unsecured loan. The lending bank no longer has the securities; it has only the borrower's assurance that the borrower has the securities which can/will be delivered if/when the need arises.Advantages of using BRs. There were several reasons why BRs came to be used in lieu of the actual securities:BRs were very convenient for RF deals because delivery was not needed. BRs could simply be cancelled and returned when the deals were reversed.In case of PSU bonds, actual delivery was almost impossible because of a variety of reasons, such as non-existence of certificates, or a single certificate for investment of several hundreds of crores of rupees.In case of government securities, the RBI had issued a directive that BRs should not be used. The reason was that, for these securities, the RBI, through its Public Debt Office (PDO), acts as the custodian. Physical securities are never issued, and the holding of these securities is represented by book entries at the PDO.The ledger in which the PDO maintains these accounts is called the Subsidiary General Ledger (SGL), and these securities are referred to as SGL securities.When a holder of these securities sells them and wishes to transfer them to the buyer, he fills up an SGL transfer form and gives it to the buyer.This SGL form can be compared to a cheque: the buyer deposits it into his SGL account at the PDO, and the PDO makes a book entry reducing the holding of the seller and increasing that of the buyer. Because of this facility, the RBI does not permit use of BRs for these securities. Had the PDO functioned efficiently and carried out its bookkeeping without delays, RBI would have been justified in not permitting use of BRs for government securities.Unfortunately, the PDO was very inefficient and laggardly in its functioning. This was a very serious matter because, like a cheque, an SGL form can also bounce if the seller does not have sufficient holding of securities in his SGL account. The buyer needs to be informed about this promptly; else, he may resell the same securities by issuing his own SGL forms in the belief that he has sufficient balance in his account. The inefficiency of the PDO made the SGL form an inconvenient and unreliable instrument, and banks preferred to use BRs even for the SGL securities, in violation of the RBI's directiveBRs Issued without Backing of Securities As stated earlier, a BR is supposed to imply that the issuer actually has the securities and holds them in trust for the buyer. But in reality the issuer may not have the securities at all. There are two reasons why a bank may issue a BR which is not backed by actual securities:A bank may short sell securities, that is, it sells securities it does not have. This would be done if the bank thinks that the prices of these securities would decrease. Since this would be an outright sale (not an RF!), the bank issues a BR. When the securities do fall in value, the bank buys them at lower prices and discharges the BR by delivering the securities sold. Short selling in some form is an integral part of most bond markets in the world. It can be argued that some amount of short selling subject to some degree of regulation is a desirable feature of a bond market. In our opinion, an outright sale using a BR which is not backed by securities is not harmful per se though it violates the RBI guidelines.The second reason is that the bank may simply want an unsecured loan. It may then do an RF deal issuing a "fake" BR which is a BR without any securities to back them. The lending bank would be under a mistaken impression that it is making a secured loan when it is actually advancing an unsecured loan. Obviously, lenders should have taken measures to protect themselves from such a possibility. This aspect will be examined later when we discuss the banks' control system in general and counterparty limits in particular.During the scam, the brokers perfected the art of using fake BRs to obtain unsecured loans from the banking system. They persuaded some small and little known banks - the Bank of Karad (BOK) and the Metropolitan Cooperative Bank (MCB) - to issue BRs as and when required. These BRs could then be used to do RF deals with other banks. The cheques in favour of BOK were, of course, credited into the brokers' accounts. In effect, several large banks made huge unsecured loans to the BOK/MCB which in turn made the money available to the brokers.7. CONTROL SYSTEMSThe scam was made possible by a complete breakdown of the control system both within the commercial banks as well as the control system of the RBI itself. We shall examine these control systems to understand how these failed to function effectively and what lessons can be learnt to prevent failure of control systems in the future. The internal control system of the commercial banks involves the following features:Separation of Functions: The different aspects of securities transactions of a bank, namely dealing, custody and accounting are carried out by different persons. Dealing refers to the decision about which transactions are to be entered into with which parties. Custody involves receiving and delivering securities/substitute instruments and cheques for the transactions done. Accounting involves maintenance of the investment account of the bank and its reconciliation with the SGL account of the bank maintained by the PDO of the RBI. Closely related to separation of functions is the notion of double custody. Just as the currency chests in the banks are under double custody where two people have to collaborate to open it, the securities too are usually under double custody. The assumption underlying double custody is that two individuals are unlikely to have a criminal intent at the same time!Counterparty Limits: The moment an RF deal is done on the basis of a BR rather than actual securities, the lending bank has to contend with the possibility that the BR received may not be backed by any/adequate securities. In effect, therefore, it may be making an unsecured loan, and it must do the RF only if it is prepared to make an unsecured loan. This requires assessing the creditworthiness of the borrower and assigning him a "credit limit" up to which the bank is prepared to lend. Technically, this is known as a counterparty limit. Strictly, a counterparty limit is required even if an RF is done against actual securities because the securities may decline in value and the RF may end up becoming only partly secured though it was fully secured to begin with.Most of the foreign banks with the exception of the Standard Chartered Bank had very strict counterparty limits and were thus protected from lending too much against fake BRs. For a bank like the Bank of Karad, a reasonable counterparty limit may have been Rs. 50 lacs so that an RF for several hundred crores would be flatly refused. The Standard Chartered Bank either did not have or did not adhere to such limits and agreed to do these RFs.These simple control mechanisms were not being operated by the PDO.What is more surprising is that even when discrepancies were discovered, such as when some SGL forms sent to the PDO bounced because of inadequate inventory of securities in the seller's account, the intimation regarding the inadequacy of securities was communicated to the buyer leisurely, may be through a letter by ordinary post, which could take days to reach. In the mean time, if the buyer sells the same securities on the strength of the SGL sent to the PDO, it could start an ever expanding chain of bounced SGLs! It appears that the PDO was not particularly perturbed by such possibilities.The RBI is expected to carry out site inspections and other audits of the investment accounts and procedures of the banks. These were not quite comprehensive and even when some irregularities were detected, the RBI did not act decisively against the erring banks.8. WINDOW DRESSING THE BALANCE SHEETS.Most banks carry investments in their books at their cost of acquisition and do not mark it down to market. This creates serious distortions during a period when, as shown in the preceding section, the prices of securities are falling.If one assumes that prices of government securities fell by about 5% over the last year, then on an aggregate holding of these securities by the banking system of Rs. 70,000 crores, the paper loss of the banks would be Rs. 3,500 crores. A 10% fall in the prices of PSU bonds would imply a further paper loss of about Rs. 800 crores to the banks (based on the assessment that banks hold about Rs. 8000 crores worth of PSU bonds).Under the current system of accounting, these losses are recognized only when the securities are sold. This means that a bank would be reluctant to sell these securities and show the loss in its books. It was in this context that the banks and the brokers resorted to innovative methods of window dressing the bank balance sheet.The basic idea is as follows:The bank sells the securities trading at a discount to a broker at face value or at a price which is much higher than the prevailing market prices. The broker incurs a huge loss in this transaction as he will have to resell the securities to some other bank at market prices.The bank then buys some other securities from the same broker at prices well above market prices. The broker therefore makes a huge profit in the second transaction which compensates him for the loss incurred in transaction (a).Thus, the net result of the two transactions is that neither the bank nor the broker make any profit or loss. Then why would these transactions be done? The reason is that while the profit earned through transaction(a) would improve the bottom line (profit) for the bank, the loss suffered by the bank in transaction(b) would not be reflected in its profit and loss account at all. The securities bought would simply appear in the bank's balance sheet at inflated values!It is a most ingenious way of creating paper profits. As far the broker is concerned, the price in transaction (a) can be as high as the bank wants so long as he gets a correspondingly higher price in transaction (b).What the scam investigations have revealed is that window dressing of this kind was rampant. Instances have been recorded of the same broker selling the same security on the same day to different banks at vastly different prices.This makes it very difficult to fathom the motives for a single transaction in isolation from other transactions done by a bank.Unless one can put together the entire series of transactions, it is impossible to know whether the banks or the brokers have been the net gainers through all the manipulative transactions. It is conceivable that some brokers were willing to absorb a part of the losses as a quid pro quo for other "services" which the banks provided them.It is interesting to note that even the pure RF deal involves an element of window dressing.The lending bank shows the interest received as an income in its profit and loss account.But the borrowing bank does not show the interest paid as an expense, because it simply carries the investment in its books at the higher repurchase price.It is, in fact, quite likely that the enormous increases in the profits that some of the banks reported in 1992 over the previous year, can at least in part be explained by use of such "creative" accounting practices.Where has all the money gone?It is becoming increasingly clear that despite the intensive efforts by several investigating agencies, it would be impossible to trace all the money swindled from the banks. At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Based on the result of investigations and reporting so far, the following appear to be the possibilities:A large amount of the money was perhaps invested in shares. However, since the share prices have dropped steeply from the peak they reached towards end of March 1992, the important question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. In the aftermath of the scam it fell to about 2500 before recovering to around 3000 by August 1992. Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's purchases were made at low prices, so that the average cost of his portfolio corresponds to an index well below 2500 or perhaps even below 2000. Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so cannot be dismissed without a serious consideration. Whether these shares are in fact traceable is another question.It is well known that while Harshad Mehta was the "big bull" in the stock market, there was an equally powerful "bear cartel", represented by Hiten Dalal, A.D. Narottam and others, operating in the market with money cheated out of the banks.Since the stock prices rose steeply during the period of the scam, it is likely that a considerable part of the money swindled by this group would have been spent on financing the losses in the stock markets.It is rumoured that a part of the money was sent out of India through the havala racket, converted into dollars/pounds, and brought back as India Development Bonds. These bonds are redeemable in dollars/pounds and the holders cannot be asked to disclose the source of their holdings. Thus, this money is beyond the reach of any of the investigating agencies.A part of the money must have been spent as bribes and kickbacks to the various accomplices in the banks and possibly in the bureaucracy and in the political system.As stated earlier, a part of the money might have been used to finance the losses taken by the brokers to window-dress various banks' balance sheets. In other words, part of the money that went out of the banking system came back to it. In sum, it appears that only a small fraction of the funds swindled is recoverable.This sort of chain to chain connection laid out as a master plan for the “Big Bull” to cheat and manipulative the stock prices with loads of money acquired with fraudulent activities for fulfilling his own pockets and his filthy intentions.“Kaam karne ki pehli shart imaandari hoti hai” ,But these big bulls were just stupid and did not have either the brain nor any morals to understand the basics.

That’s a story that goes way back! 7000 years at least, probably more.A story of religion and capitalism throughout the ages. Of oppression, and revolts. Of the rise and fall of civilizations.For those who don’t know, Usury is the practice of charging interest on a loan.Also called rent-seeking. Or interest. Or rent.A transaction, where you give someone access to something, and they must give you back that same thing, and more.Usury and debt bondage were quite common for a long time. Along with slavery, and various other forms of exploitation.When someone is desperate enough, they must agree to whatever you ask for. A starving man will accept almost anything in return for a piece of bread, even if it means agreeing to give over all of their earnings for the rest of their life. Or selling himself into slavery. For a piece of bread.Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself.Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest. Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier.While neolithic writing is a current research topic, conventional history assumes that the writing process first evolved from economic necessity in the ancient Near East. Writing most likely began as a consequence of political expansion in ancient cultures, which needed reliable means for maintaining financial accounts.Making marks on a piece of clay, to keep track of who owes how much, to whom.Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state.Now if you remember the bible story of Moses, a large part of it is about how Moses is trying to get the Pharaoh to let him and his people go.They apparently didn’t like being exploited.But the Pharaoh didn’t want to let them go, and the exploitation continued.The 4.2 kiloyear event was one of the most severe climatic events of the Holocene epoch. It has been hypothesized to have caused the collapse of the Old Kingdom in Egypt.And slaves managed to leave, cross the red sea, and do their own thing. Or so the legend goes.An ancient warning about greed and exploitation.Judaism took a different view on usury, and lending at interest. You can do it, but only to non-Jews.If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.Further north, there was a different story.First there was the Roman Kingdom - more wealth and corruption.The kings thought they could do anything. The prince raped a noblewoman, who told everyone about it before killing herself. This led to the Overthrow of the Roman monarchyAnd to the Roman Republic. There was some social mobility and limited suffrage. But also slavery and so on.There was the Conflict of the Orders, a political struggle between the Plebeians (commoners) and Patricians (aristocrats) of the ancient Roman Republic lasting from 500 BC to 287 BC, in which the Plebeians sought political equality with the Patricians.It played a major role in the development of the Constitution of the Roman Republic.The poor didn’t like being oppressed, and fought a 250 year war to try to have some rights too.After that, things were relatively stable for quite some time, since economically both the patricians and the plebeians were relatively both well off.Italy was dominated by small landowners. However, sometime after the Punic Wars, this changed due to various factors. Partly due to the availability of cheap grain coming into the Roman food supply, the countryside came to be dominated by large estates (latifundia) owned by the Senatorial order.This led to the plebeians clinging desperately to survival while the patricians lived in splendor.The growing wealth inequality led to social unrest, civil wars, and so on. Eventually, the republic fell, a dictator took power.And it was the start of the Roman Empire.During the Principate, most banking activities were conducted by private individuals who operated as large banking firms do today. Anybody that had any available liquid assets and wished to lend it out could easily do so.Moneylending during this period was largely a matter of private loans advanced to persons persistently in debt or temporarily so until harvest time. Mostly, it was undertaken by exceedingly rich men prepared to take on a high risk if the profit looked good; interest rates were fixed privately and were almost entirely unrestricted by law. Investment was always regarded as a matter of seeking personal profit, often on a large scale.The rich who were in a position to take advantage of the situation became moneylenders when the increasing tax demands in the last declining days of the Empire crippled and eventually destroyed the peasant class by reducing tenant-farmers to serfs. It was evident that usury meant exploitation of the poor.Serfdom was a condition of debt bondage and indentured servitude.In the middle east, Judaism eventually developed into Islam, which forbids Usury.Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)Unfortunately, I dont really know all that much about how this happened.I also dont really know much about ancient history in Asia, or in the Chinese dynasties, or South America, or Africa So I apologize that this post is very much centered on the history of Europe, and the US. That’s the culture I grew up in, and the one I know best.Obviously, I’m not able to cover the entire history of humanity in one post, it’s a bit long, so I’m skipping over some parts.So anyway, in the corrupt and wealthy empire of Rome, there was a guy, who was like “WTF are you doing?!?”This is not cool!We shouldn’t take advantage of the poor! We should help each other!And we dont have to always be divided along bloodlines! If people agree to work together, that’s enough… We can just symbolically splash them with water or something!You always think that there isn’t enough, but we can totally share stuff, there is enough to feed everyone!We should love each other, not fight!Of course, some people didn’t like that.They wanted to kill him. And he was like: I’m not even going to fight back. Violence is not good, even if you think you are right!So they killed him.They thought he was dead.But a couple of days later, he was resurrected.Not as a physical body, but as a spiritual one1 Corinthians 15:42-44 So is it with the resurrection of the dead. What is sown is perishable, what is raised is imperishable. It is sown in dishonour, it is raised in glory. It is sown in weakness, it is raised in power. It is sown a natural body; it is raised a spiritual body. If there is a natural body, there is also a spiritual body.As a legend. As a story. As an everlasting memory.His martyrdom inspired his disciples to spread his teachings to all the nations of the world.Early Christians were subject to heavy persecutions. Diocletianic PersecutionAnd Christianity continued to spread. Christians were being brutally killed, and as more and more people died, were made into martyrs, just because they were talking about being nice to each other instead of oppressing each other, people began to see how brutal and violent and unfair the systems in place were.Eventually, Christianity was made into the official religion of the roman empire. State church of the Roman EmpireThe Roman Empire fell, but Christianity continued to spread.The New Testament had a different view on Usury than Judaism."Give to everyone who asks of you, and whoever takes away what is yours, do not demand it back. 31 "Treat others the same way you want them to treat you. 32 "If you love those who love you, what credit is that to you? For even sinners love those who love them. 33 "If you do good to those who do good to you, what credit is that to you? For even sinners do the same. 34 "If you lend to those from whom you expect to receive, what credit is that to you? Even sinners lend to sinners in order to receive back the same amount. 35 "But love your enemies, and do good, and lend, expecting nothing in return; and your reward will be great, and you will be sons of the Most High; for He Himself is kind to ungrateful and evil men. 36 "Be merciful, just as your Father is merciful. Luke 6:31-36The Clergy was first forbidden from engaging in usury, and then the Third Council of the Lateran forbade it entirely.However, greed appeared again.“Christianity”, which at this point had very little to do with the teachings of Christ, was enforced brutally, used as another way to oppress.The church grew rich and powerful, at the expense of the people. Indulgence was used, people were sold the right to be forgiven for their sins.The church started to lend money, and charge interest, but totally not for profit, just to cover their costs….Zinskauf appeared, which is essentially the same as modern day renting.This financial transaction, essentially was a contract in which the rights to use a piece of land or other property were sold in exchange for fixed payments over a specified period of time. To avoid the appearance of usury, the creditor in this transaction was regarded as the buyer who purchased a fixed income from the debtor, who then merely was considered to be the seller of a predetermined stipend."Again, there was a guy who noticed that this was wrong. Who said: “hey, not cool!”. And started a new movement.Luther viewed zinskauf to be usurious since at the expiration of the zinskauf the creditor had increased in net-worth without ever engaging in laborLuther began by criticising the sale of indulgences, insisting that the Pope had no authority over purgatory and so on.Up till then, people couldn’t read the bible directly, it was in latin, and the clergy interpreted it for the people.With Gutenberg, and the invention of the printing press helping, bibles were translated, and spread.Leading to the Protestant Reformation, challenging Papal primacy.And also to the belief that faith in Jesus is the only way to receive God's pardon for sin (sola fide) rather than good works.Since the pope had no authority, and good works were not necessary, and people were free to interpret the bible as they wanted, a lot of people just ignored the new testament, and picked whichever passages they wanted from the old one.To justify interest, or serfdom, and so on. Or slavery even.François Quesnay, a rich merchant thought exploitation was a great idea, and that we should let it happen. He had the ear of the King of France, Louis XV and in 1754 persuaded him to give laissez-faire a try. On September 17, the King abolished all tolls and restraints on the sale and transport of grain and for more than a decade the experiment was a success, but then in 1768 there was a poor harvest, and the cost of bread rose so high that there was widespread starvation while merchants exported grain in order to obtain the best profit. In 1770, the edict allowing free trade was revoked.Later on, Adam Smith, described in great detail the ways in which the rich exploit the poor.The North American colonies, which had taken over the Native’s territory with the help of European governments rebelled against the idea of paying taxes. It should just be laissez-faire.Leading to the United States Declaration of IndependenceOf course, they still had slavery, they considered people of different skin colors to not be real people.But again, some people realized this was not so good, and said: “hey, that’s not cool!”When Abraham Lincoln won the 1860 election on a platform of halting the expansion of slavery, seven states broke away to form the Confederacy. Shortly afterward, the Civil War began, eventually leading to the 13th amendment.Darwin described how evolution through natural selection works. Which led to some people thinking again that this would be a great way to organize human society. Social Darwinism Just let those who cant feed themselves die.Ireland was under the control of the English, and during the Great Famine (Ireland) - also known as the Great Potato Famine, Charles Trevelyan, who was in charge of the administration of government relief, limited the Government's food aid programme because of a firm belief in laissez-faireMore than a million Irish starved, and another million fled the country.And then Karl Marx was another guy who was like “hey, that’s not cool!” describing in great detail how the rich oppress the poor, and his proposed solutions to it.The US had abolished slavery, but was Social Darwinism and laissez-faire was still the idea, and it was still a racist, sexist Apartheid state.With huge trusts gaining power, and workers trying to organize in unions, but being repressed violently.All across Europe, there was political unrest. Some kings had already been overthrown in the name of liberty, equality, and fraternity.In Russia, the Tsar was overthrown, Monarchy was abolished, the Russian Revolution created the soviet union.When huge trusts, speculation, and debt in the US caused a market bubble that eventually popped, the stock market crashed in the Wall Street Crash of 1929, also called black Tuesday, and the Great Depression happened.Since trade was international, the repercussions were too.Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%.As rampant poverty spread, more and more socialist unrest was happening.Since the Jews were not prohibited from lending money, while the Catholics had been, they were comparatively wealthy, and often persecuted throughout the middle ages.Hitler used them as a scapegoat, and started World War II , under ideals of Social Darwinism.The socialists in the soviet union believed in equality, while the fascists believed in rule of the strong over the weak. Even before the Jews, socialists were the first ones to be sent to concentration camps, and exterminated. The Nazis attacked the soviet union too. Eastern Front (World War II)The US was trying to stay out of it all, but with the Attack on Pearl Harbor, they joined in.The Nazis were defeated first, they were weak from fighting the soviet union.Beginning immediately after the German surrender and continuing for the next two years the US pursued a vigorous program to harvest all technological and scientific know-how as well as all patents in Germany. The "intellectual reparations" taken by the US (and the UK) amounted to close to $10 billion (1948 dollars). (Compared to America's 1948 GDP of $258 billion)Two atomic bombs were dropped on the population of Japan, to intimidate them into surrender, ending the war.After the end of the war, and the defeat of the Nazis, the ideas of Social Darwinism suffered a big blow.The public was able to see images of the concentration camps, and of all the horrors that had happened.In the US and in Europe (the First World), welfare governments were implemented.The Second World were the communist nations.And the Third World were all the rest, a lot of whom took the opportunity to revolt, and declare their independence from the colonial powers of the first world during and after the war.Social Darwinism had taken a big blow, and also, black people were sent by the US to fight WW2. And in Europe, they were treated as normal human beings. As saviors even sometimes. Not as inferior, like in the US.This led to another guy having a dream, thinking that things could be improved.And the civil rights movement, and the end of racial segregation in the US.However, there were still lots of countries trying to implement socialism. And while racial segregation had ended, the powerful in the US did not want true equality.They were fine with the idea of exploiting people of any color, as long as they could continue to exploit people. But no socialism.Leading to the Cold War.They could not just bomb the USSR, like they did with Japan, because the soviets had nuclear weapons too.So they had to resort to different tactics.Most of the regime changes that the US participated in involved sponsoring terrorists, like when they trained, armed and funded Jihadists like Ben Laden.There was a loooong list of United States involvement in regime changeBut the war was dragging on.They tried and tried and tried to do it, through sheer brute force.But for example in Vietnam, the people just never accepted it. They fought to the bitter end, they would rather die than be subject to foreign control and exploitation.Instead of trying to terrorize and oppress people into submission, which even the local population was beginning to revolt against, in the end, the US managed to win the war with a different tactic.The private propaganda machine of advertising.With ads everywhere, showing people a perfect life, amazing products, and TV shows that did not at all represent day to day life in the US, the cold war was brought to an end.Seeing things like the huge mansions of the rich, and supermarkets with stocked shelves full of packaged products that were designed to look appealing no matter what was actually inside, people thought that capitalism was indeed better.They didn’t realize that they would not be able to access the products inside, that this was why they shelves were always so stocked.That they would be reduced to begging in front of stores, and sleeping on cardboard boxes.The ads and the TV series and sitcoms never showed that part of capitalism.So in the end, Capitalism won the cold war.Social Darwinism, laissez-faire, high interest rates, debt and so on are once again a large part of society.Poverty and wealth inequality are increasing.And fascist ideas are rearing their ugly head again.A strong leader, and violent repression to keep the poor in their place, working for the rich.The new world religion is Capitalism, and not only does it not prohibit Usury, it encourages it. This is why is is now wildly encouraged.Charge as much interest as you can!We are again at the point where our civilization has reached the point of decadence.Another empire built on greed will fall.Can we do better next time? Or will we just repeat history again?I hope we can do better. But it seems people did forget why usury, interest and rent seeking is bad.

Thanks Akash for asking such an important question.As you mentioned in the mentioned you are new to traditing so Firstly I would like to tell you few important point please read those points carefully after that I'll sort out your question as well:-In the equity segment shares can be sold only if you have the shares in your demat account. Now, when you buy any shares in the delivery it will take T+2 day's to transfer the shares in your demat.Now if you make a short position in any stock and if you'll fail to transfer the Shares in a stipulated time then in the scenario, you have default of payin obligation i.e… shortage of delivery of shares.Now, understand the buyer of the share is having the right to aquire the shares hence the shares has to be transferred in buyer account. Since, you have (as a seller) have default in delivery of shares, the exchange has to put undelivered shares for “Auction”.Now the auction will process will take T+2 day's itself.What happened in the auction session, people who already have shares in the demat account can offer there shares.The auction window time is between 2:00 pm to 2:45 pm.Who can't participate in this auction, the client's broker where the default has done can't participate for auction in the same script.Settlement price:- The auction price is taken at the lowest price offered in the auction. The highest price would not be more than 20% and not be less than 20% of the closing price of the T+1 day i.e….. the previous day prior to settlement day.Now, if the shares are offered, the shares are given to the buyer of the shares on T+3 day and the seller has to pay the price for the shares offered in the auction, which is generally higher than the market price prevailing on the day.Financial Implications of an Auction would be like:-In case of default of shares delivered by a seller, an auction as described would be conducted.The series of events would be as under:T Day – Sale of 1000 Shares Infosys on Monday at Rs. 1000 and Ledger credited by Rs. 10,00,000T+2 Day (Morning) – Non – Delivery of 1000 shares on WednesdayT+2 Day (Auction Session) – Auction conducted for 1000 shares. The best price on offer in the Auction session was 1050.T+2 Day (Post Auction) – Debit Auction Bill generated for 1000 shares at 1050 of Rs. 10,50,000 with an Auction Penalty of 0.05%. Net Ledger on account of the transactions would be Rs. 50,000 + Auction Penalty amount. The 50,000 is nothing but the difference price between auction settlement price and the original sale price.Hopefully your doubt has been cleared and if you still have any questions please feel free to ask.Above content is just for the educational purposes.Thankyou,KEEP FOLLOW ME AND UPVOTE,KEEP FOLLOW ME AND UPVOTE,KEEP FOLLOW ME AND UPVOTE,KEEP FOLLOW ME AND UPVOTE,IT WILL ENCOURAGE ME TO WRITE MORE AND MORE