How the Harshad Mehta Scam Led to a Reform
The Harshad Mehta scam of the ‘90’s. What has this scam got to do with the reforms story that is the theme of Montek Singh Ahluwalia’s Backstage ? To answer that, one needs to understand how the scam worked. Banks buy and sell bonds to/from each other, either to meet regulatory requirements, or sometimes to earn money via interest for short durations. Back then, with no electronic systems, banks would do such transactions via brokers. The buying bank would issue a check, and the selling bank would issue a BR (banker’s receipt) to convey money had been received. So far so good. Centralized records of the owners of government securities was maintained by the Public Debt Office (PDO). With non-electronic record systems, it would take time for a change in the owner (seller to buyer bank) to be recorded in PDO records. Since many inter-bank transactions of this kind were of short durations (15 days), it often made no sense to even record such transactions with the PDO –...