Pallav Sheth Scam: Riding on the success of Scam 1992, Harshad Mehta shot to fame for how he worked around the markets in the Nineties. His alleged scandal is said to have cost banks tens of thousands of crores.
While the success of the series put Harshad in the spotlight, and that’s twenty years after his passing, it also brought attention to the other characters in the series such as Pallav Sheth. Read the full story about Scam 1992 here.
But there’s a higher probability that the character was based on another person entirely – A Mumbai Based Stockbroker called Pallav Sheth. Let’s dive into the article and know more about the Pallav Sheth Scam.
Who Is Pallav Sheth & What Was the Pallav Sheth Scam?
According to Sucheta Dalal’s book The Scam: Who Won, Who Lost and Who Got Away, Pallav Sheth or Pallav Seth made crores by rigging the share price of one Indian Tobacco Company or ITC Ltd back in the nineties. Pallav Sheth age is unknown as there’s no public accurate source to confirm it.
The sheer size and scale of Harshad Mehta’s alleged scam showed that it would be impossible to operate independently and without cooperation from both insiders and a team of his own.
Harshad believed in sharing the gains he made so he had a team of Mumbai-based stockbrokers who would receive insider information before the rest of the market and make buy and sell calls and reap crores from the trading calls.
Pallav Seth was one of the stock brokers under Harshad Mehta’s reign.
Pallav Sheth and Harshad Mehta
Harshad Mehta was accused of price rigging using inside information, inflating the share prices of companies by buying up large quantities of shares using loans taken from banks.
He inflated the share price of ACC (Associated Cement Company) by buying up large quantities, driving the share price from ₹200 all the way up to ₹9,000 per share. (4,400 % return on investment)
Now when he used to make such big bets on shares in the stock market, it is alleged that he didn’t do it alone or for himself completely. He would share information about stocks before they would rise with his elite team of brokers, who could make a killing just off the information he gave out.
Pallav Sheth held positions in ITC ltd, which made him at least a few crores back then. Yet all this wasn’t really covered by the mainstream media as Harshad Mehta took the limelight over the Pallav Sheth scam.
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Pallav Sheth and Canara Bank
When Sucheta Dalal published her expose, it was not only Harshad Mehta who was caught in the crossfire. Pallav Sheth’s name repeatedly appears in multiple cases including the Canfina case, Fairgrowth Financial Services Ltd, and Andhra Bank Financial Services Ltd.
The string of accusations doesn’t end there either. In an article published by ET, brokers Ketan Parekh, Pallav Sheth, Hiten Dalal, and Shrenik were sentenced to one-year rigorous imprisonment by a special court, linking them to the 1992 securities scam.
The four of them were accused of misappropriating funds from Canfina, the NBFC subsidiary of Canara bank of up to ₹ 47 crores directly to their bank accounts. Through these funds, they used to hold positions in the financial markets.
Now, how do four stockbrokers walk away with ₹ 47 crores in broad daylight, without actually robbing the bank safe? They did it using Ready Forward deals.
What Is A Ready Forward Deal?
Let’s take a look at an example to understand the Ready Forward Deal. Consider Two companies A2Z and B2Y.
The first company A2Z needs cash immediately for their business but they do not have the free flow cash in hand. So they will be forced to reach out to a bank for a loan. The bank cannot extend a loan to the company without some sort of collateral and documentation and that takes quite a bit of time. However, A2Z does have one asset in hand – A manufacturing plant.
Since the first option didn’t pan out completely, A2Z reached out to company B2Y. So company B2Y gives out a loan on the condition that A2Z hands over the manufacturing plant on a lease of 2 months.
After the two-month period, the two companies agree that the asset and cash will be returned to the original owners. This agreement that took place between the two companies is called a Ready Forward contract.
Now, this is the agreement between Canbank Mutual Fund and Canfina, orchestrated by Pallav Sheth and the company. Canfina paid Canbank MF in exchange for securities.
The payment taken by Canfina led the stockbrokers to buy positions in the stock market. Both companies adjusted their income statements to cover up the fraud and the stockbrokers’ activities.
This eventually caught up to them, leading them to be fined as well as imprisoned for one year. Pallav Sheth reached an undisclosed settlement with Canara bank under the Supreme Court.
Also Read: Jatin Mehta Scam – Are Diamonds Really Forever?
Pallav Sheth and Fairgrowth Financial Services Ltd
The company Fairgrowth Financial was established in 1990. As per the Central Bureau of Investigation (CBI), the company associated with Andhra Bank Financial Services Ltd is a ₹1,700 crore fraud. The fraud took place using fake security receipts. A security receipt is issued by an Asset Reconstruction Company that provides a promissory note in exchange for security in the future.
Fairgrowth found itself in a mix and had to borrow funds due to a liquidity crisis and this is where Andhra Bank Financial comes into play. To repay the debt, they took a loan from the bank, using security receipts that were not backed by any securities at all.
These same receipts would then be used to source the loans from ABFSL, which led to the fraud being uncovered. And all this took place in a matter of just 10 months, between July 1991 and May 1992.
When the CBI filed its charge sheet against Fairgrowth, the company turned around and accused Pallav Sheth, claiming that 70 crores were taken and unpaid by him alone.
Out of the 70 crores, only 6 crores was repaid and the remaining had to be recovered forcefully by auctioning off Sheth’s assets. In 2018, he along with five other stockbrokers were found guilty but Pallav Sheth was acquitted of the charges later.
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