Harshad Mehta : the big bull of indian stock market and its scam

Have you ever heard of Harshad Mehta: The big bull of the Indian stock market? if not heard,’ am sure you must have watched web series based on his life. Today let’s talk about Harshad Mehta and answer some questions such as why a web series has been made on his biography and how he gained so much popularity in no time.

 

Who was Harshad Mehta??

Harshad Mehta, a person who had shaken the stock market in the early 1990s belonged to a Gujarati family. He completed his schooling from Raipur, Madhya Pradesh. Later he moved to his home state Gujarat. He started his career as a clerk from the New India Assurance company. After a few years, he left the job and joined B.Ambalal broker due to his keen interest in the stock market, later he worked with J.L.Shah and Nandala Shethi. In 1984 he opened a company named ‘Grow more Research and Asset Management Company’ along with his brother and became a stockbroker on Bombay Stock Exchange, which did very well for him. He started investing in the stock market and gained heavily. His investments were huge which made him a billionaire in just a few years. At peak time he lived like a movie star with all the luxury facilities.

 

Harshad Mehta had become rich in a few years by using unfair means to obtain his wealth. He came with 1$ to the city and later become an owner of 8$ billion net worth. This money was earned by various fraudulent means. He knew every loophole of the market. And he had taken advantage of such loophole of the banking system of that time.

Harshad Mehta had started manipulating the stock market by making heavy purchases of various securities of the stock market. The hight price bid up to Rs.10,000 which belonged to ACC (Associated Cement Company). Thus he controlled the whole stock market by selling and buying securities. He started the big Bull Run in the Indian stock market in the 1990s.

 

What was the scam??

Suppose there are three banks A, B and C and a broker Harshad Mehta and Government.

 

To cover up its expenses government issues certain kinds of securities named ‘Bonds’ which were issued to the public and its mandatory for banks to invest some percentage of its money in it. So when banks needed money they mortgaged the bonds to another bank thus rose money and after a stipulated period this money was returned with interest and bonds were given to the buyer bank. Likewise, when we need money we mortgage our jewellery to the lender and he gives us money for short period. On the date of maturity, we take back our valuables by returning, money to the lender. Thus this flow goes on.

 

These were short term Ready Forwards deals. These transactions are carried by intermediaries also called brokers. Harshad Mehta became broker to carry out such deals. Suppose Bank A wants to sell its securities and bank B have to buy securities to meet government obligations. There came Harshad Mehta as a broker. Mehta took securities from bank A and ask them for some time to find a buyer. Then go to Bank B and ask them to give him money and some time. Here he took the advantages of time and money by investing this money in stocks and manipulated the market. When Bank A demanded its money, he found a new buyer suppose bank C and again asked them to give him time and gave this money to bank A. According to RBI guidelines, cheques for payment are to be issued on the name of the bank and not a broker but cheques were issued on the name of Harshad Mehta which was illegal. Many banks did not even know with which bank they were dealing.

Taking an example from real life, a borrower borrows money from the lender for a specific period when the lender asks for his money back then borrower take money from a third person and give it the lender. Thus it becomes a chain. Harshad Mehta took advantage of this chain, he was never out of money which helped him to create ruckus in the stock market. Once he knew the market was at the peak, he started making profits and market crashed.

 

Another instrument which was illegally used by Harshad Mehta was Bank receipt (BR).In the ready forward deal, securities were not moved back and forth actually. Instead, the seller i.e. borrower gave BR to the buyer which acts as a proof that seller has sold the securities. With the help of some banks, Harshad Mehta made fake bank receipts and made the biggest stock market scam to date. Mehta gave the buyer bank fake BR, the banks, in turn, gave him money believing on fake BR as real and he used this money to manipulate the market. At peak time he sold securities and made huge profits and returned the money to banks and take BR back from banks. Many banks had trusted him and given him money.

 

This process had never known to anyone if the stock market never declined. Due to downfall Harshad could not make profits thus he could not return money to bankers. On 23rd April 1992, a journalist of times of India named Sucheta Dalal exposed his scam. The entire banking system was in shock when this scam was exposed as it has to suffer loss amounting to 3000cr-4000cr. Vijaya bank chairman committed suicide because of huge loss to the bank.

 

End of Mehta

On 9th Nov. Harshad Mehta was arrested by CBI. He was charged with 800 civil action suits and 70 criminal cases. SEBI, the regulatory body of stock market banned Mehta for dealing as a stockbroker in the stock market. According to sources, Mehta complained of chest pain late night on 31st Dec 2002.and died in civil hospital around 12.40 am on 1st Jan 2002. Around 27 cases were pending against him when he died.

He became so rich at that time that some journalists called him Amitabh Bachan of the stock market. He had all the luxuries of life and also he claimed the highest taxpayer tag by paying 26 crores in 1991. Thus, this scam made him so popular that Applause Entertainment decided to make web series on ‘1992 Scam’ which emerged as a top web series of 2020. Earlier a book which was first published in 1993 named ‘The scam’ was released written by Debashis Basu and Sucheta Dalal collectively.