How did the biggest scam get revealed?

December 15, 2021 by Vandana S · 3 min read

blog-feature-image

Harshad Mehta, the wizard of the stock market, was caught in a series of fraudulent cases and finally got caught in 1992. He was a planner, yet his plans had loopholes just like the banks he fooled. Sucheta Dalal investigated the entire scenario surrounding Harshad Mehta and unveiled the scam.

It all began when SBI, Mumbai branch discovered 574 crore rupees short in its securities. When the books kept in the Office of Public Debt at RBI showed INR 1170.95 crores as Central Government loans, with an interest rate of 11.5%. Their maturity was in 2010. But in the books of SBI, the money value was 1744.95 crores. The discrepancy of 574 crores was seen in the Securities General Ledger (SGL). Of which 500 crores was written in the name of Harshad Mehta.

How did it start

SGL is the ledger which supports the general ledger control account of banks. To play a fraud one needs to get Bank Receipts (BR’s) to mask the differences. Bank receipts (BR) are given as a replacement for SGL, which confirms that the banks had sold the securities at the decided rates, while on the other hand ensured that the SGL does not bounce. This was a tactful way to show positives even when the Public Debt Office (PDO) is negative.

To back the BR and to make full utilization of the same Ready Forward Deals (RFD) was developed. RFD was secured short term given between banks against government security. The borrowing bank would sell the security and once the loan term is completed would buy the securities back at a higher price. Harshad Mehta had roped in 2 banks namely Bank of Karad and Mumbai Mercantile Cooperative Bank (MMCB) to issue fake BR’s, i.e. the ones not backed by government securities. These fake Br’s were exchanged with other banks who paid Harshad Mehta money for the securities and his reputation.

Stock Market Scam

Harshad Mehta would then pump the money in the stock market by aggressively buying shares of companies and inflating their prices. He would then sell them at profit and exit his positions and repay the borrowed money to the banks. Sucheta Dalal exposed this scam in 1992 by writing an article in the Times of India. This put Harshad Mehta in limelight. The stock market crashed and banks realized that they had a massive loss of 4000 crores as they held BR’s which had no value. SBI was the worst hit.

Sucheta Dalal

SBI asked Harshad Mehta to either bring the correct securities or pay back the sum. He approached the National Housing Board (NHB) for help. NHB issues a cheque in favor of ANZ Grindlay’s Bank. But NHB got fooled by Harshad Mehta and did not receive any securities in return for the money and the issue money did find its way into Harshad Mehta’s ANZ bank account. This money was used to pay off the debts owed to SBI.

SBI Twist

But SBI once again got fooled by the greatest financial scammer. He had over-exhausted his credit limit and SBI extended an overdraft facility of 707 crores without any collateral. This was done under the belief that the money which Harshad Mehta owed NHB would eventually find its way back to their accounts as NHB was the subsidiary of SBI.

But that did not happen. Finally, Harshad Mehta was charged with 72 criminal offenses, 600 civil action suits, which led to his arrest in 1992. He was banned from the stock market and sent to prison for his crimes. But Harshad Mehta did not go silently, he dropped a big news of having PV Narasimha Roa taken money from the latter and would shut this case out. Harshad Mehta passed away due to cardiac arrest in prison, but his scam is legendary.

LET’S WORK TOGETHER