The Beginning of Financial Scams in India- Harshad Mehta

December 15, 2021 by Vandana S · 5 min read

blog-feature-image

Beginning

Harshad Mehta is known as Amitabh Bachchan of the Stock market. Ever wondered why? He is known for laundering money worth of almost 24,000 crores within 3 years. Born in the year 1954, an average student who always got caught for being in disciplined misconduct. He came to Mumbai for his graduation with just rupees 40 in his pocket. He did his BCom and worked in many small companies. His door to success was his job in New India Assurance Company as a salesperson. This job turned his life around. He became interested in the stock market and realized this was the job he was meant to do. He quit his job and joined a stock market brokerage firm in 1981.

Life as a stock Trader

Harshad Mehta was a quick learner. He made connections with few of the top brokers of India. Within 3 years he became a broker with Bombay Stock Exchange. By 1990 he had gained quite a reputation in the Indian Stock Market. He established Grow More Research and Asset Management Company. Despite all the success, Harshad Mehta was not satisfied. He wanted to create his mark on the Indian Stock Market. He started finding loopholes in the banking system and used it to his advantage. During this period the Reserve Bank of India had made it mandatory for banks to keep a minimum level of Government Security Bonds. By the end of each week, banks had to show the Government bonds, else the RBI would penalize them.

Bank Loopholes

Not all banks could have the required level of Government bonds. Few banks had a lot of bonds, while few didn’t have any. The banks that didn’t have the bonds found it very difficult to meet the requirements of RBI. Thus, the banks which had insufficient bonds with them often borrowed the bonds from the banks who had plenty. This was given for a sum of interest.

Although this transaction never happened directly within the banks. It was done through a broker. Harshad Mehta, being a broker made use of this disadvantage of the banks to his advantage. The banks would pay interest to Harshad Mehta to his personal account in return for Government bonds. Harshad Mehta would ask the banks to wait for a time period and he would negotiate with the banks who had government bonds for the bonds with a promise to pay the interest sum in a period of time. Banks agreed to this term as he was influential and people believed in him. After a time frame both the banks used to receive their end of the bargain. So, what exactly happened?

How he pulled it off

Harshad Mehta made money in the extra time frame that he used to ask the banks. He used to invest the money in stock market He would choose shares of the company and buy it aggressively. Due to excess liquidity, other investors also used to buy the shares. This drove the prices up. Since Harshad Mehta dealt with numerous banks, a system of rotation was established by him. When in need of cash, he would liquidate a sum from the stock market. He would rotate the money between the stock market and banks.

Fake Receipts

Harshad Mehta made one mistake. He became greedy and collaborated with officials of two banks. – Bank of Karad and Metropolitan Corporative Bank. These banks issue fake Government receipts that weren’t backed up by any government bonds. These fake receipts were circulated in banks. The bank innocently paid money for these receipts and Harshad Mehta would pump in these into the stock market.

Effects on the Market

BSE quadruplet its index in one year. Nobody understood the sudden shooting up of prices in the stock market. Harshad Mehta’s portfolio grew almost 10 times and was valued at 2000 crores. The stock ACC moved from 200 rupees to 9000 rupees. Other stocks invested by Harshad Mehta were Reliance, TATA steel, Apollo Tyres, and many more.

Exposure

Harshad Mehta made a lot of money and he never failed to showcase the same. He splurged his money on an expensive property in Mumbai which had an inbuilt golf court. He owned many foreign cars that weren’t affordable even by the rich. This flamboyant lifestyle got him into trouble. Times of India journalist, Sucheta Dalal investigated Harshad Mehta. She exposed his scheme of operation in the newspaper.

Aftermath

Banks were alerted and soon the scam of Harshad Mehta was revealed to all. All the banks started asking for their money. It would not have been an issue for him as he always liquidated the cash from the stock market. Due to the winds of scam, the stock market crashed. Due to the crash, the stock prices fell. Since the main source of funds was the stock market for Harshad Mehta, he could not repay the amount to banks. CBI stepped in and he was arrested and charged with fraud. He took many top officials with him- Vijaya bank Chairman committed suicide, SBI, UCO Bank National Housing bank treasury were fired. Many investors lost money due to this scam.

Justice is given to investors

He was arrested in 1992 but received bail. He continued to give financial advice in his website and newspaper columns. Although he was arrested again in 1999. He died in Thane jail under criminal custody due to heart failure.

Interestingly the current Big Bull- Rakesh Jhunjhunwala made money in the stock market during this period by shorting his position in the market. Many lost money, while few created a wealth, this was the beginning of the financial scams in India.

LET’S WORK TOGETHER