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11 Nov 2020 by Pradeep U
Decoding The Stock Market Scam of 1992 by Harshad Mehta - Research & Ranking

“Good people don’t need laws to tell them to act responsibly and bad people will find a way around the laws” – Plato

It is said that crime never pays. History has proved this right time and again with countless examples. However, there is another school of thought followed by some according to which crime actually pays, and that is why people do it.

Harshad Mehta, the brain behind India’s first stock market scam probably belonged to the latter group of people who believed that crime actually pays. Mehta is back in the news, and this time it is due to a popular web series inspired by him. For the uninitiated, Harshad Mehta was a stockbroker who took advantage of the loopholes in the Indian banking system to pull-off India’s largest stock market scam.

Let’s take a detailed look the stock market scam of 1992 perpetuated by Harshad Mehta.

Born in Rajkot in on July 29th 1954, Harshad Mehta spent most of his early childhood in Mumbai and later at Bhilai. He moved to Mumbai after schooling and after completing his graduation in commerce did a number of odd jobs for the next few years.  It was during his stint as a salesman with the New India Assurance Company that Harshad Mehta became interested in the stock market and quit his job to join a brokerage firm of Prasann Pranjivandas. By the year 1990, Harshad Mehta went on to become a prominent name in the Indian stock market with a Midas touch as everything he touched became gold.

From enormous wealth and a plush sea-facing bungalow at Worli in Mumbai to a fleet of latest luxury cars, Harshad Mehta had accumulated it all in a short time span. But alas, crime never pays.

The anatomy of the stock market scam of 1992 by Harshad Mehta

In simple words, Harshad Mehta along with a ring of stockbrokers diverted bank funds into the stock market by using the funds to buy certain stocks, thereby creating artificial demand and jacking up the prices. As a result of this, the benchmark BSE Sensex index surged from 1000 levels in Jan 1991 to 4400+ levels by Apr 1992. Some of Harshad Mehta’s favourite stocks included ACC, Apollo Tyres, Reliance, Hero Honda, TISCO, BPL, Sterlite, Videocon etc.

Many investors who considered Harshad Mehta, a messiah, blindly followed him in and out of stocks making quick money. This newfound success in the stock market inspired many first-time investors cutting across sections of society to invest in the stock markets. From taxi drivers, paan wallahs, to the salaried and businessmen, everyone was dabbling their hands at investing in the stock market. As a result, despite weak fundamentals, stocks of unheard companies started hitting new highs every day. 

How Harshad Mehta conned the banks?

In the early '90s, Ready Forward Deals (RF) were used by banks through intermediaries (brokers such as Harshad Mehta) to lend and borrow government securities.  Under this system, the borrower, (the seller of securities), gave the buyer of the securities a Bank Receipt confirming the sale of securities. Bank Receipt is an instrument which promised to deliver the securities to the buyer and also states that, in the meantime, the seller holds the securities in trust of the buyer.

Harshad Mehta exploited this loophole in the banking system by asking banks for more time to give the securities and would ask the banks to deposit the money into his personal account or accounts of those linked with him. Banks found his offer of higher rates of interest too good to resist.

While in a normal RF deal, there would be only two banks, Harshad Mehta used a chain of banks to create a web where payments from one bank would be used to pay another.

But Harshad Mehta did not just stop there. He went a step ahead securing fake bank receipts using two small banks, Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB). He then passed on these bank receipts to other banks in exchange for money while banks were under the assumption that they were lending against government securities.

Finally, when the scam was exposed, the stock market fell like a pack of cards. And so, did the dreams of thousands of innocent investors who had blindly invested in stocks where Harshad Mehta had invested in which had little or no vaule associated with them.

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The end of Harshad Mehta’s stock market joyride

Harshad Mehta’s joyride in the stock market ended after journalist Sucheta Dalal wrote an article in the Times of India on April 23rd, 1992 exposing the loopholes in the Indian banking system which Harshad Mehta had exploited to defraud the banks of thousands of crores. It is said that Harshad Mehta caught her attention when she spotted him arriving in a brand-new Lexus car which had just been launched internationally and was worth a lot of money.

Once the scam was exposed, many banks realized that they were holding worthless BRs which did not have any value.

Harshad Mehta’s fight with the Bear Cartels

Harshad Mehta was known as the ‘Big Bull’ of Dalal street as his actions of pumping huge money in the stock market had fuelled a bull run. However, this did not go well in favour of the Bear Cartels in the market, a group of traders who would short-sell stocks in large quantities to create a bear market and then purchase those stocks at a low price to make huge profits. There are many who claim that Harshad Mehta’s ultimate downfall was brought upon by the bear cartels who considered him a thorn in their path and ganged up together to expose him.

The scale of the fraud perpetrated by Harshad Mehta is still unmatched. Mehta laundered over Rs 24,000 crore fraudulently within three years. RBI constituted a committee to investigate the matter which was known as the Janakiraman Committee. As per the committee's report, the magnitude of the scam perpetrated by Harshad Mehta was Rs.4025 crores, and he was charged with 72 criminal offences and many action suits.

There is absolutely no doubt that Harshad Mehta was a brilliant man, who unfortunately chose the wrong path. He died at the age of 47 due to a heart attack while he was still in jail in the year 2001 with many cases still pending against him.

There are many who believe that Harshad Mehta was made a scapegoat, while the big fish, including politicians and industrialists who had colluded with him behind the scenes quietly to make big bucks, got away.

It is rightly said that every cloud has a silver lining. Harshad Mehta’s stock market scam of 1992, not only exposed the loopholes in India’s banking system but also resulted in sweeping stock market reforms. The after-effects of the securities scam of 1992 gave rise to the emergence of a strong regulator, SEBI which was empowered with the passing of SEBI Act 1992 and undertook some massive reforms to regulate listed and unlisted companies, IPOs, curb fraudulent trading and protest the interest of investors.

But this did not stop stock market scams from happening. Ketan Parikh, a protege of Harshad Mehta pulled off another major stock market scam through a ‘pump and dump scheme’ using large sums of money borrowed from banks.

To end on a lighter note, let’s take a look at a popular joke inspired by these stock market scams “If you owe the bank a small amount then it is your problem. If you owe the bank millions, then it is the bank’s problem.”

 

 

 

 

 

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