Whether you call it, Harshad Mehta scam, 1992 Indian stock market scam, scam of 1992 or choose any other name, the blot has been painted and it will remain as an significant event occurred in history of Indian stock market.
I don’t even know whether to call it even a scam or someone who has successfully taken an advantage of the loopholes in Indian financial market in past.
Harshad Mehta was a stockbroker on the Bombay stock exchange(BSE) and was alleged to have engineered the BSE scam in 1992 using ready forward deals.
Below post will show you how, when, where, why this scam happened, a journey of a lower-middle class men from rags to riches and finally to jail. Moreover, how as an investor or trader you can learn lot of things while being part of financial market.
So, without further delay let us start with brief history about so called ‘Raging Bull’ aka Harshad Mehta and gradually will move step by step to the other events occurred while his journey.
History Of Harshad Mehta:
Harshad Mehta full name is Harshad Shantilal Mehta, he was born on 29 July 1954, at Paneli Moti, Rajkot district, in a Gujarati Jain family. His father had a small textile business in kandivali where he spent his early childhood days.
Later on, the family moved to Camp 2, Power House, Bhilai Madhya Pradesh which is now comes under state of Chhattisgarh.
He did his schooling from Janta Public School, Camp 2, for his further education to college and finding work Harshad Mehta moved down to Mumbai and completed his B.com in 1976 from Lala Lajpatrai College.
Although, he was not a great student but always carried a passion for cricket. After completion of his education he worked a number of odd jobs for the next ten years.
Mehta started his career as an salesperson selling hosiery, cement, and diamonds. He got his first job as a sales person in the Mumbai office of New India Assurance Company Limited (NIACL).
This was the time when he first got interested in the stock market due to which he left that job after a few days, and joined a brokerage firm.
Harshad Mehta Entry In Stock Market:
Harshad Mehta made Entry In Stock Market in early 1980’s, he joined a lower clerical job at the brokerage firm Harjivandas Nemidas Securities where he worked as an middleman for the broker Prasann Pranjivandas to whom mehta considered his “Guru“. With each passing year starting 1980 he joined several other brokerage firms and served at different positions for ten years.
Meanwhile working with these brokerages he also started trading actively from 1986, within a span of 5 years Harshad Mehta made a great fortune in the Indian security market.
With help of his brother Ashwin and Sudhir Mehta and other associates he founded Grow More Research and Asset Management in 1990, which helps people to invest and trade in stock market.
Why Harshad Mehta Became Popular As ‘Amitabh Bachchan Of Stock Market’?
You can call 1990’s as a golden period for Harshad Mehta because this was the time when he has been covered by media and has been called by different names in columns, articles by fans and authors such as “Amitabh Bachchan of the Stock market”, Raging bull, even Einstein of the market.
To name a few, Mehta favorite list of stocks included Associated Cement Company (ACC), Apollo Tyres, Reliance, Hero Honda, Tata Iron and Steel Co (TISCO), BPL, Sterlite, and Videocon etc.
He traded and invested in ACC so heavily that the stock went from Rs.200 to Rs.9,000 within a span of 3 years.
If we see this in percentage terms using moneycontain stock return calculator , its 4400% absolute return on investment whereas a cagr return of 255.69% year on year.
Everything he touched became gold, he started been called a men with Midas touch. Until the real reason behind this unprecedented rise came in front of public which we will discuss later in this post.
Harshad Mehta Luxurious Lifestyle:
Very few people have enjoyed the kind of luxury and lifestyle with name and fame as Mr. Mehta had, He owned a sea facing 15,000 square feet penthouse in the expensive area of Worli, which by the way also had a mini golf course and swimming pool.
That’s not it, he was very keen of having luxurious branded imported cars and his fleet of cars included a Toyota Corolla, Lexus Starlet, and Toyota Sera.
In the midst of 1991 Mehta had earned the nickname of the “Big Bull“, because he was said to have started the bull run in the stock market.
Recently a Hindi Bollywood movie named Big Bull starring Abhishek Bachchan based on life of Harshad Mehta is about to launch, also the web series released last month in October 2020 by name of scam of 1992 portrayed Mr. Mehta life and journey.
The series is adapted from journalists Debashis Basu and Sucheta Dalal’s book The Scam. Actor Pratik Gandhi played the role of Harshad Mehta.
Harshad Mehta Scam And Its Impact On Stock Market:
In order to understand the scam of 1992 you first need to be aware of ready forward deals. A ready forward refers to a short term, usually 15 days, secured interbank lending.
In reality, the borrowing bank actually sells securities to the lending bank and then buys them back at the end of the loan period at a slightly higher price.
A typical ready forward deal includes two banks brought together by a broker in lieu of a commission. As a part of the settlement process, the buyer and the seller need not even know each other, their identities only being known to the broker, and the deliveries of the securities and payments were made through the broker.
Although the broker is not supposed to have a proprietary position in either cash or securities, however that was not the case which lead up to the biggest scam in history.
In this particular situation, the brokers could manage because they had become market makers and had started trading on their account.
To keep up a pretence of legality and to avoid legal actions, they pretended to be undertaking the transaction on behalf of a bank. Not only this they have also used another tool called the bank receipt (BR).
So, in a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, that is, the seller of securities, gave a BR to the buyer of the securities.
Harshad Mehta used banks that could easily issue fake BRs or BRs not backed by any government securities. Once this fake BRs were issued, they were passed on to other banks and the banks, in turn, gave money to Mehta, obviously assuming that they were lending against government securities (G-Sec).
Now, this money which was given to Mehta by bank not knowing the reality were used to drive up the prices of stocks in the market and when the time come to return the money, the shares were sold for a profit, the BRs were retired and the money due to the bank was returned.
This game went on as long as the stock prices kept going up and no one has any clue about Mehta’s modus operandi. As a result, the BSE Sensex rose from 2,000-mark in January to 4,000-mark in March 1992.
Once the scam was exposed, though a lot of banks were left holding BRs that did not have any value and the banking system have been swindled of Rs.4025 crore.
If we assume that the total scam was of Rs.4025 crores in 1991 and take that in present time assuming a average inflation rate of 5.5% throughout till 2020, than using moneycontain inflation calculator you can find the inflation adjusted scam value in today’s time, which will be around Rs.19000 crore.
Much bigger than Nirav Modi Rs.13,000 crore scam or Vijay mallya Rs.10,000 crore.
The Harshad Mehta scam affected at least 10 major commercial banks of India, a number of foreign banks operating in India and the national housing bank a subsidiary of the Reserve bank of India.
It was first exposed by veteran journalist Sucheta Dalal in April 1992.
When Sucheta Dalal wrote an article in The Times of India detailing the loopholes in the banking system that had been exploited by the stockbroker.
After the scam came in public eyes, the income tax department conducted several raids on the Mehta’s office and home on February 28, 1992. Many documents and share certificates were also seized.
On June 4, 1992, the Central Bureau of Investigation (CBI) carried out a search on the Mehta his brother and several other associates involved in the scam. As a result, the tax return filed by Harshad Mehta for the assessment year 1992-93 was rejected and he was imprisoned in 1992.
The Reserve Bank of India formed Janaki Raman Committee in 1992 to provide a thorough picture of the scam. A joint parliamentary committee (JPC) was also formed in 1993 to probe the irregularities in securities and banking transactions in the aftermath of the Harshad Mehta scam.
Mehta was found guilty and convicted by both the Bombay High Court and the Supreme Court and charged with 74 criminal offences.
Harshad Mehta Scam Impact On Stock Market:
The immediate impact of the scam was a sharp fall in the share prices. The BSE index fell from 4500 to 2500 showing a loss of Rs. 100,000 crores in market capitalization.
Although the fall of the index was little exaggerated because as scam just resulted in withdrawal of about Rs. 3,500 crores from the market, so if we compare for a market of the size of Rs. 250,000 crores (at an index level of 4500) it is a very small amount, and therefore should have little impact on the prices.
But as an investor and trader you might have seen the recent impact on several stocks with regards to index e.g. YES bank, Nirav modi scam, Karvy case etc. due to the panic and chaos it creates amongst investors and shareholders.
Aftermath Of Scam Of 1992 (Custody, Cases, Punishment):
In 1992, when the scam came into light, 76 criminal cases and over 600 civil lawsuits were filed against Harshad Mehta and his family mostly relating to bribery, cheating, falsification, criminal cabal and forgery of accounts.
Not only that many banks and financial institutions had also filed cases against each other for getting their money back.
He also hired the most expensive lawyers in the country Ram Jethmalani as you can see in the image above. The JPC which was constituted after the scam made an observation that:
“The Scam is basically a deliberate misuse of public funds through various types of securities transactions with the aim of illegal siphoning off funds of banks and PSUs to select brokers for speculative transactions”.
The major groups of brokers that were involved in the scam –
- Harshad S. Mehta Group.
- Bhupen Dalal Group.
- Hiten Dalal Group.
- Ajay Kayan Group.
The above brokers used to commit frauds in the securities transactions with banks like SBI, NHB, UCO Bank and certain cooperative banks, etc. in Ready Forward/ Double Ready Forward/ Switch Deals, etc. by furnishing bogus securities papers like BRs and SGL forms, which did not have any securities backing.
The funds deployed by such banks were diverted to the stock market for the personal transactions of the brokers, whereby they enriched themselves.
The Special Court was instituted through an Ordinance on June 6, 1992 known as ‘Special Court (Trial of Offences Relating to Transactions in Securities) Ordinance’ (TORTS).
The CBI filed charges against other brokers namely AD Narottam, Bhupen Dalal, Hiten Dalal and Naresh Aggarwal, among others, to be involved in the scam, despiste for much smaller sums of money.
In 1993, Mehta created a controversy when he publicly announced that he had paid Rs 1 crore to Prime Minister PV Narasimha Rao to get off the case.
As you can see in the image above and below. The bag contained Indian currency worth 10 million rupees.
Mr.Rao refused it, and afterwards, a CBI probe also found no concrete evidence of this bribery claim made by Mehta. The important case involving Harshad S. Mehta Group concerned to the defrauding of SBI for about Rs.600 crore.
Harshad S. Mehta and his brothers, Shri Ashwin Mehta and Shri Sudhir Mehta, were arrested in 1992. Their properties were taken into custody by the Custodian appointed under TORTS Act.
Although CBI and JPC have tried their best to uncover the scam it took more than 6 years to put together criminal evidence against Mr. Mehta.
In October 1997 Special Court set up to hear the list of cases related to the securities scam and approved 34 of the 72 charges brought forward by the CBI against him.
In September 1999, the Bombay High Court awarded five years rigorous imprisonment to Mehta and three others in the Rs 380.97 million Maruti Udyog Ltd fraud case (MUL), one of the many individual cases within the larger securities scam.
He secured bail in all cases, including the Maruti Udyog Ltd fraud case, but was arrested again in 2001 for misappropriating Rs 2.5 billion from 2.7 million “missing shares” of 90 blue chip companies.
He was denied bail this time and sent to prison. Many criminal cases against Harshad Mehta and his family have been dropped, but civil cases remain and still going on.
Harshad Mehta Comeback To Stock market:
No, that’s not the end of the story Harshad had made his plans to make a comeback as the stock market guru. He was very well aware of the Internet and tried the same by launching his own website named www.harshad.com.
He used this to share stock tips and analyse market trends. Also many big, small media houses and their managers then set him up with columns in several leading newspapers.
Followed this his next step was to persuade some companies and brokers to get together with him for placing trades on his behalf.
This was called the return of the big bull as he announced the sales pitch through his website and various columns and articles, there were lot of people who still had faith in Harshad Mehta charisma. As it was clearly seen in Feb, 1998 people started talking about the return of the big bull.
As a result from April to June 4, 1998, BPL, Videocon and Sterlite share prices moved up 137 per cent, 232 per cent and 41 per cent respectively, even though BSE Sensex declined 11 per cent due to various domestic and international factors during the same time.
The companies which were involved for Harshad bidding included Damayanti Finvest, CDP Fincap and Leasing, KRN Finvest and Leasing, Rijuta Finvest and Ikshu Finvest which operated through a set of brokers and sub-brokers.
All these companies had the same address: 1208 Maker Chambers V, Nariman Point, Bombay 400 021 the same office of Growmore Research & Asset Management Ltd which was earlier founded by Harshad Mehta.
But this does not went for too long as he was put behind the bars and been barred by Securities and Exchange Board of India (sebi), which banned him for life from stock market-related activities later.
How Harshad Mehta Died ?
Harshad was under criminal custody in the Thane prison in Mumbai. He complained of chest pain late at night and was admitted to the Thane Civil Hospital. He died following a brief heart ailment, at the age of 47, on 31 December 2001. His family included his wife, and one son.
He died with many cases still pending against him. Altogether, he had 28 cases registered against him. The trial of all except one, are still continuing in various courts in the country.
According to the custodian’s report (number 26), released on January 8, 2016, the Harshad Mehta family has assets worth Rs 1,723.84 crore and total liabilities of around Rs 16,044 crore. The family has to pay 4662 crore to various banks and about Rs 11,174 crore to IT Department (mainly interest accrued and penalties).
All criminal cases against Harshad Mehta got disposed off a few years ago, but there are several civil cases awaiting for final closure.
My Opinion On Harshad Mehta Scam:
The Harshad Mehta scam stirred up many changes in India’s financial regulatory system. The Securities Laws (Amendments) Act was passed in 1995, which helped in widening Sebi’s jurisdiction and allowing it to regulate depositories, FIIs, venture capital funds and credit-rating agencies.
The Indian stock market has come a long way since Harshad Mehta scam. Over the years, there have been other stock market scams including the recent Karvy incident which shook the belief of investors and trades in brokers.
However SEBI have tried best to avoid happening such cases and made immediate actions as well as amended new laws and regulations.
As i have said in the starting whether you call it a scam or taking advantage of the loopholes in a system as a vigilant investor and being part of the financial industry you should always keep yourself away from any tips or godfather.
Try to understand the dynamics of the stock market through your own learning and never invest all your money at one place. There are enough resources available today online to make complicated financial jargons and terminologies easier to grasp.
Always Keep diversification and other methods of investment such as SIP, Gold, Real estate, RD, FD etc. in your mind while investing.
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