Scam 1992 – The Harshad Mehta Story
Harshad Mehta is one name which everyone in the stock market is familiar with. The Harshad Mehta scam that happened in 1992 is the biggest scam that happened in the Indian stock market till date.
Harshad was born in a normal Gujarati family based out of Mumbai. He worked in several broker firms during his early days. Later left his job to start his own brokerage firm – Growmore Consultants.
Harshad was really talented, he got a lot of clients and was giving great returns to his investors. But his dreams were too high, and the path to destruction started when this idea was planted in his mind to get insider information and to artificially manipulate stock prices.
Initially he started trading with insider information. He would hunt for upcoming news through his informants in companies and take positions before the news has broken out. This made him huge profits, great reputation and people started waiting to get his tips. He used it and got into artificially manipulating stock prices. He would circulate false tips about stocks and people would blindly go on a buying spree as the tip was given by Harshad Mehta and naturally stock prices surged due to high demand. But his ambitions didn’t stop there. Sometimes the tip technique wouldn’t work or the stock prices would stop rising after a certain point when buying stops. This made him think about ways to have huge capital to buy the shares himself and keep the stock prices rising. But how?
The answer lied in money markets. Money market was till then limited to banks and a small set of high class brokers who dealt with them. In 80s and 90s financial institutions were not supposed to directly invest in stock market. Banks and PSUs had to buy in govt securities through approved set of brokers. For making the process easier at the time of no internet, the money for purchase was given to the broker directly and then the broker would pay the selling entity. But this process took a minimum of 14 days time and the fund would be with the broker. Harshad used these funds given by the banks to buy securities to buy shares in his name for 14 days. By the time the time came to pay the selling entity he would pay them and keep the profit from the shares for himself. Not just that, the kind of amounts involved in banks buying securities came to thousands of crores, and this money went into the stock market. He used this to artificially increase the price of his favourite stocks.
Greed kills people. He didn’t stop even then. Securities were given to the banks in the form of document known as bank receipts. He thought why to actually buy securities when he could forge fake bank receipts? (Heights of greed). He tied up with some small banks in Bombay such as Bank of Karad to issue fake bank receipts in return for a commission to the bank. You should realise he was dealing with the biggest banks such as State Bank of India and Canara Bank, literally almost every bank in the country. Banks would accept the fake bank receipts believing that they have received the securities when in fact there was no securities and thousands of crores of money went to Harshad Mehta. He pumped in all this money into the stock market and in result Bombay Stock Exchange went up 4–5 times in a matter of months. How would it not, when such huge amount of money which belonged to the banks was going into thr stock market!!
Harshad kept on growing his portfolio in value from the money from banks. Stocks he manipulated went on surging heavily. ACC went from Rs 400 to Rs 9000! Harshad kept on being bullish on his stocks and they kept rising on and on. He had a very fancy lifestyle, and became a media celebrity being featured on almost all business magazine covers. Probably the only broker who managed to do that. He became the only one to own a Lexus car. When someone becomes so rich and enjoys a fancy lifestyle he will obviously have a lot of jealousy and enemies around. The traditional stock market bulls and bears were all jealous of him but they just couldnt figure out where all this money was coming from.
Stock markets represent the economy of a country. The money which belonged to the banks were going into the stock market. Banks thought they received the securities while they had nothing. Such huge amounts flowing into the stock market sent it on a bull run. And Harshad was called as The Big Bull.
When you get into too many illegal things of such massive scale something is bound to go wrong. It happened during an audit in State Bank of India. Harshad had bribed an SBI official for the fake BR scheme. For one transaction he missed giving the BR and it got noticed in the audit. SBI asked Harshad to repay all the money. He bribed National housing Bank chairman to lend him money to temporarily pay off SBI. A Times of India finance journalist Sucheta Dalal got hint of it. After a heavy work of investigative journalism she wrote a story on the full scam. RBI started probing in. One by one all of his activities with the other banks also came out. NHB, a direct subsidiary of Reserve Bank lending him money with no security came as the biggest hit to RBI. In total it amounted to a total of 5000 crores with all the banks combined. 5000 crores at that time is worth probably 50000 crores of today.
After the scam a set of reforms happened in the country to fix the banking loopholes and stock exchange irregularities. SEBI getting heavy powers for regulation, dematerialization of physical shares and forming of NSE all followed.
Harshad was banned for life from stock markets. Huge number of cases were registered against him after a CBI investigation. He got out later on bail. But did he stop? No. After a couple of years he got into the stock market again through benami companies. He tied up with some companies to do the same thing again, to manipulate and increase stock prices. This was with the knowledge of BSE and they supported it too, going out of the way to help him do it. Only that this time the funding came from other people and not from the banks. But it didnt last long and another probe into him by SEBI put an end to it.
He was convicted by Bombay High Court and he went on to an appeal in Supreme Court challenging it. Before the conviction judgement came from the SC in 2003, he passed away while in jail for another one of the cases.
But after all this, has the Indian system become foolproof? No. Manipulating stock prices happens even today. Manipulators keep spreading tips through various channels making retail investors buy the stock in bulk. When share prices go up, they escape. Even today we can see some stocks which are totlly worthless going up once these tips spread around and when the manipulators exit the retail investors remain trapped.
Personal warning: the most recent one going around is some company called stampede capital. Go to any forum or group you will see this name. Some days back it was some Chandrima Mercantiles. If you even think about investing in it please take while to look at the financials or atleast the price chart. You won’t feel like it. There is no becoming a billionaire overnight.
Note: This article has focused only on the financial aspects and skipped the political aspects which are also part of his story.
Geethu Sivakumar
CEO, PACE
www.pacehitech.com
