Harshad Mehta Scam 1992 – The Forgotten Story of the Wolf of the Dalal Street

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Harshad Mehta Scam 1992

This article is a part of Top Ten Scams of India – That Shook The Nation Series by Best Top Ten Review. Probably, Harshad Mehta Scam (1992) is one of the biggest scams in the History of India since independence. The magnitude of loss suffered is around 240 billion (exclusive of tax liability) – a way more significant than Nirav Modi or Vijay Malya scam. Can you imagine? How a man can deceive the entire Dalal Street and make it fragile within a period of a few years.

Harshad Mehta utilized one of the loopholes of the securities market, and the banking industries defrauded them in 1992, which is known as Harshad Mehta Scam 1992 or Stock Market Scam 1992. Such a cunning mind. I believe few of our readers do not even bear in the year 1992 when the scam had been taken place. Anyway, we are representing an insightful investigation into the matter for you today. We have arranged the story in ten parts for better readability. Please stay with us till the end. 

Harshad Mehta Scam (1992) – The Story – perhaps one of the “Rags-to-Riches” stories of its kind. Now, who is Harshad Mehta? Harshad Mehta was an Indian stockbroker, very popular for his wealth and the mastermind behind the 1992 Stock Market Scam. Why we have called this part ”Rags-to-Riches”? Because, He came to the then “Bombay” (Now, Mumbai), the city where dream comes true with just Rs. 40/- in his pocket. He turned out to be the most successful person of the securities market at the later stage of his life. Before we discuss further, we must talk about his early life.

Part#2 – An Ajinkya Born

Harshad Mehta was born on the 29th of July 1954, at Paneli Moti, Rajkot district, Gujrat in a Jain family. His father Shantilal Mehta was a small-businessman and mother Rasilaben Mehta was an ordinary housewife. Later, the family moved to Modhapara, Raipur (the capital of Chhattisgarh). Harshad Mehta studied there in Holy Cross Kapa. Cricket lover Mehta was not a bright student. After That, He came to Bombay and completed his B.Com in 1976 from Lala Lajpatrai College, and work ed plenty of jobs for the next eight years. 

Part#3 – The Struggling Monk

Harshad Mehta tried his faith at numerous jobs, like sales, including selling hosiery garments, construction materials, and sorting diamonds. Mehta started his carrier as a salesperson in the Bombay office of New India Assurance Company Limited (NIACL). This was the period when he grew his interests in the stock market. The Struggling Monk found his ‘Nirvana’. The Intelligent mind of Harshad Mehta understood this is the place where he could make his fortune. He quickly resigned and joined a clerical job at ‘Harijivandas Nemidas Securities’ in the year of 1980. Prasann Pranjivandas was ‘the Dronacharya’ of his Dalal Street career. Later, He successfully took charge in responsible positions in various brokerage firms. 

Part#4 –The Big Bull – Harshad Mehta

In 1984, Harshad Mehta was able to become a member of the Bombay Stock Exchange as a broker when the BSE auctioned a broker’s card. He established his firm GrowMore Research and Asset Management. He started trading in the year of 1986. By, the year 1990 high profile businessmen and firms started investment with his firm. He had been raised to a position of prominence in the Indian securities industries. Business, today at that time, named him as “The Amitabh Bacchan of the Stock Market”. During 1990 – 1991, the media portrayed a dignified and flashy image of Harshad Mehta, calling him “The Big Bull”. He was featured in the cover page of many magazines. Business Today again in one of his articles called him “Raging Bull”. 

He used to own a 15000 feet penthouse in the tony area of Worli. There were a mini-golf course and a swimming pool inside that penthouse. He had plenty of luxurious cars in his possession like Toyota Corolla, Lexus Starlet and Toyota Sera. These types of personalities were sporadic at that time in this country. India had witnessed the death of its prime minister Indira Gandhi in the year 1984. The economic and political condition of the country was in turmoil. Gulf war started in the year 1991. The most furiously the countrymen again witnessed the death of its beloved prime minister Rajeev Gandhi on the 21st of May 1991.

Part#5 – The Crisis 1990-91

Then, the Indian economy was under tremendous pressure for various reasons like the Gulf War and poor economic policies. The economy of the country was under twin deficit, namely, trade deficit and fiscal deficit. The situation was such a worse that Indian foreign resources could barely compete with the worth of three weeks of import. The fiscal deficit was widened due to overvaluation of Indian currencies. Moody downgraded India’s credit rating. The World Bank and the IMF denied giving further financial assistance to our country. The government has no option but to mortgage the valuable gold reserves to avoid defaulting payments. The Indian rupee was sharply depreciated, and the situation of Indians was beyond imagination.

Finally, P V Narashima Rao took the prime ministership in June, and Manmohan Singh took charge of Finance Ministry in the cabinet. The duo brought the most controversial economic reformation that the country had ever witnessed. The liberalization of the Indian market was taken place. What is market liberalization? It means the market is now open for private as well as foreign investment in an indirect manner. The economy slowly starts improving. Bombay stock exchange reacted positively with such massive change of the economic condition and touched 4500 points in March 1992.

Part#6 –The Modus Operandi (Harshad Mehta Scam 1992)

What was Harshad Mehta doing in this time? That will be explained in the forthcoming section Part#7 (The Cartel Boss) of our article. However, let’s dive straight to the main area How 1992 securities scam was taken place? What was the modus operandi of Harshad Mehta Scam 1992?

Up to the early 90s, banks in India were not allowed to invest in the equity market. However, they were expected to post profits after duly retaining a specific portion of their capital in government-approved securities. The threshold is known as the statutory liquid ratio (SLR) and controlled by RBI. The necessity of maintaining the balance by the banks is nothing but to stay in capital-healthy positions. 

What if a bank failed to maintain SLR? A bank can face sudden spite in the net demand and time liabilities. To cope with the situation, a bank used to rely on Ready Forward (RF) Deals at that time. Roughly saying, an RF deal is a secured short- term (15 days) loan from one bank to another like penny-broker lends money against jewellery. The borrowing bank sells the securities to the lending bank and buys back the same after completion the period of the loan. 

Another instrument used in a big way was the Bank Receipt (BR). In an RF deal, the securities were not moved from one hand to another in actuality. Rather, the borrower, i.e. the seller of securities, gave the lender, i.e. the purchaser of the securities a BR. A bank receipt is thus nothing but the proof of money received and an unconditional promise to deliver the securities to the buyer. 

The whole procedure, as described above, used to taken place through a security broker. Stockbrokers used to act as a middleman in the process. In times of exchange, the broker used to get a commission from the transactions. The banks were strongly dependent on the brokers due to maintain the secrecy of transaction, anonymity, and to maintain liquidity and capital adequacy.

This system was cleverly exploited by Harshad Mehta and his accomplices, which in turn results in the infamous Harshad Mehta Scam (1992). How?

Part#7–The Cartel Boss

Harshad Mehta cunningly squeezed the capital out of the banking system to address the SLR requirements of banks and pumped this money to the share market. He also promised the banks higher rates of interests. He somehow managed the banks to transfer the funds in his bank account, and he used to transfer the money to the share market. Mehta used to buy shares and thus hiking up the share price of several renowned companies like ACC, Sterlite Industries and Videocon. After that, he used to sell them and thus was making a profit.

But, The stocks of ACC hit Rs. 9000/- from Rs. 200/- within three months. The net increase in ACC price was around 4400%. The stock market was overheated, and the bulls were running mad. Before someone doubted the fact, He coined a term known as ‘Replacement Cost Theory’ to justify the abnormal growth. He stated his ‘Replacement Cost Theory’ is nothing but to correct undervalued stock to revalue a company at a cost to establish an enterprise He was like a financial guru, a dream maker for those companies and the securities market itself. It was a mere eye-wash for the government and its people.

The main competitors of Harshad Mehta were the bear cartels, namely, Hiten Dalal, A D Narottam, and many others. They too operated with the money cheated out from the Banks. But, their motto was to drive the stock market low, which eventually undervalued the stocks. They used to purchase the stocks then and held the stocks until the price rise happened. In this way, they were making profits. It is a nice and intelligent Bull Vs. Bear story up to now. Everything was alright, and things were peaceful. Everybody was making their cut money the banks, the bear cartels, stock market, and the team of Mehta too.

But, soon, Harshad Mehta’s cunning mind portrayed the concept of fake bank receipts. As he understood in RF deals, the banks were much dependent only on brokers he planned his masterstroke. But, Mehta needed banks, which could issue fake BRs, or BRs not backed by any government securities. Two small and unknown banks – the Bank of Karad (BOK) and the Metropolitan Co-operative bank (MCB) found to be faithful in this matter. Once the fake BRs were issued, they were transferred on to other banks and the banks, in turn, gave money to Mehta, depending upon the assumption that they were lending against genuine BRs backed by government securities. Thus, the infamous 1992 Stock Market Scam or, Harshad Mehta Scam 1992 was taken place.

Harshad Mehta

Part#8–The Karma Repays

On the 23rd of April 1992, an undaunted journalist Sucheta Dalal exposed Harshad Mehta’s illegal activities in an article in The Times of India. Mehta was illegally manipulating the Banks to finance his buying. Sucheta Dalal was intrigued by the posh lifestyle of Harshad Mehta. Sucheta Dalal co-authored a book named “The Scam” with Debashish Basu in 1993. She described Mehta as a vibrant, charismatic and with a recklessly ambitious personality. However, thanks to the brave lady who saved the day; saved our Nation and saved the soul of her countrymen. But, this is not the end. What happened after that?

Soon after the Harshad Mehta Scam 1992 was exposed, various banks started demanding their money back, causing the massive collapse of the stock market. The stock market lost approximately trillion of rupees as Mehta fooled the market with artificially inflated value. The banks soon realized the fact that their loans were not backed by securities. A massive loss was suffered by the Indian banking sectors. Many bankers were convicted. This led to the suicide of the chairman of Vijaya Bank. Even State Bank of India suffered a significant loss. The RBI set up ‘Janakiraman Committee’ to investigate the matter. As per their report, the magnitude of the scam was around Rs. 4000 Crore.

Harshad Mehta and his brothers were convicted initially. But, somehow on June 1992, he was released on bail. At that time, he thanked Sucheta Dalal by saying “Congratulations, you have broken the story of the decade”. On the 9th of November 1992, his accomplices along with him were arrested by CBI for the alleged charge of misappropriation of 2.5 billion worth shares of about ninety companies (ACC, Hindalco and many others). He charged with 72 criminal offences and 600 civil suits was filed against him. Once he said to his friends that his name should be in the Guinness Book of World Records for these numbers of charges or suits.

Part#9–The Outlaw Torn

Harshad Mehta made a brief comeback as a stock market guru, giving tips on his website as well as a weekly newspaper column in vain. In September 1999, Bombay High Court convicted and sentenced him five years of rigorous imprisonment and a fine of Rs. 25000/-. On the 14th of January 2003, the Supreme Court of India confirmed the High Court’s judgement. It was a 2:1 majority judgement. While Justice B.N. Agarwal and Justice Arijit Pasayat upheld his conviction; Justice M.B. Shah voted to acquit him. 

Harshad Mehta was under conviction in the Thane prison. One day, Mehta complained of chest pain, and soon after that, he was admitted to the Thane Civil Hospital. He died at the age of 47, on the 31st of December 2001 due to a massive heart attack. Harshad Mehta left behind his wife Jyoti Mehta and one son Atur Mehta. He died with many litigations pending against him, and they are still running in various courts of this country. SEBI has banned him for life from the stock market.

The major litigation worth to be mentioned here is by the Income Tax Authority, which claimed Rs.11174 Crores to Mehta. Harshad Mehta’s firm GrowMore Research and Asset Management had a significant client base, and the IT department had linked all the transactions that may have involved Harshad Mehta or his firm with Harshad Mehta’s income. His lawyer, however, denied the allegation and called this as bizarre as Harshad Mehta’s lifetime assets were worth around Rs.3000 Crores. Recently, his wife won over IT authority claim and few other cases also.

Part#10–The Memory Remains

Was Mehta only responsible for Harshad Mehta Scam 1992? Or, he was only a scapegoat. It was assumed that Citibank, brokers like Pallav Sheth and Ajay Kayan, industrialists like Aditya Birla, Hemendra Kothari, several politicians, and the RBI governor R. Venkitaramanan all had played a significant role in Mehta’s rigging of the securities market. Mehta made a controversial public announcement on the 16th of June 1993 that he had paid 1 Crore to the then President and even the Prime Minister P.V. Narashima Rao.

The controversies are beyond the scope of our blog, and neither have we wanted to make our personal opinions on the matter. We have collected all the information available in the world wide web and summarize the chilling spine scam of Indian History. Best Top Ten Review never guarantees the validity or correctness of the story. 

The Big Bull

The Real Vs. The Reel–Harshad Mehta Scam 1992

The Harshad Mehta Scam 1992 was portrayed in movies/OTT platforms several times. Few examples are documented below –

  • Natwar Shah in movie Aankhein (1993) was influenced by the character of Harshad Mehta.
  • The Movie Gafla (2006) was based on the Stock Market scam of 1992.
  • The Bull of Dalal Street (February 2020) – The story broadcasted in one of the OTT platforms is based on the Harshad Mehta Scam 1992.
  • The last but not the least The Big Bull (Harshad Mehta was played by Abhishek Bacchan) – an upcoming show to be broadcasted in one of the famous OTT platforms is going to be based on the Harshad Mehta Scam 1992.

What do you think was Harshad Mehta an ill-fated scapegoat or The cunning wolf of the Dalal Street?

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