Scam 1992: Who was Harshad Mehta?

Harshad Shantilal Mehta was an Indian stockbroker. Mehta’s involvement within the 1992 Indian securities scam made him infamous as a market manipulator. Although, as reported by Economic Times, some financial experts believe that Harshad Mehta didn’t commit any fraud; he simply exploited loopholes within the system.

Born 29 July 1954
Paneli Moti, Rajkot (now in Gujarat), India
Died 31 December 2001 (aged 47)
Thane, Maharashtra, India
Occupation Businessman, stockbroker

Criminal penalty 5 years rigorous imprisonment ff the 27 criminal charges brought against him, he was only convicted of 4, before his death (by sudden heart attack) at age 47 in 2001.

It had been alleged that Mehta engaged during a massive stock manipulation scheme financed by worthless bank receipts, which his firm brokered for “ready forward” transactions between banks. Mehta was convicted by the Bombay supreme court and therefore the Supreme Court of India, for his part during a financial scandal valued at ₹ 10 Thousand Crores which happened on the Bombay stock market (BSE).

The scandal exposed the loopholes within the Indian banking industry and therefore the Bombay stock market (BSE) transaction system, and consequently the SEBI introduced new rules to hide those loopholes. He was unproved for 9 years, until he died at the top of 2001.

Scam 1992: The Harshad Mehta Story is predicated on then his lifetime

Early life
Harshad Shantilal Mehta was born on 29 July 1954, at Paneli Moti, Rajkot district, during a Gujarati Jai family. His infancy was spent in Ghatkopar, where his father was a small-time textile businessman. Later, the family moved to Raipur, Raipur Madhya Pradesh (Now Chhattisgarh).

He spent his early study in Janta Public School, Camp 2 Bhilai. A cricket enthusiast, Mehta didn’t show any special promise in class and came to Mumbai after his schooling for studies and to seek out work. Mehta completed his B.Com in 1976 from Lala Lajpatrai College, Mumbai and worked variety of strange jobs for subsequent eight years.

Stamp paper fraud
Up to the first 90’s banks in India weren’t allowed to take a position within the equity markets. However, they were expected to post profits and to retain a particular ratio (threshold) of their assets in government fixed interest bonds. Mehta cleverly squeezed capital out of the banking industry to deal with this requirement of banks and pumped this money into the share market. He also promised the banks higher rates of interest, while asking them to transfer the cash into his personal account, under the guise of shopping for securities for them from other banks. At that point, a bank had to travel through a broker to shop for securities and forward bonds from other banks. Mehta used this money temporarily in his account to shop for shares, thus hiking up demand of certain shares (of good established companies like ACC, Sterlite Industries and Videocon) dramatically, selling them off, passing on a neighborhood of the proceeds to the bank and kept the remainder for himself. This resulted in stocks like ACC (which was trading in 1991 for ₹200/share) to just about ₹9,000 in only 3 months.

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Bank receipt fraud
Another instrument utilized in an enormous way was the bank receipt. During a ready forward deal, securities weren’t moved back and forth really. Instead, the borrower, i.e. the vendor of securities, gave the customer of the securities a BR. The BR is a receipt from the selling bank, and also promises that the customer will receive the securities they need purchased at the top of the term.

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Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed by any government securities.

Once these fake BRs were issued, they were passed on to other banks and therefore the banks successively gave money to Mehta, plainly assuming that they were lending against government securities when this was not really the case.

He took the worth of ACC from ₹200 to ₹9,000. That was a rise of 4,400%. The stock markets were overheated and therefore the bulls were on a mad run. Since he had to book profits within the end, the day he sold was the day when the markets crashed.

Outbreak of 1992 securities fraud
On 23 April 1992, journalist Sucheta Dalal exposed Mehta’s illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking industry to finance his buying.

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A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasn’t the case in the lead-up to the fraud. In this settlement process, deliveries of securities and payments were made through the broker.

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The vendor handed over the securities to the broker, who passed them to the customer , while the customer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the customer and therefore the seller won’t even know whom that they had traded with, either being known only to the broker. This the brokers could manage primarily because by now that they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank.

Mehta used forged BRs to gain unsecured loans, and used several small banks to issue BRs on demand. Once these fake BRs were issued, they were passed on to other banks and therefore the banks successively gave money to Mehta, assuming that they were lending against government securities when this was not really the case. This money was wont to approach the costs of stocks within the stock exchange . When time came to return the cash , the shares were sold for a profit and therefore the BR was retired. The money due to the bank was returned.

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This went on as long because the stock prices kept rising, and nobody had a clue about Mehta’s operations. Once the fraud was exposed, though, a lot of banks were left holding BRs, which did not have any value – the banking system had been swindled of a whopping ₹4,000 crore (equivalent to ₹250 billion or US$3.5 billion in 2019).

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He knew that he would be accused if people came to understand about his involvement in issuing cheques to Mehta. Subsequently, it transpired that Citibank, brokers like Pallav Sheth and Ajay Kayan, industrialists like Aditya Birla, Hemendra Kothari, a number of politicians, and the RBI Governor S.Venkitaramanan all had played a task in allowing or facilitating Mehta’s rigging of the share market.

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