When one looks back at the Indian history and digs out the watershed moments in matters of economy, 1991 should feature at the top of the list. It was an altogether different era back then- televisions were not in every household, license had to be obtained by the companies to manufacture, Bollywood was looking for its next superstar after Amitabh Bachchan and governments could be questioned and criticized without fear. Prior to that, by the end of 1980s, Government coffer ran dry and Government of India had a Forex Reserve that sufficed for crude oil import of only a fortnight. India was in deep financial crisis and Liberalization of 1991 came as the savior of last resort and and the world witnessed a new India that was set to become the ‘Consumer Economy’ in times to come. Those were the days when share markets were offline and market penetration was very low, primarily due to lack of knowledge and accessibility. In those turbulent times when the liberalized India was in its nascent stage came to light a scam that shook the entire nation- Harshad Mehta Scam. It was the biggest scam that India had witnessed by that time- estimated to be around 4000 crore in 90s. Adjusted for inflation, that’d amount to the tune of 24000 crore in present times. But the Harshad Mehta story is not just a scam with a big shot paying some individuals to gain favors; it’s a story of rags to riches with financial finesse and exploitation of systematic loopholes to its limit.
Rags to Riches
Born in 1954 as Harshad Shantilal Mehta, he spent his early childhood on Kandivali, Mumbai. His father owned a small business but the son was destined for greater heights, and by a proportionate extent, greater falls. The family shifted to Raipur for personal reasons and this is where Harshad completed his school education. He was never among the brightest of lads when in came to school and he moved back to Mumbai for his B.Com from Lajpat Rai College. In his early days, he did all sorts of jobs like hosiery selling and diamonds sorting. He became a sales person at The New India Assurance Company and this is where his interest in Stock Market began to develop. He also worked as a jobber (an individual who brings investors to stock brokers to earn commission). Soon, he realized the infinite potential that trading offered and he began trading himself. In 1984, Harshad Mehta became a broker himself at the Bombay Stock Exchange and established his own firm called GrowMore Research and Asset Management. People began to avail the services of his firm and he held a client portfolio of eminent individuals. In no time, he became one of the most talked about personality in top corridors. People availed his services as he was seen someone who could guarantee returns. He was making his investors rich and himself, the top shot of the stock market. His 12000 square feet sea facing penthouse and over a dozen expensive cars turned him into a personality that India had never witnessed before. Media reports termed him as ‘The Big Bull’ and ‘The Amitabh Bachchan of Stock Market’. It is reportedly said that when he used to step out of his cars in front banks and offices, there used to be crowds to catch a glimpse of their stock market hero. Little did they know they he was a hero at their very expense. It was on one such occasion that the famous journalist Sucheta Dalal spottem him getting out of his Rs. 40 lakhs Toyota Lexus and she found it disturbing as to how could a stock broker live a life of such flamboyance without being involved in some shady practice. She dug deep and what unearthed was the Harshad Mehta Scam.
Your guide to scam
Assume an ecosystem where 10 banks are in operation, named Bank A to Bank J. Under the guidelines by Reserve Bank of India, all the banks have to buy a certain percentage of Government Securities issued by the Government of India. Some banks have more than the required numbers of securities while others fall short of the prescribed number, and thus they have to trade the securities. Say, at a given point of time, Bank A has excess of securities while Bank B is in deficit. Naturally, they need to trade in a way that A sells the excessive securities to Bank B in return for a definite sum of money and Bank B stands to get securities to satisfactorily comply with RBI guidelines. The problem is the 2 banks cannot trade with one another and thus need an intermediary in form of a broker- the point where Harshad Mehta enters into the scene. Harshad would go to Bank A, tell them that he has a buyer for their additional security and obtain a Receipt that states securities sold be Bank A. What he would do is buy some time too from Bank A to pay the money earned from selling those securities. Now, he would go to Bank B which is in need of those Securities and ask them for money which Bank B would pay after getting the receipts that Bank A had given. The issue is that the payment by Bank B needs to made in favor of Bank A but Harshad Mehta got it made in favor of his own firm and this is where the scam begins. Now, Harshad has bought some time from Bank A to pay them and has already taken money from Bank B. This huge amount of money is put into the stock market by Harshad Mehta which raises the share price of the stocks he buys and thereby the market gets manipulated. He buys huge number of shares, increase their price and then sell the shares and earn great profits for himself and his investors. Meanwhile, Bank A would ask him to pay the due amount but that has already been put into the stock market, so he would go to Bank C, raise money and pay back to Bank A. When it’s time to pay back to Bank C, he’d raise money from Bank D and pay Bank C. Later on, he generated fake Bank Receipts and used them to take money from banks. In a nutshell, what was happening was banks were losing money for fake receipts shown and Harshad Mehta was making the Stock Market dance to his tunes on money that he never owned in first place. He has his favorite list of shares that included ACC, Reliance and Hero Honda among others. The extent of his influence could be estimated from the fact the he invested such huge amounts in ACC share that the price per share rose from Rs. 200 to Rs. 9000. He reportedly defrauded banks with a sum of 3400 crores. The audacity of Harshad is best highlighted through the fact that a month prior to the expose, he had paid an advance tax of 26 crores. ( Remember, it was 1992!!)
Back in those days, technology was not so advanced as it is today and there was no centralized system so that banks could know who they were trading with and this loophole was exploited to its limit by Harshad Mehta until it got exposed by Sucheta Dalal on April 23, 1992. The stock market, which had clocked an all time high in March 1992 crashed as one would expect. All the gullible investors who had followed his leads lost huge sums of money. Among several cases of reported depression and suicide was the suicide of the then Vijaya Bank Chairman.
Litigation and Ahead
In its detailed report Harshad Mehta: The Baap of Bank Frauds Before Nirav Modi, The Quint reports that Harshad was charged with 72 criminal cases upon getting arrested in November ’92 along with his brother Ashwin and Sudhir. RBI set up a Joint Parliamentary Committee to assess the fraud and Government also set up special courts. 3 months after the arrest, Mehta and his brothers got out on bail and Mehta received a hero’s welcome on return. He shook the political landscape when he claimed, along with his lawyer Ram Jethmalani, that he had paid the then PM late PV Narsimha Rao a bribe of 1 crore to get him ‘off the hook’, a allegation that CBI ultimately could not find evidence of. Upon return, he donned the hat of investment advisor and had his own website along with columns where he shared investment lessons. Later on, even these recommendations were found to be influenced and manipulative for personal gains. In 1997, the special court constituted by the Government of India approved 34 out of the 72 charges levied by the CBI. In 1999, Bombay High Court sentenced him for rigorous imprisonment of 5 years. Harshad Mehta passed during his jail term and the recorded cause of death was Cardiac Arrest.
While the Office of Custodian reports that the asset owned by Harshad Mehta Family is Rs. 1723 crores and liabilities are around Rs. 16044 crores, The Economist Times report dated July 2016 quotes Ashwin Mehta “Even after paying you all, I’ll have a little over Rs. 1000 crore to take home”. The case have been dragged for so long that the verdicts have lost their significance.
Beyond the Harshad Mehta Scam
In one of our stories for the business failure series, we discussed The DHFL- HDIL Story. It exposed a deep rooted problem in the ecosystem- the ecosystem itself thrives on corruption, be it in monetary terms or abuse of power. The Harshad Mehta scam exposes numerous problems that the entire ecosystem suffers from and how the challenges haven’t vanished with time. But it’s not that we haven’t made any progress with time. With advancement in technology and robust regulatory channels, such a scam can’t be repeated today. With trading exchanges having such efficient algorithms and norms in place, most inefficiencies have been done away with and the brokers today are much more transparent and compliant today. Nonetheless, we still witness banking scams like Nirav Modi-PNB scam and broker issues like investors today face with KARVY.
It is, in all probability, a never ending cycle of rectifying our errors, then another loophole getting identified by someone and technology catching up to cure its latest grievance. It’s a cycle that shall go on forever, in all societies, and it falls on the conscience of the individual to decide which part of the ecosystem they wish to contribute to.
Most Used Tags
Alibaba Bankruptcy BCCI Billionaire CNET corruption Cricket DHFL Entrepreneur Entrepreneurship Eric Failure Story Fitbit Google HDIL IIMA Indian IT indias_biggest_scam InfoEdge India Internet Business IPL Jack Ma James Korea Naukri.com OneWeb Philanthropist Real Estate Realty Rich Sanjeev Bikhchandani scam Silicon Valley SoftBank Space Stanford Stock market Success Story Technology Tech Startup Telecom USA Vision Fund WeWork Yahoo!