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Published by Nitin Garg

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Published by: Nitin Garg on Dec 09, 2010
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HARSHAD MEHTA- THE BIGBULL
INTRODUCTION
Harshad Mehta was an Indian stockbroker caught in a scandal beginning in1992. Harshad Shantilal Mehta was born in a Gujarati jain family of modestmeans. His father was a small businessman. His early childhood was spent inthe industrial city of Bombay. Due to indifferent health of Harshad’s father inthe humid environs of Bombay, the family shifted their residence in the mid-1960s to Raipur, then in Madhya Pradesh and currently the capital of Chattisgarh state. While doing odd jobs he joined Lala Lajpat Rai College fora Bachelor’s degree in Commerce.After completing his graduation, Harshad Mehta started his working life as anemployee of the New India Assurance Company. During this period his familyrelocated to Bombay and his brother Ashwin Mehta started to pursuegraduation course in law at Lala Lajpat Rai College. After his graduationAshwin joined (ICICI) Industrial Credit and Investment Corporation of India. They had rented a small flat in Ghatkopar for living. In the late seventiesevery evening Harshad and Ashwin started to analyze tips generated fromrespective offices and from cyclostyled investment letters, which had madetheir appearance during that time.In the early eighties he quit his job and sought a job withstock brokerP.Ambalal affiliated to BombayStock Exchange(BSE) before becoming a jobber on BSE for stock broker P.D. Shukla.In 1981 he became a sub-broker for stock brokers J.L. Shah and NandalalSheth. After a while he was unable to sustain his overbought positions anddecided to pay his dues by selling his house with consent of his motherRasilaben and brother Ashwin. The next day Harshad went to his brokers andoffered the papers of the house as guarantee. The brokers Shah and Shethwere moved by his gesture and gave him sufficient time to overcome hisposition. After he came out of this big struggle for survival he becamestronger and his brother quit his job to team with Harshad to start theirventure GrowMore Research and Asset Management Company Limited.While a broker’s card at BSE was being auctioned, the company made a bidfor the same with financial assistance from Shah and Sheth, who wereHarshad's previous broker mentors. He rose and survived the bear runs, thisearned him the nickname of the Big Bull of the trading floor, and his actions,actual or perceived, decided the course of the movement of the Sensex aswell as scrip-specific activities. By the end of eighties the media startedprojecting him as "Stock Market Success", "Story of Rags to Riches" and he
 
too started to fuel his own publicity. He felt proud of this accomplishmentsand showed off his success to journalists through his mansion "Madhuli",which included a billiards room, mini theatre and nine hole golf course. Hisbrand new Toyota Lexusand a fleet of cars gave credibility to his show off. This in no time made him the nondescript broker to super star of financialworld. During his heyday, in the early 1990s, Harshad Mehta commanded alarge resource of funds and finances as well as personal wealth.
WHAT WENT WRONG?
Harshad Mehta was the darling of the stock markets -- a superstar whosepopularity had begun to rival that of a matinee star. He was the cover storyon several magazines and was being shot by audio-visual newsmagazinessymbolically feeding peanuts to bears at the Bombay zoo. The fall In April 1992, the Indian stock market crashed, and Harshad Mehta,the person who was all along considered as the architect of the bull run wasblamed for the crash. It transpired that he had manipulated the Indianbanking systems to siphon off the funds from the banking system, and usedthe liquidity to build large positions in a select group of stocks.In the early 1990s, the banks in India had to maintain a particular amount of their deposits in government bonds. This ratio was called SLR ( StatutoryLiquidity Ratio). Each bank had to submit a detailed sheet of its balance atthe end of the day and also show that there was a sufficient amount investedin government bonds. Now, the government decided that the banks need notshow their details on each day, they need to do it only on Fridays. Also, therewas an extra clause that said that the average %age of bond holdings overthe week needs to be above the SLR but the daily %age need not be so. Thatmeant that banks would sell bonds in the earlier part of the week and thenbuy bonds back at the end of the week. The capital freed in the starting of the week could then be invested. Now, at the end of the week many bankswould be desperate to buy bonds back. This is where the broker comes in. The broker knew which bank had more bonds (called ‘plus’) and which hasless than the required amount (called ‘short’). He then acts as themiddleman between the two banks. Harshad Mehta was one such broker. Heworked as a middle man between many banks for a long time and gained thetrust of the banks’ senior management. Lets say that there are two banks A(short) and B (plus). Now what Harshad Mehta did was that he told thebanker at A that he was dealing with many banks and hence did not knowwho would he deal in the end with. So he said that the bank should write thecheque in his name rather than the other bank (which was forbidden by law),so that he could make the payment to whichever bank was required. Since
 
he was a trusted broker, the banks agreed. Then, going back to the exampleof bank A and B, he took the money from A and went to B and said that hewould pay the money on the next day to B but he needed the bonds rightnow (for A). But he offered a 15 % return for bank B for the one dayextension. Bank B readily agreed with this since it was getting such a nicereturnNow since Harshad Mehta was dealing with many banks at the same time hecould then keep some capital with him at all times. For eg. He takes moneyfrom A on Monday, and tells B that he’ll pay on Tuesday, then he takesmoney from C on Tuesday and tells D that he’ll pay on Wednesday and themoney he gets from C is paid to B and as a result he has some workingcapital with him at all times if this goes on with other banks throughout theweek. The banks at that time were not allowed to invest in the equitymarkets. Harshad Mehta had very cleverly squeezed some capital out of thebanking system. This capital he invested in the stock market and managedto stoke a massive boom. The story began to fall apart with the revelation that Harshad had helpedhimself to a cool Rs 5 billion from State Bank of India by making a SGLreceipt vanish.

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