1) What Happened in India

2) April 28, 1992

3) The Original Big Bull

 WHAT HAPPENED IN INDIA
The 1990s will go down as the most important decade in the history of the capital market of
India. Liberalization and globalization were the new terms coined and marketed during this
decade. The decade was characterized by a new industrial policy, emergence of SEBI as a
regulator of the capital market, advent of foreign institutional investors, euro-issues, free
pricing, new trading practices, new stock exchanges, entry of new players such as private
sector mutual funds and private sector banks, and primary market boom and bust.

Major capital market scams took place in the 1990s. These shook the capital market and drove
away small investors from the market.

What Harshad Mehta did? – The Stock Scam

In the early 1990s, banks in India had to maintain a particular amount of their deposits in
government bonds. This ratio was called SLR or the Statutory Liquidity Ratio1. Each bank had to
submit a detailed sheet of its balance at the end of the day and also show that there was a
sufficient amount invested in government bonds. Now, the government decided that the banks
need not show their details on each day, they need to do it only on Fridays. Also, there was an
additional clause that said that the average percentage of bond holdings over the week needs
to be above the SLR but the daily percentage need not be so. That meant that banks would sell
bonds in the earlier part of the week and then buy 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 banks would 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 had less than the
required amount (called ‘short’). He then acted as the middleman between the two

1 Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the commercial banks in India
require to maintain in the form of gold or government approved securities before providing credit to the customers. Statutory
Liquidity Ratio is determined and maintained by Reserve Bank of India in order to control the expansion of bank credit.
 banks. Harshad Mehta was one such broker. He worked as a middle man between many banks
for a long time and gained the trust of the banks’ senior management. Let’s say that there are
two banks A (short) and B (plus). Now what Harshad Mehta did was that he told the banker at A
that he was dealing with many banks and hence did not know who he would deal in the end
with. So he said that the bank should write the cheque 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 example of
bank A and B, he took the money from A and went to B and said that he would pay the money
on the next day to B but he needed the bonds right now (for A). But he offered a 15 % return
for bank B for the one day extension. Bank B readily agreed with this since it was getting such
a nice return.
Now since Harshad Mehta was dealing with many banks at the same time he could then keep
some capital with him at all times. For e.g. he takes money from A on Monday, and tells B that
he’ll pay on Tuesday, then he takes money from C on Tuesday and tells D that he’ll pay on
Wednesday and the money he gets from C is paid to B and as a result he has some working
capital with him at all times if this goes on with other banks throughout the week. The banks at
that time were not allowed to invest in the equity markets. Harshad Mehta had very cleverly
squeezed some capital out of the banking system. This capital he invested in the stock market
and managed to stoke a massive boom.
He took the price of ACC from 200 to 9000! The market went up like crazy and the bulls2
were on a mad run. Since he had to book profits in the end, the day he sold was the day when
the market crashed. The same day Vijaya Bank chairman committed suicide by jumping from
the top of the bank’s office. The chairman knew that when it would become public that he had
written cheques in the name of Mehta, he would be dead meat3. One rather unknown fact
about this scam is that there was a very important player in this scam who managed to keep a
very low profile. That man was

2 A financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most
often used to refer to the stock market. Bull markets are characterized by optimism, investor confidence and expectations that
strong results will continue. The use of “bull” and “bear” to describe markets comes from the way the animals attack their
opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the
movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.
3 ‘Dead meat’ is an idiom which is sometimes used to threaten someone. It means that the person will be doomed or ruined.
 Nimesh Shah. He was just as involved as Harshad Mehta but he knew how keep out of the
hands of the law.

April 28, 1992

It was a bright sunny morning at Dalal Street in erstwhile Bombay. Brokers, day traders and
retail investors were anxiously walking towards their chambers, praying for another profitable
day as the Bombay Stock Exchange was about to ring the opening bell at 9:55 AM.
Unfortunately, what lied ahead was a ruthless day that shattered their dreams and shook their
trust on the functioning of stock markets in India. This was the day when every investor had to
pay the price of the greed and misdeeds of 'big bull' Harshad Mehta. While innocent investors
were still struggling hard to understand what was going on, the Harshad storm caused Sensex
to crash by 570 points or 12.77 per cent to close at 3,870, its second-largest fall by percentage
till date.

The tremors of Rs 5,000 crore Harshad Mehta scam were felt across the length and breadth of
the nation. While retail investors were grieving the loss of their life savings, 1500 kilometers
away from Dalal Street, law makers in New Delhi were busy finding out ways to give some
teeth to the newly born stock market regulator SEBI or Securities and Exchange Board of India.
Though SEBI was officially born in 1988, it remained an institution on papers till 1992, when it
got statutory powers after the SEBI Act was passed by Parliament in 1992, days before the
Harshad Mehta scam blew lights out of Dalal Street. This was the first event in history of Indian
stock markets that gave strength to voices “demanding a powerful Daddy to regulate
the functioning of markets.”

The Original Big Bull

Harshad Mehta came to the limelight for rigging4 the stock market and causing a
Rs.5000 crore financial scandal in the BSE securities scam of 1992. India's original Big

4Rigging is a term of the stock-exchange, denoting the practice of inflating the price of given stocks, or enhancing their quoted value,
by a system of pretended purchases, designed to give the air of an unusual demand for such stocks.
 Bull, Mehta was known for his flamboyant ways and fleet of imported luxury cars. Exploiting
the loopholes in the banking system, Mehta and his associates siphoned off funds from inter-
bank transactions and bought shares heavily at a premium triggering a rise in the Sensex. He
was also accused of offering a bribe of Rs.1 crore to former prime minister P V Narasimha Rao
to hush up the case against him. Despite the action taken against him, he made a comeback by
illegally jacking up share prices of BPL, Sterlite and Videocon in the late 90s. He was tried for
nine years and died behind bars in Thane 2001 as a broken man. When he died, Mehta had
been convicted in only one of the 27 cases filed against him. What attracted the taxman’s
attention was Mehta's advance tax payment of Rs 28-crore for the financial year 1991-92.
Significantly, the Harshad Mehta security scandal also became the flavor of Bollywood with
Sameer Hanchate's film Gafla.

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