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What Harshad Mehta did?

The Stock Scam


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 (Statutory Liquidity Ratio). 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 extra clause that said that the average %age of bond holdings over the week needs to be above the SLR but the daily %age needing 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 has less than the required amount (called short). He then acts as the middleman between the two 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. Lets 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 eg. He takes money from A on Monday, and tells B that hell pay on Tuesday, then he takes money from C on Tuesday and tells D that hell 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. Read Indian Stock Market Articles He took the price of ACC from 200 to 9000.Thats an increase of 4400%!!!The market went up like crazy and the bulls 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 banks office. The chairman knew that when it would become public that he had written cheques in the name of Mehta, he would be dead meat. 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 Nimesh Shah. He was just as involved as Harshad Mehta but he knew how keep out of the hands of the law. Nimesh Shah still deals in the stock market and is known to be a heavy player. Harshad Mehta is now dead. It is rumored that when he died, he still had 10% of ACC shares with him.

Harshad Mehta Scam

THE HARSHAD MEHTA SCAM

INTRODUCTION: Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early childhood was spent in Mumbai (Kandivali) where his father was a small-time businessman. After completing his secondary education Harshad left for Bombay. While doing odd jobs he joined Lala Lajpat Rai College for a Bachelors degree in Commerce. After completing his graduation, Harshad Mehta started his working life as an employee of the New India Assurance Company. During this period his family relocated to Bombay and his brother Ashwin Mehta started to pursue graduation course in law at Lala Lajpat Rai College. In the late seventies every evening Harshad and Ashwin started to analyze tips generated from respective offices and from cyclostyled investment letters, which had made their appearance during that time. In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to Bombay Stock Exchange a jobber on BSE for stock broker P.D. Shukla. In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. Harshad along with his brother Ashwin started their venture Grow More Research and Asset Management Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for the same with financial assistance from Shah and Sheth, who were Harshad's previous broker mentors. He rose and survived the bear runs, this earned 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 as well as scrip-specific activities. Harshad is alleged to have engineered the rise in the BSE stock exchange in the year 1992. Exploiting several loopholes in the banking system, Harshad and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex. When the scheme was exposed, the banks... (BSE) before becoming Stock Market Scandal Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and had an expensive lifestyle. He lived in a 15,000 square feet (1,400 m2) apartment, which had a swimming pool as well as a golf patch. By 1990 Harshad Mehta had risen to prominence in the stock market. He had been buying shares heavily. The shares which

attracted attention were those of Associated Cement Company (ACC). The price of ACC was bid up to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation. The theory basically argues that old companies should be valued on the basis of the amount of money which would be required to create another such company. Through the second half of 1991 Mehta had earned the sobriquet of the Big Bull, who was said to have started the Bull Run. On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India exposed the dubious ways of Harshad Mehta. The broker was dipping illegally into the banking system to finance his buying. The authors explain: The crucial mechanism through which the scam was affected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jeweller. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price. It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system. 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 wasnt the case in the lead-up to the scam. In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker. This the brokers could manage primarily because by now 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. Another instrument used in a big way was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR. As the authors write, a BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer. Having figured this out, Mehta needed banks, which issue fake BRs, or BRs not backed by any government securities? Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and

when required, for a fee, the authors point out. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, obviously assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned. The game went on as long as the stock prices kept going up, and no one had a clue about Mehtas modus operandi. Once the scam 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 Rs 4,000 crore. When the scam was finally revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof because he knew that if people come to know about his involvement in issuing cheques to Harshad Mehta, people would accuse him. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. This time around, he was in cahoots with owners of a few companies and recommended only those shares. This game, too, did not last long.[1] Interestingly, by the time he died, Mehta had been convicted in only one of the many cases filed against him. Till now, the real story behind the entire scam is unknown. The recent Hindi movie 'Gafla' showed this scam in a different perspective In the wee hours of December 31, just before the year 2001 came to a close, Harshad Mehta passed away in a jail in suburban Mumbai. It was a tragic and unceremonious end to the man who was the first broker to become a mega-star of the Indian capital markets and fire the greed and imagination of every middle class Indian in the early 1990s. He promised the ultimate rags to riches story -- from the small town Raipur boy who was once rusticated from school to Sultan of Dalal Street with all the trappings of wealth such as a fabulous house, a fleet of cars and multiple stock exchange memberships. Charismatic, ebullient and recklessly ambitious, Harshad Mehta set out to be a role model for investors. "I thought I'd be like Pied Piper", he had told a newspaper in 1992, "I thought I can sell dreams... that asset-creation is not a crime, that if you wanted to be Harshad Mehta come to the stock market".

In June 1992, when he was released after 107 days in custody, he told me "Congratulations, you have broken the story of the decade". That was Harshad again - willing to revel even in negative publicity. He made a triumphant exit from court, a la Laloo Yadav's recent jail yatra, amidst a mob of cheering and slogan-shouting investors, who wanted him back in the market, igniting another never-ending bull run. Instead, his disdain for the means the he employed to achieve his mega ambition, left behind a shattered dream and a tarnished image. He ended his days in judicial custody, and will forever be known as the main architect of the Rs 50-billion scam - India's biggest securities scandal. Instead of fawning epithets such as the Big Bull, or the Amitabh Bachchan / Einstein of the market that were showered on him by his investor fans, he ended his days as a tired scamster, who could not stop trying to pull off the same old quick money schemes. For a few months after the scam, it almost seemed as though Harshad and his brother Ashwin would remain at center-stage and dominate events. Within weeks after his release he was hogging headlines as the first man ever to claim that he had bribed a sitting Prime Minister. That too was done in typical Harshad fashion - press conferences at the Taj and the Oberoi, high profile lawyers, an editor-turned-MP acting as emcee, the release of audiotapes and the bizarre demonstration of Rs 10 million being stuffed into a large suitcase. That too fizzled out, with the Mehta brothers perjuring themselves. However, they clearly got themselves a deal to avoid further harassment by other government agencies in charge of money laundering and such offences. Did the aftermath of the investigation change Harshad's attitude to business? No way. Almost every year after 1992, Harshad Mehta has never ceased to attempt a comeback. The problem was that he never changed his formula. He failed to realize that his old magic was not working with investors anymore. At least nowhere near enough to move the market. If the Central Bureau of Investigation is to be believed, Harshad was also continuously funding himself by selling part of his 1992 stock portfolio, which he had not declared to the Custodian appointed by government. In fact, it is the sale of these benami shares (shares that were held in street names when he and 19 other entities were notified by the Custodian and their assets impounded) that had put him back in police custody at the time of hisdeath.

Harshad's problem has always been his flashiness. In 1992, when I broke the story about the Rs 6 billion that he had swiped from the State Bank of India, it was his visits to the bank's headquarters in a flashy Toyota Lexus that was the tip off. Those days, the Lexus had just been launched in the international market and importing it cost a neat package. Even before that he was featured in a video news magazine feeding peanuts to bears at a Mumbai zoo to symbolize his victory over the bearcartel in the stock market. In fact, for weeks after the scam, he was convinced that he would never have been caught but for the bear cartel. 1997 saw Harshad Mehta making another big comeback attempt. This time as a new age stock market guru. He was among the first to set up his own website to dispense tips. He had also built up a network of senior media managers who gave him the publicity and commissioned him as a columnist. He also had powerful friends at the helm of the Bombay Stock Exchange with close connections to the regulator. Some of the largest newspapers in the country, including the Times of India where I first wrote the story of the securities scam, were convinced that a Harshad Mehta column was sure to send circulation figures soaring. Typically, Harshad did not stop at dispensing tips. He had struck a deal to ramp up the prices of several stocks - among these were BPL, Videocon and Sterlite. He had managed to build up quite a speculative bubble and was again the cynosure of investor attention when India's nuclear tests caused a sudden collapse in prices and his bubble burst. Brokers who operated for Harshad Mehta were then infamously bailed out at the behest of the Bombay Stock Exchange authorities by opening the trading system in the middle of the night to insert synchronized trades at manipulated prices. Investigations by the Securities and Exchange Board of India have revealed that Harshad had set up an entire network of investment companies, known as the Damayanti Group to front his market operations. That investigation led to SEBI imposing a lifetime bar against him (he had filed an appeal against the SEBI order).

It is a pity that Harshad's eternal optimism and furious stream of get-rich ideas were never channeled to more productive use. When the end came, he had a score of cases filed under different stages of trial and one conviction by the Special Court in the Maruti Udyog case. But the last decade had certainly taken its toll. The sunny optimism and good cheer, was replaced by a more pensive and tired visage. He not only looked defeated but sources close to him say that he was steadily running out of funds. Most of this was probably due to the realization that with one conviction by the Special Court and another by SEBI, his dreams of coming back to the capital market had ended forever. Now it is truly over. NEW DELHI: The income tax department is in for an Rs 2,000 crore windfall from the custodian, which is working to recover the money lost during the securities scam of 1991-92 that was perpetrated by Big Bull Harshad Mehta. The decks were cleared by the Supreme court on Tuesday to recover and distribute the money among claimants when it refused to grant a stay against the ongoing distribution proceedings in the special court, which was set up to deal with all scam-related cases. In its judgment in 2010, the special court had granted permission to the custodian to treat the entire Harshad Mehta family as one group and consequently sell the residential apartments owned by family members of Harshad Mehta to meet the group's liabilities. The custodian had filed a proposal to pay Rs 2,000 crore of the Rs 2,250 crore collected by liquidating Mehta's assets to the tax department. The group approach is being contested by individual constituents. When contacted, Satish Loomba, the principal administrative authority of the custodian, confirmed the development and said that the way forward for the special court was now clear. When asked on the extent of fulfillment of the liabilities of this group, Loomba said that the funds currently available would completely square off the primary income tax liabilities and additional funds were likely to be available in due course, which would meet the basic claims of the banks. At present, bank claims are estimated to be around Rs 1,700 crore.

The I-T department had staked claim as taxes on the transactions entered into by Mehta and his group during the securities scam. The infamous securities scam had caused a huge setback to the Indian stock market, leading to a loss of around Rs 60,000 crore of public money due to the crash in share prices. All banks together are estimated to have lost around Rs 4,000 crore. In its judgment, the special court had granted permission to the custodian to sell eight sea-facing apartments in Madhuli complex in Worli. The special court had noted that family members and entities owned by them constituted the Harshad Mehta group. The judgment had said, "The custodian is directed to take steps to sell the flats in Madhuli in accordance with the procedure that is settled by the court." It also asked the custodian to initiate the process of sale immediately. MONEY TRAIL Banks together had lost Rs 4,000 crore at present, bank claims are around Rs 1,700 crore the scam had resulted in a loss of Rs 60,000 crore of public money.
Exploiting several loopholes in the banking system, Harshad and his associates siphoned of funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex. When the scheme was exposed, the banks started demanding the money back, causing the collapse. He was later charged with 72 criminal offenses and more than 600 civil action suits are filed against him. He died in 2002 with many litigations still pending against him. He was arrested by CBI on November 9 with his brothers, Ashwin and Sudhir, in the case of alleged misappropriation of Rs 2.50 billion from 2.7 million 'missing' shares of 90 blue chip companies. On December 21, a special court had rejected the bail plea of Harshad and his brothers and remanded them to judicial custody till January 4. Harshad and his brothers contended that it was on the basis of their complaint that the court had earlier ordered CBI to probe the 'missing' shares, while CBI argued that these shares were sold fraudulently in the market by the accused. Harshad and his two brothers are charged with various offences under IPC such as 120-b IPC (conspiracy), 467 (forgery of valuable security), 468 (forgery for the purpose of cheating) and 471 (using as genuine forged documents).

In another case, Harshad Mehta and three others were acquitted on April 16 in a case of alleged misappropriation of Rs 588,000 from the funds of Bank of America in its inter-bank call money transactions ostensibly with SBI Mutual Fund. After his arrest Harshad was confined to central prison and other jails in Mumbai. Recently, he was shifted to Thane Central Prison. In special courts here and Supreme Court in New Delhi, Harshad was defended by a team of lawyers led by Mahesh Jethmalani. He, however, raised a controversy by addressing a press conference along with his lawyer Ram Jethmalani by displaying two suitcases in which he claimed to have paid Rs 10 million donation allegedly to the then Prime Minister Narasimham Rao for the Congress party. Later, a special court ordered a CBI probe into the allegations made by Harshad Mehta that donations of Rs 10 million from the scam money were indeed paid to Congress. CBI held Harshad and his two brothers responsible for introducing these 'missing' shares in the market surreptitiously in benami (fake) names to rig share prices. Accordingly, a case was registered against them. The 1991-92 scams had sent shock waves all over the country and saw many heads rolling. In the wake of the scam, chairman of UCO Bank K M Margbandhu was sacked and arrested. Planning Commission member V Krishnamurthy and SBI managing director V Mahadevan were forced to quit their offices.