Introduction
“The Harshad Mehta Scam” or “The Securities Scam 1992” is a classic example of stock market scam by Harshad Mehta, a registered and well-known broker during the time. This scam took over the stock market of India by storm and reflected the then volatility in the stock exchange. This scam involved misappropriation of funds of over Rs. 3500 crore and this scam wiped out the stocks with market value of Rs. 100,000 crore.
Harshad Mehta
Harshad Mehta was born on 29th July, 1954 in Rajkot, Gujrat. He was an Indian broker and main convict for Securities Scam of 1992. He completed his B. Com education in 1976 from Lala Lajpatrai College, Bombay. Mehta joined brokerage firm Harjivandas Nemidas Securities for a clerical job from where his journey to securities market started.
The Securities Scam 1992
“The Securities Scam 1992” was the result of systemic loopholes in the banking sector of India. Harshad Mehta exploited those loopholes in the banking sector to manipulate the funds and stock market operations.
Harshad Mehta was a registered and well-known broker of Dalal Street. Mehta had established strong relations in the banking system and he used this network to take advantage of deals in government securities and bank receipts.
What happened ?
As per the guidelines of RBI, government securities were only transacted between the banks. Banks wherein, involved in Ready-Forward Deals (RFD), to increase the value of those government bonds. RDFs were short term 15 days loans from one bank to another.
Harshad Mehta, going against the RBI guidelines, started acting as a broker for banks who wanted to deal in government securities. Those securities which were supposed to be transacted between banks, Harshad started to take control over those government securities and started issuing Bank Receipts (BRs), with the help of bank employees, as a promise to buy/sell the government securities.
If one bank wanted to sell securities then another would want to buy it and Harshad Mehta would act as broker for both the transacting banks. Instead of direct transaction, now banks would rely over Harshad Mehta. He had created a huge pool of such funds with the help of fake Bank Receipts (BR). For fake BRs , Mehta persuaded small banks like Bank of Karad (BOK) and Metropolitan Cooperative Bank (MCB)
Harshad Mehta diverted the same funds in the stock market. Such regular injection of funds led to a bullish trend in the stock market. This juiced up the stock price up to 4,400 percent and hence BSE sensex rose from 2000 mark in January to 4000 mark in March 1992. Mehta earned a significant profit from such a transaction. He started manipulating the stock market as investors started buying the stocks he invested in. This made him get the title of “Big Bull” or “Amitabh Bachhan” of Indian Stock Market.
End of “The Securities Scam 1992”
Investigative Journalist Sucheta Dalal exposed the scam. She revealed how Harshad Mehta had exploited banking loopholes to manipulate stocks. Also, Harshad Mehta’s advance tax of 28 crore for financial year 1991/92 caught the attention of tax-authorities.
Sucheta Dalal’s report led to a series of investigations against Harshad Mehta. The CBI started probing him. Investigation later linked high-profile bank employees, brokerage firms, bureaucrats and politicians and held them responsible for the case. Harshad Mehta and his family members were charged with 76 criminal cases and over 600 civil suits.
The scam news escalated in the market and the public reacted accordingly. There was panic among the investors in the stock market. It was reflected in their investment rationale. There was a huge surge in the stock market and sensex tanked to 2,529 points from 4,467 points, wiping out Rs. 100,000 crore in market capitalization.
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References
