Everything you need to know about the Harshad Mehta scam 1992

Harshad Mehta scam 1992

pic source; Google (Wikipedia)

Everyone wants to build wealth, especially the people who enter the stock market have the only goal, building wealth. But I think most people know that building a huge wealth is quite a big process in the stock market and of course it's a patience game if you don't have patience you are going to destroy yourself. But still, there were some people present in the world who love to take shortcuts, and today we are going to talk about one of them, said to be the big bull of the Indian stock market Harshad Mehta and the biggest stock market scam ever in Indian history, the Harshad Mehta scam 1992. The man who exposed almost all the loopholes in the Indian financial system. 

Why Harshad Mehta scam getting attention again?

If you don't have too much interest in the film industry then you might be confused that why the scam which was happened in 1992 getting attention again after 28 years. So, a web series has been released a few days back on the 9th of October named Scam 1992. Because the scam was one of the biggest scams in the stock market people are loving it and currently it is the highest-rated web series in the Hindi language. Apart from this web series a movie named "The Big Bull" based on the Harshad Mehta scam was supposed to release in 2020 but due to the pandemic covid-19, it will release on Hotstar worldwide. These are the reasons because of which people are curious to know more about the Harshad Mehta scam.

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Harshad mehta scam 1992

Let's have a look at Harshad Mehta's early life

Harshad Shantilal Mehta was born on 29th July 1954 in Rajkot, Gujrat. Later on, he shifted to Madhya Pradesh along with his family where he completed his schooling at SS Kalibadi H S School, and after completing his school education he came to Bombay to study further and to find the job where he got the BCOM degree from Lala Lajpat Rai college in 1976. After completing his education he worked in different companies for the next 8 years. The first company he joined was New India Assurance Company Limited as a salesperson and then he got interested in the Stock Market. What an incident, I got interested in the stock market too when I was working as a salesperson in an insurance company. But don't worry I am not gonna do a scam. HaHa, jokes apart let's move to his story. Then he resigned from the insurance company and joined a broking firm. He also worked as a jobber in Harjinvandas Nemidas securities under the broker Prasann Pranjivandas in his early 1990's.

As he also has earned a reputation in the stock market he started his own firm named GrowMore Research and Assets ltd. in 1987. People used to trust him blindly so he started getting funds to invest from big clients. He started trading in the stock market heavily for the next four years and around 1990 he became a well-known face in the Indian stock market. He was also known by the name "The Big Bull" and "Amitabh Bacchan of the stock market".

What allowed Harshad Mehta to do the biggest scam ever?

SEBI came into the industry around 1988 even at that time SEBI had not enough authority. SEBI just used to make guidelines and rules for the stock market. The large stockbrokers had all the controls on the Bombay stock exchange even they didn't use to follow any rules and regulations. Large investors and stockbrokers used to do insider trading because there were no rules and regulation exists for insider trading. Also, the NPA's of the banks was increased up to 30% at that time so they were looking to earn a profit that doesn't matter from where. So, Harshad Mehta and some more brokers were taking advantage by offering them high returns. 

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How Harshad Mehta changed the market into bullish?

He started putting funds and manipulating in many stocks blindly and because of his good reputation in the stock market people started to follow him which resulted in huge demand in those stocks in which he was putting funds. His targeted shares were ACC cement, Videocon, Sterlite industries, Videocon, Tisco, and BPL.

How the scam executed?

In April 1991, Sensex was trading at around 1250 points and you will get amazed to know that after one year in April 1992 Sensex had touched 4467 points which were almost four times in just a year.
In January 1992, Sensex was at around 2300 points and got almost doubled in just three months. So, you can imagine how much money one has to put into the market to make it bullish at this level. Do you think that only Harshad Mehta was the man who was manipulating the market? ACC cement was the major target of Harshad Mehta. He put that much funds into the ACC that the price of the stock rose from Rs. 200 to Rs. 9000 in just three months. The reason he gave for the rise in those stocks is "Replacement Cost Theory". He defined this theory as if you want to establish that kind of business at that time then it requires much more funds than the funds which you invested in starting which totally meant that the stocks are undervalued.

Harshad mehta scam 1992

How he arranged the funds to manipulate the market?

It is obvious that if the market is at a bulling run for a long time as I already told you that market had been it's four times in just one year, then there must be someone who was putting lots of funds into the market. But the question is how he arranged the funds?

So, let's see how he defrauded the banks.

Ready forward deal and Bank Receipt scam

Basically, the Government of India issues some bonds to arrange the funds to complete their projects in return for a guarantee to give some interest to the investors who will gonna invest in those bonds. At that time it was mandatory for the banks to invest in those bonds and if a bank doesn't have money to invest they had to borrow the funds from other banks using a ready-forward deal method and this deal was used to executed by the brokers. That is the point where Harshad Mehta found the loophole. Harshad Mehta was a reputed broker at that time. Let's understand by an example:

Let's suppose Bank A needed some funds so they used to ask the brokers to find the lender who can give funds in return for securities and when bank A will have the funds to return they will get their securities back by returning the borrowed funds to Bank B. But the loophole was that if until the broker finds the seller of securities the funds were used to keep in the broker's account for a maximum of 15 days. But in Harshad Mehta's case, he had started to use the bank's funds to manipulate the market. Let's suppose Bank A wants to buy some securities so it gave the funds to Hashad Mehta to find the seller but he used to issue fake Bank Receipts (BR's) instead of giving securities and started using those funds to manipulate the market and if Bank A ask their money back he used to go to Bank B to ask the funds in return of fake Bank Receipt then to Bank C after then to Bank D and this cycle were used to continue. He was continuously using the bank's money to manipulate the market and making huge profits.

If you want to know in brief about the Harshad Mehta scam. Then you can go for the book "The scam" written by Debashis Basu and Sucheta Dalal. This book includes all the incidents that happened from the Harshad Mehta scam to the Ketan Parekh scam. Now many of you must be curious that who is Ketan Parekh. No, am not gonna tell you about him. You will get to know about him in this book.

How Harshad Mehta scam was exposed?

Harshad Mehta was having too many luxurious cars which were getting the attention of many people and why not? Having those types of vehicles was not possible for many rich people at that time. And that was the turning point of his story as he also gets the attention of Sucheta dalal who was the financial editor in Times of India. On 23rd April 1992 journalist Sucheta dalal published an article in the Times of India exposing the scam of Harshad Mehta. Then the Banks got to know that the bank receipts they were getting from Harshad Mehta were totally fake. The overall loss of banks was calculated around Rs. 3000-4000 crores. The chairman of Vijaya Bank who issued cheques to Harshad Mehta committed suicide. The stock market also got crashed after this news came into the market.

Janki Raman committee 

On 30th April 1992, the first investigation committee was made named the Janki Raman committee. The aim of this committee was to investigate the total loss that banks faced in that scam. According to the committee, the total loss that the bank had faced is of amount Rs. 4024 crores.

Joint parliament committee

In August 1992, the Joint Parliament Committee came into play for further investigation. The main purpose of that committee was to investigate how many people along with Harshad Mehta were involved in that scam. Along with these committees, CBI was also investigating.
After 17 months of this committee, on 9th November 1992, Harshad Mehta got arrested. His account was got ceased along with his brother and his family's accounts. Also, he was banned from the stock market forever along with his family by SEBI. There were 72 
criminal charges applied to him

So, Harshad Mehta hired a very famous advocate at that time, Mr. Ramji Jethmalani. In June 1993, they both made a statement in a press conference that Harshad Mehta gave Rs. 1 crore as a bribe to the prime minister Mr. Narsimha Rao which was clearly refused by Mr. Narsimha Rao.

Harshad Mehta was convicted by both the Bombay high court and supreme court and on 31st December 2001, he got a cardiac heart attack when he was living in thane prison and died.

The bottom line...

All of the information given in the article are taken by thorough research on Harshad Mehta but if you still think that we have missed something to add then, Please feel free to comment down. It will be a great pleasure for us.

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