The biggest defrauder of Dalaal-street
April 23, 1992: More than 25 years ago, the story began to fall apart with the revelation that Harshad had helped himself to a cool Rs.5 billion from State Bank of India by making a SGL receipt vanish.
“We learn from history that we learn nothing from history.”
George Bernard Shaw
The above mentioned quote is very apt, especially in the light of the Rs.13,000-crore Nirav Modi-Punjab National Bank scam, among others. Why? Because back when India had just opened up its markets to the world in 1991, a stockbroker named Harshad Mehta had pulled off an even more audacious scam by exploiting the loopholes in the Indian banking system.
Adjusted for inflation today, Harshad Mehta fraudulently laundered over Rs.24,000 crore in the stock market over a three-year period.
Explaining the Harshad Mehta Scam of 1992:
- Who Was Harshad Mehta?
- Harshad Mehta’s Rs.40 Journey.
- What was the Scam all about?
- Effect on the Stock Market
- Effect on the Political Environment
- Effect on the Banking Sector
- What Happened to Harshad Mehta?
- He did it Again?
- Whatever Happened to the All the Cases?
- Closing Thoughts
Who was Harshad Mehta ?
Harshad Mehta was the sugarplum of the Indian Stock Markets–He was known as the “Amitabh Bachchan” of the stock market. Terms such as ‘The Big Bull’ and ‘Raging Bull’ were regularly used in reference to him.
Born as Harshad Shantilal Mehta in 1954 to a lower middle-class Gujarati family, Mehta spent his early childhood in Kandivali, Mumbai, whilst his father ran a small business. However, the family had to shift to Raipur in Chhattisgarh for medical reasons.
Mehta completed his schooling in Raipur but never showed much promise. He moved back to Mumbai alone after completing school, completed his B.Com from Lajpat Rai College and took up odd jobs – from selling hosiery to sorting diamonds – for the next eight years.
His journey to becoming the ‘Big Bull’ Mehta began when he landed a job as a sales person at The New India Assurance Company. It is here that he got interested in the stock market.
Harshad Mehta’s Rs.40 Journey
Undoubtedly that makes the Harshad Mehta story even more interesting is that despite migrating to Mumbai with only Rs.40 in his pocket he managed to influence the country in such a massive way. He started working for broker Prasann Panjivandas in the 1980s. Harshad expressed Prasann Panjivndas as his guru. Over the next Decade, he went on to work for different brokerage firms eventually opening up his own brokerage firm under the name GrowMore Research and Asset Management.
By year 1990, Mehta became a prominent name in the Indian stock market. He started buying shares heavily. The shares of India’s foremost cement manufacturer Associated Cement Company (ACC) attracted him the most and the scamster is known to have taken the price of the cement company from 200 to 9000 (approx.) in the stock market – implying a 4400% rise in its price. It is believed that It was later revealed that Mehta used the replacement cost theory to explain the reason for the high-level bidding. The replacement cost theory basically states that older companies should be valued on the basis of the amount of money that would be needed to create another similar company. By the latter half of 1991, Mehta had come to be called the ‘Big Bull’ as people credited him with having initiated the Bull Run.
Execution of Scam
The making of the 1992 security scam Mehta, along with his associates, was accused of manipulating the rise in the Bombay Stock Exchange (BSE) in 1992. They took advantage of the many loopholes in the banking system and drained off funds from inter-bank transactions. Subsequently, they bought huge amounts of shares at a premium across many industry verticals causing the Sensex to rise dramatically. The shares of India’s foremost cement manufacturer Associated Cement Company (ACC) attracted him the most and the scamster is known to have taken the price of the cement company from 200 to 9000 (approx.) in the stock market – implying a 4400% rise in its price. It is believed that It was later revealed that Mehta used the replacement cost theory to explain the reason for the high-level bidding. The replacement cost theory basically states that older companies should be valued on the basis of the amount of money that would be needed to create another similar company.
Harshad Mehta was also a broker of the RF deals (RFD system). He managed to convince the banks to have the cheques drawn in his name. He would then manage to transfer the money deposited in his account into the stock markets. Harshad Mehta then took advantage of the broken system and took the scam to new levels.
In a normal RF deal, there would be only 2 banks involved. Securities would be taken from a bank in exchange for cash. What Harshad Mehta did here was that when a bank would request its securities or cash back he would rope in a third bank. And eventually a fourth bank so on and so forth. Instead of having just two banks involved, there were now multiple banks all connected by a web of RF deals.
Harshad Mehta noticed early on the dependence of the RF deals on BR’s. In addition to this, the RF deal system also placed a great deal of reliance on prominent brokers like Harshad Mehta. So he along with two other banks namely Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) decided to further exploit the system. With the help of these two banks, he was able to forge BR’s. The BR’s that were forged were not backed by any securities. This meant that they were just pieces of paper with no real value. This is similar to a situation where you can avail loans with no collateral. Harshad Mehta further would pump this money into the stock market increasing his amount of influence.
The RBI is supposed to conduct on-site inspections and audits of the investment accounts of the banks. A thorough audit would reveal that amount represented by BR’s in circulation was significantly higher than the government bonds actually held by the banks. When the RBI did notice irregularities it did not act decisively against Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB).
Another method through which the collateral was eliminated was by forging government bonds themselves. Here the BR’s are skipped and fake government bonds are created. This is because PSU bonds are represented by allotment letters making it easier for them to be forged. However, this forgery amounted for a very small amount of funds misappropriated.
Exposure
However, that was not to continue. Journalist Sucheta Dalal was intrigued by the luxurious lifestyle of Harshad Mehta. She was particularly drawn to the fleet of cars owned by Harshad Mehta. They included Toyota Corolla, Lexus Starlet, and Toyota Sera which were rarities and a dream even for the rich in India during the 1990s. This further interest had her further investigate the sources through which Harshad Mehta amassed such wealth. Sucheta Dalal exposed the scam on 23rd April 1992 in the columns of Times of India.
The exposure of Mehta’s modus operandi led banks to start demanding their money back, causing the Sensex to plunge almost dramatically as it had risen. Mehta was later charged with 72 criminal offences while over 600 civil action suits were filed against him. Significantly, the Harshad Mehta security scandal also became the flavor of Bollywood with Sameer Hanchate’s film Gafla.
“I would probably find a place in the Guinness Book of World Records, going by the number of Criminal and Civil cases against me.”
Mehta confined to his Friend
Effect on Stock Market
The 1992 scam was the biggest stock market scam ever committed in the Indian Stock Market, the main perpetrator of which, was a well known stock broker Harshad Mehta. The scam impacted the entire exchange system as the securities system collapsed and investors lost thousands of rupees in the exchange system.
Less than 2 months after the scam was exposed, the stock market had already lost a trillion rupees. The RBI created a committee to investigate the matter. The Committee was called the Janakiraman Committee. As per the Janakiraman Committee Report, the scam was of the magnitude of Rs.4025 crores. This impact on the stock market was huge considering that the scam amounted to only 4025 crores in comparison to a trillion or 1 lakh crores.
This major fall, however, cannot be attributed to the scam alone but also to the governments’ harsh response. In an attempt to ensure that all the parties involved are brought to justice, the government did not permit the sale of any shares that had gone through the brokers in the last one year. This affected not only the brokers but also the innocent shareholders who may have gone through these brokers to purchase securities. The shares came to be known as tainted shares. Their value was reduced to pieces of paper as their holder was not allowed to sell them. This just resulted in a worsened financial environment.
Effect on Political Environment
The opposition demanded the resignation of the then Finance Minister Manmohan Singh and the RBI Governor S. Venkitaramanan. Singh even offered his resignation but this was rejected by prime minister P. V. Narasimha Rao.
Effect on Banking Sector
When the scam was exposed the banks started demanding their money back and recovery efforts made them realize that there were no securities backing the loan either. The Investments in the stock market by Harshad Mehta were tainted and had reduced by a significant value. A number of bankers were convicted. It also led to the suicide of the chairman of Vijaya bank.
What Happened to Harshad Mehta
Harshad Mehta was arrested by the Central Bureau of Investigation (CBI) in November 1992, along with his brothers Ashwin and Sudhir, who masterminded and executed this scam together.
The CBI charged Mehta specifically with 72 criminal cases (bribery, cheating, forgery, criminal conspiracy and falsification of accounts) and over 600 civil action suits by banks and institutions pertaining to monies he owed them. Other brokers such as his brothers and AD Narottam, Bhupen Dalal, Hiten Dalal and Naresh Aggarwal, among others, were also charged for taking part in the scam, but for much smaller sums.
Alongside, the Reserve Bank of India appointed a joint parliamentary committee (JPC), also known as the Janakiraman Committee, to provide a comprehensive picture of the extent and mechanics of the fraud. The government, through an ordinance, set up a Special Court for the trial of offences in the case and also created an Office of the Custodian, occupied by a bureaucrat and appointed by the court, to manage the assets of the scam-accused during the trial and for the disbursement of dues to banks and the Income Tax Department.
Mehta and his brothers were released on bail after three months in custody, weeks after which he publicly claimed, along with his lawyer Ram Jethmalani , that he had paid Rs.1 crore to then Prime Minister PV Narasimha Rao as donation to the Congress to get him acquitted. He even displayed the suitcase in which he allegedly carried the cash. Rao denied it, and later, a CBI probe also found no concrete evidence of this bribery claim.
Once out on bail, severval stock market investors gave Mehta a hero’s welcome. He made several comebacks after that as a “new age” stock market guru, and by 1997, he had his own website and newspaper column where he would advise people about what stock to buy and sell.
He Scammed Again?
June 1998: Harshad had made his plans carefully. He anticipated the Internet as a powerful tool and launched his own website — www.harshad.com to dispense stock tips and analyze market trends. A set of media managers then set him up with columns in several leading newspapers. The next step was to convince a set of companies to collaborate with him in ramping up their prices and find several legitimate brokers to put through his trades.
Sebi’s investigation reveals that a set of brokers was happy to deal with these unknown companies with no financial standing or professional expertise and without taking any security or deposit, only because of their faith in the Harshad Mehta magic. BPL, Videocon and Sterlite were lured by Harshad’s sales pitch and by February 1998, the market was buzzing about the return of the Big Bull. SEBI’s investigations show that from April to June 4, 1998, BPL, Videocon and Sterlite’s scrip prices moved up 137 per cent, 232 per cent and 41 per cent respectively, even while the bellwether BSE Sensex declined 11 per cent due to various domestic and international factors.
But April 1998 was very different from April 1992. Harshad had limited access to funds, his trading cards were suspended. More importantly, he needed to create a large network of front companies to do his business. SEBI refers to these as the Damayanti Group. The companies included Damayanti Finvest, CDP Fincap and Leasing, KRN Finvest and Leasing, Rijuta Finvest and Ikshu Finvest which operated through a set of brokers and sub-brokers who did Harshad’s bidding.
All these companies had the same address: 1208 Maker Chambers V, Nariman Point, Bombay 400 021 — once famous as Harshad’s nerve centre and the office of Growmore Research & Asset Management Ltd. He also started another set of companies in keeping with his plans. They were Money Television Industries, Esquire International, Starshare Investment and Finanz, Stable Constructions and New Prabhav Finvest.
The Damayanti group began to face payment difficulties and papered this over by rolling their positions from one bourse to another and transferring positions among brokers though a system of kaplis or credit notes. (This was a loophole for manipulation, which has since been plugged).
SEBI says the Bombay Stock Exchange, which was perfectly aware about Harshad’s shenanigans, not only failed to take “effective surveillance measures”, but also lowered margins in these scrips and later tried to bail him and his brokers out by arm-twisting companies to cover the payment default. They also opened the trading system in the middle of the night to insert synchronized trades at prices that were completely out of line with the day’s trading.When the payment crisis hit the market, it was common knowledge that Harshad had gone broke. Newspapers wrote about it, but SEBI’s job was to track his front companies and to link them to him. That was a tough proposition, since SEBI has limited powers of search and seizure. At every stage, Harshad’s people fudged their answers, refused to co-operate and tried to cover their tracks. Yet, the 1999 investigation was complete.
SEBI found that four persons — Anil Doshi, Dinesh Doshi, Dilip Shah and Vinod Shah — were directors of the Damayanti group in various permutations and combinations. The first two were his wife’s brothers. The latter two claimed they were just salaried employees and had carried out orders. Pankaj Shah, Sunil Samtani and Atul Parikh, who were co-accused with Mehta in 1992, were also an important part of the front operators.
After searches at the Damayanti offices, Sebi established links to Harshad through telephone bills, payment to lawyers, investment details and brokers such as LKP Securities and Digital Leasing.
Travel bills found at Harshad’s office were key to linking the Mehtas. Though the bills and invoices of the two travel agencies — Taurus Travels and Bonik Travels — were fudged to show purchases in the names of company employees, Sebi managed to verify through the airlines that it was Harshad Mehta, his family and associates who had actually traveled on the tickets.
It also found payments to the tune of Rs 1.4 million made from the front companies to Harshad’s lawyers Mahesh Jethmalani, S D Jaisinghani, and Chougle & Co when they had sought no legal advice from them. SEBI also tracked telephone calls from the Damayanti group to senior BPL executives such as its director T C Chauhan, who admitted he had made the calls to Harshad at the Damayanti group offices. SEBI hit pay dirt when it found a document from the Damayanti office which listed details of investments of Rs 1.46 billion in BPL, Videocon and Sterlite in the second week of June, which pertained to the BSE and NSE settlements of that period.
The document also connected Harshad Mehta’s activities to a series of brokers — El Dorado Guarantee, Dil Vikas Finance, LKP Securities, Madhukar Sheth, Sony Securities and GNH Global Securities. Of these, Madhukar Sheth and LKP have figured prominently in the 2001 debacle too. S S Gulati of LKP Shares and Stockbrokers and Digital Leasing, which had tried to recover money from Harshad Mehta, provided further corroboration. Shrenik Jhaveri and Bharat Khona were two other brokers who informed SEBI that Harshad had delivered a large quantity of BPL shares to them through the front companies in lieu of old liabilities.
The key to Mehta’s market manipulations were his dealings with BPL, Videocon and Sterlite which were finally barred last week from accessing the capital market for four, three and two years respectively. SEBI discovered that these companies lent Harshad the initial money to build up concentrated position in these counters. The outstanding purchases were particularly heavy at the end of each settlement period in order to provide price benchmarks for the next settlement. In fact, at one stage the brokers operating in BPL for the Damayanti group accounted for 70 per cent of the total outstanding position of the scrip on the BSE — a clear indicator that the BSE was studiously turning a blind eye to their activities.
Interestingly, another set of brokers operating on the NSE took delivery of 70 per cent of the total delivery for BPL in settlement no 22 of 1998 — indicating how positions were rolled over from on bourse to another. Exactly the same operation was replicated in Videocon and Sterlite as well. Having established that the Damayanti Group was set up by Harshad Mehta, the rest was easy. The three corporate houses did not even cover their tracks as we show in the next two parts. As SEBI points out, such cornering of shares and price manipulation created an artificial market that ultimately led to the collapse and was detrimental to the interest of investors in general.
Whatever Happened to the All the Cases?
In October 1997 that the Special Court set up to hear the bevy of cases related to the securities scam approved 34 of the 72 charges brought forward by the CBI against him.
In September 1999, the Bombay High Court awarded five years rigorous imprisonment to Mehta and three others in the Rs 380.97 million Maruti Udyog Ltd fraud case (MUL), one of the many individual cases within the larger securities scam.
He secured bail in all cases, including the MUL conviction, but was arrested again in 2001 for misappropriating Rs.2.5 billion from 2.7 million “missing shares” of 90 blue chip companies. He was denied bail this time, and on 31 December 2001, at the age of 47, he passed away in Tihar jail after a heart attack.
By the time he died, he had been convicted in only one (the MUL fraud) case, his appeal against which was dismissed by the Supreme Court in 2003. The rest of the criminal cases were abated due to his passing away, but the civil suits for the recovery of crores of money remained.
Closing Thoughts
Notwithstanding the scam, Harshad Mehta is still looked up to in certain circles, As reported by Economic Times some financial experts believe that Harshad Mehta did not commit any fraud, “he simply utilized the loopholes in the system”. When Harshad Mehta was first released out of prison in 1992 he was greeted with cheers and applause as his return would signify the return of his bullish trend. It is doubted that if businessmen who have been embroiled in scandals with the likes of Vijay Mallya, Nirav Modi will receive the same welcome.
The Harshad Mehta scam can be looked on from two sides. The first as a scam where Harshad looted the stock market and the public or the second way where Harshad Mehta was made the scapegoat as someone had to be blamed and at the same time kept other influential people away from the limelight. The Year 1991 is generally referred to as the year of progress due to liberalization but if seen from this perspective discussed here it just makes one exclaim “ What a chaos!”.
Disclaimer:
The above information was collected from the media reports. www.mkstocktalks.in or its owners do not take any responsibility for the authenticity of the content. Since some cases are in the court of Law, we do not endorse any cases or do not conclude on the same.
