Bernard Baruch, a US stock investor and political consultant once said: "The fundamental motivation behind the stock market is to trick however many men as could reasonably be expected." This quote perfectly suits Harshad Mehta - the man behind the Security Scam worth Rs 4,000 crore.
Recalculating considering inflation today, Harshad Mehta fraudulently laundered more than Rs 24000 crore in the stock market in 3 years. Now the questions you might ask are, how did Harshad Mehta perform such a large scam in the Indian stock market? What happened to those accused in the scam, including Harshad Mehta himself? Was the money ever recovered? What was the court's judgment regarding fraud cases? Along with these questions, today we will discuss the man whose story is just like a Bollywood movie.
Who was Harshad Mehta?
Harshad Shantilal Mehta was born on 29th July 1954, in Rajkot district of Gujarat, in a Jain family.
Born in a middle class, Mehta concentrated in Holy Cross Byron Bazaar Higher Secondary school in Raipur yet he didn't show any exceptional promise in school.
He moved to Mumbai with just Rs 40 in his pocket for additional investigations and in 1976 he, however, became able to finish his graduation in commerce from Lala Lajpat Rai College, Mumbai. After graduation, he did various temporary jobs for the next eight years.
Earlier Career
Mehta struggled in his earlier career doing low pay scale jobs associated with sales, including selling hosiery, cement, and sorting diamonds. Around then he had no clue about what he will do in his life yet he continued investigating and his luck pivoted when he joined New India Assurance Company Limited (NIACL) as a salesperson.
During this time, he got interested in the share market and after a couple of years, resigned and joined the stockbroker B. Ambalal.
Later in 1981, he filled in as sub-broker to stockbroker J. L. Shah and Nandalal Sheth. He understood that this is the game he was born to play. In a decade, in early 1980, he served in a position of increasing responsibility in a series of brokerage firms.
A Journey from an Ordinary Broker to "Big Bull"
In 1984, Mehta got a chance to be a member of the Bombay Stock Exchange as a broker and established his own firm named 'Grow More Research and Asset Management', with the financial assistance of relatives and friend circle, when the BSE auctioned the brokers' card.
In 1986, he began trading effectively.
By early 1990, he turned into a renowned stockbroker and various prominent individuals started to invest in his firm, and use his services including the minister (of that time) P. Chidambaram through Chidambaram's own shell companies.
By 1990, the media (including famous magazines, for example, Business Today) portrayed a praising image of Mehta, calling him " The Amitabh Bachchan of Stock market." However, he was not happy with his success, he had bigger ambitions, so in this hunger for money, he began investigating different loopholes in the Indian banking system.
Around then, the Reserve Bank of India has commanded all the banks to hold a specific ratio of their assets in the government's fixed interest bonds before the end of every week or the RBI would punish them.
Mehta smartly took the capital out of the banking system to address this necessity of banks and invested this money into the stock market and started purchasing stock heavily.
Mehta's number one stocks included Associated Cement Company (ACC), Apollo Tires, Reliance, Hero Honda, Tata Iron and Steel Co. (TISCO), BPL, Sterlite, Videocon, and many more. The ACC, India's premier cement firm, was Mehta's top most choice.
He invested money into its shares so aggressively that its stock rose from Rs 200 per share to Rs 9000 per share in three years - a 4400 % rise!
For the individuals who asked, Mehta had the replacement cost theory as a clarification. The replacement cost theory fundamentally expresses that more established companies should be valued based on the amount of money that would be expected to create another comparable company.
In the second six months period of 1991, Mehta became popular as the 'Big Bull' as people credited him with having started the Bull Run.
The Scam of 1992 that Shook the Indian Financial System
So, the question is, what exactly the Harshad Mehta did? How was he making the money?
Harshad Mehta utilized the technique of the Ready Forward Deal in a scam. A ready forward deal is a secured short-term credit that is given starting with one bank then onto the next bank for Ready forward deal is a secured short-term advance which is given starting with one bank then onto the next bank for 15 days.
Fundamentally government needs funds for infrastructure projects and different costs so the government constrained the banks to keep up a specific amount of their stores in government bonds.
This ratio is called SLR (Statutory Liquidity Ratio).
At whatever point the government required assets, it used to sell its securities in the market, and banks expected to get it which blocks the liquidity of banks.
So when this liquidity is hindered, at that point banks have another decision that banks can sell their government securities in form of a ready forward deal to another bank and thusly get money.
Understand it better with an example.
Assume there are two banks - Bank A and Bank B. Presently Bank A (the borrower bank) because of its liquidity blockage needs money and Bank B (the loaning bank) has adequate assets with them and is ready to propel money to Bank A.
So, Bank B will loan money (short-term advance) to Bank A against the government bonds of Bank A going about as collateral security. Yet, this exchange of getting and loaning between the two banks happens with the assistance of a mediator, that is, the broker.
The broker ordinarily unites two banks for a deal and against this, he gets a commission. The securities and payments were conveyed through the broker and in such settlement banks may not know with whom they are dealing.
Harshad Mehta exploited this as it were.
The bank (A) who required money used to approach Mehta and gave him their government securities and thusly Mehta would approach them for quite a while to make the important arrangements.
Since Mehta was so powerful the banks didn't complain hanging tight for some additional days.
In the interim, he discovered the purchaser bank (B) who might propel money against the securities of the dealer bank (A). According to the norms of banking, the purchaser bank (B) should transfer money straightforwardly for the sake of the vendor (A).
In any case, Mehta asked the purchasing bank (B) to transfer the assets in his own name and since he had assembled such a huge amount of trust in business, the banks began giving checks in his own name which was illegal.
During that time he had this huge cash in his personal account and he was investing that money into the stock market. He simply picks a few portions of the company and continues purchasing those offers aggressively and due to this monstrous liquidity infusion, the offer cost of these stocks would go up.
He had the dash of Midas: all that he contacted got gold and a huge number of naive investors took cues from him which raised the stock costs considerably higher.
This time, the merchant (Bank A) was all the while believing that Mehta is attempting to orchestrate a purchaser bank. They didn't realize that their (Bank A) securities were already transferred to another bank (Bank B) and the money was loaned for the sake of Harshad Mehta.
Presently the inquiry emerges that if the money was being siphoned into the share market, at that point how was Mehta making installment to the merchant bank (A)?
Here is the point where his keenness came in.
At the point when the vendor bank (A) continuously Jabbed Mehta for the money, at that point he used to sell his shares in the market at a lot higher cost and made the installment to the concerned bank. However long the market was in the Bull phase, Mehta didn't confront any issue in creation installment to the banks.
The entirety of this was going well overall and till this time the scam was not unreasonably big.
The scam went big when his voracity for money expanded and the fake Bank Receipts (BRs) came into the picture. The vendor bank, that is, the borrower (A) used to give a bank receipt to the purchaser bank, that is, the lender (B) as an affirmation of offer of securities.
A bank receipt is a receipt for the money received by the selling bank, that is, the borrower (A).
Mehta required banks that could give fake bank receipts thus he plotted with the officials of two banks to be specific Bank of Karad (BOK) and Mumbai Mercantile Co-employable bank to give bank receipts that were not upheld up by any government bonds.
These fake bank receipts were simply a bit of paper.
When these fake bank receipts (BRs) were given, they were given to different banks constantly thusly offered money to Mehta accepting that they were loaning against government security when this was not generally the situation.
The money he got was utilized to drive the costs of the stock in the stock market and when the opportunity arrived to return the money, offers would be sold for a benefit and the fake BRs were resigned.
The game went on as long as the stock prices kept going up and nobody had an idea about Mehtas' business as usual. He cheated around 4000 crore rupees thusly from the banks and controlled around 90 stocks.
This broad liquidity offered an adrenaline chance to the stock market by and large and the market started to make significant expectations.
Truth be told, Bombay Stock Exchange quadrupled its index (Sensex) in a range of only one year, and because of Mehta's own portfolio of stock holdings picked up in the value near multiple times to an expected 100 crore rupees.
This money made Mehta a hero of the stock market and he turned into the most elevated taxpayer in Mumbai around then.
Exposure and Arrest
Harshad Mehta carried on with a luxurious lifestyle and was never shy to flaunt his wealth.
He purchased a 12,000 square feet sea-facing Worli penthouse, complete with a mini-golf course and swimming pool, and used to drive a Toyota Lexus car which has recently been delivered internationally and cost more than Rs 40 lakhs around then.
His armada of two dozen extravagance cars denoted his lofty and abrupt ascent to riches and celebrity - status. He even paid the Income Tax Department an advance tax of Rs 26 crore only weeks before the scandal broke.
Tragically, this hotshot and blind greed pushed him into difficulty.
On 23rd April 1992, an investigative journalist Sucheta Dalal got a hint of Mehta's unlawful methods and she wrote an article in The Times of India enumerating the loopholes in the banking system that had been exploited by the stockbroker which was the start of Mehta's end.
Following this, the State Bank of India acknowledged it was holding onto worthless bank receipts and was owed Rs 500 crore by Harshad.
Before the end of April 1992, he was blamed for having diverted money from the public sector Maruti Udyog Limited (MUL) to his own accounts, and the lending banks started to request money from Mehta.
Paying the money back was never an issue for Harshad Mehta because he would simply sell his shares in the stock market and subsequently satisfying his commitments.
Yet, this time it was distinctive because when the scandal broke out, the stock market crashed radically and the estimation of Mehta's share dropped steeply and he had no real way to repay the banks.
It didn't require some investment for CBI to step up and on 9th November 1992, Mehta and his brothers, who masterminded and executed this trick together was arrested. However, Mehta and his brothers were delivered on bail after three months in custody.
Regulatory Actions Taken Against Mehta
The CBI accused Mehta clearly for 72 criminal cases (bribery, cheating, forgery, criminal conspiracy, and falsification of accounts) and more than 600 civil actions by banks and institutions relating to the money he owed them.
Of the 27 criminal accusations brought against him, he was just sentenced for four, before his death at age 47 in 2001.
The market watchdog - the Securities Exchange Board of India (SEBI) banned him for life from stock market-related activities with investors holding him liable for making a loss of different elements.
Close by, the Reserve Bank of India delegated a Joint Parliamentary Committee (JPC), also called the Janakiraman Committee, to give an exhaustive image of the mechanics of the fraud.
Comeback of Mehta
Once out on bail, a few stock market investors gave Mehta a legend's welcome.
Mehta made a short comeback as a stock market master, giving tips on his own website just as in a week after week newspaper column.
After few weeks, Mehta with his lawyer Ram Jethmalani in a press conference claimed that he paid Rs 1 crore to (then) Prime Minister PV Narasimha Rao as a gift to the Congress Party, for getting him out of the scandal case. He showed the suitcase in which he supposedly carried the cash.
Rao denied it, and later, a CBI test likewise found no concrete evidence of this bribery claim.
Regardless of the promptness that appeared by CBI and the JPC in revealing this fraud, it required a long time to assemble criminal evidence against Mehta.
Finally, in September 1999, Bombay High Court indicted and condemned him to five years of thorough imprisonment and a fine of Rs 25000. On 14th January 2003, the Supreme Court of India affirmed High Court's judgment.
Death of Mehta
Mehta was sent under Criminal custody in the Thane prison. Mehta was griped of chest pain late around evening time and was admitted to the Thane Civil Hospital. He kicked the bucket following a concise heart ailment, at 47 years old, on 31st December 2001.
Impact of Scam on the Market
Because of Harshad Mehta's scam, Sensex tumbled from 4500 to 2500 losing Rs 100,000 crore in market capitalisation.
Mehta additionally brought down a ton of senior authorities with him.
The chairman of Vijaya Bank, who had given the checks in name of Harshad Mehta, understood that the BR receipts given by Mehta were fake and subsequently committed suicide following trick was presented because of depression.
The top treasury authorities of the State Bank of India and the chairman of UCO Bank all lost their jobs.
Yet, the most lamentable of everything was a large number of financial specialists lost their well-deserved money and failed, and once a saint of the stock market ended up being the best villain for those investors.
The liberalization policies were required to be postponed by the public authority and Bank Receipt was eliminated by RBI. After Mehta's trick in 1992, the Government of India passed the " SEBI Act 1992" and gave statutory power to it.
The Final Verdict
The big bull of the stock market, Harshad Mehta who executed the greatest stock market trick worth Rs 4000 crore is in the news again reviving recollections of the 1992 security scam that shook the whole system of the country and changed the rules of the game on Dalal Street.
In uplifting news for his family, the ITAT turned around a request for the Income Tax Department and scrapped increases to income worth minimal over Rs 2000 crore and have mentioned important objective facts.
The ITAT while scrapping the augmentations made by the IT department for the assessment year 1992-93 mentioned an objective fact that each receipt of money can't be named as the taxable income naturally.
Also, it is the occupation of the department to process the right taxable income implanted in each transaction.
The tribunal emphasized that this guideline of taxation must be followed despite the extent of the trick and despite tests and perception made by the JPC, the RBI, the CBI, and the capture of volumes of documents by the IT department.
Conclusion
The name of Harshad Mehta will live on in memory not just as a result of the devastation he released on speculator's wealth but since he uncovered expanding openings in India's monetary system.
Somewhere in the range of 1998 and 1992 SEBI started developing and in the year 1992, it had to accelerate the cycle and set out on a precarious expectation to absorb information - because of Harshad Mehta and his partners.
Individuals regularly state that "What doesn't execute you, makes you more grounded" - words that have been valid for market controller SEBI who gained from these breaches and arose quicker and more grounded.
This trick additionally instructs us that when the valuations of the organization begin to jump on the insane side the shrewd investors should begin getting mindful as opposed to getting greedy.
In this way, on the off chance that you become a basic mastermind who takes no Dalal Street "fact" on trust, and you contribute with patient confidence, you can exploit even the most noticeably awful bear markets.
Eventually, how your speculations carry on is substantially less significant than how you act.
(Also Read: What happened to Harshad Mehta's 'Grow More' Company and his family after his death?)
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