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Harshad Mehta – The Big Bull of Indian Stock Market (A Scamster or a Scapegoat )

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Harshad Mehta – The Big Bull of Indian Stock Market (A Scamster or a Scapegoat )

Harshad Mehta – The Big Bull of Indian Stock Market (A Scamster or a Scapegoat )

Deepak Sharma 12 Nov 2020

Harshad Mehta Was an Indian Stock Broker who is also referred to as the Big Bull of the Indian Stock Market. He is well known in the Indian Stock Market Circuit and well known for his wealth and luxurious life. He has been charged with multiple financial crimes in the 1992 securities market scam and using the money to manipulate the stock market by rigging the price of shares. It was alleged that Mr. Harshad Mehta was engaged in a massive stock market manipulation which was financed by worthless bank receipts which his firm Grow More Research and Asset Management brokered for “ready forward transactions between banks. It was considered as one of the greatest stock market scams which occurred in 1992 valued at over Rs 5000 crore by a man known as ‘The Big Bull’ of the Indian Stock market, Harshad Mehta. 

The early life of Harshad Mehta in the Stock Market 

Harshad Mehta started his early Stock market Career as a Jobber in a stockbroking firm in the early 1980s. Over a period of 10 years, he served in various positions of increasing responsibility at a series of broking firms. He actively started to trade in the stock market in 1986 through his own brokerage firm Grow More Research and Asset Management.  By 1990 he had risen to a position of The Big Bull of Indian Stock market by the Media and Financial Market fraternity. 

Background of the 1992 Securities Scam

Government  Securities paper scam

Banks in India were not allowed to invest in the stock market in the early 1990s. However, they were allowed to retain a certain ratio of their total assets in government fixed interest bonds and securities to maintain their SLR ratio(Statutory Liquidity ratio). There was an extra clause that the average percentage bond holding over the week needs to be above the SLR ratio but the daily percentage need not be so which means banks would sell bonds at the earlier part of the week and would buyback at the end of the week. 

The broker would act as a middleman for the banks. Harshad Mehta squeezed capital through loopholes in the banking system to address this requirement of banks as a market maker and pumped this money into the share market and rigged the share prices. In the early 1990s, Indian Banks were not highly efficient in securities operation and were relying on stockbrokers to find a deal as a market maker. Harshad Mehta was a smart broker and he was able to find the loophole in a very short span of time. Further, he promised the banks a higher rate of interest sometimes asking money to transfer into his personal account on the pretext of buying securities for them from other banks. Mr. Harshad Mehta used this money from his account to buy shares in huge quantities thereby hiking the demand for certain shares and skyrocketed the price. Some of the well-established companies like Cipla, ACC, Hindalco, Sterlite, and Videocon Industries He sold off when the price rose dramatically. He had single-handedly operated the price of ACC from 200/per share to 9000/per share in a span of 3 months. Imagine the euphoria he created with his aura in the Indian Stock Market as “The Big Bull”. In a span of one year from 1st April 1991 to 31st March 1992, the BSE Sensex has risen by a whopping 247% which is a historic record in a financial year in the Indian Equity market to date as of 31st October 2020.

Bank Receipt scam

The most lucrative instrument used by Harshad Mehta in a big way to pump money in the share market was Bank Receipt. Typically BR transaction was a ready forward deal wherein securities were not moved back and forth in reality. Instead, the borrower of money i:e the seller of securities issue BR to the buyer of securities. The BR confirms the sale of securities. It also acts as a receipt for the money received by the selling bank and promises the delivery of securities to the buyer. The seller holds the securities in trust (as a novation)of the buyer side. After figuring this method, he needed banks who could issue fake BRs or BRs not backed by securities. Once the fake BRs were issued, they were passed on to other banks and the bank in turn gave money to Mehta assuming that they were lending to other banks against govt. Securities which were not really the case as the BR were fake without backed by security. The stock market was overheated because of the buying spree from Mehta and Sensex had risen 247% in one year. 

The outbreak of 1992 Securities Fraud:

Sucheta Dalal, a young financial Journalist got the tipoff about the fake BRs fraud. Sucheta kept on digging about the amount of fake BRs used by Mehta to pump in the stock market. On 23rd April 1992, Sucheta Dalal exposed the scam of Harshad Mehta in Times of India. Once the scam was exposed Banks realized that they were holding Brs of no value at all. The chairman of Vijaya Bank committed suicide as he issued fake BRs to Mehta in lieu of commission from him knowingly.Mr. Mehta died at the age of 47, on 31st December 2001 due to cardiac arrest and left behind the biggest scam of Indian Stock Market and created the historic bull run of all times till date and hence came to be known as “The Big Bull of Indian Stock Market”.

Inference of Harshad Mehta Scam:

Some conclusion and evidence say that the activity was going on in the entire market and was used by all brokers in the stock market and he was made a scapegoat as he used to believe in a bull run and the rest of the brokers were against that. Due to Harshad Mehta, they have to suffer major losses. No doubt the method used by the entire market was unethical and after the scam exposed by Sucheta Dalal SEBI and the market, regulators made stringent rules and regulations so as to prevent the misuse of securities to manipulate the stock market.

 

 




 

 


 

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