Harshad mehta

Roshankumar S Pimpalkar
Email: roshankumar.2007@rediffmail.com

HARSHAD MEHTA : MAN WHO
HAUNTED INDIAN STOCK
MARKET


Mehta was famous for ripping higher profits from stock market
and trading, and for his famous financial scandal, worth of
5,000 crore (US$997.5 million) in Bombay Stock Exchange
(BSE), of 1992. He was tried for 9 years, until he died in the late
2001.
Let‟s see what and how he did it.


THE BEGINING


The banks in India have to maintain a particular amount of their
deposits in government bonds. This ratio is called SLR
(Statutory Liquidity Ratio).

In the early 1990s, each bank had to submit a detailed sheet of
its balance at the end of the day and also show that there was a
sufficient amount invested in government bonds.


Now, the government decided that the banks need not show
their details on each day, they need to do it only on Fridays.

Also, there was an extra clause that said that the average %age
of bond holdings over the week needs to be above the SLR but
the daily %age need not be so.


That meant that banks would sell bonds in the earlier part of
the week and then buy bonds back at the end of the week.

The capital freed in the starting of the week could then be
invested.

Now, at the end of the week many banks would be desperate to
buy bonds back.

This is where the broker comes in.


The broker knew which bank had more bonds (called „plus‟) and
which has less than the required amount (called „short‟). He
then acts as the middleman between the two banks.

Harshad Mehta was one such broker. He worked as a middle
man between many banks for a long time and gained the trust
of the banks‟ senior management.


THE TRAP


Lets say that there are two banks A (short) and B (plus). Now
what Harshad Mehta did was that he told the banker at A that
he was dealing with many banks and hence did not know who
would he deal in the end with. So he said that the bank should
write the cheque in his name rather than the other bank (which
was forbidden by law), so that he could make the payment to
whichever bank was required.

Since he was a trusted broker, the banks agreed.


Then he took the money from A and went to B and said that he
would pay the money on the next day to B but he needed the
bonds right now (for A).

But he offered a 15 % return for bank B for the one day
extension. Bank B readily agreed with this since the offer was
very lucrative


Now since Harshad Mehta was dealing with many banks at the
same time he could then keep some capital with him at all
times.

Example: He takes money from A on Monday, and tells B that
he‟ll pay on Tuesday, then he takes money from C on Tuesday
and tells D that he‟ll pay on Wednesday and the money he gets
from C is paid to B and as a result he has some working capital
with him at all times if this goes on with other banks throughout
the week.


MON TUE WED

Money Money
for D Money Money
for F
from C from E
Money for B;
promises to
pay to B on
tue

Retains money of A for whole week as working capital


The banks at that time were not allowed to invest in the equity
markets.

Harshad Mehta had very cleverly squeezed some capital out of
the banking system.

This capital he invested in the stock market and managed to
stoke a massive boom.


He was buying shares heavily. The shares which attracted
attention were those of Associated Cement Company (ACC).

The price of ACC went up from Rs 200 to Rs 10,000.


Since he had to book profits in the end, the day he sold was the
day when the market crashed.

The same day Vijaya Bank chairman committed suicide by
jumping from the banks‟ office roof.

The chairman knew that when it would become public that he
had written cheques in the name of Mehta, he would be dead
meat.


Another instrument used was the Bank receipt (BR).

In a ready forward deal, securities were not moved back and
forth in actuality. Instead, the borrower, i.e., the seller of
securities, gave the buyer of the securities a BR.

A BR confirms the sale of securities. It acts as a receipt for the
money received by the selling bank. Hence the name - bank
receipt.

It promises to deliver the securities to the buyer.

It also states that in the mean time, the seller holds the
securities in trust of the buyer.


Having figured out his scheme, Mehta needed banks which
issued fake BRs (Not backed by any government securities).

“Two small and little known banks - the Bank of Karad (BOK)
and the Metropolitan Co-operative Bank (MCB) - came in handy
for this purpose.

These banks were willing to issue BRs as and when required,
for a fee.


Once these fake BRs were issued, they were passed on to other
banks and the banks in turn gave money to Mehta, assuming
that they were lending against government securities whereas
this was not really the case.

This money was used to drive up the prices of stocks in the
stock market.

When time came to return the money, the shares were sold for a
profit and the BR was retired.

The money due to the bank was returned.


This went on as long as the stock prices kept going up, and no
one had a clue about Mehta‟s operations.


THE CONSEQUENCES


crash on March 1, 2001 came as a major shock for the
Government of India, the stock markets and the investors alike.

Once the scam was exposed lot of banks were left holding BRs
which did not have any value - the banking system had been
swindled of a whopping 4,000 crore (US$798 million).

The panic run on the bourses continued and the Bombay Stock
Exchange (BSE) President Anand Rathi's resignation added to
the downfall.

Rathi had to resign following allegations that he had used some
privileged information, which contributed to the crash.


The scam shook the investor„s confidence in the overall
functioning of the stock markets.

By the end of March 2001, at least eight people were reported
to have committed suicide and hundreds of investors were
driven to the brink of bankruptcy.


This sudden crash in the stock markets prompted the
Securities Exchange Board of India (SEBI) to launch immediate
investigations into the volatility of stock markets.

SEBI also decided to inspect the books of several brokers who
were suspected of triggering the crash.

Meanwhile, the Reserve Bank of India (RBI) ordered some
banks to furnish data related to their capital market exposure.


Mehta and his associates siphoned off funds from inter-bank
transactions and bought shares heavily at a premium across
many segments, triggering a rise in the Sensex.

When the scheme was exposed, banks started demanding their
money back, causing the collapse.

He was later charged with 72 criminal offenses, and more than
600 civil action suits were filed against him.


He was arrested and banished from the stock market with
investigators holding him responsible for causing a loss to
various entities.

Mehta and his brothers were arrested by the CBI on November 9
1992 for allegedly misappropriating more than 27 lakh shares
(Approx. USD 54,000) of about 90 companies, including ACC and
Hindalco, through forged share transfer forms.

The total value of the shares was placed at 250 crore
(US$49.88 million).

The two brothers have been granted temporary bail for five
days following the death of Mehta in late 2001


Mehta again raised a furore in 1995 when he made a public
announcement that he had paid 1 crore (US$199,500) to the
then Congress President and Prime Minister, Mr P.V. Narasimha
Rao, as donation to the party, for getting him off the scandal
case.


THE END OF THE DEVIL


Mehta was under judicial custody in the Thane prison.

Mehta complained of chest pain late last night and was
admitted to the Thane civil Hospital.

He died following a brief heart ailment, at the age of 47, in
December 31,2001.


Mehta died on with many litigation still pending against him.

He had altogether 28 cases registered against him.

The trial of all except one, are still continuing in various courts
in the country.


The Mehta scandal was portrayed in a Hindi movie “Gafla”.

It was premiered in Times BFI 50th London Film Festival.

IF YOU HAVE ANY SUGGESTION, OPINION OR FEEDBACK
PLEASE FEEL FREE TO WRITE US AT
roshankumar.2007@rediffmail.com

Harshad mehta

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