Born on 29th july,Gujarati Jain family.
Father: Mr. Shantilal Mehta, small business man.
Moved from Raipur to Mumbai to find his future.
First job: Dispatch clerk in the New IndiaAssurance
Worked with stock brokers and soon managed to get a
Later started his own venture:Grow More Research and
Asset Management Company Ltd.
Became a dream seller and a celebrity of the financial
Got the great tag of the “Big Bull” of Indian Stock
After the recommendations of the Big Bull, demand for the
stocks used to exponentially rise.
Propounded the Replacement PriceTheory.
The theory basically argues that old companies should be
valued on the basis of the amount of money which would be
required to create another such company.
He was alleged to have engineered the rise in the BSE stock
exchange in the year 1992.
On April 23, 1992 journalist Sucheta Dalal in a column in
theTimes of India, exposed the dubious way of Harshad Mehta.
He was later charged with 72 criminal offences and more
than 600 civil actions suits were filed against him.
He died in 2002 of a massive heart attack in a jail inThane
with many litigations still pending against him.
The scam can be categorized as
Capital Market scam in which it is
done by manipulating the facts in
order to attain enormous profits.
There are four different aspects of
Diversion of funds
Use of Ready Forward (RF) to maintain SLR
Fake Bank Receipts (BR)
READY FORWARD (RF) –MODUS OPERANDI
Ready forward is actually a sort of a short term loan (typically 15 days
or less) usually from one bank to another. Unlike other loans, it is
actually a secured loan with Government securities backing it up.
In essence, it’s like one bank selling its securities to another with a
promise of buying it back at a pre-determined price.
Another instrument used in this scam was the bank receipt (BR).
In an RF deal, securities were not moved back and forth in actuality.
Instead, the borrower, who is the seller of securities, gave the buyer of
the securities a BR. In practice, borrowing bank gives a Bank Receipt (BR)
instead of delivering the actual securities to the lender.
Bank receipts serve three functions
• It confirms the sale of securities promises to deliver the securities to the
• It states that the securities are held by the seller in trust for the buyer.
• Acts as a receipt for the received money by the selling bank.
A BR means that the issuer holds the securities in trust for the buyer,
but there is a possibility that the issuer may not have the securities at all.
Following are the reasons for a bank to issue a BR which is not backed by
• A bank may also short sell securities, i.e. bank will sell securities
it doesn’t have.This will be done if the bank anticipates fall in prices.
Bank buys securities at lower prices when the fall in value and
discharges the BR.
• Bank may do an RF deal and issue a fake BR(not backed by securities) if
banks simply want an unsecured loan , where a lending bank would be
under the impression that it’s dealing with a secured loan but in reality
it’s advancing an unsecured loan.Though, lenders should have taken measures
to protect themselves.
During the scam, brokers were so perfect in the art of
using fake BRs and obtained unsecured loans from
various banks.They managed to persuade little known
banks like the Bank of Karad (BOK)and the
Metropolitan Cooperative Bank (MCB) to issue BRs
and then these BRs were used to do RF deals with
other banks.This way several large banks made huge
unsecured loans to these banks and thus it created
money for the brokers.
Taking advantages of the loop holes in the banking system Harshad
and his associates triggered a securities scam diverting funds to the
tune of Rs. 4000 Cr. From the banks to the stock brokers from April
1991 to May 1992. He caused the steep price in the stock market in
the year 1992 by bidding at a premium for many shares.
Some of the stocks which were highly invested in by Harshad Mehta
Tata Iron and steel Co.(TISCO)
The above graph shows the rise in Sensex during the period when
Harshad Mehta was operational and putting in loads of money in
stock exchange thus increasing the liquidity and thus arbitrary
increase in the prices of some shares.
In the early 1990s, Banks in India had to maintain a fixed
ratio of their deposits in the form of Government securities
/bonds which was governed by the statutory liquidity ratio
(SLR).This obligation on the part of the banks required
them to show a detailed sheet of its stock of Government
bonds at the end of every day. Soon after the rule changed
and the banks were not required to show these details at
end of everyday rather they were allowed to show in once
in a week i.e. Friday.This allowed the banks to sell their
bonds in the earlier part of their week and then buy it back
in the later part.This helped them make some profits as
they could invest the money that they got by selling the
bonds.The whole process of buying and selling the bonds
was taken care of by brokers and only they knew the two
parties which were involved. Individual banks did not have
any idea as to who the other party in the whole transaction was.
The whole process can be described in 3 phases:
3.Dispensing of securities
SETTLEMENT PROCESS :
The normal settlement process usually involved the two banks exchanging the money
and the securities at the same time.This was very beautifully manipulated by the
brokers so that the money first gets into the hands of the brokers and then they paid off
PAYMENT CHEQUES :
The brokers asked the banks to give the cheques in their own name claiming that they
will pay to the other party on their own.The practice thus emerged was that the
broker would obtain a cheque drawn on the RBI favouring not himself but his bank and
the bank would get the money and transfer it to the broker account on the same day.
This helped the brokers to get the money as soon as the transaction is made which could
further be used to be channelled into the stock market.
DISPENSINGTHE SECURITY :
Here the brokers used their credibility to persuade the banks to
part with the cheques without actually receiving the securities
with the promise that they will get the securities the next day
with a 15%interest for one day. Bank officials were bribed to
accomplish this task as this was illegal on the part of the banks
to let go of their money without any assurance.This was
Harshad Mehta and his associates were able to use the money of
the banks which was eventually used for speculating in the stock
There was a complete breakdown of the control system
within the commercial banks and that of RBI.
Following features are involved in the internal controls
•Whenever an RF deal is done by using BRs rather than
securities, the lending bank has to contend actual
with the possibility that it may be making an unsecured
loan.This requires assigning credit limit to the borrower
by assessing the credit worthiness of the borrower.
• The different aspects of securities transactions of a bank
are carried out by different persons.
DISAPPEARANCE OF MONEY
It is becoming increasingly clear that despite the intensive efforts by several
investigating agencies, it would be impossible to trace all the money swindled from
the banks. At this stage we can only conjecture about where the money has gone and
what part of the misappropriated amount would be recovered.
Based on the result of investigations and reporting so far, the following appear
to be the possibilities:
• A large amount of the money was perhaps invested in shares. However, since the
share Prices have dropped steeply from the peak they reached towards end of
March 1992, the important question is what are the shares worth today?
Till February 1992, the Bombay Sensitive Index was below 2000; thereafter,
it rose sharply to peak at 4500 by end of March 1992. In the after math of the scam
it fell to about 2500 before recovering to around 3000 by August 1992.
Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's
purchases were made at low prices, so that the average cost of his portfolio
corresponds to an index well below 2500 or perhaps even below 2000.
Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so
cannot be dismissed without a serious consideration.Whether these shares are in
fact traceable is another question.
• It is well known that while Harshad Mehta was the "big bull" in the stock market,
there was an equally powerful "bear cartel", represented by Hiten Dalal,A.D.
Narottam and others, operating in the market with money cheated out of the banks.
Since the stock prices rose steeply during the period of the scam, it is likely that a
considerable part of the money swindled by this group would have been spent on
financing the losses in the stock markets.
• It is rumoured that a part of the money was sent out of India through the
Havala racket, converted into dollars/pounds, and brought back as India Developmen
Bonds.These bond share redeemable in dollars/pounds and the holders cannot be
asked to disclose the source of their holdings.Thus, this money is beyond the reach
of any of the investigating agencies .A part of the money must have been spent as
bribes and kickbacks to the various accomplices in the banks and possibly in the
bureaucracy and in the political system.
• A part of the money might have been used to finance the losses taken by the
brokers to win dow-dress various banks balance sheets. In other words, part of the
money that went out of the banking system came back to it.
• In sum, it appears that only a small fraction of the funds swindled is recoverable.
After the Harshad Mehta scandal was exposed,April, 1992, the
situation in share market was that of utter chaos.The first impact
of the scam was a steep fall in the share prices.The index fell from
4500to 2500 representing a loss of Rs. 100,000 crores in market
capitalization. However, the major damage to the stock market
did not stop here. Since the accused were active brokers in the
stock markets, they had traded a large number of shares during
the previous year. All these shares became tainted and worthless
and could not be used in the market.This was a great loss to the
innocent investor who had bought these shares much before the
scandal was exposed.
IMPACT ONTHE INDIAN ECONOMY
There was a lot of media coverage on the scam and the political
parties left no opportunity in criticizing the government for it.The
government was under immense pressure and its liberalization
policies were severely criticized. It was also believed that Harshad
Mehta and his accomplices were behind framing of these policies.
In the end the government had to put the liberalization plans on
hold. SEBI had to postpone the sanctioning of private sector
mutual funds. Implementation of some aspects of the
Narasimham Committee recommendations on the banking
system had to be delayed.They much talked about entry of
foreign pension funds and mutual funds became more remote
than ever.The Euro-issues planned by several Indian companies
were delayed since the ability of Indian companies to raise equity
capital in world markets was severely compromised.
IMPACT ONTHE BANKS
Fake bank receipts (BR) which were an integral part of the
execution of the whole scam landed the banks involved in a tight
spot.These BR were declared void and public money was at stake.
At least ten prominent banks were involved in this; some of them
being SBI, Standard Chartered and a subsidiary of RBI.The scam
could have been checked in time with proper policies and
verifications.The government, the RBI and the commercial banks
are as much accountable as the brokers for the scam.The brokers
were encouraged by the banks to divert funds from the banking
system to the stock market.The RBI too stood indicted because
despite knowledge about banks over-stepping the boundaries
demarcating their arena of operations, it failed to check them.
Some of the prominent individuals who were penalized were K. M.
Margabandhu, CMD of the UCO Bank (Arrested and sacked) andV.
Mahadevan, one of the MD the State Bank of India (Suspended)
RESPONSE OFTHE GOVERNMENT
As discussed, the government was under immense pressure from
media and opposition to take concrete steps to bring justice to the
people and also to ensure that the loopholes in the system which
caused such scam were closed so that such scams would not recur.
As a first step by the government, the case was handed over to
Central Bureau of Investigation and the Joint Parliamentary
Committee(JPC).Then a special court was set up to facilitate
speedy trial.The special court declared an ordinance for the
attached the properties of all individuals accused in the scam.
Further, all transactions done by the accused after March 31, 1991
were considered void.To reform the system further, the
government banned RF deals and slowed down the liberalization
The government, the RBI and the commercial banks were as much
accountable as the brokers for this scam.The brokers were encouraged
by the banks to invest their funds in the stock market in place of
investing in the banking system.The RBI was also responsible for this
scam because despite knowledge about banks over-stepping the
boundaries demarcating their arena of operations, it failed to reign them
in. RBI didn’t take any action against the commercial banks.The looting
was done with full knowledge of the very individuals appointed by the
government who were responsible to guard against such a possibility.
So the Harshad Mehta’s scam could have been detected earlier if
either of the above (commercial banks, RBI or government) parties
not encouraged the brokers to invest in the stock market.
ACTIONSTAKEN BYTHE GOVERNMENT:
•Discover the guilty:
This task was assigned to the Central Bureau of Investigation (CBI)
and to the Joint Parliamentary Committee (JPC).A special court
was set up to facilitate speedy trial.
•Transactions became void:
The government set up a special court and promulgated an
ordinance with several draconian provisions to deal with the scam
Sections (3) and (4) of the ordinance attached the properties of all
individuals accused in the scam and also voided all transactions
that had at any stage been routed through them after March 31,
•Recover the money:
Provisions of the Ordinance for attachment of property and
voiding of transactions with the consequent creation of "tainted"
shares were attempts in this direction.
•Reform the system:
The government's response so far, banning of RF deals and
going slow on liberalization.The main motive behind punishin
the offenders is more to prevent future offenders to not to try
this type of scam.The government must ensure that not only
the obviously guilty (the brokers) but also the not so obviously
guilty (the bank executives, the bureaucrats and perhaps the
politicians) are identified and brought to book.These types of
investigations are not only very time consuming but also very
The ethical temperature of any business depends upon :
1. Individual’s sense of values: If large sums of money are involved, a person
is often dictated by greed and hence tends to become unethical.
2. Social values accepted in the industry i.e. acceptance of unethical
practices because they are the prevailing norm. For example during the
Harshad Mehta Scam, it was claimed that Bank receipts were
the prevailing norm and hence there was nothing unethical in using them
though they proved to be one of the main reasons causing the scam.
3. The third and the most important reason being that there is a lack of
corporate governance systems in India. Corporate Governance is the
result of the above two points, and in addition, it’s the result of public
governance system. If the public governance is weak, we cannot have
good corporate governance.
“Scam after scam”
- Harshad Mehta to Ketan Parekh, corporates get away scot free.
Brokers & bankers should be jailed. After all they pay the netas!”
- Sucheta Dalal , Journalist who exposed Harshad Mehta
AVOIDANCE OF SUCH SCAMS
• Strengthen the legal and administrative framework of
public governance system It is necessary to have a strong
public governance system, because even if there are
companies who follow honourable and ethical practices , if
the general environment is such that everyone is unethical
because of the lack of a proper legally enforceable system,
then people are tempted to indulge in unethical practices.
But at the same time it does not mean that the money
markets are overregulated, because then even legitimate
deals will be disguised.
• Stricter norms for corporate governance to be set by bodies
like Association of CA’s
a. Bringing transparency
b. Bringing accountability
It is necessary for every corporate to follow the highest standards
of corporate governance.The laws for corporate governance
need to be enforced as brutally as the law for any other crime.
These markets control our economy and the money of many
small investors.There is no future for an economy where the
markets are not subjected to the highest levels of accountability.
• Wrong-doers to be punished severely to discourage others from committing
the crime.There was a research done in India according to which a sample
of people were asked that if you are walking on a road and if you find a 1000
rupee note, will you pick it up? 90% of the peoples aid yes.Then the
question was modified slightly and the people were asked , what if there
was a surveillance camera on the road and if it worked only 10% of the
times, will you pick up the note?This time 90% of the people said no.
In India today, the violators feel that they will not be punished and even if
they are punished they can easily get away with the whole thing.These same
people will follow world standards of transparency while dealing with the
Nasdaq or the NYSE but they violate laws in Mumbai without thinking a
second time. After the Harshad Mehta scam, very soon , there was this Ketan
Parekh scam, who followed the footsteps of Harshad Mehta just because no
example was set by punishing Harshad Mehta to deter future violators .
Finally it is important to punish those directly involved (brokers) and also
those indirectly involved ( politicians, bureaucrats) because these people
are the facilitators.
•Corporate Governance is the value framework,
ethical framework and moral framework within which
businesses make decisions.
•Business must harness the power of ethics which is
assuming a new level of importance andpower.
(James Joseph - former US ambassador to SA).
•When large sums of money are involved, greed
causes people to become unethical. How