The story of rags to riches to ashes. how one man brought down the entire share market of a country

1. The story of rags to riches to ashes. How
one man brought down the entire share
market of a country.
The Big Bull
gone wild…
Sanga Agrawal

2. BR in name
of Lending
bank
Broker Transfer
the BR
Lending
Bank
Borrowing
Bank
“The Big Bull” gone
wild...
It’s 2001, in a dark jail cell somewhere in a small city of Maharashtra, India, a 47-year-old millionaire
suddenly complains of chest pain and is immediately transferred to a hospital where he takes his last
breath. Who is this millionaire? And what was he doing in a jail cell?
Introduction:
Harshad Mehta also known as the Big Bull of Indian stock markets, migrated to Mumbai with Rs. 40($0.57)
and managed to somehow finish his graduation in commerce in 1976. In 1980s he joined the stock broking
firm B. Ambalal and in 1984 started his own firm named Grow more research and Asset Management and
became a member of Bombay Stock exchange as a broker.
By 1990s he became one of the most well-known brokers with whom the who’s who of every industry
started investing, including P. Chidambaram, the then minister and who later held the position of Finance
minister of the country and helped navigate through the 2008 crises (currently injail)
The system:
Harshad Mehta manipulated the RF (Ready forward) deals and the BR (Bank receipt) system.
Ready forward deal was a short-term loan instrument for banks backed by government securities.
Government securities are basically issued by government for raising money for its projects and they pay
interest to the securities holder. Government bond is an example of a Government security.
The point to be noted is that in those days it was necessary for every bank to hold some part of
government securities in their books.
In 1990s if any bank needed short term loans, it could enter into a repurchase agreement with another
bank whereby it could keep its government securities as a mortgage and get it back after a certain period
of time after paying the borrowed amount with some interest. But for any such deal to go through, they
had to go through a broker who would arrange for this deal by being amediator.
Brokers work was to find the buyers for banks, willing to sell their securities or bonds and vice-versa find
sellers for the banks which are ready to buy the securities. Harshad Mehta was the broker and used to
work as mediator between two banks.
In Ready Forward deal when any bank used to sell its securities to another bank, then as a collateral first
bank used to give a receipt to buyer bank and not the actual bond or securities. This receipt was called
as Bank Receipt (BR). BR was the symbol of confirmation that selling bank has got the money while buying
bank has got the securities.
So, when a borrowing bank made a request to the broker, he/she searched for a lending bank, got the
money from lending bank transferred it to the borrowing bank, got the BR from the borrowing bank and
gave it to the lending bank.

3. The system although simple was full of loopholes and that is where all the trouble began.
Modus Operandi:
As we know Harshad was a well-known broker with high reputation. This made it easier for him to play
with the trust that banks had on him. As the systems in 1990s were not computerized, the brokers had to
look through their records manually to find lenders for the borrowing banks. This gave Harshad the chance
to ask for time once he received orders from borrowers as well as lenders who were looking to enter a
deal.
Harshad would receive the BR from borrowing bank in his own name which the banks wouldn’t mind as
he was a top broker and ask for some time to find a lender. It would find a lender and get the money and
ask for time to find a borrower.
After getting this money, he would use it to invest in stock markets and manipulate it. To understand the
system in more detail let’s take an example
Assume that there are four banks A, B, C, and D. Harshad worked as a broker between these banks. If bank
A wants to sell its securities to generate the fund, so it approached to Harshad and ask to find a buyer.
Harshad would take the bonds from bank A and ask the bank to give him some time to find the buyer. In
the same way if Bank B wants to buy the securities then same like above Harshad would take the money
from bank B and ask for some time to find the seller. According to guidelines of RBI, if one bank is selling
their securities to other then the other bank should issue the check in the name of bank who is selling
their securities and not in the name of broker. But in this case, banks directly used to issue the check in
the name of Harshad Mehta (since in those days he was a famous broker with good name). Banks used to
deal directly with Harshad, which was illegal.
Now after some time if bank A would ask for the money against their bond or security then Harshad used
to go to bank C. Take money from it, ask for some time to give them the security or bond against money
and give that money to bank A. In the same way he took money (funds) from many banks and used it to
manipulate the stock market. Hence Harshad used the RF Deal like a chain system, he took money and
bonds from many banks due to which he always had ample of money in hishands.
He crossed the limit when he used two co-operative banks to create fake bank receipts, he borrowed
money from lending banks and gave them fake BRs in return.
Harshad used this money to invest in stock market due to which the price of many stock increased
drastically. The share price of ACC went to Rs9000 from Rs200 in just few months. Due to these increasing
prices, people started investing in share market and hence prices of stocks went to peak. Harshad used to
sell his shares when market went at peak and earned good profits. From these profits he used to return
Transfer to
Borrower
Broker
Lend
Money in
Exchange of
Securities
Borrowing
Bank
Lending
Bank

4. the money of banks and recollect his fake receipt. All this continued until the market was bullish and prices
of shares were increasing.
He heavily invested in certain shares, thus creating fake demand and increasing the prices to
unfathomable highs, when questioned about them, he suggested that the market is adjusting to its real
value and that until now they were undervalued.
Outbreak of the scam:
In 1990–1991, the media portrayed a heightened deified image of Mehta, calling him "The Big Bull". He
was covered in a cover page article of a number of publications including the popular economic
magazine Business Today, in an article titled "Raging Bull". His flashy lifestyle of a sea facing 15,000 feet
penthouse in the tony area of Worli complete with a mini golf course and swimming pool, his fleet of a
fleet of cars including a Toyota corolla, Lexus Starlet, Toyota Sera were flashed in publications. These
further exemplified his image at a time when these were rarities even for the rich people of India.
In 1992, journalist Sucheta Dalal exposed Harshad’s illegal methods in her column in Times of India and it
took mere hours for Harshad to be conceived as the devil that he was rather than what the media
portrayed until then.
Exposure, Trial and Conviction:
He was arrested and banished from the stock market with investors holding him responsible for causing
a loss to various entities. Mehta and his brothers were arrested by the CBI on 9 November 1992 for
allegedly misappropriating more than 2.8 million shares (2.8 million) of about 90 companies, including
ACC and Hindalco, through forged share transfer forms. The total value of the shares was placed at ₹2.5
billion (US$36 million).
Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly
newspaper column and was again accused of recommending shares in which he had vestedinterest
Mehta was convicted by the Bombay High court and Supreme Court of India for his part in a financial
scandal valued at ₹ 5000 Crores ($704 million+) which took place on the Bombay Stock exchange BSE. In

5. Impact of the Scam
The scam lead to a sharp fall in the share prices and indices.
Sensex fell from 4500 to 2500.
Post Harshad Mehta scam, markets lost ₹3542 crore ($7 billion) in market
capitalization.
The Governments Liberalization policies came under severe criticism and subsequently, were put on
hold for a while.
SEBI, the securities market regulator, postponed sanctioning of private sector mutual funds.
Indian companies were unable to raise capital in the world markets.
The Chairman of Vijaya Bank committed suicide
Suspended brokers acting as Directors and other office bearers of BSE, for alleged insider trading.
Imposed volatility margin on net outstanding sale positions of FIIs, financial institutions, banks and
mutual funds.
Rolling settlements system made compulsory.
Allowed banks to offer collateralized lending only through BSE and NSE, to increase liquidity.
Launched trade guarantee fund to guarantee all transactions.
September 1999, Bombay High Court convicted and sentenced him to five years with rigorous
imprisonment and a fine of ₹25,000 (US$360).
Mehta again raised a furor on 16 June 1993 when he made a public announcement that he had paid
Rupees 1 Crore to the then prime minister, Mr. P. V. Narsimha Rao, as donation to the party, for getting
him off the scandal case
Consequences and change in policies:
The scandal erased public confidence from the market. Share markets which were already considered
risky were now considered biased and controlled by powerful individuals like Mehta.
The money invested by middle class workers and laborers into banks thinking of them as a safe haven was
blown up overnight. The money from banking system was illegally pumped into share markets to create
a bubble and when the bubble burst, the only losers turned out to be naïve investors, poor bank
depositors and honest tax payers.
Although many claims were laid on Harshad’s earnings, after 27 years in 2019, his family is free of clout
as the taxation department had to repeal its request of over Rs. 2000 Crores ($282 million)
In this case we can say that time has overtaken justice by a mile. Even after 27 years and death of Mehta,
the banks and financial institutions are yet to receive theirdues.
SEBI the regulatory body of securities exchange in India took the following measures after the breakout:
Like any other crises, these measures came a little too late to protect any of the parties involved.
We can see that one man can ruin the economy of an entire country if the regulators don’t do their job
diligently.
This situation can be highly related to the Barings bank chapter where Nick Leeson a sole trader takes
down the entire bank, there’s also use of fraudulent documents in both the cases and in one case Nick
goes back to a normal life while Mehta’s family lives a lavish life even after he is gone.

6. What could have stopped this from happening?
Looking back, we can point our fingers at a lot of people and institutions but, to be completely honest I
don’t believe there was anything that could have stopped it from happening.
We can say that SEBI should have been more vigilant, the banks should have complied to their rules of
lending, a broker with such a big stature should have been kept under check, there should have been a
system in place for checking validity of the fake bills created.
But, in a country like India which had gained independence just 43 years ago from 1991, and was in a
phase of implementing the biggest policy change in its History (LPG- liberalization, Privatization,
globalization) and a population of 888.1 Million in the same year it was impossible for anyone to foresee
this. Whenever the market gets comfortable at a position, there are bound to be lapses in system.
This being said, even though it was impossible to see this coming, the prevalence of justice should have
been made a priority, which in this case was completely lacking. The entire case raises questions on
numerous entities as well as the judicial system of the country.
What can stop this from happening in future?
All the entities involved should go through the assigned channels and follow the rules as they are listed
by government instead of trusting any other mid entity.
Individuals as well as firms with high net worth should be made to comply with certain standard of
disclosures.
Regulators should conduct timely compliance checks on banks as well as other public institutions.
More than anything else, this is the case of a man’s greed. Ethics should be ingrained through
examinations and teaching whenever any individual joins a profession, in this case a broker.
Corruption can also be blamed in this case for letting Mehta go scot free numerous times even after the
break out.
Circuits have also been introduced to limit both upside and downside created by artificial demand and sell
off.
References:
Management study guide
SSR Shetty Chartered accountant blogs
Economic Times
CEIC data
Rediff columns by Sucheta Dalal
Moneylife.in
Indian Mirror
Parliamentofindia.nic.in