Scams in India are no news. Whenever we talk about Stock Market scams, Harshad Mehta’s scam is the first that pops up in anybody’s head. So what exactly happened in the 1992 Securities Scam that it still is the most talked about scam in the world of bulls and bears.
Mehta was born in a small, middle-class family, he completed his schooling and moved to New Delhi. After a few switches in his job, he became a stock brokers registered with Bombay Stock Exchange. In less than a decade, people started calling him as the ‘Big Bull’ of the industry. Harshad Mehta was having the time of his life, he was living in a 15,000 square feet house with flashy cars parked outside his home. He once even paid advance tax of 28 crores, his lavish lifestyle caught a lot of attention.
So, what exactly was Mehta doing?
He was investing very heavily in stocks of particular companies, so heavily that it lead to an almost 4400% rise in the share prices of those companies. It can be imagined what would happen to the markets the day he will sell these shares.
However, this is not what was wrong, interestingly, very few people questioned about the money; nobody knew where he was getting so much money for investment. And, it turned out that was where all the mystery lied. Harshad Mehta was making use of a process called ‘Ready Forward’, it basically means that banks can borrow from each other although the borrowing banks needs to deposit some securities with the lending bank and then after a certain amount of time buy back the securities, usually at a higher price. Also, usually the broker is the mediator between both the banks, the banks might not even know who they are dealing with.
But here the trick was that Mehta was using Bank Receipts to carry out such transactions. So what used to happen was that securities were not traded in actuality rather the borrowing bank used to present a receipt to the lending bank which used to acknowledge the amount being lent and the securities being the property of the lender bank now for the given period.
Now all that Mehta required was banks who would be willing to issue fake bank receipts to him, and he found out two small banks: Bank of Karad, Vijaya Bank & Metropolitan Cooperative Bank. Mehta used to take fake bank receipts from these banks and then present the same to other banks who in turn lent him money which he used to invest in stock markets and after gaining huge profits, the BRs were retired.
Soon, his trick was discovered by Sucheta Dalal, and banks realised that they were holding mere papers, because those bank receipts were not backed by any securities.
“Mehta was arrested and banished from the stock market with investors holding him responsible for causing a loss to various entities. He was arrested by the CBI on 9 November 1992 for allegedly misappropriating more than 2.8 million shares of about 90 companies through forged share transfer forms. The total value of the shares was placed at ₹2.5 billion.”
In the next blog, we’ll learn about the next biggest scam: The Ketan Parekh Scam, who was known to be the protege of Harshad Mehta.