HARSHAD MEHTA SCAM 1992

Author: Manvi Tokas, The NorthCap University

The Harshad Mehta scam is the oldest and the biggest scam of our country that shook everyone, exposing the banking and the stock market systems of that time. It is also known as the biggest stock market scam of our country, which was carried out by Harshad Mehta and his companions. This scam caused chaos and disruption in the stock market of India, uncovering the fraud of the banking system of 3000-4000 crore.

BACKGROUND


Harshad Mehta was born in a Gujrati family, completing his education from the Lala Lajpat Rai college he had moved to Mumbai in the 1970’s to find a job. The starting of his career included small works like selling cement; with his ambitions high, Harshad Mehta soon uncovered the stock market systems and became deeply interested in the same. Harshad Mehta leaving his earlier jobs joined the B. Ambalal brokers, afterwards continuing his job at the J.L Shah and the Nandalal Sheth.  In 1984, Harshad Mehta along with his brother established a company named Grow More Research and Asset Management and being a broker for DSE started his broking business. Harshad Mehta used the Ready Forward Deal method, which includes banks giving loans on behalf of the government security fund or RF Deal in other words was a short term loan instrument for banks. In RF Deal, brokers used to work as a mediator between the banks who would find seller and buyers for the banks for the securities. Harshad Mehta also worked as a broker and he had quick success and soon earned the nickname of ‘big dull’ or Dalal of the street. He had a sharp witted brain and was an observant person who found fast and clever ways to success and gaining money.

THE SCAM-
There were loopholes in the RF Deal through which a lot of money could be gained through illegal means. Harshad Mehta, observing these loopholes used them for his own interest.
For example, there are banks A and B. If A wanted to for example sell its securities, and Harshad Mehta works in the bank, he would find buyers for the securities of the bank, asking for time from bank A while taking its securities in the meanwhile. If B wanted to buy securities for their bank, Harshad Mehta would take the cheque from the bank in his name and ask for some time to find sellers. Therefore, Harshad Mehta would keep the securities taken from one bank and the money taken from another bank with him for extra time.
But according to the Reserve Bank of India regulations, no bank buying securities could issue cheques in the name of the broker, they could only issue the cheque in the name of the banks selling their government security funds. This rule was mostly not known to the banks during the time, advantage of which was cleverly taken by Harshad Mehta; as he would be asking the buying banks to issue the cheque in his own name not to that if the selling bank, due to which most of the banks were not aware of the banks selling them their security funds.
Following these methods Harshad Mehta worked for many years gaining a lot of name in the market as a broker. He illegally; taking money from the banks used the time to increase prices of various stocks in the market therefore manipulating the stock markets. Harshad Mehta would use the RD Deal as a chain system as he would continuously be finding the buying banks allowing them to issue cheques in his name while also finding the sellers banks, taking their securities, through which Harshad Mehta would always have money in his pocket, allowing him to manipulate the stock market as well. Therefore, he used to cleverly divert the funds for his own interest.
To sell the bank securities, the selling bank would give the buying bank, to affirm the selling of the securities a  Bank Receipt (BR). As Harshad Mehta was in the need for more money for his stock market manipulation he took a step ahead and started issuing fake bank receipts  with the help of some banks and took again advantage of the same to gain more money.
With gaining so much money, Harshad Mehta now had the finances of manipulating the stocks further; the ACC (Associated Cement Company) stock under him went from 200 rupees to direct 9000 rupees in just a few months. As the stock market achieved heights more and more people became interested in it and started investing. Harshad Mehta with the manipulation would increase the prices of the stocks and would sell them at very high prices gaining a fortune. He would with the money he gained complete his task of giving money to the seller bank and taking the BR.
His tactics and manipulation went on smoothly for a very long time wherein he gained immense success and earned a fortune. His lifestyle showcased his achieved success, he owned many luxury cars like Scarlett and Lexus, had a 15,000 sq. feet apartment in the Worli area of Mumbai and he himself was mostly seen in high quality and prices clothing attending many rich and esteemed parties of his time.

UNRAVELLING OF THE SCAM-
The scam started unravelling as the government security funds had a shortfall as per the SBI reports, which also revealed how banks had issued BR’s in Harshad Mehta’s name but had not received any securities for the same. The stock market therefore started declining and Harshad Mehta therefore had to incur huge losses as now he was unable to successfully pay back the money to the selling banks. This slowly led to the uncovering of his fraud activities.
The Sensex fell from 4500 points to 2500 points in months, wiping out huge amounts of investor wealth.
Sucheta Dalal who was a journalist  on 23 April 1992, in a Times of India article disclosed the scam done by Harshad Mehta. Through which the banks later realised how the BR given to the them are fake and of no value. Agitation and chaos overflowed the market and the country with banks now asking the money from Harshad Mehta. But Harshad was unable to provide any money due to the bear run in the stock markets. As a result banks incurred heavy loss of  3000-4000 crore. Vijaya bank chairman who had earlier issued the cheque in Harshad’s name committed suicide immediately after knowing about the scam.
The then governor of the Reserve Bank of India, A.D Narottam, faced heavy criticism of not knowing about the irregularities in the banking systems earlier.
On 9 November, 1992, CBI (Central Bureau of Investigation) arrested Harshad Mehta, he has 600 Civil Action Suits and 70 Criminal charges against him. Along with him Bhupen Dalal and Hiten Dalal who were working closely with Harshad Mehta were also arrested. 
Security Market Regulator, SCBI permanently banned Harshad Mehta from participating in the stock market.
Harshad Mehta after arrest was  put in Thane jail, Maharashtra where on 31 December 1992, he complained of chest pain for which he was admitted in the Thani City Hospital, eventually dying in the hospital itself at 12:30 am. When he died 27 cases were still pending against him.

IMPACT OF THE SCAM-
Crash of Stock markets
The most impact was on the stock market itself which was crashed and suffered from a bear run.  The BSE Sensex, which had risen to 4467 points in April 1992, crashed to 2529 points by August – a fall of over 43%.


Reforms
The scam induced an urgent need for banking reforms incorporating stricter laws for a better management. RBI introduced new laws to protect the government security funds.



SEBI
As the scam exposed problems with the regulatory system of the country it led to the establishment of SEBI, Securities and Exchange Board of India as a statutory body  to regulate the securities market.

Market Reforms
Due to the frenzy, chaos and disruption caused by the scam of 1992, market had major reforms specially due to the awareness people later had in all sectors of the country. The market trading became electronic and a more transparent and efficient system was established.

Other than that Sucheta Dalal, the journalist who exposed Harshad Mehta scam got a Padma Shri for her outstanding work in 2006.

CONCLUSION


The Harshad Mehta scam of 1992 also known as the stock market scam has been the biggest scam the country has ever seen. It shook the country, exposing the irregularities and vulnerabilities in the financial system of the country while also causing major reforms to be established. The scam has been the most known and the popular scam ever to be occurred on such a wide scale. It made its way into the media fast and has since been in the subject of movies or books. Overall the scam had a lasting impact on the public and it still hold its influence in the financial sector of the country.

FAQS

What is meant by the term scam?
Scam in general sense means a dishonest plan for making money or getting an advantage, involving tricking or fooling people.

When was Harshad Mehta arrested and in which jail was he put?
Harshad Mehta was arrested on 9 November 1992 and  put in the Thane jail in Maharashtra.

What are the major impact of the scam of 1992?
The scam exposed problems with the regulatory system of the country it led to the establishment of SEBI, Securities and Exchange Board of India as a statutory body  to regulate the securities market. Due to the frenzy, chaos and disruption caused by the scam of 1992, market had major reforms specially due to the awareness people later had in all sectors of the country. The market trading became electronic and a more transparent and efficient system was established. The scam induced an urgent need for banking reforms incorporating stricter laws for a better management. RBI introduced new laws to protect the government security funds.

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