The Big Bull of Dalal Street

The Big Bull Of Dalal Street

The stock market offers opportunities for millions to achieve significant financial success. It has witnessed inspiring stories of individuals going from humble beginnings to immense wealth. Conversely, there have been instances of people exploiting loopholes for unfair gains, such as Ketan Parekh and Charles Ponzi. This article delves into one of the most notorious stock market scams in history: the Harshad Mehta Scam.

Harshad Mehta

Harshad Mehta's journey from an ordinary person to one of India's most influential figures is remarkable. Born into a middle-class family without many luxuries, he spent nearly eight years working various jobs before deciding to pursue his passion for the stock market. In the 1980s, he secured a position as a broker at the Bombay Stock Exchange.

Mehta was a brilliant individual who quickly grasped stock market intricacies. While working as a broker, he became exceptionally knowledgeable about the exchange's operations. After a few years in this role, he established his brokerage firm, "Grow More Research and Asset Management." He gained fame for his investment consultancy and strategies, earning him the moniker "Big Bull of Dalal Street."

Following the resounding success of his brokerage firm, Mehta became associated with what is now known as one of the most significant stock market scandals in history.

Government response

Governments worldwide issue government bonds to raise funds, offering interest to buyers. Similarly, the Indian government sought funds to support public sector enterprises. Banks were mandated to purchase and hold reserves of these bonds. This sets the stage for the initial aspect of this situation, involving the Ready Forward Deal (RFD).

The Ready Forward Deal served as a short-term loan mechanism facilitated by banks. For instance, if Bank A required a short-term loan of ₹5 Crores (50 million rupees), they would sell their securities to Bank B, receiving the amount with interest and reclaiming their securities. This arrangement used the securities as collateral. Brokers played a crucial role in connecting buyers and sellers for these transactions. Harshad Mehta was one such broker, leveraging his established reputation and experience in dealing with Indian banks.

Stock market scam

Phase 1

Banks were initially required to issue cheques in the name of the bank from which they had purchased their bonds, rather than in the name of the broker. However, Harshad Mehta ingeniously persuaded the banks to issue cheques in his name while ensuring that these banks received lucrative interest rates in return for their cooperation.

For example, if Bank A wished to sell securities to Bank B, Mehta would obtain the securities from Bank A and the cheque from Bank B. He would then approach both banks, requesting some time to locate suitable buyers and sellers, respectively. Subsequently, he would utilize the funds received from Bank B to make strategic investments, thereby driving up stock prices in the market.

When Bank A eventually sought repayment, Mehta would establish a mutually beneficial arrangement with another bank, such as Bank C. He would transfer Bank A's securities to Bank C and the cheque from Bank C to Bank A. Likewise, when Bank B demanded repayment, he would identify another willing partner, perhaps Bank D, to facilitate the transaction and obtain the necessary funds to reimburse Bank B.

This cycle continued, allowing Mehta to channel substantial sums of money from these banks into the stock market for his personal financial gain.

Phase 2

In Phase Two of this intricate scheme, a significant component involved the use of Bank Receipts (BR). Instead of physically transferring the securities, banks issued BRs, certifying that the securities had been sold, and the corresponding funds had been received. In this phase, Harshad Mehta took his manipulative tactics to another level, collaborating with multiple banks to orchestrate the issuance of fraudulent BRs.

Mehta would skillfully provide counterfeit BRs to banks seeking to acquire securities, effectively diverting the funds acquired towards inflating stock prices on the Bombay Stock Exchange (BSE). There was a remarkable instance where he successfully propelled the stock prices of ACC from a modest ₹200 to an astounding ₹9000 in just a matter of days. This extraordinary surge in the market spurred retail investors to participate, further propelling the prices upwards.

At this juncture, Mehta would strategically sell his shares, securing substantial profits. It's worth noting that Mehta's net worth soared to an astonishing Rs 3542 crores during this period, enabling him to maintain a lavish lifestyle. Additionally, he benefited from unwavering political support, further adding to his influential position.

Discovery

It was his sudden surge in popularity that brought Harshad Mehta to the attention of the masses. Sucheta Dalal, a diligent journalist, displayed a keen interest in Mehta's activities within the stock market. The revelation of his misconduct and the entirety of the elaborate scheme he had orchestrated came to light on the 23rd of April 1992 when Dalal penned an article detailing Mehta's actions. This exposé in The Times of India triggered a tremendous outcry, with bank officials, government authorities, and even the general public demanding that he be held accountable for his actions.

For Mehta, returning the embezzled funds did not pose a significant challenge, as he could readily meet his obligations by liquidating stocks. However, his world came crashing down when a bearish trend gripped the market following the publication of the article. This resulted in a market crash, causing colossal losses ranging from ₹3000 to ₹4000 Crores (equivalent to 30,000 to 40,000 million rupees) for the banks. Mehta's actions set off a chain reaction of bankruptcy and substantial financial losses.

With mounting debts and an inability to repay the amounts owed to the banks, Mehta was eventually apprehended, bringing an end to years of scheming and embezzlement.

Arrest

In early November 1992, Harshad Mehta and his brothers faced arrest and imprisonment at the hands of the Central Bureau of Investigation. They were ultimately found guilty of 74 criminal offenses. After spending three months behind bars, they were granted bail, and, with the assistance of their legal counsel, played a role in the political landscape by raising allegations against Prime Minister PV Narasimha, whom they purportedly provided Rs 1 crore, implicating him in Congress-related matters. They also took action against other senior banking officials who were believed to be involved in the scandal.

While the fallout from their actions led to the loss of employment for many executives, it tragically resulted in the chairman of Vijaya Bank taking his own life due to fears of imminent arrest. Only 34 offenses were ultimately proven from the extensive charges filed by the CBI. Subsequently, Mehta was sentenced to five years in prison by the Bombay High Court. In an unexpected twist, he was granted bail once again. However, this respite was short-lived, as he was later found guilty of involvement in the disappearance of shares from 90 other blue-chip companies, which led to the denial of his bail request.

On the 31st of December 2001, Harshad Mehta passed away from cardiac arrest while in Tihar prison at the age of 47.

Aftermath

The Harshad Mehta scam, one of India's most notorious financial scandals, resulted in substantial losses for countless investors and eroded their trust in the financial system. However, it also catalyzed essential reforms, such as market computerization, the creation of the National Stock Exchange (NSE), the increased regulatory authority for SEBI (Securities Exchange Board of India), and the requirement for banks to establish separate audit systems for portfolios, overseen by the Reserve Bank of India (RBI). These reforms have significantly enhanced the RBI and the Government of India's ability to monitor and prevent future financial scandals, restoring confidence in the financial sector.

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