The Harshad Mehta Scam is once again in news, thanks to Hansal Mehta’s web-series ‘Scam 1992’.
It’s a fantastic series with brilliant performances from the entire cast – especially Pratik Gandhi, who lives the role of Harshad Mehta.
The charismatic performance is so powerful that mid-way through the series, you start rooting for Harshad. You want him to get out of the mess he has created.
If you haven’t watched it, watch Scam 1992 online on SonyLiv.
Harshad Mehta Scam 1992
It is called the ‘Harshad Mehta Scam’, but it wasn’t only him. One individual cannot possibly dupe the entire system.
Large banks, institutions, other brokers and even top-level politicians were involved in what went on to become India’s biggest financial scam.
Let’s try to simplify the case.
When you buy or sell a stock, you do it through a stock broker (like Zerodha) – who is a middleman between the buyer and the seller.
Similarly, back in the 1980s and 1990s, when a bank required money – they would often take short term loans from other banks. As a guarantee, they would keep ‘government securities’ (for example, Government Bonds) with the bank which was giving the loan.
When it was time to return the money (usually 15 days), the bank would take the government securities back – and also pay interest for the short term loan.
This was called the ‘Ready Forward Deal’.
Since there were several banks that often required short term loans, there were brokers who acted as middlemen between two banks.
Harshad Mehta – The Middleman
Harshad Mehta was one such broker – who often finalized such short-term loans between two banks.
This is where things get interesting.
We are talking about an era where most transactions were maintained on physical books. The use of technology and computers wasn’t widespread. Internet was almost non-existent and quick communication wasn’t easy either.
There were several loopholes in the system, which Harshad Mehta misused. He was able to do this because he was a well-known broker – with name, fame and big political connections.
Mehta would first find a bank that required a loan and take the government securities from them. Next, he would find another bank which was willing to lend money and take cash from them.
Not in the bank’s name, but his name!
The transaction was supposed to happen like this:
- Bank 1: Needs a loan, gives government securities to Bank 2 as guarantee.
- Bank 2: Needs to give out loans to earn interest income, gives cash directly to Bank 1.
Simple and straight forward.
Instead, we had a middleman like Harshad Mehta, who kept both the securities and cash with himself – before finalizing the deal.
The short period of time when Harshad had cash – he would use it to invest in the stock market. Since he was directly taking cash from the banks in his name, he had a lot of cash.
This was the kind of money which the market had never seen. It destroyed the bears and inflated the stock prices to crazy levels.
The Viscous Cycle
Mehta kept rotating the cash and became the big bull of the stock market.
Take cash from one bank, invest in the stock market. When the time came to return the money, he would take cash from another bank and return it. This cycle continued for a long time.
As Mehta’s connections and ambitions grew, more cash began to flow in. The stock market kept sky-rocketing. Banks trusted him because he returned their money on time.
As this viscous cycle continued, Mehta got richer and more powerful. From buying cars that were never before seen on Indian roads, to buying the biggest of houses – Mehta became the king of the stock market. A true rags to riches story, which inspired millions of people across the country.
This is when greed for more, began to get the better of him.
The market as we all know – goes through its usual ups and downs. When the market would correct in the short term, there were times when Mehta did not have money to return to the bank.
When he desperately needed more money, he hatched a plan which eventually led to his downfall.
Bank Receipts (BR)
When a bank needed a short term loan, they wouldn’t transfer the ‘Government Securities’ they held. Instead, they gave a receipt which was called as ‘Bank Receipt’ (BR).
These BR’s were confirmation receipts for both banks. That one bank has got the guarantee and other has received the loan.
Harshad used this system to his advantage and started using fake bank receipts to take more money from the lending banks.
This was a clear-cut scam, a fraud of epic proportions which led to his downfall.
Too much money was invested in the stock market, too much was at stake and a day came when Harshad could no longer return the money on time.
The story of this scam was broken by Suchetaa Dalal on Times of India.
News of financial fraud was terrible news for the stock market. The market began to crash and the valuations of Harshad Mehta’s holdings began to plummet too.
While his rise to the top was rather quick, the downfall was even faster. As the scam broke out, the mass-hero became a mass-villain. Overnight.
Simple Real Life Example
During the peak of the bull run, before the Harshad Mehta scam was made public – many people took loans to invest in the stock market.
Let’s take an example to understand this better:
- Since the stock market was performing well and many stocks were doubling within a few days -Rohit believes he can invest and earn quick returns from the market. However, he does not have money.
- He take a ₹ 10,000 loan from a friend and promises to return the money a month later – with 10% interest.
- He invests the money in the market and his stocks begin to perform well. Rohit believes he can earn more from the market. He takes a loan from another friend.
- When it’s time to return the money to the first friend, he is fully invested and does not want to take money out from the market. After all, he is earning 5-10% every day!
- He takes another loan of ₹ 11,000, promises to pay 10% interest after a month and clears his first loan.
- The stock market crashes.
- Rohit has two loans to return. One of ₹ 11,000 and other ₹ 12,100.
- Since his stocks are already below his investment value, he decides not to sell them.
- He takes a bigger loan. To clear his two pending loans, as well as to invest more in the market to recover his losses – which were also from the market.
- He is convinced the market will recover, like it has done several times in the past.
- This becomes a viscous cycle and getting out of it becomes almost impossible.
The above story didn’t just happen during the Harshad Mehta era. It continues to happen even today. Especially during the peak of a bull market.
Thousands of people have taken loans to invest in the stock market and suffered. Many have committed suicide. We do not hear about them, because the amount is usually small.
In Harshad Mehta’s case, his transactions were in hundreds of crores.
Highlights of Harshad Mehta’s Life
- Born in 1954 in the Rajkot district of Gujarat, Harshad spent his childhood in Kandivali (Mumbai) and later moved to Raipur where he did his schooling.
- Harshad was average in studies, but managed to complete his Commerce degree – after which he did a number of sales jobs.
- He later joined New India Assurance Company, and it’s here he got interested in the stock market.
- Mehta started working in a stock brokerage firm – as a ‘jobber’ for a major broker.
- These were his learning years in the stock market – a time when he rose with the market, fell with it – made mistakes, learnt from it and made a name for himself as an extraordinary talent.
- In 1984, Mehta founded his own company under the name ‘Growmore Research and Assets Management Ltd’.
- From here on, he was unstoppable. A true rags to riches tale, where a small-town boy from Raipur became one of the richest men in the country.
- From imported cars to large bungalows, Mehta’s rise was spectacular. At one point in time, he was paying more tax than Dhirubhai Ambani.
- Mehta was touted as the ‘Einstein of the Stock Market’, the ‘Amitabh Bachchan of the Stock Market’ and India’s first ‘Big Bull’.
- While Mehta manipulated the stock price of many companies, the most prominent of them all was of the cement company ‘ACC’. The price of this stock rose from 200 to 9000 in a short period of time – with Mehta justifying the inflated value to his ‘Replacement Cost Theory’ (How much would it cost to setup another company like ACC?).
- Whether it is stock market or life itself – when the rise is too fast, the fall is usually faster. This is exactly what happened with Mehta and his stocks.
- From 1000 points in January 1991 to over 4500 points in April 1992 – the Sensex gave phenomenal returns to traders as well as investors. When interest and greed were at its absolute peak in 1992, the scam broke and Sensex hit a bottom of 2000 points – a year later in April 1993.
- The crash was brutal. Mehta spent 3 months in jail. The nation’s biggest stock market hero, became a villain overnight – when India’s biggest financial scam was unearthed.
- Amidst intense pressure, Mehta, true to his extremely courageous nature, targeted the Prime Minister of the county – PV Narasimha Rao – and accused him of taking ₹ 1 crore as bribe.
- Mehta became a hero once again and got the backing of the opposition who targeted the Prime Minister.
- Even after his jail-term and SEBI banning him, the stock market was close to Mehta’s heart till the very end.
- In the Mid 90s, when very few even had an internet connection – Mehta started his own website and started posting his stock market tips. He was also writing a weekly column for a newspaper.
- In September 1999, the Bombay High Court convicted Harshad Mehta in another case and sent him to 5 years of imprisonment.
- In prison he suffered heart ailments and passed away at the Thane Civil Hospital on December 31 2001 – minutes before the world celebrated a new year.
Bear Cartel: Rakesh Jhujhunwala and Radhakishan Damani
Without Harshad Mehta, we probably wouldn’t know Rakesh Jhunjhunwala as the ‘big bull’ today.
And the owner of the supermarket chain ‘Dmart’, Radhakishan Damani, wouldn’t be one of the richest men in the world either.
Jhunjhunwala and Damani were a part of the ‘bear cartel’ during the bull run.
The biggest and most influential bear among them all was Manu Manek, also known as the ‘Black Cobra’.
The ‘bear cartel’ shorted stocks that were quoting insane valuations and waited. After all, they earn when stocks fall.
In Radhakishan Damani’s own words, “Agar Harshad saat din aur apni position hold kar leta, toh mujhe kathora leke road par utarna padta.” (Had Harshad Mehta held his position for seven more days, I’d have taken a begging bowl and walked on the road).
The bull run ended when Sucheta Dalal broke the scam on Times of India and the stock market crashed.
Harshad Mehta’s stocks fell heavily – and the big bears Radhakishan Damani and Rakesh Jhunjhunwala made huge money.
There is a scene in ‘Scam 1992’ where Damani says he wants to quit trading and become a long-term value investor.
That’s exactly what he did. Not only did he become a very successful investor, but Damani used his gains from the stock market and started ‘Dmart’ which has become a super-successful supermarket chain and made him a multi-billionaire.
Jhunjhunwala too agreed with Damani and said the Sensex would touch 40,000 one day. In his last scene in the series, he says “who knows, I could be the next big bull”.
And that’s exactly what he went on to become.