Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.

com

HARSHAD MEHTA : MAN WHO HAUNTED INDIAN STOCK MARKET

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com

Mehta was famous for ripping higher profits from stock market and trading, and for his famous financial scandal, worth of 5,000 crore (US$997.5 million) in Bombay Stock Exchange (BSE), of 1992. He was tried for 9 years, until he died in the late 2001. Lets see what and how he did it.

Roshankumar S Pimpalkar Email: roshankumar.2007@rediffmail.com

THE BEGINING

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The banks in India have to maintain a particular amount of their deposits in government bonds. This ratio is called SLR (Statutory Liquidity Ratio). In the early 1990s, each bank had to submit a detailed sheet of its balance at the end of the day and also show that there was a sufficient amount invested in government bonds.

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Now, the government decided that the banks need not show their details on each day, they need to do it only on Fridays. Also, there was an extra clause that said that the average %age of bond holdings over the week needs to be above the SLR but the daily %age need not be so.

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That meant that banks would sell bonds in the earlier part of the week and then buy bonds back at the end of the week. The capital freed in the starting of the week could then be invested. Now, at the end of the week many banks would be desperate to buy bonds back. This is where the broker comes in.

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The broker knew which bank had more bonds (called plus) and which has less than the required amount (called short). He then acts as the middleman between the two banks. Harshad Mehta was one such broker. He worked as a middle man between many banks for a long time and gained the trust of the banks senior management.

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THE TRAP

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Lets say that there are two banks A (short) and B (plus). Now what Harshad Mehta did was that he told the banker at A that he was dealing with many banks and hence did not know who would he deal in the end with. So he said that the bank should write the cheque in his name rather than the other bank (which was forbidden by law), so that he could make the payment to whichever bank was required.

Since he was a trusted broker, the banks agreed.

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Then he took the money from A and went to B and said that he would pay the money on the next day to B but he needed the bonds right now (for A). But he offered a 15 % return for bank B for the one day extension. Bank B readily agreed with this since the offer was very lucrative

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Now since Harshad Mehta was dealing with many banks at the same time he could then keep some capital with him at all times. Example: He takes money from A on Monday, and tells B that hell pay on Tuesday, then he takes money from C on Tuesday and tells D that hell pay on Wednesday and the money he gets from C is paid to B and as a result he has some working capital with him at all times if this goes on with other banks throughout the week.

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MON

TUE

WED

Money for D Money for B; promises to pay to B on tue

Money from C

Money for F

Money from E

Retains money of A for whole week as working capital

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The banks at that time were not allowed to invest in the equity markets. Harshad Mehta had very cleverly squeezed some capital out of the banking system. This capital he invested in the stock market and managed to stoke a massive boom.

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He was buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). The price of ACC went up from Rs 200 to Rs 10,000.

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Since he had to book profits in the end, the day he sold was the day when the market crashed.

The same day Vijaya Bank chairman committed suicide by jumping from the banks office roof.
The chairman knew that when it would become public that he had written cheques in the name of Mehta, he would be dead meat.

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Another instrument used was the Bank receipt (BR).

In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e., the seller of securities, gave the buyer of the securities a BR. A BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer.

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Having figured out his scheme, Mehta needed banks which issued fake BRs (Not backed by any government securities). Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in handy for this purpose.

These banks were willing to issue BRs as and when required, for a fee.

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Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities whereas this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.

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This went on as long as the stock prices kept going up, and no one had a clue about Mehtas operations.

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THE CONSEQUENCES

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crash on March 1, 2001 came as a major shock for the Government of India, the stock markets and the investors alike. Once the scam was exposed lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping 4,000 crore (US$798 million). The panic run on the bourses continued and the Bombay Stock Exchange (BSE) President Anand Rathi's resignation added to the downfall.

Rathi had to resign following allegations that he had used some privileged information, which contributed to the crash.

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The scam shook the investors confidence in the overall functioning of the stock markets. By the end of March 2001, at least eight people were reported to have committed suicide and hundreds of investors were driven to the brink of bankruptcy.

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This sudden crash in the stock markets prompted the Securities Exchange Board of India (SEBI) to launch immediate investigations into the volatility of stock markets. SEBI also decided to inspect the books of several brokers who were suspected of triggering the crash. Meanwhile, the Reserve Bank of India (RBI) ordered some banks to furnish data related to their capital market exposure.

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Mehta and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex. When the scheme was exposed, banks started demanding their money back, causing the collapse. He was later charged with 72 criminal offenses, and more than 600 civil action suits were filed against him.

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He was arrested and banished from the stock market with investigators holding him responsible for causing a loss to various entities. Mehta and his brothers were arrested by the CBI on November 9 1992 for allegedly misappropriating more than 27 lakh shares (Approx. USD 54,000) of about 90 companies, including ACC and Hindalco, through forged share transfer forms. The total value of the shares was placed at 250 crore (US$49.88 million). The two brothers have been granted temporary bail for five days following the death of Mehta in late 2001

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Mehta again raised a furore in 1995 when he made a public announcement that he had paid 1 crore (US$199,500) to the then Congress President and Prime Minister, Mr P.V. Narasimha Rao, as donation to the party, for getting him off the scandal case.

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THE END OF THE DEVIL

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Mehta was under judicial custody in the Thane prison. Mehta complained of chest pain late last night and was admitted to the Thane civil Hospital. He died following a brief heart ailment, at the age of 47, in December 31,2001.

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Mehta died on with many litigation still pending against him. He had altogether 28 cases registered against him.

The trial of all except one, are still continuing in various courts in the country.

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The Mehta scandal was portrayed in a Hindi movie Gafla. It was premiered in Times BFI 50th London Film Festival.

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