Scam 1992 Exposed! Indian Securities Scam of Rs.24,000 Crore.

The Harshad Mehta scam is one of the largest financial frauds India has ever witnessed. The magnitude of the Harshad Mehta scam was so big, that if put into perspective today, it brought a bear market in Dalal Street. If we look into the numbers, that single man deceived the entire nation with an amount of over Rs.24,000 crores as reported by a source.

Life Journey of Harshad Mehta

People often refer to Harshad Mehta’s life as a rags-to-reaches story that went wrong. At first, Mehta did odd jobs. He sold hosiery and cement. But he had bigger dreams. He became interested in the stock market and wanted to be part of it. Soon, he started working as a Jobber- A type of broker at the Bombay Stock Exchange.

Dates	Events of Life
29-07-1954	Harshad Mehta was born to a traditional cloth merchant Shri Shnatilal Mehta and a Mother Smt Rasilaben Mehta at Ghatkopar, Mumbai.
1954 to 1964	Harshad had Initial schooling at Ghatkopar and then at Rose Manor Garden School in Santacruz Mumbai.
1964	Due to the health problems of Harshad Mehta’s father, the nucleus family moved to Raipur.
1964 to 1973	Harshad father faced multiple business setbacks in which he lost his wealth but honoured his obligations even by ale of the jewellery of Harshad’s mother. The Mehta family faced acute financial problems and even faced difficulties in paying for the school fees but the gift best education was given by parents.
1973 Onward	Harshad migrated to Bombay for a better future and lived with his uncle and aunt. While in college and studying for B.com, Harshad tried his hands at several mental jobs with little success such as supplying cement, getting diamond polished every weekend by travelling to Surat and working in a relative’s hosiery store.
1976-77	Harshad joined New India Assurance in their Head Office at Fort in the Hull Department without having a house of his own and reasonable earnings and for better prospects he sought a transfer to the investment department of New India Assurance and also started visiting Bombay Stock Exchange during lunch break. During the same time, the other family members and parents also migrated to Bombay to a small rented place in Kannamwar Nagar, Vikhroli, the lowest point in their lives.
1978	As the lease expired in 11 months, the family hired a flat at Padma Apartments near Charkop, Kandivali (West) for another 11 months. Due to a conflict of interest, Harshad resigned from his job at New India Assurance and started full-time carer at BSE. He took to market making under which two-way quotations are given to impart liquidity in the market keeping a small margin and the positions are squared up by the end of the day.
1979	Mehta family purchased a small flat in Rajesh Apartments, Shankar Lane, Kandivali (West) through the initial success of harshad in the Stock Market
12-11-1980	Harshad and Jyoti Mehta were blessed with a son Aatur.

 

However, he built his success on unethical practices and fraud. By the 1980s, he had set up his firm called GrowMore Research and Asset Management. In the late 1980s and early 1990s, Mehta became famous for making bold stock market moves. People began calling him the “Big Bull” because of his ability to predict stock market trends and make huge profits. But behind all this wealth and glamour, Mehta was doing something risky. He used his connections in the banks and financial institutions to get money illegally. He manipulated stock prices to make a profit. This dangerous game would eventually lead to his downfall.

Scam Exposed!

Harshada Mehta was executed how he was able to fool the entire Dalal Street and even the Indian banking systems. During the early 1990s, Harshad Mehta started facilitating ready-forward deals transactions among Indian banks, acting as an intermediary. In this process, he used too raise funds from the banks and subsequently illegally invest the same in stocks exchange to inflate the stock in the Bombay Stock Exchange to raise funds from the banks and subsequently illegally invest the same in the stocks listed in the Bombay Stock Exchange to inflate the stock in the Bombay Stock Exchange to inflate the stock prices artificially.

The year 1991 marks the year of liberalization of the Indian economy. Today we are grateful for his opening up, however, Indian businesses found their own set of challenges. The public sector was forced to face increased competition and was under pressure to display profitability in the new environment. The private sector, however, responded positively to this news as this would mean more funds from foreign investments.

The securities scam of 1992, led to sweeping stock market reforms and revealed systemic loopholes in the country’s banking sector. Journalist Sucheta Dalal uncovered the scam in 1992, which led to an immediate crash in the stock market. Mehta again caused a furore on 16 June 1993 when he publicly announced that he had paid Rupees 1 Crore to the then Congress president and prime minister, Mr P.V. Narasimha Rao, as a donation to the party for getting him off the course.

Also Read This: Scam Exposed! How Ketan Parekh Managed to Commit the Rs.40000 Crore Scam?

Inside The Scam

Harshad Mehta siphoned off around Rs.100 crore from the baking system to buy shares in the Stock Exchange. As he pumped in money, the markets continued to achieve new highs. Retail investors took cues from what Mehta was buying and followed in the footsteps of the ‘Big Bull’. Between April 1991 and April 1992, the Sensex went into a frenzy and returned 274 per cent, moving from 1,194 points to 4,467. That is the highest annual return for the index.

He also promised the banks a higher rate of interest, while asking them to transfer the money into his account, under the guise of buying securities for them from other banks. At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. Mehta used this money temporarily in his account to buy shares, thus hiking up demand of certain shares, thus hiking up demand of certain shares dramatically, selling them off, passing on a part of the proceeds to the bank and keeping the rest for himself. This resulted in stocks like ACC to nearly in just 3 months.

Illegal Activities	How it work
Fake Bank receipts (BRs)	Harshad Mehta used fake Bank Receipts is a documents that acknowledge the receipt of funds in exchange for selling securities. Mehta convinced banks to issue fake BRs, which allowed him to get loans without having any real securities to back them. He then used this borrowed money to buy large quantities of stocks, pushing their prices up.
Circular Trading	Traders buy and Sell stocks between each other to create the illusion of high demand in circular trading. Mehta used this tactic to inflate the prices of stocks, By doing this, he attracted other investors who thought the stocks were doing well, leading to even higher prices.
Spreading False Information	Mehta also spread false information to hype up certain stocks. This created excitement in the market, and many investors bought those stocks, driving their prices even higher. But in reality, these stocks had no real value.

 

On 23 April 1992, journalist Sucheta Dalal exposed Mehta’s illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking system to finance his buying.

Further Investigation

The Investment revealed many suspects:

• Citibank, brokers like Pallav Sheth and Ajay Kayan, industrialists like Aditya Birla, and Hemendra Kothari, several politicians, and the RBI Governor all played a role in the rigging of the share market. Also, Minister P. Chidambaram utilized Harshad Mehta’s services and invested in Harshad Mehta’s grow more form through his shell companies.
• Harshad Mehta was Charged with 72 criminal offences and more than 600 criminal action suits. After spending 3 months in custody Mehta was released on bail. The dram however never subdued but only intensified.
• In a press conference, Harshad Mehta claimed that he had bribed Prime Minister P. V. Narsimha Rao for Rs.1 crore to secure his release.
• Harshad Mehta even displayed the suitcase in which he allegedly carried the cash. However, the CBI never found any concrete evidence of this.
• Harshad Mehta was now also barred from participating in the stock market. The investigator felt that Harshad Mehata was not the original perpetrator who forged the bank receipt. It was clear that Harshad Mehta capitalized and made profits using these methods.
• IT department claimed an Income tax owed to the Rs.11,174 crores. Harshad Mehta’s firm GrowMore had significant clientele and the IT department had linked all the transactions that may have involved Harshad mehta or his firm with Harshad Mehta’s income.
• Harshad Mehta’s lawyer addressed this as bizarre as Harshad Mehta’s lifetime assets were worth around Rs.3000 crore. He highlighted the possibility whereby making Harshad Mehta the face of the scam allowed other powerful players a chance to have the focus lifted away from them and escape or slowly be exonerated.

Stocks Targeted by Mehta

Mehta could persuade others to invest in those stocks by showing them the potential he saw. One of his famous ideas was the “Replacement Cost Theory”. This theory states that investors should value stocks based on the cost of building a similar business from scratch.

Stock	Manipulation
Associated Cement Companies (ACC)	Mehta increased the price of ACC stock from Rs.200 to over Rs.9000 in just a few months. Buying large amounts of shares and using circular trading created an illusion of demand.
Sterlite Industries	Mehta inflated the price of Sterlite stock from Rs.30 to Rs.1,500. He used money borrowed from banks and circular trading to push the price up.
Videocon	Mehta manipulated Videocon’s stock, causing its price to jump from Rs.45 to Rs.2000. The artificial demand caused many investors to buy the stock, only to lose money when the bubble burst.

 

Suspect in the Scam

Several people either participated in the scam or played a role in exposing it.

Suspect	Involvement in the Scam
Harshad Mehta	Harshad Mehta was the mastermind of the scam. His innovative thinking helped him manipulate the stock market. He used loopholes in the banking and stock market systems to carry out his illegal activities.
S. Venkataraman	S. Venkataraman was the Governor of the Reserve Bank of India at the time of the scam.  The RBI failed to detect the fraud before it happened. After exposing the scam, he played an important role in introducing reforms to prevent such scams in the future.
Sucheta Dalal	Sucheta Dalal was a journalist with the Times of India.  She helped uncover the scam by exposing the connection between Harshad Mehta’s lavish lifestyle and the rising stock prices. Her work forced the authorities to investigate the fraud.
P. V. Narasimha Rao	P. V. Narasimha Rao was the Prime minister of India during the scam. Though there was no evidence, some accused him of accepting bribes from Harshad Mehta to protect him from legal action. This added a [political angle to the scam.
A. D. Narottam	The then-governor of the RBI faced criticism for not detecting the irregularities earlier.
Bhupen Dalal	Another prominent stockbroker who was implicated in the scam.
Various Bank Official	Several bank employees, especially from public sector banks, were found to be complicit in issuing fake BRs and facilitating unauthorized transactions.
Politicians	While no major political figures were directly implicated, there were allegations of political involvement and cover-ups.

 

Impact of the Harshad Mehta Scam

The Harshad Mehta scam had a huge impact on the Indian Stock Market and the economy.

Event	Impact
Stock Market Crash	When the scam was exposed in April 1992, the Indian stock market went into fall. Investors panicked and started selling their stocks. As a result, the Bombay Stock Exchange lost nearly half of its value. This led to a loss of billions of rupees for investors.
Regulatory Informs	The scam exposed the weaknesses in the Indian financial system. As a result, the government had to introduce strict regulatory reforms. The Securities and Exchange of India (SEBI) was given more powers to regulate the stock market. New rules were also introduced for IPOs and stock trading practices.
Loss of Investor Confidence	The scam severely damaged investor confidence in the Indian Financial system. Many people who had invested their life savings in the stock market had huge amounts of money. This created a negative sentiment towards the stock market, and it took years to rebuild trust among investors.
Economic Aftermath	The scam did not limit its effects to the stock market. The banking sector also suffered huge losses. Which led to tighter credit conditions. This caused a slowdown.
Modernization of Trading	The scam accelerated the move towards electronic trading and dematerialization of shares, making the market more transparent and efficient.
Corporate Governance	There was a renewed focus on corporate governance led to a more mature and robust stock market in India.
Market Maturity	In the long run, the scam and subsequent reforms led to a more mature and robust stock market in India.

 

End Chapter of Harshad Mehta

• In September 1999 the Bombay High Court convicted him and sentenced him to 5 years of imprisonment.
• Mehta died while in criminal custody after suffering from cardiac arrest in Thane Prison on 31st December at the age of 48.
• When Harshad Mehta died he still had 27 cases pending being cleared before his death there were still several civil cases pending in court.

Nearly 21 years after the scam-accused stock broker Harshad Mehta died of a heart attack in prison, his wife, Jyoti, has claimed he died due to medical negligence as jail authorities denied treatment for nearly hours.

She also stated that her family has been harassed by the Income Tax Department and custodian for nearly three decades despite winning more than 1,200 large cases filed against them in various judicial forums. Mehta was accused of bank fraud in 1992. she further claimed that when the remaining appeals are heard the claims of revenue would fall to about Rs.200 crore and this would entail further refunds.

The broker was ordered to pay the amount with 18% interest which roughly accumulated to 524 crores. The cases have dragged on so long that his brother secured a law degree in his 50s and represents the family in court. Harshad Mehta’s son now makes headlines regarding his investments.

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