Harshad M Mehta was an Indian stockbroker, well known for his wealth and for having been
charged with numerous financial crimes that took place in 1992. Of the 27 criminal charges
brought against him, he was only convicted of one, before his death at age 47 in 2001.
It was alleged that Mehta engaged in a massive stock manipulation scheme financed by worthless
bank receipts, which his firm brokered in "ready forward" transactions between banks.
Mehta was convicted by the Bombay High Court and Supreme Court of India for his part in
a financial scandal valued at 49.99 billion which took place on the Bombay Stock Exchange.
The scandal exposed the loopholes in the Bombay Stock Exchange transaction system and SEBI
further introduced new rules to cover those loopholes. He was tried for 9 years, until
he died in the late 2001.
Early life Mehta was born on 29 July 1954, at Paneli
Moti, Rajkot district, in a Gujarati Jain family. His early childhood was spent in Kandivali,
Mumbai, where his father was a small-time businessman. Later, the family moved to Raipur,
Chhattisgarh, where Mehta studied in Kalibadi Higher Secondary School.
Career By profession Mehta was Graduate in commerce.
Over a period of ten years, beginning 1980, he served in positions of increasing responsibility
at a series of brokerage firms. By 1990, he had risen to a position of prominence in the
Indian securities industry. He established his own firm, with the financial assistance
of associates, when the BSE auctioned a broker's card. It was at this time that he began trading
heavily in the shares of Associated Cement Company. The price of shares in the cement
company eventually rose from Rs. 200 to nearly 9000. Mehta justified trading in ACC shares
by stating that the stock had been undervalued, and that the market had simply corrected when
it revalued the company at a price equivalent to the cost of building a similar enterprise;
the so-called "replacement cost theory". In criminal indictments later brought by the
authorities, it was alleged that Mehta and his associates then undertook a much broader
scheme, which resulted in manipulating the rise in the Bombay Stock Exchange. The scheme
was financed by supposedly collateralised bank receipts, which were in fact uncollateralised.
The bank receipts were used in short-term bank-to-bank lending, known as "ready forward"
transactions, which Mehta's firm brokered. By the second half of 1991 Mehta had earned
the nickname of the 'Big Bull', because he was said to have started the bull run in the
stock market. The 1992 security scam
On 23 April 1990, 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.
A typical ready forward deal involved two banks brought together by a broker in lieu
of a commission. The broker handles neither the cash nor the securities, though that wasn't
the case in the lead-up to the scam. In this settlement process, deliveries of securities
and payments were made through the broker. That is, the seller handed over the securities
to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker,
who then made the payment to the seller. In this settlement process, the buyer and the
seller might not even know whom they had traded with, either being known only to the broker.
This the brokers could manage primarily because by now they had become market makers and had
started trading on their account. To keep up a semblance of legality, they pretended
to be undertaking the transactions on behalf of a bank.
Another instrument used was the Bank receipt. 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. As the authors write, 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."
Having figured out his scheme, Mehta needed banks which issued fake BRs. "Two small and
little known banks – the Bank of Karad and the Metropolitan Co-operative Bank – came
in handy for this purpose. These banks were willing to issue BRs as and when required,
for a fee," the authors point out. 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 when 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. This went on as long as the stock prices kept
going up, and no one had a clue about Mehta's operations. Once the scam was exposed, though,
a lot of banks were left holding BRs which did not have any value – the banking system
had been swindled of a whopping 40 billion. When the scam was revealed, the Chairman of
the Vijaya Bank committed suicide by jumping from the office roof. He knew that he would
be accused if people came to know about his involvement in issuing checks to Mehta. M
J Pherwani of UTI was also linked to Mehta. Exposure, trial and conviction
Exploiting several loopholes in the banking system, 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 offences,
and more than 600 civil action suits were filed against him.
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 9 November 1992 for allegedly misappropriating more than 2.8 million shares of about 90
companies, including ACC and Hindalco, through forged share transfer forms. The total value
of the shares was placed at 2.5 billion. Mehta made a brief comeback as a stock market
guru, giving tips on his own website as well as a weekly newspaper column. However, in
September 1999, Bombay High Court convicted and sentenced him to five years rigorous imprisonment
and a fine of 25000. On 14 January 2003, Supreme Court of India confirmed High Court's judgement.
It was a 2:1 majority judgement. While Justice B.N. Agrawal and Justice Arijit Pasayat upheld
his conviction, Justice M.B. Shah voted to acquit him.
Allegations of payment of bribe to India's prime minister
Mehta again raised a furore in 1995 when he made a public announcement that he had paid
10 million 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.
Death Mehta was under Criminal custody in the Thane
prison. Mehta complained of chest pain late at night and was admitted to the Thane civil
Hospital. He died following a brief heart ailment, at the age of 47, on 31 December
2001. He is survived by his wife and one son. He died with many litigations 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. Market watchdog, Securities and
Exchange Board of India, had banned him for life from stock market-related activities.
In popular culture In the 1995 movie "Gambler" starring Govinda,
Harshad Mehta is referred in the parody song "Stop That" at [ 02:13 ]
The character Natwar Shah in movie Aankhein, placed under scanner for a Rs. 50 billion
scandal, was inspired by Harshad Mehta. The Mehta scandal was portrayed in the Hindi
movie, Gafla. It was premiered in Times BFI 50th London Film Festival on 18 Oct 2006.
Mehta scandal life is covered by Sucheta Dalal and Debashish Basu in their book The Scam:
From Harshad Mehta To Ketan Parekh. Harshad Mehta's trial has been referred to
in 2001 Bollywood movie Nayak. The movie Gafla that was nominated globally
in various important film events including at London by Mr. Bradshaw is based on the
actualities and prevalent realities in the stock market and Harshad Mehta's scam.
See also Bombay Stock Exchange
Abdul Karim Telgi Ramalinga Raju
Hasan Ali Khan List of scandals in India
References
External links NY Times Article on Harshad Mehta
Insight on Mehta's Lifestyle Mehta's Flat for Sale