The Harshad Mehta Story – Journey into India’s Financial Turmoil
Introduction about Harshad Mehta
Harshad Mehta was an influential Indian stockbroker and financial speculator who gained popularity in the early 1990s for his involvement in one of the most significant financial scandals in the history of India. Born on July 29, 1954, in Raipur, Madhya Pradesh (now in Chhattisgarh), Harshad Mehta played a key role in the Indian securities market during his career.
Mehta rose to prominence during a period of economic liberalization in India when the financial markets were undergoing significant changes. He became known as the “Big Bull” for his bullish market predictions and his ability to manipulate stock prices. Mehta’s modus operandi involved exploiting loopholes in the banking system to manipulate the stock market and create a surge in the value of certain stocks.
The Journey of Mehta
Harshad Mehta’s journey, marked by a meager starting point of just Rs. 40 upon his migration to Mumbai, adds a layer of intrigue to his already compelling story. Despite this humble beginning, Mehta would go on to leave a lasting mark on the financial landscape of India. His foray into the stock market began in the 1980s when he found employment with broker Prasann Panjivandas, whom he considered his guru and mentor.
Over the following decade, Mehta’s trajectory in the financial world took him through various brokerage firms, each time contributing to his growing expertise and acumen. Eventually, he took the bold step of establishing his own brokerage firm, bearing the name GrowMore Research and Asset Management. This move marked the inception of a journey that would ultimately shape the destiny of the Indian stock market.
By the 1990s, Harshad Mehta had risen to unprecedented prominence, earning him the moniker ‘Amitabh Bachchan of the Stock Market.’ The titles ‘The Big Bull’ and ‘Raging Bull’ became synonymous with his name, capturing the essence of his soaring influence. Mehta’s wealth amassed during the 1990s is exemplified by his opulent lifestyle.
Described by journalist Sucheta Dalal as charismatic, and recklessly ambitious, Mehta’s personality became as iconic as his financial exploits. Yet, it was this very recklessness that would prove to be the catalyst for his eventual downfall. His ambitious schemes, while initially pushing him to great heights, eventually exposed the vulnerabilities in his financial maneuvers.
Harshad Mehta’s journey from a modest beginning to becoming a financial luminary reflects not only the dynamism of the Indian stock market during that era but also the complexities of ambition and the thin line between success and downfall in the financial world.
Role Played by Harshad Mehta
Harshad Mehta, employing his shrewd understanding of the financial system, played a pivotal role in putting together the Ready Forward (RF) deals. However, he elevated the complexity of these deals by persuading banks to issue cheques in his name. This provided him with an avenue to manipulate the funds deposited into his account for speculative activities in the stock markets. This marked the inception of a scam that would later reach unprecedented levels under Mehta’s adept manipulation.
In the typical RF deal structure, two banks engage in the exchange of securities for cash. Mehta, however, cleverly exploited this framework by introducing a twist. When a bank sought the return of its securities or cash, Mehta intricately introduced a third bank into the equation. This pattern continued, with additional banks being incorporated into the scheme, creating a cascading effect. The result was a network of interconnected banks, all entangled within a web of RF deals masterminded by Mehta.
By introducing multiple banks into the transactions, he not only expanded the scope of the scam but also intensified its complex process. This strategic manipulation of the system enabled Mehta to exploit the vulnerabilities of the banking sector, leading to a financial scandal that echoed across the Indian financial landscape. The web of RF deals woven by Mehta stands as a testament to his fraudulent activities and the challenges faced by regulatory mechanisms in combating such sophisticated financial schemes.
The Strategic Planning
Harshad Mehta swiftly identified the inherent dependence of the Ready Forward (RF) deals on Bank Receipts (BRs). Recognizing the pivotal role played by both BRs and prominent brokers, including himself, Mehta, in collaboration with two banks, namely Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB), made a strategic decision to exploit the vulnerabilities within the system. Together with these two banks, he began a scheme to forge BRs, thereby manipulating a critical element of the financial framework.
The forged BRs which lacked authentic backing in the form of securities, essentially became mere pieces of paper devoid of real value. This scenario draws parallels with situations where loans can be secured without the need for collateral. Seizing this opportunity, he injected this forged capital into the stock market, exponentially increasing his sphere of influence within the financial domain.
Despite the Reserve Bank of India’s (RBI) mandate to conduct on-site inspections and audits of banks’ investment accounts, the comprehensive audit process failed to detect the disproportionate representation of BRs in circulation compared to the actual government bonds held by the banks.
Even when the RBI eventually became aware of the irregularities, its response lacked decisiveness, refraining from taking stern action against the BOK and the MCB. This regulatory leniency further underscored the systemic weaknesses and lapses that allowed the malpractices to survive.
Another facet of Mehta’s deceptive strategy involved the direct forging of government bonds. In this, the use of BRs was bypassed altogether, with counterfeit government bonds being created. This method took advantage of the fact that Public Sector Undertaking (PSU) bonds were represented by allotment letters, making them susceptible to forgery. However, the funds misappropriated through this particular form of forgery amounted to a relatively small sum in comparison to the broader scope of Mehta’s financial scams.
What did banks do if they couldn’t maintain the SLR ratio?
When banks found it challenging to maintain the Statutory Liquidity Ratio (SLR) ratio due to temporary surges in Net Demand and Time Liabilities, they employed a strategic approach to address the situation. Rather than undergoing the lengthy process of directly purchasing bonds, banks used a mechanism known as Ready Forward Deals (RFD) to navigate these fluctuations.
An RFD constituted a secured short-term loan, typically spanning 15 days, from one bank to another. The collateral for such transactions was provided in the form of government bonds. To streamline the process, instead of physically transferring the bonds, banks opted for the transfer of Bank Receipts (BR). This choice came from the fact that the bond certificates held by the banks often exceeded the SLR requirements, making BRs a more convenient means of short-term transfer.
Bank Receipts, akin to short-term IOUs (I Owe You), served as the financial instruments personifying the transfer of securities. Despite the transaction’s nature as a loan, when an RF deal was executed, it was not as a conventional loan transfer but as a transaction involving the purchase and sale of securities, all represented by BRs. The borrowing banks, in this scenario, would sell securities, symbolized by BRs, to the lending banks in exchange for cash.
As the agreed-upon period, typically 15 days, elapsed, the borrowing bank would repurchase the BR (securities) from the lending bank at a higher price. The disparity between the buying and selling prices constituted the interest payable to the lending banks. The brilliance of utilizing Bank Receipts in this process was evident as the actual transfer of securities didn’t physically occur. Rather, the BRs could be simply canceled and returned once the RFD deal reached its completion. This allowed banks to navigate SLR requirements with a certain level of agility and efficiency.
Benefits to Banks
The complex web of banks in Harshad Mehta’s mechanism was not born out of ignorance but a deliberate choice to turn a blind eye to his actions. The financial institutions, aware of Mehta’s scam, opted for a passive stance, with the expectation of reaping substantial benefits from the profits he generated in the stock market. Mehta would funnel a percentage of his gains back into the banks, creating a mutually advantageous scenario.
This collusion was not just an instance of negligence but a strategic alignment where banks chose to prioritize short-term gains over ethical considerations. By aligning their interests with Mehta’s speculative activities, the banks envisaged a direct positive impact on their bottom line. The injection of funds from Mehta’s profits into the banking system not only bolstered their financial health but also facilitated the maintenance of overall profitability.
In reality, the banks, fully aware of the ethical dilemmas surrounding Mehta’s practices, made a calculated decision to prioritize their immediate financial interests. This relationship underscores the complex interplay between financial institutions and unscrupulous market players, highlighting the delicate balance between regulatory responsibility and the greed for immediate financial gains. The nature of this association, while providing short-term advantages to the banks, ultimately played a role in the unraveling of one of the most significant financial scandals in Indian history.
Role of Political Influencers in the Harshad Mehta Scam
The fallout from the Harshad Mehta scandal triggered a political storm, with the opposition demanding the resignation of the then Finance Minister, Manmohan Singh, and the Reserve Bank of India (RBI) Governor, S. Venkitaramanan. The scandal, marked by large-scale financial irregularities and stock market manipulations by Mehta, had profound implications for the political landscape of India during the early 1990s.
In response to the mounting pressure, Finance Minister offered his resignation as a gesture of accountability. However, in a twist of political dynamics, Prime Minister P. V. Narasimha Rao rejected Singh’s resignation. The decision to retain Singh in his position reflected the complex interplay of political considerations, and the need for stability in the face of a financial scandal that had shaken the nation.
The rejection of the resignation became a pivotal moment in the aftermath of the Harshad Mehta scandal. It underscored the delicate balance between political accountability and the essentials of governance, especially during a period when the Indian economy was grappling with the repercussions of financial malpractices. The political aftermath of the scandal extended beyond individual resignations, influencing policy responses, regulatory reforms, and public perception of government efficacy.
This episode in Indian political history serves as a case study for examining the complex connections between financial scandals and political decision-making. The Harshad Mehta scandal, with its far-reaching consequences, left an indelible mark on the political environment. It contributed to discussions on ethics, accountability, and the need for robust regulatory frameworks in the financial sector.
Who Exposed Harshad Mehta
Journalist Sucheta Dalal found herself deeply intrigued by the opulent lifestyle led by Harshad Mehta. Her attention was particularly captured by the impressive fleet of cars that Mehta owned. These vehicles, considered symbols of affluence, were the stuff of dreams even for the wealthy in India during the 1990s.
Sucheta Dalal embarked on a thorough investigation. This inquiry delved into the details of Mehta’s financial dealings and the sources behind his extraordinary affluence. Dalal’s commitment to investigative journalism reached a pivotal moment on April 23, 1992, when she exposed the intricate web of financial manipulations by Mehta in a revealing piece published in the columns of The Times of India.
It exposed the systemic vulnerabilities that Mehta had exploited to engage in large-scale stock market manipulation. The revelation of the scam had profound consequences, triggering legal actions and inspiring regulatory reforms within the Indian financial system.
Some important things about the scam coming to light are connected to accusations hinting at the Bear Cartel’s participation. It is claimed that this group of market players strategically collaborated to blow the whistle on Mehta. Their intent was not only to eliminate Mehta’s influence but also to bring an end to the bullish run that had characterized the financial markets.
Mehta’s Life after Scam
Harshad Mehta found himself entangled in a legal web, facing 72 criminal charges and over 600 criminal action suits. After spending 3 months in custody, Mehta secured his release on bail, but the drama surrounding the scandal only intensified.
In a dramatic turn of events, Harshad Mehta, during a press conference, made a startling claim. He asserted that he had bribed the then PM, P.V. Narasimha Rao, with Rs 1 crore to secure his release from custody. Mehta even went so far as to display the suitcase that purportedly contained the cash used for the alleged bribe. Despite this revelation, the Central Bureau of Investigation (CBI) failed to unearth any concrete evidence supporting Mehta’s bribery allegations against PM Narasimha Rao.
Consequently, Harshad Mehta found himself barred from participating in the stock market. It was a significant blow to an individual who had wielded considerable influence in the financial domain.
As investigations delved deeper, it became apparent that he might not have been the original perpetrator who forged the bank receipts. While it was clear that Mehta had capitalized on these fraudulent means, investigators began to consider the possibility that the bear cartels, motivated by their own interests, had ganged up on Mehta. This strategic move aimed to expose the scam through journalist Sucheta Dalal, diverting attention from their own similar activities.
This twist redirected investigators’ focus towards the bear cartel, as they, too, had utilized similar means. Subsequently, these other brokers faced legal trials in connection with the securities scam.
The Income Tax department asserted that Harshad Mehta owed them a staggering Rs. 11,174 crores in unpaid income tax. This claim was linked to all transactions involving Mehta or his firm, GrowMore. Mehta’s lawyer, in response, deemed this claim as bizarre, emphasizing that Mehta’s lifetime assets were estimated at around Rs. 3000 crores. The case showcased not only the financial malpractices at play but also the complex interconnection between power, influence, and legal charges in the aftermath of one of India’s most significant financial scandals.
Legal Battles After Harshad Mehta's Release
Harshad Mehta made a surprising resurgence as a market guru, dispensing advice through his website and newspaper columns. Despite the events that had spoiled his reputation in the early 1990s during the securities scam, Mehta sought to rebuild his image and regain influence in the financial domain.
However, this comeback was short-lived, as in September 1999, the Bombay High Court delivered a verdict that would once again alter the course of Harshad Mehta’s life. Convicted on charges related to financial irregularities, Mehta was sentenced to five years of imprisonment. Tragically, Harshad Mehta’s life took a final turn when he passed away while in criminal custody. The story of Harshad Mehta is one of highs and lows, marked by financial acumen, legal controversies, and a relentless pursuit of success.
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