The 1992 Securities Scam
The Bombay High Court finally convicted the six primary accused of the 1992 securities scam on 25th November 2016, 24 years after the scam had first come to light. By then their crimes were long forgotten, buried under the weight of scamsters and con-men who had perpetrated far more devious frauds. These were no ordinary fraudsters though. By 1992, these men had nearly wiped the country’s coffers clean.
Also conspicuous by his absence among those convicted was the main accused of the scam, who also lent his name to the whole turn of events — Harshad Mehta, the wolf of Dalal Street. The man who had been used to the admiration and adulation of thousands of gullible investors, had died a surprisingly undignified death in 2001, in an ordinary hospital in Mumbai, with 72 cases still pending against him.
So what was the securities scam of 1992?
Flashback to the 1990’s
In an economy that was much more controlled than it is today, banks were mandated by the government to invest above a certain threshold amount in government securities.This amount could vary from day to day but at the end of the week, banks had to make this cut.
Smaller banks were hard pressed to maintain this threshold limit and they needed to buy securities from banks which had surplus securities. These transactions were effected by an RF (ready forward) deal- a sort of a 15 day loan from one bank to another against government securities. The borrowing banks would issue a BR( bank receipt) promising to deliver the money to the lender, at the termination of the 15 day period. BR was a trusted mode of exchange; often the receipt itself was treated as security and the securities never really needed to pass from bank to bank.
In those days a broker conducted this transaction between banks for commission. A broker would find a lender for a bank which was ready to sell and vice versa. Buying banks, acting through a trusted broker need not even know the identity of the selling bank. This anonymity provided a situation ripe for exploitation.
Big Bull Mehta
Mehta convinced two little known banks — the Bank of Karad(BoK) and the Metropolitan Co-operative Bank(MCB) to issue fake BRs; i.e BRs which did not have the backing of any securities. With these in hand, he took the entire banking system for a merry ride.
The modus operandi of the scam was very simple. Let’s say there were three banks, A,B and C and a broker X.
Bank A would approach X to find a bank willing to lend them bonds, because they were falling short of the target. Broker X, not sure where the bonds would come from, would ask bank A to sign the cheques in his name. (Signing of these cheques in the broker’s name was an illegal practise and Mehta made the most of it.) Next, X would approach B or C and and show them the BR issued by A and promise to deliver the money in the next few days to which B or C would agree because X is well known to them. With this, Mehta and his coterie of brokers always ensured that they had some money in their hands. In fact Mehta went a step ahead when he got fake BRs issued for himself. Now there were no banks asking for bonds. He was on his own, answerable to none and free to do what he pleased with the money.
And he made good use of it.
Suddenly, The BSE Sensex rose from around 2,000 points in January 1992 to 4,467 points in April that year. The price of shares in the cement company ACC eventually rose from Rs. 200 to nearly 9000 due to a massive spate of buying from a set of brokers including Mehta.
It was a grand time for buying stocks. Whatever Mehta touched, from ACC to Videocon seemed to almost quadruple in its value overnight. As the public revelled in his golden touch, the media presented almost a deified image of Mehta in the news. He was lavished with the titles like ‘the Amitabh Bachhan of the stock market’ and ‘the Big Bull’. Mehta’s 11,685 sq ft Worli penthouse and his fleet of some two dozen cars ( among which was a Lexus, just released in the international market) graced the covers of many magazines. Always the showman, he paid an advance income tax of 26 crore, that year. Making it big had never seemed so easy, or so appealing. He was the pied piper of the common man, leading the dance to the get-rich-quickly dream and the common man quickly lapped it up.
End of the dream run
On April 23, 1992 eagle eyed journalist Sucheta Dalal exposed the dubious ways of Harshad Mehta in an article in The Times of India, detailing exactly how he had siphoned off 500 crore from the treasury of the State Bank of India. Dalal had followed a tip off from an acquaintance, saying that Harshad (whose net worth was 1000 crore at that moment) had been summoned by the chairman of SBI to cough up Rs.500 crore, which he was to pay by cheque the next day( which he did in style, arriving at the bank in his 40 lakh plus Toyota Lexus). Why had he defaulted on his payment? Her suspicions were further raised when both the chairman and Harshad flatly denied any occurrence of the meeting when contacted.
You can read more about the scoop at http://www.wikileaks-forum.com/corruptionanti-corruption/124/harshad-mehta-scam-broke-20-years-ago-what-has-changed/10939/
When this report appeared in The Times of India, panic ensued. A series of investigations and arrests later it soon materialised that SBI wasn’t the only bank left in the lurch, even National Housing Bank( a subsidiary of RBI) got caught up in the fray. These, and other banks soon realised the BR’s they had trustingly accepted, were no more than scraps when Mehta couldn’t repay the promised amount. Crores had been milked from the banking system.
Banks started demanding their money back and the Sensex crashed from 4,467 points in January to 2,529 points in August, wiping out over Rs 100,000 crore in market capitalisation.
The common man, who had trustingly followed Harshad’s ‘golden words’ lost his life’s savings in a single day.
Naturally, the Budget session that year was a stormy one.
The then Finance Minister Manmohan Singh said in his speech that the government was in the process “of scaling down the Statutory Liquidity Ratio (SLR) which at present locks up a large portion of bank funds in the relatively low yielding government securities.” This mega scam of unprecedented proportions had exposed the lawlessness and regulatory oversight at the RBI, the Securities and Exchange Board of India(SEBI) which practically had no power then and the Finance Ministry.
Mention the scam in a gathering of old wise gents. You’ll be rewarded with bitter smiles and sarcastic replies for sure.
For more information, visit:
http://www.suchetadalal.com/?id=50775e5a-689d-fb73-492e82e5b47b&base=sub_sections_content&f
