Wildest Wolf of Dalal Street

Dalal Street is Indian equivalent of Wall Street (in New York). When Bombay Stock Exchange was relocated, the street next to it was named Dalal Street.

Stock market, for some reason, have animal identifiers for investors. May be because humans tend to lose control over their emotions as stock investors.

Anyway, so overtly optimistic investors who believe the stock price will rise, and therefore want to buy more, are Bulls. Pessimistic investors who believe stock price will fall, and therefore want to sell, are Bears.

They are most popular because most investors largely falls in either of these categories.

There are wolves too.

Wolves are powerful individuals who manipulate the market through unethical or criminal means to make money. They essentially exploit the emotional ride of bulls and bears to make money in the market.

There is a popular hollywood movie “Wolf of Wall Street”. Now you know where the title came from and that it actually meant something!

Our street is called Dalal Street. And today we will learn about the wildest wolf, who incidentally was also called the “Big Bull”.

How is the market manipulated

Stock market is a place to make money. It is more a place to lose money, but we will focus on winning today.

In fair market, the normal demand supply dynamics work on the price of the product. More demand, less supply increases the price. More supply, less demand reduces the price.

Now if you wanted to manipulate it, means you either want the price to be more than what the forces of demand and supply are setting it at Or you want the prices to be much lower. You are just not happy with the prices that you see, that lets you make profits just like everyone else in the market.

You want more. You are only winning today, remember.

You bought 500 units of something at Rs 10 which is now trading at Rs 25. You can sell it at Rs 25 and make (25–10)*500 = Rs 7,500 profit on it. But you want more.

For the price of item to increase, it should have more demand. A lot many people must be desperate to buy it. When people are desperate, they pay a premium to buy. That’s what increase the prices.

And so you will have to create demand. You will place an order to buy at Rs 27, then Rs 30, then Rs 35.

I am a seller. I want to sell the item that you want to buy. I see your first order to buy 50 units at Rs 27, I will sell it since it gives me more profit than current price of Rs 25. The price of item in market is Rs 27 now. Sellers don’t want to sell below that because they know someone out there is buying at 27.

You place next order at Rs 30, taking the market price up to Rs 30. Then you take it to Rs 35.

Meanwhile, your friends can see that you have good potential to make profit if you decide to sell at Rs 35. They think the item is profitable.

So they also decide to buy 200 units at Rs 35. The increased demand start pulling the prices further up. The bulls in the market, who are optimistic of further rise in prices start placing orders at higher prices, taking the prices further up.

Now the price is Rs 70. You are happy.

You decide to sell 650 units at Rs 70.

You have booked your profit. You have not only recovered your initial investment but also the additional investment you made to create demand, increase the prices and manipulate the market.

As soon as you sell, your friends start panicking. Why did you sell it all when the prices were still going up? The price fell to Rs 48, but they don’t care. They sold their items too. Further panic. Price is down to Rs 40. Further panic.

Everyone starts selling anticipating some news they don’t yet know and the price of the item fall back to Rs 10.

Everyone who bought at Rs 70 are left in red! They have no idea what hit them.

They then go on to become chickens — absolutely fearful of stock market and and exit to never come back.

Wolves make money by manipulating markets using unethical means. Almost all of the scams have same underlying sequence of events.

What I explained with a few hundred items, runs in thousands of stocks and crores of rupees.

How one wolf differ from other is in the modus operandi of arranging the funds to manipulate the market. They are wolves, they don’t use their own money to create demand. They weave this huge web of scams that become a source of regular funding for them.

Till they get caught.

Harshad Mehta — The Pied Piper

What he would have ultimately done, you know now. He pulled the prices of the shares up and then booked profits and made shit loads of money.

But that’s the tip of the iceberg, just like every other scam.

Let’s see the full iceberg now.

Government always needs money for its projects. It never has enough money though.

So it borrows from public and institutions by issuing government securities (like bonds).

Many years ago, government made it compulsory for banks to loan say 1 cr to government through securities.

Government can do anything, so they did.

And they told the banks, “we will come and check your book once a week to see if you have invested 1 Cr.”

Now for the ease of understanding, let’s say each GS was for Rs 10,000. So for 1 Cr, each bank should hold 1000 GS.

Every bank bought 1000 GS. But overtime, they would exit these and invest money elsewhere, or they would end up investing more than 1 Cr in GS.

So you may have 1100 GS, while I may have 900 GS.

But the government will come checking every week and therefore I need to arrange 100 GS. You have them extra.

Many years ago, banks did not like talking to each other.They preferred brokers.

Let’s call this broker Harshad!

Harshad came to me. I told him I need 100 GS through RF deals.

RF (Ready forwards), like bonds, was what banks would use to loan money from each other.

He said, “since I will need some time to figure out which bank has extra GS available, you please draw the cheque in my name. As soon as I find the bank, I will get you the RF deals and pay the bank required money.”

Now Harshad is not a nobody. Harshad is well known stock broker on the street! And I don’t want government going too deep into my books. So I am okay.

I draw out a cheque of 10 lakh.

Now Harshad comes to you and says, “you give me your GS, let me go out in the market and see if I can find a buyer for you. I will get back in 4 days.”. You are okay.

While we are okay-ing, Harshad invests those 10 lakh in stock market and pulls the price up for a particular stock.

Now after 4 days, you start asking for money.

So Harshad will go to a third bank, “Vijaya Bank”, who also wants GS and therefore issue the cheque in Harshad’s name. He will pay you with that money.

Now you are squared off. You got money for the RF deals.

Vijaya is added to the chain.

Harshad kept on adding more and more banks in this web.

Meanwhile, let us acknowledge that since we all have been issuing the cheque and dealing with Harshad, we have no idea who the other party is!

Now one would think why am I and Vijaya not concerned about getting the GS in return for the money we paid to Harshad?

That’s where the scam gets deeper.

So the actual exchange of GS never took place. What worked instead was a Bank Receipt.

When I wanted GS, all I needed was a bank receipt issued by you to prove that you have sold 100 GS to me through RF deal (a loan).

Remember, RF deals were short term loans. So, I am loaning you the money against the securities because I need to show the government that I do lend it the required amount. But when the checking is over, I want my money back and so the bank receipt, at that time, will prove that you owe me money.

Simply put, I was writing cheque to Harshad on the basis of Bank receipt.

And so Harshad went ahead and cracked a deal with a small bank somewhere to issue fake bank receipts!

This bank kept on supplying Harshad with fake receipts that Harshad would present me and Vijaya with. We are Okay because we have a confirmation now and we pay for those securities by issuing the cheque in name of Harshad!!

Harshad banks those cheques and invest money in Stock market. The prices of some stocks, most famous example being ACC, went up from Rs 200 to Rs 9000! Harshad sold his shares at the peak and made humongous profits!!

And because profits were humongous, he could easily repay the money he took from banks and would collect the fake bank receipts back.

Life was set. He had it all in control.

All it took was a Woman, a Lexus and the Bear

Harshad became superstar of sorts because any stock he touched would go for a “bull run”. Prices would shoot up and he made shit loads of money. People thought he had a knack, he was going to be the God of Stock market!

But markets have a mind of their own. The Bulls and Bears take turns to pull it. And there came a time for bears. In bearish market, prices come down. The profits lowered, and lowered till he suffered losses. And then got a notice from a bank to pay up Rs 500 crores.

Harshad decided to visit the bank in his Lexus.

Sucheta Dalal, a journalist, took offence.

Rest is history.

The woman got to business and exposed the entire Modus Operandi.

As soon as I and Vijaya realised that we have been duped heavily, that the bank receipts are fake and no one owes us anything, that we have lost all the money ; I quit my job as bank CEO and Vijaya committed suicide.

No kidding. Sadly, Vijaya Bank chairman actually committed suicide.

Harshad had criminal and civil cases, went to jail and died in 2001. He was 47.

He committed close to Rs 5000 crore scam.

He kept on winning, till he lost.

I wanted to write about three to four wolves, yes there are more, but it would not have done justice to his story. Or to other wolves.

He was a Wild Wild Wolf tamed by a woman, bear and lexus.

Originally published at She Talk Cents.