Scam 1992, The Harshad Mehta Story
What is the one thing that is common between Harshad Mehta, Ketan Parekh, Nirav Modi, and Vijay Mallya? They all found loopholes in the Indian banking system and exploited that to create an insane amount of wealth. today we will get to know the story of the man who started it all ‘Harshad Mehta’. Harshad Mehta laundered over $3.2 billion in the stock market over a period of three years. His story is nothing short of a movie, and there is so much to learn from it.
So let’s start from the beginning. Harshad Mehta was born in 1954 into a very poor family. He completed his schooling in Raipur, but he was the very average kind of a student. He was even suspended from the school ones for indiscipline and misconduct. After completing his schooling he came to Mumbai where he did his B.Com. from Lala Lajpat Rai College. After graduation, he struggled even to taking low-level jobs, selling garments and appliances, etc. At that time he had no idea what he was going to do in life, but he just exploring, his luck turned around when he joined New India Assurance Company as a salesperson, from where he first got interested in the stock market. He realized that this was the game he was born to play. So he quit his job and joined the stock market brokerage firm in 1981. He quickly understands that in and out of the stock market made connections with influential brokers. And within three years he became a broker in the Bombay Stock Exchange.
By 1990 he had risen to prominence in the Indian stock market he also establishes, his own firm call to grow more research and Asset Management, but Mehta was not satisfied with his success. He had bigger ambitions. So in this lust for money, he started exploiting various loopholes in the banking system. At that time Reserve Bank had mandated all the banks to keep a certain minimum level of funds into government bonds. By the end of each week, every bank needed to have a certain amount of government Bond else RBI would penalize them. Now there was some strong bank, and there were some weak banks. the strong bank had no trouble keeping the minimum balance of government bonds whereas weak banks always struggled to do so, think of it like homework given by a teacher the good students always finish the homework on time, whereas weak students had to pay something to copy the homework of the strong students. So similarly the weak banks always had to borrow the government bonds from the strong banks and in return, they paid some interest but these bank transactions were not done directly between the strong and weak banks. They were done through brokers. And one of them was Harshad Mehta.
So Harshad Mehta would approach the weak banks and tell them that he would give them the government bonds they needed and for those bonds the weak banks would write him a check on his personal name. Now Mehta would ask them for some time to make the necessary arrangement. Since Mehta was so influential these banks didn’t mind waiting for a few extra days. next Mehta would approach the strong banks who had the extra government bonds and promised them to give that extra interest in return here also Mehta would ask for some extra time. Since Mehta was very influential and repeated neither of the banks had any problems with extra time to Mehta. At the end of the promised time, he was keeping his promise to both the Banks. The weak banks got the government bonds they needed and the strong banks were very happy with the money they made from the interest, everybody was happy.
So how was Mehta making money? Remember that Mehta would ask for some extra time from both the lending and borrowing banks? Well during that time, he had all this massive cash in his own personal account and he was funneling that money into the stock market he would pick selected shares of the companies and just kept buying those shares aggressively because of this massive liquidity injection. The share prices of these stocks would go up and because of that other investors would also start buying the stock in anticipation of more movement this would raise the stock prices even higher. But wait for a second, if the money was being pumped into the share market how was Mehta returning the money to the strong banks who lend those bonds.
Here is where his genius comes in, he was not just dealing with these two banks, he was dealing with the whole lot of them and he became very good at rotating the money from Lenders to borrowers. And whenever the stocks he pumped ran up a lot he would liquidate his positions from the stock market and take care of any deficit. All in all, Mehta was rotating the money between the banks and the stock market and he was getting very good at that. All this was working out very well, but Mehta got more greedy. He wanted more so he conspired with officials of two banks bank of Karad and Metropolitan Cooperative Bank to issue fake bank receipts. That was not backed by any Government Bonds so they were nothing but pieces of paper once these fake bank receipts were issued they were passed on to the banks. And banks, in turn, would give money to Mehta, obviously assuming that they were lending against the government securities, but that was not the case.
This money was used to drive the prices of the stock in the stock market. And when the time came to return the money shares would be sold for a profit and the bank receipts were retired. The game went on as long as a stock price kept going up and no one had a clue about Mehta’s modus operandi. this extensive liquidity has given an adrenaline shot to the stock market in general and the market began to make major moves. In fact, BSC quadrupled its index in a span of just one year, and because of that Mehta’s own portfolio of stock holdings gained in value close to 10 times to an estimated $2.8 billion. One of the stocks he pumped was ACC he moved from $2.72 to $122.25. I think you can understand how crazy valuations can get when liquidity is behind the stock. Here is some other stock that he later pumped, Reliance, Apollo, Tata Steel, and Sterlite copper. All this money made Mehta a hero in the stock market people started calling him the Amitabh Bacchan of the stock market. He lived a very luxurious lifestyle and was never shy to show off his wealth, he bought a 15000 ft property in Mumbai which had a mini-golf course and swimming pool. He had a fleet of foreign cars that were not even affordable to the richest of the rich people at the time, but all the show of and blind greed got him into trouble.
In 1992 an investigative journalist name Sucheta Dalal got wind of Mehta’s modus operandi and she published an expose in Times of India this was the beginning of Harshad Mehta’s end.
All the senior officials in the banks got alerted immediately and the lending banks began to ask for money, now remember that paying the money back was never a problem for Harshad Mehta because he would just sell his shares in the stock market and fulfill its obligations. But this time it was different because as soon as the scandal broke the market started crashing and the value of Mehta’s shares drop steeply. So he had no way of repaying those banks it didn’t take much time for CBI to step up and they charged him with 70 counts of fraud by this time Mehta’s game was over. He was under criminal custody in Thane prison.
Very later died of heart failure. Mehta also took down a lot of senior officials with him Vijaya bank, chairman committed suicide by jumping from the top of a building, and top treasury officials from SBI National housing bank and UCO bank chairman, they all lost their jobs, but most tragic of all thousands of investors lost their hard-earned money and most of them were never able to recover their losses. Once the hero of the stock market actually turned out to be the greatest villain for those investors.
Interestingly two of the biggest Indian traders of our time Rakesh Jhunjhunwala and Radhakishan Damani made a lot of money by shorting the market at the time. They had the vision and understanding that the valuations of this market work really not sustainable so by taking some very astute short trades they made a lot of money.
Harshad Mehta’s story and more recently the Nirav Modi scandal are humble reminders, that the Indian banking system and the stock market are extremely vulnerable to manipulation. It also teaches us that when the valuations of the companies start to get on the crazy side smart investors should start getting cautious instead of getting greedy. This was a story of Harshad Mehta.
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