Flash-back; Harshad Mehta Scam “detailed explanation”October 28, 2018
People in India are very keen about news about doubling their money or earn in short-term. Before going into details we are ready to act on the news because we believe that if somebody is delivering something to us through media it must be correct because of the news channels which never sell wrong things. Peoples are so restless to make an investment for a longer time to have better returns.
This typical human psychology gave Harshad Mehta an advantage to double his money or to earn in short-term. In his run, he also made others rich and become a trustable person for all.
Harshad Mehta belonged to a poor family. His father was a Peon. But his dream was big. He always dreamt of being doubled what he is off now. And these dreams take him to Mumbai. With his strong determination and devotion to his work, he became the Most Powerful and Influenced broker at that time. He was named as Big Bull or Mr. Bull by the people. But nobody knows the truth behind his success and how he was leading other people with him.
The time was started when Govt. Bond was a leading investment instrument to double your money. Govt always issues bond or securities to lend money from people or farms for ongoing govt projects in the country for which govt. pays interests to the people.
During 90s govt. ordered banks for minimum investment in Govt. Securities for which a bank can default his daily investment but can’t default the weekly and the weekly investment should meet the minimum investment for the month or a year. For this those banks that failed to pay the average installment to the govt bonds, buy others banks bonds (The banks that are paying for the govt. securities) to meet the average investment. In this process, the seller banks earn more interest from the buyer banks.
Here, Harshad Mehta saw the loopholes in the banks and acted accordingly to earn money. To understand this let’s take an example; let’s say you have an uncle who has 1 crore rupee but don’t know where to invest or handle his money. Now you have convinced him of getting a 9% return of his investment which is more than the bank FD e.i, 6-7% right now. Now let’s say you know a source where you can earn about 18% from an investment. You will put your uncle’s money into that source and after 1 year you will earn 18 lakhs as an interest. And after paying your uncle 9% you will have 9 lakhs in your hand. Everyone one is happy, right? This is how Harshad Mehta took the bank’s money to stock market and made a bull run which was a pure example of a pump and dump of a stock.
Now let’s understand how he had taken the banks money to put it into the stock market. To understand this let’s take an example. Let’s say we have four banks namely “W”, “X”, “Y” and “Z”. Now let’s say the bank “W” wants to buy some bonds from a bank which was maintaining the minimum govt. bonds buying payments and the bank “X” was ready to sell their bonds in higher interests. In this scenario, Harshad Mehta comes in and made a deal between the two banks. He asked the bank “X” for a receipt of their bonds to sell to any bank and also the money and receipt from the bank “W” to buy bonds from any bank. In this case, he earns commision from both the parties and also the money to buy the bonds. RBI had some rules to issue payments or bonds directly to the buyer and seller. But Harshad Mehta, however, convinced the two parties to issue everything on his name. Now, he puts both parties transaction on hold asking for some time to search for a buyer and a seller. And during this holding period, he invested the whole money into the stock market to earn more than he invested. And later on, he pays both parties. He was doing pretty good in this. He involved the other banks namely “Y” and “Z” and asked for more time for the transaction. Thus he bought more time for making money in the stock market.
As already said Harshad Mehta was a Most Powerful and influenced broker at that time. People followed him while investing in the stock market. Mr. Mehta also managed to make fake receipts for bonds purchasing and selling and this let the stock market getting poured by billions of money and the Bull Run started.
He soars the shares of ACC, STERILE, VIDEOCON (and a few) to skyrocket and sell at the high and made lots of billions. He soars the ACC shares from 200rs to 9000rs within a very short time. He was the one to have an Ultraluxurious lifestyle at that time which only a few Indians can maintain but not like Harshad Mehta. He had a sea facing house of about 15k sq ft where he had his private Golf course, swimming pool, and others. His collection of luxurious cars were just a dream for the rich people at that time.
This was all about the Bull phase in 1991. Somehow a correction phase came into 1992. Where the Indian stock market started to show some correction from its 52 weeks high (as a nature of the stock market) until April 23rd, 1992 when a Journalist from TOI (Times of India) named Sucheta Dalal revealed the scams of Harshad Mehta. Then what, the Stock Market got collapsed. The banks realized that they have been looted so far and lakhs of investors lose their money and got bankrupted. Chairman of Vijaya Bank Mr. B.B Shetty had committed suicide due to issuing illegal cheques to Harshad Mehta. Later on the Journalist, Sucheta Dalal awarded with Padmashree to reveal the scams by Mr. Mehta.
On 9th Nov’1992, Harshad Mehta got arrested by the CBI and put him into the Thane Jail. He was accused of 600 Civil Action Suits and 70 Criminal cases of which 27 cases were still pending even after his death.
SEBI (established on 12thApril 1992) has restricted Harshad Mehta from the stock market for his rest of life and established NSE on the same year by the govt. to make transparency in the stock market.