Harshad Mehta

Harshad Mehta was an Indian stockbroker, well known for his

wealth and for having been charged with numerous financial
crimes that took place in the 1992 securities scam.

Harshad Shantilal Mehta was born on 29 July 1954, at

Paneli Moti, Rajkot district, in a Gujarati Jain family. His early
childhood was spent in Kandivali, Bombay,where his father was a
small-time businessman. Later, the family moved to Raipur's
Modhapara, Madhya Pradesh where Mehta studied in Holy Cross
Byron Bazaar Higher Secondary School. A cricket enthusiast,
Mehta did not show any special promise in school and came to
Bombay after his schooling for studies and to find work. Mehta
completed his B.Com in 1976 from Lajpatrai college Bombay and
worked a number of odd jobs for the next eight years.

Mehta tried his hand at various jobs, often related

to sales, including selling hosiery, cement, and sorting diamonds.
Mehta started his career as a sales person in the Bombay office of
New India Assurance Company Limited (NIACL). During this
time, he got interested in the sabji (vegetable) market and after a
few days, resigned and joined a brokerage firm. In the early
1990s, he moved to a lower level clerical job at the brokerage firm
Harjivandas Nemidas Securities where he worked a jobber for the
broker Prasann Pranjivandas Broker who he considered his
"Guru". Over a period of ten years, beginning 1980, he served in
positions of increasing responsibility at a series of brokerage
firms. By 1990, he had risen to a position of prominence in the
Indian securities industry, with the media touting him as "The
sunny deol of the Stock market".

In 1984, Mehta was able to become a member of the

Bombay Stock Exchange as a broker and established his own
firm called GrowMore Research and Asset Management, with
the financial assistance of associates, when the BSE auctioned a

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broker's card. He actively started to trade in 1986. By early 1990,
a number of eminent people began to invest in his firm, and
utilize his services. It was at this time that he began trading
heavily in the shares of Associated Cement Company (ACC). The
price of shares in the cement company eventually rose from Rs.
200 to nearly 9000 due to a massive spate of buying from a set of
brokers including Mehta. Mehta justified this excessive trading in
ACC shares by stating that the stock had been undervalued, and
that the market had simply corrected when it revalued the
company at a price equivalent to the cost of building a similar
enterprise; the so-called "replacement cost theory" that he had
put forward.

Stamp paper scam: Up to the early 90s, Banks in India were

not allowed to invest in the equity markets. However, they were
expected to post profits and to retain a certain ratio (threshold) of
their assets in government fixed interest bonds. Mehta cleverly
squeezed capital out of the banking system to address this
requirement of banks and pumped this money into the share
market. He also promised the banks higher rates of interest,
while asking them to transfer the money into his personal
account, under the guise of buying securities for them from other
banks. At that time, A bank had to go through a broker to buy
securities and forward bonds from other banks. Mehta used this
money temporarily in his account to buy shares, thus hiking up
demand of certain shares (of good established companies like
ACC, Sterlite Industries and Videocon) dramatically, selling them
off, passing on a part of the proceeds to the bank and keeping the
rest for himself. This resulted in stocks like ACC (which was
trading in 1991 for Rs. 200/share) to nearly Rs. 9000 in just 3
months.

Bank receipt scam: In a ready forward deal, securities were

not moved back and forth in actuality. Instead, the borrower, i.e.
the seller of securities, gave the buyer of the securities a BR(Bank
receipt).The BR confirms the sale of securities. It acts as a receipt
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for the money received by the selling bank. It promises to deliver
the securities to the buyer. It also states that in the meantime,
the seller holds the securities in trust of the buyer.

Having figured this out, Mehta needed banks which

could issue fake BRs, or BRs not backed by any government
securities. Two small and little known banks - the Bank of Karad
(BOK) and the Metropolitan Co-operative Bank (MCB) - came in
handy for this purpose.

Once these fake BRs were issued, they were passed

on to other banks and the banks in turn gave money to Mehta,
plainly assuming that they were lending against government
securities when this was not really the case. He took the price of
ACC from Rs. 200 to Rs. 9,000. That was an increase of
4,400%.The stock markets were overheated and the bulls were on
a mad run. Since he had to book profits in the end, the day he
sold was the day when the markets crashed.

Outbreak of 1992 security scam:

The crucial mechanism through which the scam was effected was
the ready forward (RF) deal. The RF is in essence a secured short-
term (typically 15-day) loan from one bank to another. Crudely
put, the bank lends against government securities just as a
pawnbroker lends against jewellery. The borrowing bank actually
sells the securities to the lending bank and buys them back at
the end of the period of the loan, typically at a slightly higher
price.

A typical ready forward deal involved two banks brought

together by a broker in lieu of a commission. The broker handles
neither the cash nor the securities, though that wasn't the case
in the lead-up to the scam. In this settlement process, deliveries
of securities and payments were made through the broker. That
is, the seller handed over the securities to the broker, who passed
them to the buyer, while the buyer gave the cheque to the broker,
who then made the payment to the seller. In this settlement
process, the buyer and the seller might not even know whom they

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had traded with, either being known only to the broker. This the
brokers could manage primarily because by now they had
become market makers and had started trading on their account.
To keep up a semblance of legality, they pretended to be
undertaking the transactions on behalf of a bank.

Having figured out his scheme, Mehta needed banks

which issued fake BRs (Not backed by any government
securities). Two small and little known banks – the Bank of
Karad (BOK) and the Metropolitan Co-operative Bank (MCB) –
came in handy for this purpose. These banks were willing to
issue BRs as and when required, for a fee. Once these fake BRs
were issued, they were passed on to other banks and the banks
in turn gave money to Mehta, assuming that they were lending
against government securities when this was not really the case.
This money was used to drive up the prices of stocks in the stock
market. When time came to return the money, the shares were
sold for a profit and the BR was retired. The money due to the
bank was returned.

This went on as long as the stock prices kept going

up, and no one had a clue about Mehta's operations. Once the
scam was exposed, though, a lot of banks were left holding BRs
which did not have any value – the banking system had been
swindled of a whopping ₹40 billion (US$560 million). He knew
that he would be accused if people came to know about his
involvement in issuing cheques to Mehta.

Exploiting several loopholes in the banking system, Mehta

and his associates siphoned off funds from inter-bank
transactions and bought shares heavily at a premium across
many segments, triggering a rise in the BSE SENSEX. When the
scheme was exposed, banks started demanding their money
back, causing the collapse. He was later charged with 72 criminal
offences, and more than 600 civil action suits were filed against
him.

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He was arrested and banished from the stock market with
investors holding him responsible for causing a loss to various
entities. Mehta and his brothers were arrested by the CBI on 9
November 1992 for allegedly misappropriating more than 2.8
million shares (2.8 million) of about 90 companies, including ACC
and Hindalco, through forged share transfer forms. The total
value of the shares was placed at ₹2.5 billion (US$35 million).

Mehta made a brief comeback as a stock market guru,

giving tips on his own website as well as a weekly newspaper
column. However, in September 1999, Bombay High Court
convicted and sentenced him to five years rigorous imprisonment
and a fine of ₹25,000 (US$350). On 14 January 2003, Supreme
Court of India confirmed High Court's judgement. It was a 2:1
majority judgement. While Justice B.N. Agrawal and Justice Arijit
Pasayat upheld his conviction, Justice M.B. Shah voted to acquit
him.

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