Harshad Mehta

HARSHAD MEHTA SCAM
Company: Not by a company, but by a stockbroker.
Year: 1992, scam is also known as “the Securities Scam 1992”
Harshad Shantilal Mehta was an Indian stockbroker. Mehta's involvement in the 1992 Indian
securities scam made him infamous as a market manipulator. Although, as reported by
the Economic Times, some financial experts believe that Harshad Mehta did not commit any
fraud, he had "simply exploited loop holes in the system". Of the 27 criminal charges brought
against him, he was only convicted of four, before his death (by sudden heart attack) at age
47 in 2001. It was alleged that Mehta engaged in a massive stock manipulation scheme
financed by worthless bank receipts, which his firm brokered for "ready forward"
transactions between banks. Mehta was convicted by the Bombay High Court and
the Supreme Court of India for his part in a financial scandal valued at ₹100
billion (US$1.4 billion) which took place on the Bombay Stock Exchange (BSE). The
scandal exposed the loopholes in the Indian banking system and the Bombay Stock Exchange
(BSE) transaction system, and consequently the SEBI introduced new rules to cover those
loopholes. He was on trial for 9 years, until he died at the end of 2001.
Stamp paper fraud
Up to the early 90's 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 kept the rest for himself. This resulted in stocks like ACC (which was trading in
1991 for ₹200/share) skyrocketing to nearly ₹9,000 in just 3 months.
Bank receipt fraud

Another instrument used in a big way was the bank receipt. In a ready forward deal, securities
were not moved back and forth in reality. Instead, the seller of securities, gave the buyer of
the securities a BR. The BR serves as a receipt from the selling bank, and also promises that
the buyer will receive the securities they have paid for at the end of the term.
Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed
by any government securities.
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 ₹200 to ₹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 securities fraud
On 23 April 1992, journalist Sucheta Dalal exposed illegal methods in a column in The Times
of India. Mehta was dipping illegally into the banking system to finance his buying.
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 was not the
case in the lead-up to the fraud. 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 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.
Mehta used forged BRs to gain unsecured loans, and used several small banks to issue BRs
on demand. 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
fraud 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 (equivalent
to ₹250 billion or US$3.5 billion in 2019). They knew that they would be accused if people
came to know about his involvement in issuing cheques to Mehta. Subsequently, it transpired
that Citibank, brokers like Pallav Sheth and Ajay Kayan, industrialists like Aditya Birla,
Hemendra Kothari, a number of politicians, and the RBI Governor S.Venkitaramanan all had
played a role in allowing or facilitating Mehta's rigging of the share market.

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HARSHAD MEHTA SCAM

Company: Not by a company, but by a stockbroker.

Year: 1992, scam is also known as “the Securities Scam 1992”

Stamp paper fraud

Bank receipt fraud

Outbreak of 1992 securities fraud

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