The Harshad Mehta scam – Rs 4000 crores

Harshad Mehta Car | Omnibulls

The story of Harshad Mehta perfectly fits a Bollywood movie. Even Bollywood knew it.  Consequently ‘Gafla’ a movie released in 2006 was loosely based on him. As if one movie was not enough, Abhishek Bachchan is going to portray Harshad in a biographical financial crime drama film this year. Harshad was born in a lower-middle-class Gujarati family in 1954. After completing his schooling in Raipur, he pursued B.Com in Mumbai. After which he did odd jobs from selling hosiery to sorting diamonds to even a salesperson for several years.

Finally, his life changed when he learned about the stock markets. Thereafter he joined a brokerage firm as a sub-broker in 1981. As he gained some experience he opened his own company “Grow More Research and Asset Management” where he became a broker and asset manager.

 By 1990 Mr. Mehta had risen from rag to riches. He owned a 12,000 sq. ft. penthouse, miniature golf course, and a fleet of luxury cars. Harshad had the touch of Midas, everything he touched became gold as thousands of innocent investors followed his lead. People termed him as the “Amitabh Bachchan of the stock market”, “The Big Bull”. Unfortunately for Harshad, this lasted only till the 23rd of April 1992. Until Sucheta Dalal a journalist exposed his illicit methods.

What was the scam?

The mechanism of the scam was based on- The ready forward deal and the Bank receipts. The ready forward deals were secured short-term loans from one bank to another. The bank lends against government securities just as a pawnbroker lends against jewelry. Likewise, the borrowing bank 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. Usually, the borrowing bank did not sell government securities. They just issued a receipt called “Bank Receipt” which confirmed the sale of securities to the lending bank. Thus the lending bank upon shown the bank receipt would transfer the money to the borrowing bank.

A broker acted on behalf of the banks. The broker neither handled cash or the securities. But only took a commission for completing the deal. But not in this case. Harshad issued fake bank receipts (which had no government securities) by exerting his influence on two small banks. After that, he used those receipts to borrow money from the banks. Unlike a normal broker who just acted as middlemen for the banks. Harshad would transfer the money into his account first. After that to the borrowing bank’s account. The banks would trust Mehta as had a certain reputation.

This is where it went wrong. Harshad used the money from the fake bank receipts to invest in the stock markets. He would earn handsome returns and return the money to the banks in a few days. When the scam came out. The banks learned that they had lent money on fake BRs. Even SBI had lent him 500 crores on the fake BRs.  The total amount drawn from the fake bank receipts was 4000 crores.

Harshad Mehta arrest | Omnibulls

It came to light that Harshad had pumped the price of ACC (also 90 other stocks) from 200rs to 10,000rs a whopping 4400% increase. The Sensex rose from 2500 to 4500 in just 3 months of Jan-April 1992. The Sensex fell 2000 points after the scam got unearthed. Due to which thousands of innocent investors lost the money. The CBI charged him with 72 criminal cases on account of bribery, cheating, forgery, criminal conspiracy and falsification of accounts. Moreover, 600 separate cases were filed from banks and investors to whom he owed money. Thus Mehta was jailed. When on bail he even made a comeback as an advisor and news column writer. By 1997 all the evidence was gathered and a special court approved 34 of 72 charges against him and he was sent to jail again. Harshad died due to heart ailment in 2001.

Whatever may have happened, but Harshad was the name that invited dreams. When we walked in, the money walked in. He lived a lifestyle that only a few have ever lived…

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