The new web series Scam 1992 directed by Hansal Mehta puts emphasis on the Indian stock market scam committed by Harshad Mehta in the year 1992 also known as Harshad Mehta Scam. It was one of the largest stock market scam in the history of India . It is considered to be bigger than the scam of Nirav Modi and Vijay Mallaya which had racked the Indian financial system, stock market and the stakeholders. The fraud of around Rs 4000 crore exposed the loopholes of the banking system and changed the rules of the game in the stock market for the future as well.
Harshad Mehta came to Bombay and started his journey as a broker with Rs 40 in his pocket. In 1980’s , he worked for many brokerage firms but considered Prasann Panjivandas as his guru. His passion for trading allowed him to influence the nation in a massive way. During the early 1990’s, Harshad Mehta was known as the Amitabh Bachhan of the Dalal Street by changing the way of trading in the stock market. Over time , he became popular for his wealth and people referred to him as ‘The Big Bull’. He intelligently took the advantage of the loopholes in the system and used government securities and ready forward deals to defraud the financial system of India.
When the liberalization reforms were introduced, the banks were required to main certain threshold of Statutory Liquidity Ratio (SLR) against the government securities. It is the minimum percentage of ratio that banks have to maintain in the form of bonds or other liquid assets. The government securities are the bonds of the government that are issued to raise funds. Government issued bonds to raise capital in the hope to finance the multi-dollar projects to boost the economy. Though, it were mandated for the banks to invest in government bonds, at times, banks were also pressured to maintain the profitability.
In the year 1991 and 1992, banks were barred from participating in the stock market. Therefore, to meet the temporary demand for funds , instead of going through the whole process of purchasing bonds they were allowed to lend and borrow these liquid securities through a system called Ready Forward Deals (RFD). An RFD is a secured short term loan for 15 days , from one bank to another. The collateral here is government bonds.
How he used Ready Forward Deals instruments to defraud the banks which lead to leakage in the stock market-
The RFD is a type of scam that needs broker between the two banks. When one bank needs money and wants to sell securities to enhance the liquidity in the bank. The bank then approaches the dealer or the mediator for the counter party transactions. Harshad Mehta at that time acted as the mediator because of his reputation in the market. Then, he accepted the bank receipt from the bank who is selling the securities and ask for time to find the buyer.
On the other hand , he is asking for the same time frame from the bank who wants to buy the securities and accept the cash. In this way, he ended up having the bank receipts and the sufficient cash to invest in the stock market. As he was dealing with the multiple banks with the same strategy, this cycle continued . Meanwhile, he used the cash and invested that money in the Bombay Stock Exchange to surge the demand for his securities and to generate high returns. When the due time of the seller bank came , he took the money from the other prospective buyer and pay the proceeds to the former bank.
The next loophole he found was that of the Bank Receipts (BR). In the banking system, actual sale and purchase of securities didn’t take place. Instead, the BR were used to confirm the sale of the securities. A bank would not give securities but issue bank receipts in the name of the other bank that is the buyer. These receipts were treated as securities buy the buyer bank. In this way, he took forged bank receipts from the banks and put the money in the market to artificially inflate the market. Although, banks were not allowed to issue the BR’s in the name of the broker but Mehta was trusted broker and lured the banks to repay their amount at higher interest rates that enticed them to issue receipts in his name.
Impact of the Harshad mehta scam –
The artificial pumping of shares soared the prices and the index value of the BSE that turns the market in the bullish phase. People started blindly following the Mehta and start buying the high priced shares. This ultimately lead to the increase in prices of the securities which are in high demand. Sensex touched 4500 points in no time. When the scam came into light, people start loosing faith and started withdrawing the money from the market that pushed the market into the bearish phase. The immediate effect was the fall in the share prices and the market index. Lakhs of people lost their millions of hard-earned money in this scam. The index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalization.
As we all know, the market is driven by the emotions of the investors. This impacted the majority of share prices to fall at that time. The scam caused the entire stock market of India to collapse. Hence, it raised many questions on the government officials during the collusion the Harshad Mehta. Because in one of his interview, Mehta has given a statement of indulging of many high ranked bank officials in his scam. The government realized that the fundamental problem with the financial structure of the stock markets was the lack of computerized systems which impacted the whole stock market.
Changes in the stock market after 1992 –
The Harshad Mehta scam saw the Indian Market collapse completely as the stock prices dropped by almost 40% wiping out market value by ₹1,00,000 Crores. The Indian Financial system saw a complete restructuring of the fundamental systems of the banks and the stock market. The first major structural change in the financial sector was the formation of the National Stock Exchange (NSE) and the development of the CII Code for Corporate Governance. Post 1992, a new regulatory board known as the Securities and Exchange Board of India was formed to monitor the National Stock Exchange and the National Securities Depository.
There were structural changes in the equity market. The paper based trading was transformed into the online trading platform in 1984 by the NSE. Now, the capital markets open and close at the same time nationally and was functioned by satellites. The introduction of online trading buying changed the dynamics of buying and selling in the stock market. The RBI was given more power and their scope in the financial markets increased. The entire stock system restructured to prevent any other scams.
This scam came to light by the journalist Sucheta Dalal who wrote a column about the fraud in the Times of India in 1992. After this , Mehta was investigated and taken into judicial custody in the Thane Prison. At the age of 47 he passed away because of cardial attack in 2001. Some believed he was murdered by an underworld. However, his death remains a mystery because no further investigation was done.
Even after the death of Harshad Mehta, his family had to visit the court because of the pending cases frequently. In one of the cases, his wife, Jyoti Mehta, claimed Rs. 6 crores from the Federal Bank and a stockbroker, Kishore Janani, owed by her husband. This judgment was held in her favour. The court also ordered the broker to pay the principal with an 18% interested until the whole amount is cleared. This was calculated to be approximately Rs—524 crores, which were used to pay the debtors of Harshad Mehta.
By Pooja Arora October 21, 2020
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