When we hear the name ‘Harshad Mehta’ one word obviously comes to our brain and it is ‘scam‘. Let’s see what is Harshad Mehta scam and how did Harshad Mehta do scam in indian stock market and why it is considered as one of the biggest frauds in stock market in india?
Harshad Mehta completed his B.Com degree from Lala Rajpat Rai college. He did job in different companies for next few years after his degree. In this time period his interest gradually grew in stock market. So he resigned his job and joined B.Ambalal. After he became the stock broker of J.L.Shah and Nandalal sheth. In 1984 Harshad Mehta and his brother established ‘Grow More Research & Asset Management’ company. Then he started the broking business as a broker of BSE.
Harshad used the RF or Ready Forward method in this scam. Basically to cover the expenses sometimes goverment issue securities that are called goverment securities such as goverment bond. With the help of this bonds or securities goverment collects money from investors. In return of goverment gives a fixed return to all investors. And it is compulsory for all banks to invest minimum certain amount in this securities. When any bank needs money the bank gives the security(bond) to another bank and takes a short term loan from the another bank. After the contract time period the bank takes the goverment bond from the another bank paying the capital with fixed contract interest. In simple words when we need money we give the jewels,gold etc to the jeweler and takes money from the jeweler. After the contract time period we take back the jewels after giving the contract money with intetest. In this same way Ready Forward deal allows to use itself for taking a loan from another bank. In short for banks Ready Forward or RF deal is a short term loan instrument that banks use for short term loans. In ready forward deal broker works as a mediator between banks. The main work of brokers is to find the buyer for those banks which want to sell the goverment bond and to find the seller for those banks that wants to buy the goverment securities or bonds.
Harshad Mehta was a broker and he works as a mediator between banks. There was some loopholes in ready forward deal. With the help of those loopholes anyone can make money illegally. Harshad knew about the loopholes. He used the loopholes for himself illegally. Let’s think there was four bank(A,B,C,D). When bank ‘A’ needed money the bank wanted to sell their securities. Harshad worked as a mediator(broker) between the banks. Harshad took the securities and sometime to find the buyer from the bank ‘A’. And think then bank ‘B’ wanted to buy bond and bank ‘B’ found Harshad who was broker. Harshad took money for the securities in advance and took sometime to find the seller. In this way Harshad kept the money from buyer and the bond from seller to himself. According to RBI or Reserve Bank of India guidelines any bank can not issue the cheque directly to the broker’s name for the goverment bonds. It is mandatory for the seller bank to issue the cheque in the name of the buyer bank. But in this case seller bank issued the cheque to Harshad Mehta not to the buyer bank. Most of the banks did not know about the other banks with whom the bank did transactions. Because the banks deal with Harshad Mehta directly. So Harshad used to say the buyer bank to issue the cheque in his name. Harshad worked as a pretty good broker for many years and on this time he had a good position and name in the stock market. But he misused the trust of banks and investors. He manipulated the price of stocks using the money which he got to buy securities from the bank. After somedays when the bank ‘A’wanted the money for the securities that bank ‘A’ gave to Harsad to sell then harsad used to find out another bank that wanted to buy the securities. Suppose bank ‘C’ wanted to buy the securities. So harshad went to bank ‘C’ he took the money for the securities in advance and also took sometime. Harshad gave the money to bank ‘A’. And to fulfill the deal with bank ‘B’,’C’ harshad contract with another banks. When these banks wanted money or securities harshad used to deal with another banks. In this way harshad was a mediator or broker between banks and deal with banks in this way that he had a huge amount always. Harshad Mehta used the RF deals as a chain system. For this harshad he used to have always a good amount.
You see obviously around us such people who do the same thing. They borrow money from someone. After somedays when he wants his money back they find out another people and borrow money from them. With the help of this money he pays the first other one and the chain system is going on. Harshad Mehta used this chain system in his fraud. A good amount was always left in his hand and he used to manipulate the stock’s price using this money. Till now we see how the banks sell the goverment securities for short term loan. When any bank sold the goverment securities the bank did not give actual securities. In return of bank gave BR or bank recipt to buyer bank. BR confirmed that securities was sold and the seller bank got the moneey for securities. When harshad needed money to manipulate stock market or to increase the price of particular stocks he went ahead a step more. Harshad crossed his all limits on this time and with the help of some bank he prepared fake bank recipt or br. He started to use this fake bank recipt. When any bank wanted to buy the goverment securities harshad gave the fake bank recipt. And bank pay harshad as the bank thought that the recipt was real and they bought the securities. But it was not real. Harshad used the money to manipulate the stock market. He reached the price of some stocks in high level. Harshad increased the share price of ACC from 200 to 9000 rupees in few months. Harshad invested in stock market heavily using the money which he got from some banks. For this investors were investing more in stock market and boosting up the stock market.
When stock’s price reached the peak harshad sold his stake of this stock and earned huge money from it. He paid the bank and took back his fake bank recipt. And this incident was continuing. This incident was continuing good untill then the stock’s price was growing. When recession came to indian stock market the stock’s price was reducing highly and harshad lost heavily in stock market. For thus harshad could not pay banks. On 23th april,1992 Sucheta Dalal published a post in TOI or Times of India about harshad mehta’s scam and exposed his fraud. As a result bank came to know the bank recipt was not real and it had no value and in return of harshad took crore rupees from the bank. Banking system was damaged by 3000-4000 crore rupees and it was a very huge amount on this time. When the scam was exposed stock market crushed badly. Many investors were affected financially. The chairman of Vijaya Bank who issued the cheque in the name ‘Harshad Mehta’ sucided after getting exposed the scam. Banks forced harshad to give back their money. But for recession and market crush harshad lost huge money. And for this harshad could not give back money to banks. Before expose anyone had no idea about the harshad’s scam and technique.
On 9th November,1992 CBI arrested Harshad Mehta. Harshad was complained and charged 600 civil action suits and 70 criminal cases. Stock market regulator,SEBI banned harshad to trade in stock market for lifetime. Harshad was sentenced in Thane jail. Suddenly chest pain was arrived and he was admitted in Thane hospital. On 31th Decemeber,2001 Harshad fought for life in hospital. Around 12:30 am he took his last breathe. When he was dead about 27 cases were pending against him. The lifestyle of harshad was the lifestyle of a bollywood celebrity. In many news he was addressed the Amitabh Bacchan of stock market. Harshad had a sea facing bungalow with a mini swimming pull and mini golf court in Mumbai. He had many branded cars that could not afford easily rich businessman of that time. Harshad was one of the biggest tax payer of india after paying 26 crore rupees tax in advance. Harshad Mehta was known as ‘Big Bull’ because it was said the bull run of 1991 was started by him. Ketan parekh who joined as a trainee to Harshad Mehta did also scam.
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