Whenever the name of Harshad Mehta appears, the first thing that strikes in the mind is the Harshad Mehta Scam. So now, let us find out what exactly was Harshad Mehta Scam and how did he perfomed the India's biggest scam. Harshad completed his B.Com from Lala Lajpat Rai College, Mumbai and for a few years, he worked at different companies. During this time, Harshad Mehta developed an interest in the stock market. He left his job and joined the broker-B.Ambalal He later became a Broker of J S Shah and Nand Lal Sheth He started a company with his brother by the name of Grow More Research & Asset Management in 1984. He became the Broker of BSE and started his own Career
Harshad Mehta used RF .i.e Ready Forward Deal in his scam Basically, the government issue securities in a few of its projects to cover their expenses. These are known as Government Securities For example, Governemnt Bonds through which Govt.
Raise funds to cover its expenses. In return, Govt provides interests to all of its investors. and it was compulsory for all banks to invest certain amount in these securities Whenever a bank needed funds, it used to sell its govt securities to the other bank. and it used to avail loans for the short term
and after a few days, the bank would have its govt securities back after returing the loan at the agreed interest rate. In simpler terms, it's like going to the jeweller and borrowing money for your jewellery and then, after a few days, you get your jewellery back from the jeweller after returning the money with interest Similarly, in Ready Forward Deal, one bank used to provide short term loan to the other bank In short, Ready Forward Deal was a kind of short-term loan instrument for banks. In Ready Forward Deal, brokers used to work as a Mediator for the banks Their job was to find buyers for those who want to buy and find sellers for those who want to sell Harshad Mehta was also a broker and hence, worked as a Mediator for the banks There were some loopholes in the RF deal, one could have made money with the help of these.
Harshad was very much aware of these loopholes, and he started using them for his personal benefit Just assume there are 4 banks -A B C & D ..Harshad used to look for buyers to sell the securities of Bank A Then he used to go to Bank B, take the money of the securities and ask for some time to get the seller He used to keep the security given from Bank A, as well as the cash from Bank B According to the Guidelines issued by RBI, no bank was supposed to issue a direct cheque on the name of the broker However, in this case, the banks were issuing cheques on the name of the broker directly .i.e On Harshad Mehta's name Surprisingly most of the banks weren't even aware that they were making transactions with which bank because banks directlt dealt with Hardhad Mehta This is the reason why Harshad used to ask Banks to issue cheques on his name As a broker, Harshad has been doing quite well in the stock market for some years.
Besides, Harshad was quite popular in the stock market those days But Harshad took disadvantage of this opportunity He used this money received from the bank to manipulate the Stock Market by raising the stocks' prices.
When Bank A used to ask for the securities, then Harshad used to look for another bank seeking to buy govt securities. Supposedly if Bank C was also looking for securities then Harshad used to go to Bank C and ask them for money He then asked for some time to return the money. In the meanwhile, he returned the same money to the bank A. To complete the deals of Bank B & C, he used to adopt the same deals When these Banks used to ask for their money, he used to deal with other banks Harshad used the RF Deal as a chain system which helped him having loads of money in his hands So, we observed how, in a ready forward deal,a bank used to sell govt securities to the other for short term When a Bank used to sell Bank securities to other banks for the short term, then the bank used to give them a receipt instead of the actual Bank securities This Bank Receipt clearly meant that Govt security has been sold out and the bank has got its money Harshed took one more step in his scam when he needed more money He crossed all the limits and started making fake bank receipts with the help of a few banks.
Banks which wanted to buy Govt securities, Harshad used to give them the fake receipts Banks used to hand over the money to Harshad thinking the bank receipts were original Harshad used this money to manipulate more stocks and took them to a higher level Harshad managed to raise the ACC stock from Rs. 200 to 9000 After seeing the sudden growth in the share market, a lot of people started investing in stocks This led to the rise in the price of the stocks in the share market When stock markets used to go up, Harshad used to sell his stocks, return the banks' fund, and get back its fake receipt This went on till the price of the shares were rising, suddenly the prices of the shares started falling Harshad started facing losses and he was not able to return the money of the banks Then on 23rd April 1992, Journalist Sucheta Dalal exposed the scam of Harshad Mehta in TOI's article This is how the banks came to know that the receipts given by Harshad were fake and they hold no value.
The Banking system suffered a loss of around 300-400 crore rupees When this scam was exposed, the stock market was crashed badly and a lot of Investors suffered huge losses The Chairman of Vijaya Bank committed suicide right after the scam was exposed Banks started asking Harshad for their money, but Harshad was not able to return the money due to the Market Crash Before the scam was exposed, No one had an idea of Harshad’s technique or motive CBI arrested Harshad Mehta on 9 Nov 1992. He was charged with 600 Civil action suits & 70 criminal cases.
forever SEBI had banned him from investing in the Stock Market for ever He was kept in Thane Jail and suddenly he felt pain in the chest and he breathed his last around 12.30 am When Harshad died, there were still 27 cases pending against him His lifestyle was like a Bollywood star, some Magazines even called him the Amitabh Bachchan of the Stock Market He owned a Sea facing bungalow in Mumbai which had a Golf Course & Swimming pool.
He owned many luxury cars as well that were not easy affordable even by the rich people those days. He was the biggest Tax-Payer of that time as he paid the tax of around 26 crores. People also called him the Big Bull of the Stock Market. A lot of people known him as the Big Bull as it is believed that 1991 Bull Run was started by him only Ketan Parekh had joined his firm as a trainee only, he was also involved in many scams. In the next lecture, we will know about the Ketan Parekh scam.