How Harshad Mehta rigged the Stock market

Last updated on April 26th, 2017

  Details of Harshad Mehta Scam

Assuming prevailing FD rates as 9%, imagine you succeeded in convincing your uncle to lend you 1 Crore rupees at rate of 10% per annum. Now, assume you know some source or method from where you can easily make 18% per annum..

All you have to do is to deploy the amount for one year and earn 18 Lakhs, return 10 Lakhs to your uncle and pocket the rest 8 Lakhs. Your uncle is happy, you are happy, win-win situation, isnt’ it? This is the core essence of Harshad Mehta scam which rocked the Indian Stock Markets during 90’s. Though it was called Stock Market scam, it was the banking system which was exploited and milked..

In 90’s, it was mandatory for the banks to invest a minimum amount in government bonds.The daily amount could be less than this threshold but weekly average should be maintained above this limit. You can equate this to quarterly minimum balance in our savings bank account of present times.

The banks whose average was less that the threshold were desperate to bring it up by buying the bonds from another bank whose average is already above the limit. The seller bank usually offered the bonds at slightly higher rates . But all these transaction were not one to one but used to happen through brokers.

  Enter Mr. Broker

Now this is where Mehta made grand entry to the scene. By this time Mehta was already established himself as top broker and had won trust of top bankers (as you are to your uncle!).

Now Mehta would approach buyer bank on Monday and promise to get them the bonds by Tuesday on condition that the bank issues the cheque in his name instead of seller bank. And then he goes to seller bank and request for immediate release of bonds but promise them to pay slightly higher amount by Friday which they readily agreed.  (like 1% extra that you paid to your uncle!)

Harshad mehta scam -Courtesy Slideshare.net

Harshad mehta scam -Courtesy Slideshare.net

He handled multiple transactions like this and rotated them so beautifully that he always had some money with him all the time. Then he used this money to manipulate the value of many shares like ACC, Sterile, Videocon and so on and made huge money out of this after settling the due amount to the buyer bank. He took the price of ACC from 200 to 9000.Thats an increase of 4400% .The market went up like crazy and the bulls were on a rampage. Everyone from industrialist to road side tea vendor were discussing stocks at that time..

You can imagine the magnitude of the scam and the level to which Sensex spiked from the chart below. 

Harshad Mehta Scam sensex behaviour

Image Courtesy: tflguide.com

.

  Harshad Mehta lifestyle

Mehta lived flashy lifestyle, bought sea facing penthouse at worli spanning 15,000 sq feet with golf patch and swimming pool, lifestyle enjoyed by very few during those times.

He also owned fleet of cars including his favorite Toyota Lexus, a Toyota Corolla, a Toyota Corsa, a Toyota Starlet, a Toyota Sera, a blue Toyota, two Honda Accords, a Mazda Miata, two Maruti 1000s and a Maruti van..

Harshad Mehta lexus cars

Harshad Mehta with Lexus

  Beginning of the End

It went on for long, but on April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, exposed the dubious ways of Harshad Mehta. This is when banks woke up to the bitter truth and realized that they were taken for a ride and there is no real money and everything was created out of thin air. The stock market collapsed. Lakhs of innocent investors went bankrupt.

It is said that the chairman of Vijaya Bank committed suicide by jumping from the top of bank’s office since he had illegally issued the cheques in the name of Mehta. Ms.Sucheta Dalal was later awarded padmashri for exposing the scam.

Harshad Mehta was arrested on 9th November 1992 and was under criminal custody at Thane prison until his death on 31st December 2001.

  How Harshad Mehta Scam impacted future of Indian Markets?

Harshad Mehta scam has done many good things to Indian stock markets in the later years. As a knee jerk reaction government established Security Exchange Board of India (SEBI) to regulate the stock exchanges. NSE was setup which introduced much needed transparency to the system.

*Read: What is a demat Account? and How to open it?

  Sharing is definitely caring!

Today everything is at a click of mouse. Interaction of the traders is very minimal with brokers. But what intrigues us is that how a single man cleverly exploited the loopholes in banking systems. It is counted in one of the top intelligent fraud of independent India.


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