Stock market scam by Harshad

Mehta in 1992
Introduction
As soon as we hear the name of Harshad Mehta, the first thing
that strikes our mind is SCAM.
Harshad Mehta scam or 1992 scam is one of the biggest scam in
the history of India stock market.
Harshad Mehta was an Indian stockbroker, well known for his
wealth and for having been charged with numerous financial
crimes that took place in the Securities Scam of 1992. There were
nearly 27 criminal charges filed against him.
Harshad Mehta born in 1954 grew up in Raipur and worked in the
New India Assurance Company. But in the year 1980 he quit his
job only to join the stockbroker P. Ambalal who was affiliated to
the BSE. Later in 1981 Mehta worked as a sub broker for
stockbrokers J.L. Shah and Nandalal Sheth. Once he gained
enough experience Mehta along with his brother Sudhir came up
with a new project in the name of Grow More Research and Asset
Management Company Limited. Later Mehta's company seeked
for the financial support of J.L. Shah and Nandalal Sheth when BSE
offered for a sale of broker's card. Another name which was in the
conversation of Harshad Mehta scam was Nimesh Shah who
played a very safe game and however he is supposed to be a
heavy player in the Indian stock market.
HARSHAD MEHTA AND STOCK EXCHANGE
Soon Harshad Mehta started buying shares in heavy numbers and
soon his name became very well known in the Indian Stock
market. The problem actually started when Mehta started buying
the shares of Associated Cement Company (ACC) and increased
the price of the shares from Rs.200 to Rs. 9000 (approx.). which
according to the stock markets norm was a rise of about nearly
4400% rise in its price.
Harshad Mehta was able to convince the reason behind the high
level bidding as for the replacement cost theory which defines
that the old companies can be marked or valued only based on
the amount of money which is required to produce another
similar company in par. This is called as the replacement cost
theory.
DEATILED REPORT
As he was doing this he also apart from the ACC shares bought
various other industrial shares at a heavy premium which led the
sensex to rise subsequently. However this strategy of Harshad
Mehta didn't hold good for a long time and was soon exposed so
the banks started to demand their money back.
This obviously led the sensex to dive back at the same rate at
which it reached its peak. As a result of this there were lot charge
sheets filed against him of nearly 72 criminal offences and 600
civil actions. Thus the scandal of Harshad Mehta came into public.
Harshad Mehta was declared to be guilty of the criminal offence
by the verdict of the Bombay High Court and Supreme Court of
India for his part in a financial scandal valued at INR 4999 crores
which took place in the Bombay Stock Exchange (BSE).This in a
way helped the Bombay Stock Exchange and SEBI to bring about
new rules which helped to cover the ambiguity or the inadequacy
in the law.
INVESTIGATION
Scam got its shape by the ready forward (RF) deal. The RF is a
fortified loan given from one bank to another for a very short
period of time. In the normal case the bank lends against
government securities where the bank which is borrowing gives
away the securities to the lending bank at a very higher rate and
get back the securities at the end loan period. In a ready forward
deal the broker acts as a mediator to bring both the banks
together and they get a commission for it and by no chance they
handle either the cash or the securities. But this was not the
curtain raiser in Mehta's case where his firm used the same RF
deal and channelized money through the banks successfully.
In Mehta's case both the securities and the money was
transferred through the brokers where they acted as an
intermediary who received the securities from the seller and
handed them over to the buyer and he received the check from
the buyer and subsequently made the payment to the seller.
UNDERTAKING THE TRANSACTIONS ON BEHALF OF A BANK
In this case the Mehta firm was very clever enough even in not
enabling the buyer and the seller to know each other's identity.
This was beautifully handled by the brokers as they were already
the market makers and they were behaving to be undertaking the
transactions on behalf of a bank to sustain a semblance of validity.
Whereas Mehta used another tool which is the bank receipt (BR)
which was given by the seller to the buyer establishing the sale of
securities and a solemn promise to give the securities to the
buyer. Thus in due course the securities are held in the seller's
trust by the buyer.
Harshad Mehta used this method where he located two banks
namely the Bank of Karad (BOK), Mumbai and the Metropolitan
Co-operative Bank (MCB) who were ready to give counterfeit bank
receipts without any government securities. Using these fake bank
receipts Mehta was able to borrow money from other banks
thinking that they were lending it against government securities.
The shares were then sold for significant profits and the BR retired
when it was time to return the money to the bank.
SITUATION CAUSING TO FUNCTION A HUGE INCREASE IN THE
PRICES OF STOCK
Harshad Mehta used this technique of exercising unscrupulous
control over the situation causing to function a huge increase in
the prices of stock. However many banks soon realized that they
were holding fake BR's which was of no use at all but however by
then Mehta was smart enough to scam the banks an amount of
nearly Rs 4,000 crore.
Once this scam was brought into light and taken to the
Parliament, Harshad Mehta was immediately taken to prison. But
however when this scam was exposed the chairman of Vijaya
Bank committed suicide feeling culpable of having given lot of
cheques to Mehta thereby holding responsible to the public
money. Thus Mehta was charged with 72 criminal offences and
more than 600 civil action suits against him and was arrested on
these grounds on November 9th in 1992.
His brothers were also arrested along with Mehta. The arrest
warrant was issued based on the grounds of misappropriating
more than 2.8 million shares (2.8 million) of about 90 companies,
including ACC and Hindalco, through forged share transfer forms.
Conclusion
The Harshad Mehta scam was discovered when attention was
paid to the money missing from the government securities
market. As the scam broke loose, the valuations in the Bombay
Stock Exchange collapsed.
People lost their life savings in the scam. Some investors were
heavily leveraged and as a result committed suicide as a result of
the fallout.
To this day, the Harshad Mehta scam brings up memories of
unprecedented boom and bust which was never witnessed earlier
by the Bombay Stock Exchange