HARSHAD MEHTA SCAM

By: - Ujjawal Rastogi

The Harshad Mehta Scam, also known as the 1992 Indian Stock Market
Scam, was a significant financial fraud in India that led to a severe stock
market crash and widespread financial losses. Here is a detailed
summary of the scam and its aftermath:
Background
Harshad Mehta, a stockbroker from Mumbai, took advantage of the
growing stock market and exploited loopholes in the banking system
during India's economic liberalization in the late 1980s and early 1990s.
The Scam
Mehta used a technique called the ready forward (RF) deal to manipulate
the interbank lending system. He artificially inflated the prices of certain
stocks, attracting other investors and creating a market bubble. This
manipulation was facilitated by his firm, Grow More Research and Asset
Management, and involved colluding with banks and other brokers.
Bank Funds Scam
Harshad Mehta exploited the banking system by using bank funds to
finance his buying activities in the stock market. He did this by:
1. Misusing Bank Receipts (BRs): Mehta obtained BRs from banks,
which were essentially receipts for government securities. These
BRs were used as collateral to borrow money from other banks,
creating a false impression that the funds were backed by
government securities.
2. Fake BRs: Mehta also obtained fake BRs from banks, which were
not backed by any government securities. He used these fake BRs
to borrow money from other banks, further exacerbating the scam.
3. Manipulating Stock Prices: Mehta used the borrowed funds to
buy shares of certain companies, artificially inflating their prices.
He then sold these shares at the higher prices, making a significant
profit.
Rise and Fall
The stock market experienced an extraordinary rise, with the Bombay
Stock Exchange (BSE) index, known as the Sensex, surging from
around 1,000 points in early 1991 to a peak of 4,467 points on April 23,
1992. However, the scam eventually came to light when journalist
Sucheta Dalal exposed Mehta's fraudulent practices in an article
published in The Times of India. This revelation led to a loss of
confidence among investors and a subsequent crash in the stock market.
Conclusion
The Harshad Mehta Scam of 1992 left a lasting impact on India's
financial landscape. It revealed weaknesses in the system, resulting in
reforms and stricter regulations. The incident serves as a reminder of the
dangers of unchecked market manipulation and the importance of
integrity and transparency in the financial sector.