BIG BULL : Harshad Mehta Scam

BIG BULL : Harshad Mehta Scam

Varun Aggarwal 09/05/2020 4
BIG BULL : Harshad Mehta Scam

Harshad Mehta was born on 29 July, 1954 at Rajkot, Gujarat. 

A cricket enthusiast, Mehta did not show any special promise in school and came to Bombay after his schooling for studies and to find work. Mehta completed his B.Com in 1976 from Lajpatrai college Bombay and worked a number of odd jobs for the next eight year.

He worked at companies like New India Assurance, P Ambalal, PD Shukla, JL Shah, and Nandala Seth.

In 1984, he along with his brother started his own company named “Grow More Research and Asset Management”.

He did lobbying of shares.

To understand it better let’s say he started creating artificial demand of share in the market, manipulating the stock to increase the prices tremendously.

This is done by using tipping strategy in the market.

Let’s understand better with an example.

Harshad Mehta circulated a message with help of different agencies that stock XYZ is a buy at the price of Rs. 1000 and the target price is Rs. 2200.

We would normally ignore such messages knowing that it is fake. But the Mehta used to invest huge funds into this XYZ Company and try creating a artificial demand of this particular stock.

As per normal economics when demand increases and supply remains constant, automatically the prices start increasing. The prices start increasing from Rs. 1000 to Rs. 1500, 1700.

Now it is obvious we will try to get into this stock seeing the increase in the price.

People would invest at a level where Mehta is about to withdraw the funds by selling the shares.

Let’s say he withdrew at a rate of Rs. 2000, people would invest now thinking it will reach 2200. As Mehta sells a large number of shares directly impacting the prices and the price falls tremendously.

This way he earned a huge amount of money.

From the example itself it is clear he made investment at Rs.1000 and sold that at Rs. 2000, simply making it 2 times of the investment.

He invested in different companies and to name some – Apollo tyres, Reliance, Tata Iron and Steel, BPL, Videocon, ACC.

When he invested in ACC the share price went from Rs. 200 to Rs. 9000

If we simply calculate it is 4500% return. Just imagine the amount of money he made doing this.

He created a trustworthy image in the market and was also known as Amitabh Bachchan of stock market.

He was one of the biggest Indian Tax Payer.

The instruments that he used to execute all this were:

1)  Ready Forward Deal (RFD)

2)  Bank Receipts (BR)

Let’s first understand these terms:

RFD – It is a secured short term loan which is given from one bank to another.

BR – It refers to a receipt issued by the lending bank to the borrowing bank on receiving the securities and lending money in exchange of that.

BIG BULL : Harshad Mehta Scam

Harshad Mehta was the broker in between the different banks.

Bank B required funds so it decided to sell government securities to the broker.

Now the broker went to Bank A and received funds in his name and promising to get the securities.

He kept both the securities and the money with him too and presented a fake Bank Receipt to Bank B promising to pay.

Same way he approached Bank C and Bank D.

Issued fake bank receipts when needed. 

This way he kept on expanding the ready forward deal chain series.

The Bank Receipts confirms the sale of securities and states that the securities are held by the seller in trust of the buyer. It also acts as a receipt for the received funds by the selling bank.

The Bank of Karad (BOK) and Mumbai Mercantile Co-operative bank (MCB) had helped him issuing fake receipts for the same.

This kept on expanding and fake receipts were issued on a very large scale.

As he was one of the highest tax payer so he had manipulating power over BSE as well.

As per the RBI norms the lending bank should always issue the funds in the name of borrower bank but it didn’t happen. The funds were issued in the name of Harshad Mehta.

BIG BULL : Harshad Mehta Scam

This kept on going until 23rd April, 1993 when a journalist Sucheta Dalal went into deep research about the same and exposed the Mehta scam. She did a background study about the tremendous increase in share price in the market and wrote a column in TOI.

Her article proved “pen is mightier than sword”.

BIG BULL : Harshad Mehta Scam
  • Sensex fall from 4500 to 2500 loosing Rs. 1,00,000 crore in market capitalization (O/s shares *CMP).
  • Liberalisation policies were put on hold by the GOI.
  • Indian companies faced difficulty in arranging capital.
  • BR were removed by RBI.
  • Stock market crash badly.
  • There was a loss of Rs. 3000 crore to the banks.
  • SEBI postponed sanctioning of private sector mutual funds.
  • SEBI banned Harshad from investing in stock market forever.
  • Naked short sales (borrower and lender being unaware about each other) was banned in 2001.
  • GOI passed “SEBI Act 1992” post Mehta scam after correcting the loopholes of the existing SEBI Act. This was also known as “Harshad Mehta Act 1992”.

The financial scandal valued around Rs. 5000 crore in total.

Key weaknesses of the case:

1)  The loopholes in the banking system.

2)  BSE transaction system.

3)  SEBI introduced new rules to cover the loopholes in the existing ones.

On 31st Dec 2001, Harshad Mehta died while being into the custody.

Movies/Series on Harshad Mehta : GAFLAThe BIG BULLTHE BULL OF DALAL STREETSCAM 1992

Here is a list of 28 mind-blowing movies for stock market enthusiasts to watch

1. Trading Places (1983) -- Stock Trading Movie

2. Billion Dollar Day (1985) - Documentary

3. Wall Street (1987) -- Stock Market Fiction

4. Glengarry Glen Ross (1992) -- Finance Fiction

5. Barbarians at the Gate (1993) -- True Story

6. Rogue Trader (1999) – Stock Trading Movie -- True Story

7. Boiler Room (2000) – Stock Market Fiction

8. The Corporation (2003) -- Finance Documentary

9. Enron: The Smartest Guys in the Room (2005)

10. Baazaar (2018) - Fiction (Hindi)

11. Wall Street Warriors (2006) -- Wall Street Documentary

12. The Ascent of Money (2008) -- Finance Documentary

13. Million Dollar Traders (2009)

14. Capitalism: A Love Story (2009) -- Finance Documentary

15. Floored (2009) -- Stock Trading Documentary

16. Freakonomics (2010) -- Finance Documentary

17. Chasing Madoff (2010) Stock Market Scam, True Story

18. Margin Call (2011) – Stock Trading Fiction

19. Inside Job (2011) – Financial Crisis 2008, Finance Movie

20. Too Big to Fail (2011) – Documentary, Finance Movie

21.Wall Street – Money Never Sleeps (2011) -- Stock Market Fiction

22. Arbitrage (2012) -- Finance Fiction

23. The Wolf of Wall Street (2013) – True Story -- Stock Market Movie 

24. The Big Short (2015) – Financial Crisis -- Stock Market Movie

25. Equity (2016) -- Financial Thriller

26. Money Monster (2016) - Stock Market Thriller

27. Banking On Bitcoin (2017) – Financial Markets Documentary

28. The China Hustle (2018) – Finance & Trade Documentary

Similar Article : “Bombay bull” or “Pied Piper of the Dalal street”BPLHow Harshad Mehta did it againSterlite and Videocon: The Harshad linkHarshad Mehta: From Pied Piper of the markets to India's best-known scamster

Special thanks to Pooja Yadav in compiling this article. Hope you all liked reading it. Feedback will be appreciated. Thank You!

Articles & Case study on Value Investing : Jet AirwaysVHLDhunseri InvestmentsNBI FinancePonni Sugars(Erode)LupinCrude Oil!

Case Study on Options : Techno - DerivativesEffective Option Trading

Connect on my Facebook Page : Varun Aggarwal

Free Telegram Channel for updates : Link

YouTube : Channel

Twitter : Link

Your feedback is important, don't forget!

Share this article

Leave your comments

Post comment as a guest

0
terms and condition.
  • Ryan Couture

    Wolf of Wall Street is must see !!

  • Lee Stephen

    Thanks for sharing this list of movies

  • Ian Byron

    Interesting

  • Richa Batra

    Wonderfully explained article. I have seen the big shot and Margin call too. Such scams I honestly think make us aware about our system more and more. Well written. Would love to read such more articles in future as well

Share this article

Varun Aggarwal

Finance Expert

Varun is the director of Profit Idea. He is a multi-skilled experienced professional in academics, corporate and administration fields. He has over 10 years of corporate training experience in the field of finance & provides training for CFA, MBA, Stock Market (Derivatives, Fundamental & Technical Analysis) & various other financial subjects. He is also associated with various institutes, boards & banks. Varun holds financial and investment qualifications from Delhi University, Yale University, London Business School, Indian School of Business, Columbia University and IESE Business School.

   

Latest Articles

View all
  • Science
  • Technology
  • Companies
  • Environment
  • Global Economy
  • Finance
  • Politics
  • Society