- Introduction
- Rise of Harshad Mehta
- Role of Banks and Share Market Rally
- Scam Exposed and Market Crash
- Effect of scam
- Conclusion
Rs. 24,000,0000000
This is the size of Harshad Mehta Scam 1992 whooping 24,000 Cr, one of India’s biggest share market scams. If we look into the numbers then it is bigger than any other financial scam in India.
Today, we will look at the story of a common person who deceived the entire Dalal Street and broke the strength of Sensex. This is the story of Harshad Mehta, the Big Bull of BSE.
Harshad Mehta was born in Ghatkopar, Mumbai in 1954. He has completed his B.Com and joined the share market due to his huge interest. He joined broker Prasanna Panjivandas in the 1980s.
Rise of Harshad Mehta
Between 1980-84, Harshad worked with different brokerage firms and finally, in 1984, he started his brokerage firm Growmore Research and Asset Management. In the next 5 years, he was actively engaged in Trading. By the end of the 1990s, Harshad Mehta was called the “Amitabh Bachchan” of BSE.
Harshad Mehta uses various tactics like Insider trading, and stock manipulation to boost the price of stocks. He was alleged to have used the Bank’s money to pull the market up. He virtually created the demand for shares and created a boom environment in the Market.
Due to this, Sensex has rallied from 1000 to 4500 in 3 years. His most focused stock ACC rallied from 200 to 9000 in a very short period which created a lot of wealth for investors.
Role of Banks and Share Market Rally
Imagine there are four banks – let’s call them B1, B2, B3, and B4. B1 and B4 have plenty of government bonds. Government bonds are debt securities that were given by the government to raise money. But Bank B2 and Bank B3 don’t have enough government bonds. Whenever a bank wanted to buy government bonds from another bank, they could give a check to the selling bank and get the bonds in return.
Here’s where Harshad Mehta comes in. He found out which banks needed to sell government bonds and which ones needed to buy them. Then, he acted as the middleman between those banks. First, he would get the extra government bonds from B1, promising to pay them back soon. Then, he would go to B2, get money from them, and promise to give them the government bonds they needed.
He used the money from B2 to buy a lot of stocks in the stock market. This made the stock prices go way up. For example, the price of a company called ACC went from Rs 200 to Rs 9000 in just 3 months, which is a huge increase.
Whenever B2 asked for the government bonds it paid for, Harshad Mehta would find another bank, B4, that was ready to sell the bonds. He made a sort of “chain” of banks and was able to hold onto a lot of government bonds and a ton of cash for a while. He used all that cash to buy even more stocks in the stock market, making their prices go way up.
Whenever the stock prices got very high, he would sell the stocks and make a lot of profit. He did this because everyone thought the prices would keep going up, so he made a lot of money by using the banks’ cash for his investments.
Scam Exposed and Market Crash
In 1992, this scam came to the news when Sucheta Dalal, a journalist for the Times of India published about this scam on the front page. Stock Market crashed badly due to this news and Harshad Mehta could not book his profit. At that time, it was like he used bank money and didn’t return.
But the situation became worse when news came to light that Harshad Mehta had used fake Bank receipts. There was a procedure for transferring government bonds at that time. Seller bank used to give a bank receipt to the buyer bank without transferring the actual government bonds and that bank receipt was considered as potential proof for the transfer of government bonds from one bank to another. Harshad Mehta designed fake bank receipts and used them to transfer government bonds.
It created fatal trouble for him. Before this, he can return the money of banks by selling stocks. But now when the news was out, the stock market crashed very badly. Sensex plunged by 570 points, around 13%. This was the worst market crash in the history of the Indian Share Market. Banks lost more than 1800 crore due to this scam.
| Name of Banks | Rs. in Crores |
| National Housing Bank(NHB) | 1200 Cr. |
| State Bank of Saurashta | 175 Cr. |
| SBI Capital Market Limited(SBI Caps) | 125 Cr. |
| Standard Chartered Bank | 300 Cr. |
| Total | 1800 Cr. |
Effect of Scam
- Effect on the Share Market
In less than 2 months, the stock market lost a trillion rupees. RBI created a committee called the Jankiraman committee which calculated the magnitude of the scam worth more than 4000 crores in comparison to a trillion. The situation became worse when the government did not permit the sale of any shares that had gone through the brokers in the last year.
This decision not only affected the brokers but also broke the trust of shareholders. The shares came to be known as tainted shares. This resulted in a worsened financial environment.
- Effect on the Politics
After this scam, the opposition demanded the resignation of the RBI Governor S. Venkitaramanan and Finance Minister Manmohan Singh. Manmohan Singh sent his resignation but it was rejected by Prime Minister P.V. Narasimha Rao.
- Effect on the Banking Sector
This scam revealed the loopholes present in the banking sector. The Securities and Exchange Board of India(SEBI) was given more powers and new regulatory mechanisms were put to prevent similar types of fraudulent activities. This scam removed public trust in the banking sector and the share market.
Conclusion
There are two types of opinions about Harshad Mehta in Public. Few people consider him as a hero due to his story. A person who came from a humble background and became one of the most successful stockbrokers at that time. Some people get huge benefits due to the bull run led by Harshad Mehta. For them, he is the Hero.
Few People consider him a villain due to his fraudulent actions. This scam led to massive financial losses for investors and the economy. This situation created a negative reputation for Harshad Mehta among Invetsors.
According to me, this is not only Harshad Mehta’s scam. It was fueled by ministers and businessmen. Harshad was only a victim of their game. Jyoti Mehta has launched a website in defense of his husband. A web series was also launched named “Scam 1992” that depicted the whole incident.
