Harshad Mehta – The Lord of Bank Frauds

thumbnail
Reading Time: 4 minutes

Written By: Priyansh Chachani

“Jab jeb mein money ho to Kundli mein Shani hone se koi fark nai padta, ye meri Astrology hai” – Dialogue by Harshad Mehta from the series: Scam 1992

Scam 1992 is about to hit on Sony Liv on October 9th. It is the story of India’s biggest financial scam which involved The Big Bull, Harshad Mehta. Harshad Mehta was a stockbroker who ran the firm, GrowMore Research and Asset Management.

Let’s learn a bit about him.

Harshad Mehta – The Big Bull Who Conned the Banks

Harshad Mehta, born on 29th July 1954 at Rajkot of Gujarat, completed his BCom from Lala Lajpat Rai College, Mumbai in 1976. After graduating and doing a few odd jobs, Harshad Mehta landed in New India Assurance.

Thereafter, Harshad Mehta developed an interest in the stock market. Post that, he landed in a job in a Stockbroking firm where his rags-to-riches story started.

Harshad Mehta joined the brokerage firm in 1981 and from there he started to trade in markets.

Harshad Mehta

Scam by Harshad Mehta

During his stockbroking career, Harshad Mehta diverted banks funds to the tune of Rs. 3500 Cr towards the Indian stock market.

The prominent stocks that he dealt with were ACC Cement, TISCO, Reliance, Hero Honda, Sterlite, and Videocon.

ACC was among Harshad Mehta’s favorite. He put in money so aggressively that in a span of 3 years, the stock moved from 200 to 9000 (4400% rise).

On 23rd April 1992, Moneylife founder, Mrs. Sucheta Dalal reported the loopholes in the banking system which were being exploited by Harshad Mehta to pull off the scam.

Also Read on FinMedium:  Important Comparison of Top 14 Pharma Companies in India

After Sucheta Dalal reported this, it came to light that a massive amount of Rs.500 Cr was missing from the books of SBI which was owed by Harshad Mehta. All the receipts were found to be fake bank receipts.

Harshad Mehta was accused of diverting money towards his accounts from various PSUs. The government formed a special committee to look into this matter urgently.

By then, the stock market had crashed. The banks had started demanding money from Harshad Mehta which he couldn’t repay as he himself had lost all of it in the market crash.

But How Did Harshad Mehta Defraud the Banks?

Harshad Mehta’s lust for money didn’t end just at earning from broking and managing assets.

Since the day he started, he started finding loopholes in the Indian Banking System. RBI had mandated all the banks to keep a certain sum of money into government bonds with themselves which were checked every week. If the bonds were not to sufficient levels, banks would be penalized.

The strong banks didn’t have a problem keeping the balances high enough whereas the weak banks found it difficult to maintain.

And thus, they had to borrow from the strong banks.

This borrowing transaction came with interest and was done through brokers.

One of the brokers was Harshad Mehta. He would assure the weak banks that he would give them the bonds they needed and for that he should get the money in the cheque.

Also Read on FinMedium:  Avenue Supermarts Company Analysis and Future Outlook

As Mehta had the credibility in the market, banks wouldn’t mind giving him some extra time. Thereafter, Harshad Mehta would approach the strong banks who had bonds in excess and would tell them that he would find a buyer for the same with interest.

And this, in the end, weak banks would get the bonds, while strong banks would get the interest needed.

But how did Mehta get the extra money?

Well, during the extra time taken, he would pump in that money in the stock market in a few selected stocks and inflate the prices. This led to more people pumping their money. And then, Mehta would take the profits by selling his holdings at an inflated price.

Then, he would return the money to respected banks. This was not limited to just 1 or 2 banks. Harshad Mehta used the same strategy with multiple banks at the same time. This led to a massive rise in the prices of stocks.

Still, Mehta was not happy with the money he made. Day by day, he became greedier.

He got in touch with officials of two banks, Bank of Karad and Metropolitan Cooperative Bank to issue fake receipts which were just a piece of paper. Mehta would issue these to other banks.

On the contrary, the other banks didn’t know whether these were fake or not. The would just hand over the money to him. Eventually, this money would further be used by Mehta to drive stock prices even higher.

It kept on going further and further. No one had the clue as the banks would get their money.

Also Read on FinMedium:  The Super Computer at Asian Paints Ltd

Mehta became so rich that he bought a sea-facing bungalow with a golf course, luxurious cars which even the richest of the riches could not afford.

But then a reporter named Sucheta Dalal reported this scam in the Times of India. Post her story, all banks got alerted. They started asking for money from Mehta.

Harshad Mehta didn’t have a problem making payments but this time as soon as the scam was busted, stock prices started to fall and Harshad Mehta was left with no money in his account.

Then CBI took over and registered close to 70 cases against Mehta. Mehta named many senior bank officials during the interrogation. A few even committed suicide.

Going by the valuation, if one sees the value of the scam in today’s time, it would go up to Rs.25K Cr. Much higher than what the duo of Nirav Modi and Vijay Mallya did.

While all this was happening, he died in the year 2001 due to a heart attack.

Harshad Mehta was one of the reasons why the stock market became famous in India and a lot of people started to trade and make money in the markets.

No wonder, he was once called “The Big Bull.”

This post has been written by Priyansh Chachani for FinMedium Research Desk.

Every Wednesday and Saturday, we send Info-Graphic and FinMedium Weekly Digest newsletters to our 25000+ Subscribers.

Join Them Now!

Please Share :)
FinMedium Research Desk
Read our research and analysis on Sectors, Companies, Investing Ideas, and other cool financial stuff. All from our in-house Research Desk.
Back To Top