Article by Aryan Chhajer & Ridha Bazaz from Finance Wing, GAEE JMI

“Business mein saturation aata hai, dimag mein thodi? Woh chalta rehta hai na!” – Scam 1992: The Harshad Mehta Story

The Indian thriller web series ‘Scam 1992: The Harshad Mehta story,’ based on Debashis Basu’s book ‘The Scam: Who Won, Who Lost, Who Got Away,’ debuted on October 30, 2020, and sparked controversy. This story is based on Harshad Mehta, a stockbroker from Bombay who became well-known during the 1992 financial securities scam. He was also dubbed “Amitabh Bachchan of the Indian Stock Exchange.”

The financial scam amounted to nearly 4000 crores, which, when adjusted for inflation, amounts to around 20,000 crores today. The financial scam occurred due to loopholes in the banking system exploited by Harshad Mehta, paving the way for SEBI to be established as the watchdog of the Indian Securities Market with the implementation of the SEBI Act 1992.

When the State Bank of India reported that 500 crores were missing in the form of a Subsidiary General Ledger, the scam exploded into the public eye.

In the early 80s, Harshad Mehta had established good relations in the banking system. Harshad sought the assistance of alternatives used by banks to trade in government securities. Although RBI guidelines required banks to deal directly with other banks in security transactions, they chose to rely on brokers because it was easier and less time-consuming.

Many banks used a process known as Ready-Forward Deals (RFDs) to increase the value of their government bond holdings—- it was a short-term debt used from one bank to another. The lendings were made in exchange for government securities. The borrower bank used to sell securities to the lending bank and then repurchase them at a higher price after the transaction was completed.

Harshad would act as a broker between these banks that used to deal in government securities and acted as an intermediary between these banks that used to deal in these securities for his benefit.

Harshad used to divert these funds to the stock markets to inflate and deflate stock prices for his benefit. After two weeks, he liquidated his stocks and returned the money to the bank. Sucheta Dalal, a reporter, exposed this scam in an article published in the Times of India’s column on April 23, 1992. The next day, the Sensex fell by about 12%.

Banks demanded Harshad return their funds, but he was unable to do so due to the market crash. The CBI arrested Harshad Mehta on November 9, 1992, and charged him with 600 action suits and 70 criminal cases. He died of a heart attack on New Year’s Eve, 2001. Even at the time, he had 27 pending cases against him.

Another aspect of this case is the well-known bull run and its ramifications. The series focuses on Harshad Mehta, known as “The Big Bull” of the Indian stock market. A bull buys securities with the expectation of a price increase or someone who causes a price increase to occur. Harshad Mehta was presumably the latter.

It is impossible to predict whether a bull market will result in economic growth. Economic growth is dependent on a variety of factors, and a bull market cannot be the sole cause of a country’s growth.

For example, during the covid pandemic, India had a negative GDP of -23.6 percent in its Q2 of 2020-21, but the capital market was reaching new highs every week. Whereas, following the stock market crash in 2000, India achieved a good GDP growth rate, and stock markets were also performing well. In fact, the market capitalization of Indian stock exchanges surpassed one trillion dollars in 2007.

The bull market is generally favorable because the market is rising. Most investors are optimistic about investing in the market’s upward trend. The rise in the price of the company’s shares aids in the improvement of its goodwill.

This is also advantageous for employees compared to a market decline or bearish run, which forces companies to lay off employees. A bull run usually indicates people’s willingness to spend, leading to higher profits, affecting stock market valuation.

During a bull run, demand for securities is exceptionally high while supply is deficient. To maximize profits, an investor should buy stocks early in the trend (if possible) and sell them when the price has reached its peak. Such investments usually result in a small/temporary loss or no loss.

For the same reason, an investor may prefer to invest in fixed income securities or defensive stocks, whose performance is only marginally influenced by market fluctuations.

As narrated by Harshad Mehta in the series, “Ab meri tarah risk se Ishq hai to kood pado, ya to doobogay ya uddogay…” which translates to, “If you love to take a risk like me then jump, you’ll either drown or you’ll fly.”

Article Summary: This article examines the ‘Securities Scam,’ as it is now known, as one of the largest scams ever perpetrated in the Indian stock market, involving fraud of approximately Rs 4,000 crore. It was a systematic fraud involving bank receipts and stamp papers that eventually caused the stock market to crash. The scandal shook the country, and Mehta was sentenced by the Bombay High Court and the Supreme Court for 74 criminal violations. The article then delves into other aspects of the case, such as the ‘bull-run.’

Aryan Chhajer and Ridha Bazaz is a B.A.(Hons.) & B.Com(Hons.) student respectively at Jamia Millia Islamia, Delhi, and a part of GAEE JMI, an autonomous branch of the Global Association of Economics Education in India. The views expressed are personal and they do not purport to reflect the opinions or views of GAEE or its members.


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