Harshad mehta scam

The year 1992 will go down in the history of India as the year of the stock market scam. Harshad Mehta, a broker known for his rags-to-riches story and a poster boy for many investors, had used receipts of public sector banks to manipulate stock prices.

BY DEVANSHI | 2 MIN READ

It's often said that history is relevant to everyone, at one point of time or the other.

Exploiting several loopholes in the banking and trading markets, India's most scandalous history lesson perhaps lies in Harshad Mehta's financial scam of 1992.

They say that the greatest thefts happen in plain sight and Mehta's systematic stock fraud is perhaps one of the best examples you could quote.

Harshad Mehta’s scheme was very simple in essence. He would secretly embezzle huge sums of money from the government securities market for a short duration. He would then invest this money in a few selected securities and drive their prices insanely high. When people would get excited about a particular security, Harshad Mehta would slowly liquidate his holdings, pay off the embezzled money and pocket the huge difference caused by rising prices. The scale at which Harshad Mehta was doing this was unimaginable. In one year, Mehta had driven the Sensex from 1000 to 4500 !  It was an unprecedented bull run, never seen in the history of a conservative Indian market, giving Mehta the nick name, The big Bull.

So how did Mehta embezzle the money itself?

Harshad Mehta’s method of embezzlement was a bit complicated. Mehta had colluded with the banks to change the very nature of the government securities market. Earlier, the role of a broker was only to bring the parties together whereas the banks would undertake the transaction of securities and lending of money themselves. In the new market established by Mehta, the broker was more of a market maker. This meant that both the banks were dealing with the broker and neither knew who the counter party was. Therefore, Mr Mehta could get the banks to deposit a check in his account and have the funds for himself for a short period of time.

The aftermath of Mehta's Scam witnessed the most rapid Boom and Bust the Indian stock market has ever witnessed.

The index fell from 4500 to 2500 representing a loss of Rs. 100,000 crores in market capitalisation and Harshad Mehta was found directly responsible for embezzling worth Rs 1439 crores ($3 billion) and causing a scam that led to the loss of wealth to the tune of Rs 3542 crores ($7 billion).

The importance of history lies not in what happened in the past, rather learning from what happened and preventing it from happening again.

Mehta's scam and exploitation of loopholes in the Indian financial market led to major reforms in the security system of India, ultimately leading to the formation of National Stock Exchange Of India (NSE) and SEBI and structural changes in the system too.