Harshad Mehta Scam : Explained...

Harshad Mehta Scam is considered as one of the biggest stock market scams in the world. The amount involved in the scam was around Rs.5000 crores. It is also known as The 1992 Indian Stock Market Scam.

This scam was basically carried through Ready Forward Deal. Here, the banks issued loan from the other bank by keeping their Govt. securities as mortgage. And within the decided time period they repay the money and get back their securities. Thus, the Govt. securities were used by banks to get short term loans. The securities were usually sold and purchased through Receipts by banks.

In ready forward deals, the broker acts as the mediator for buying and selling of securities. Harshad was also a broker and use to do this business. There were some loopholes in the RF deal, which Harsad Mehta knew very well.  And he started using those loopholes to do the fraud.

So, what happened is….

Suppose there are 3 Banks A, B, C

When Bank A wants to sell the securities, Harhsad acted as a broker and asked bank A to give some time to find the buyer, and Suppose bank B wants to buy the securities, he takes the money and ask to give some time, to find the seller.

**As per the directions of the Reserve Bank of India, if any banks sell their Govt. securities then the cheque has to be issued to the buying bank and vice versa, but not to the broker. But in this case, Harsad Mehta asked the banks to issue the cheque on his name. Thus, banks had no idea with which other bank they are dealing, as they were directly dealing with Harsad.

When bank A asks Harshad to pay the amount of the securities, he would immediately search for other banks which were interested to buy the securities. For eg. If Bank C wants to buy securities, then he takes the money from  Bank C and asks for some time to find the seller, and the money was repaid by him to bank A. He continued this business with all other banks. By doing this Harsad always had huge amount of money present with him.

The amount that Harshad received from the banks was used by him to manipulate stock prices in the market. He used that money to increase the share prices of various companies. And later on, when he required more money to manipulate stock market, with the help of some banks, he started making fake security receipts. Those fake receipts were sold by Harshad to other banks and the banks also paid the money by thinking that they were getting original security receipts in return.

He used all this money to increase stock market prices. With the effect, there was a bullish move in the stock market. The shares prices of various companies started increasing. For eg. Axis bank’s share price went from Rs.200 to Rs.9000 in just few months. By seeing this many investors were attracted to invest their money in the market. And when the share prices went upto peak, Harsad used to sell those shares and thus made huge profits. With that profit, he returned money to banks and take back his fake receipts.

This continued till long time. And when there was a shift in the movement from bullish to bearish, he started incurring huge losses and thus was finding difficulties to repay the money to the banks.

On 23^rd April 1992, Sucheta Dalal a journalist revealed all this scam on Times Of India newspaper. He was arrested on 9^th November 1992 by CBI after investigating the case. He was charged with 600 Civil Action Suits & 70 Criminal cases. Securities and Exchange board of India (SEBI) had put a lifetime ban on Harsad Mehta.

One day when he was kept on Thane jail. He started receiving pain on his chest and then immediately taken to hospital. He died on 1^st Jan 2002 -12.30A.M at Thane civil hospital. (Cardiac Arrest). And when he died 27 criminal charges were still pending on him.