THE FIRST BROKER TO BECOME A MEGA-STAR

     In the wee hours of December 31, just before the year 2001 came to a close, Harshad Mehta passed away in a jail in suburban Mumbai. It was a tragic and unceremonious end to the man who was the first broker to become a mega-star of the Indian capital markets and, fire the greed and imagination of every middle class Indian in the early 1990s.

Harshad Shantilal Mehta born to a Gujarati Jain family on 29 July, 1954 spent his early childhood in Mumbai, where his father was a small-time businessman. Later, on his family moved to Raipur. His life is an ultimate rag to riches story -- from the small town Raipur as a boy who was once rusticated from school (Holy Cross Higher Secondary School, Raipur) to The Sultan of Dalal Street with all the trappings of wealth such as a fabulous house, a fleet of cars and multiple stock exchange memberships. Mehta gradually rose to become a stock broker on the Bombay Stock Exchange and had an expensive lifestyle. He lived in a 15,000 square feet (1,400 m2) apartment, which had a swimming pool as well as a golf patch.

Harshad Mehta was one of the bold and the flashy ones, in 1992 when the story about Rs 6 billion that he had swiped from the State Bank of India was broke, it was his visits to the bank's headquarters in a flashy Toyota Lexus that tipped off. Those days, the Lexus had just been launched in the international market and importing it would cost a neat package.

            Instead of fawning epithets such as the Big Bull, or the Amitabh Bachchan / Einstein of the market that were showered on him by his investor fans, he ended his days as a tired scamster, who will forever be known as the main architect of the Rs 50-billion scam - India's biggest securities scandal.

What Harshad Mehta did? – The Stock Market Scam

            By 1990, Mehta had risen to prominence in the stock market. He was buying shares heavily. The shares which attracted attention were those of Associated Cement Company (ACC). He took the price of ACC from 200 to 9000.Thats an increase of 4400% when asked; Mehta used the replacement cost theory as an explanation.

Before those days, the banks in India had to maintain a particular amount of their deposits in government bonds. This ratio was called SLR (Statutory Liquidity Ratio). Each bank had to submit a detailed sheet of its balance at the end of the day and also show that there was a sufficient amount invested in government bonds. But by 1990’s, the government decided that the banks need not show their details on each day, they need to do it only on Fridays. That meant that banks would sell bonds in the earlier part of the week and then buy bonds back at the end of the week. The instrument used was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e., the seller of securities, gave the buyer of the securities a BR.

Now, at the end of the week many banks would be desperate to buy bonds back. This is where the broker comes in. The broker knew which bank had more bonds (called ‘plus’) and which has less than the required amount (called ‘short’). He then acts as the middleman between the two banks. Harshad Mehta was one such broker. Having figured out his scheme, Mehta needed banks which issued fake BRs, or BRs not backed by any government securities. Two small and little known banks - The Bank of Karad (BOK) and The Metropolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.

The game went on as long as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. Once the scam was exposed, though, a lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping Rs 4,000 crore. When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof. He knew that he would be accused if people came to know about his involvement in issuing cheques to Mehta.

One rather unknown fact about this scam is that there was a very important player in this scam who managed to keep a very low profile. That man was Nimesh Shah. He was just as involved as Harshad Mehta but he knew how keep out of the hands of the law. Nimesh Shah still deals in the stock market and is known to be a heavy player.

It is rumored that when Mehta died, he still had 10% of ACC shares with him.The Mehta scandal was portrayed in a Hindi movie, 'Gafla', directed by Sameer Hanchate.

Harshad Shantilal Mehta ultimately was the stock market Guru, the Big Bull who did

“The Wrong Things The Right Way”.

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