HARSHAD MEHTA

An Indian stockbroker and is alleged to have engineered the crash in the BSE stock exchange in the year 1992. What all he did: Exploiting several loopholes in the banking system, Harshad and his associates siphoned of funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the Sensex. When the scheme was exposed, the banks started demanding the money back, causing the collapse. He was later charged with 72 criminal offenses and more than 600 civil action suits are filed against him. He died in 2002 with many litigations still pending against him. His early life:

In the early eighties he quit his job and sought a job with stock broker P. Ambalal affiliated to Bombay Stock Exchange (BSE) before becoming a jobber on BSE for stock broker P.D. Shukla.In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. After he came out of this big struggle for survival he became stronger and his brother quit his job to team with Harshad to start their venture GrowMore Research and Asset Management Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for the same with financial assistance from Shah and Sheth, who were Harshad's previous broker mentors. He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as well as scrip-specific activities. In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was all along considered as the architect of the bull run was blamed for the crash. It transpired that he had manipulated the Indian banking systems to siphon off the funds from the banking system, and used the liquidity to build large positions in a select group of stocks. When the scam broke out, he was called upon by the banks and the financial institutions to return the funds, which in turn set into motion a chain reaction, necessitating liquidating and exiting from the positions which he had built in various stocks. The panic reaction ensued, and the stock market reacted and crashed within days.He was arrested on June 5, 1992 for his role in the scam.

What Harshad Mehta did? The Stock Scam In the early 1990s, 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. Now, the government decided that the banks need not show their details on each day, they need to

do it only on Fridays. Also, there was an extra clause that said that the average %age of bond
holdings over the week needs to be above the SLR but the daily %age need not be so. 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 capital freed in the starting of the week could then be invested. 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. He worked as a middle man between many banks for a long time and gained the trust of the banks senior management. Lets say that there are two banks A (short) and B (plus). Now what Harshad Mehta did was that he told the banker at A that he was dealing with many banks and hence did not know who would he deal in the end with. So he said that the bank should write the cheque in his name rather than the other bank (which was forbidden by law), so that he could make the payment to whichever bank was required. Since he was a trusted broker, the banks agreed. Then, going back to the example of bank A and B, he took the money from A and went to B and said that he would pay the money on the next day to B but he needed the bonds right now (for A). But he offered a 15 % return for bank B for the one day extension. Bank B readily agreed with this since it was getting such a nice return

Now since Harshad Mehta was dealing with many banks at the same time he could then keep some capital with him at all times. For eg. He takes money from A on Monday, Early life Harshad Shantilal Mehta was born on 29 July 1953 at Paneli Moti, a village of Rajkot District in a Gujarati Jain family of modest means. His early childhood was spent in Mumbai (Kandivali), where his father was a small-time businessman. Later, the family moved to Raipur in Chattisgarh after doctors advised his father to move to a drier place on account of his health. Mehta studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur.. He traded in the Stock Market 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. 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). The price of ACC was bid up to Rs 10,000. When asked, Mehta used the replacement cost theory as an explanation. . Through the second half of 1991 Mehta had earned the sobriquet of the Big Bull, because he was said to have started the bull run. On April 23, 1992, journalistSucheta Dalal exposed Mehta's illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking system to finance his buying. The authors explain: The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another.

Crudely put, the bank lends against government securities just as a pawnbroker lends against jeweller. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price. It was this ready forward deal that Mehta and his accomplices used with great success to channel money from the banking system. A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasnt the case in the lead-up to the scam. In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker. This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank. Another 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. As the authors write, a BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer. 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, the authors point out. 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 Mehtas 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. M J Pherwani of UTI also died in this scandal. Mehta made a brief comeback as a stock market guru, giving tips on his own website as well as a weekly newspaper column. This time around, he was working with owners of a few companies and recommended only the shares of those companies. This game, too, did not last long. Death STOCK broker Mr Harshad Mehta died at Thane civil hospital following a brief heart ailment. Mr Mehta, who was 47, is survived by his wife and two sons.

Mr Mehta was under judicial custody in the Thane prison after a special court remanded him and his two brothers, Mr Ashwin Mehta and Mr Sudhir Mehta, in a fresh case of misappropriation. According to sources, Mr Mehta complained of chest pain late last night and was admitted to the civil hospital where he died around 12.40 a.m. The body was moved to J.J. Hospital for post-mortem. Mr Mehta and his brothers were arrested by the CBI on November 9 for allegedly ``misappropriating (in 1992) more than 27 lakh shares of about 90 companies, including Sensex heavyweights such as ACC and Hindalco, through forged share transfer forms. The total value of the shares was placed at Rs 250 crore. The two brothers have been granted temporary bail for five days following the death of Mr Harshad Mehta. Mr Harshad Mehta started his career as an employee of New India Assurance Company but later quit the job to play the stock market. By 1991, Mr Mehta had become the most recognisable and revered icon of the stock market. Considered a financial genius by many, he was nicknamed the Big Bull who singlehandedly decided the course the markets would ply. At the height of his criminal career, before it became public, Mr Mehta lived in a 15,000 sq.ft. house with a private swimming pool and a golf patch. His lavish lifestyle and flashy cars were the stuff known only of movie stars. His ``bull run, however, ended in April 1992 when the stock market scam broke out bringing down in its wake several financial entities and causing despair to millions of investors. The man who was singularly credited with the rise of the market was also squarely blamed for the crash. Mr Mehta's fall from grace was as fast as his meteoric rise. Investigations revealed that his ``unending resources were actually siphoned off from the banking system. According to investigators, he had devised an ingenious way of using bank receipts to feed the stock market frenzy. He was arrested and banished from the stock market with investigators holding him responsible for causing a loss of more than Rs 4,000 crore to various entities. Mr Mehta again raised a furore in 1995 when he made a public announcement that he had paid Rs 1 crore to the then Congress President and Prime Minister, Mr P.V. Narasimha Rao, as donation to the party for getting him ``off the hook. The decade-long tug of war with the law that started in 1992 was continuing when Mr Mehta died. He had altogether 28 cases registered against him. The trial of all except one, are still continuing in various courts in the country. Market watchdog, Securities and Exchange Board of India, had recently banned him for life from stock market-related activities. Mr Mehta perhaps had as many admirers as critics. If he was loathed by some, he was revered by many. But almost all of them admit that he caused a ``change in the Indian stock market, permanently.[1][2]