When we hear the name “Harshad Mehta”, the first thing that comes to our mind is the stock market scam. Harshad Mehta’s stock market scam had shaken the country’s economy.
Harshad completed his education from “Lala Lajpat Roy” College, Mumbai. And worked in different companies for the next few years. While working, he became interested in the stock market. A few days later, Harshad quit his job and started working with a “B. AMBALAL” broker. A few days later, Harshad became a stock broker for “JL Shah and Nandlal Shet”.
In 1984, Harshad started a company with his brother. Became a broker of BSE (BOMBAY STOCK EXCHANGE) and started his own brokerage business.
Harshad used READY FORWARD DEAL in his scam. The government brings security to cover the cost of its own project, which is called government security. E.g. Governments take money to cover their expenses through government bonds. In return for this money, the government pays investors a fixed interest rate. All banks in India were required to invest some money in these securities.
When a bank needed money, the bank would sell its government securities to another bank and take a short-term loan from them. And a few days later, the bank was returning the money to another bank with interest and taking back the government securities. Simply put, when we need money, we mortgage the “Gold” we have to the lender and take the money at interest. A few days later, after finishing our work, we go back to the lender
We return the money with interest and take back our gold.
Similarly, in “READY FORWARD DEAL”, one bank was lending to another bank in the short term in exchange for government securities. In short, “R.F.D. means “READY FORWARD DEAL” was a short term loan tool for banks.
In READY FORWARD DEAL, the broker was acting as an intermediary between the banks. Their job is to find buyers for the banks that want to sell the securities and to find a seller for the banks that want to buy the securities. Harshad Mehta was a broker who was also a mediator among banks. “R.F.D.” There were some “Loopholes” in. Money was being made in a non-profit way through this RFD. And Harshad knew everything about it and Harshad used it for his own benefit.
Suppose there are four banks Bank A, Bank B, Bank C, and Bank D. When Bank A wanted to sell government securities, Harshad Mehta was working as a broker for them, meaning he was looking for a buyer for Bank A. He was taking government securities from Bank A and was asking Bank A for some time to sell those securities. And then Bank B which has Government Security
wanted to buy it, take money from them and ask for some time to bring security. In this way, the security taken from Bank A and the money taken from Bank B were kept with us for a few days. As per RBI GUIDELINE, no bank could issue a CHEQUE directly in the name of a broker.
The bank that bought the government securities was issuing a CHEQUE in the name of the bank that sold the government securities, not in the name of the broker. But in this case, the CHEQUE was being drawn in the name of broker Harshad Mehta. Most of the banks did not even know which bank they were dealing with. Because the bank was dealing with Harshad directly and so Harshad was asking the bank that bought the securities to draw the cheque in his own name. Harshad was doing a very good job as a broker with all the banks as Harshad was very well known in the market at that time. And Harshad misused this belief. He used the money from the bank to raise the price of shares “in the stock market”.
A few days later, when Bank A asked for money for the security sold to Harshad. Harshad wanted to find another bank to buy the government security. Suppose Bank C wanted government security, then Harshad would take money from Bank C and ask for some time to bring the security and go to Bank A and return the money to them. Finding another bank to complete the transactions of Bank B and Bank C. Thus “R.F.D.” Used as Harshad CHAIN. Harshad used this chain method which was making good money in his hands in the stock market scam.
So now we see how “R.F. D.” When a bank sells government securities to another bank for a short term, it gives a receipt to the bank that buys the bank securities, which is called “Bank RECEIPT”. That bank receipt proves that the government securities have been sold and the seller of the government securities has received the money.
Harshad went one step further when he needed money to mislead the shares. With the help of some banks, fake bank receipts were created and used. Banks that wanted to buy government securities were given fake bank receipts. The bank would pay Harshad on the understanding that the bank receipt was ORIGINAL and that he had received government security. Harshad used the money to raise the prices of companies in the stock market. Using this money, some stocks went up in price. Harshad raised the price of ACC from Rs 200 to Rs 9,000 in just a few months. Harshad invested heavily in the stock market with the money he received from the bank, which kept the share price rising and created a boom in the market. Seeing the boom in the stock market, ordinary people also started investing in the stock market. When the stock market was at a high price, Harshad used to sell the shares and make a good profit and return the money to the banks and get back the FAKE receipts from them and this will continue as long as the market is booming. And then when there was a downturn in the market, the share price started coming down and Harshad started losing. He could not return the money to the banks. On April 23, 1992, journalist “Sucheta Dalal” exposed the Harshad Mehta “SCAM” scam. Later the banks realized that the bank receipt given by Harshad was fake and had no value. In return, Harshad had taken crores of rupees. Banks had incurred a loss of Rs 5,000 to 6,000 crore at that time. And that amount was too high at the time. The stock market plummeted when the scandal broke out. A lot of people were hurt.
Some ordinary investors had committed suicide. The chairman of VIJAYA BANK who had forged receipts in Harshad’s name committed suicide after the scam was exposed.
The bank started demanding money from Harshad Mehta as the market was in a slump and he suffered a lot due to the fall in share price so Harshad could not repay the money to the banks.
CBI arrested Harshad on November 9, 1992. Harshad was charged with 600 CIVIL ACTION SUITS and 70 CRIMINAL CASES.
SECURITY EXCHANGE BOARD OF INDIA (SEBI) bans Harshad Mehta from investing in the stock market. Harshad was locked up in Thane Jail. Suddenly, his chest started hurting. On the night of 31st December 2001, when the whole world was welcoming the New Year, Harshad was struggling with death and at 12:30 pm, Harshad died. At the time of his death, 27 cases were pending against him.
Harshad’s LIFE STYLE was like that of an actor who was called “Amitabh Bachchan” by the stock market. Harshad became the highest tax payer of Rs 26 crore that year.
Harshad had 30 luxury cars at that time, including an expensive car like LEXUS which no one could easily afford. Ketan Parekh had joined Harshad’s office as a trainee Going forward, he also scammed. In the next blog we will learn about Ketan Parekh.
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