Unfolding the Harshad Mehta Scam

27 Feb 2020 Read 972 Views

Gaurav was a self-made man. His rags to riches story made him an influential person. Using his good reputation, he started taking loans from his friends using made up collateral and gambled it.

Initially, he earned huge profits but later in his quest to conquer the world, he incurred huge losses. It was unfortunate for him that the banks also discovered the fake collaterals that he deposited. Gaurav was left with nothing but bankruptcy. 

This story can be used to understand the infamous ‘Harshad Mehta Scam’. Harshad belonged from a Gujarati family. He did his graduation in commerce from Lajpatrai College, Mumbai and showed keen interest in the stock market. After working for various brokerage firms, he became a member of the Bombay Stock Exchange and then soon established his own firm to be known as GrowMore Research and Asset Management. 

What was the scam about? 

Back in those days when the Indian stock market was still in its structural phase, banks were supposed to invest in government bonds through a broker. Exploiting his powerful position, Mehta became the broker of various such banks who issued the cheques for buying securities under his name.

He then invested the amount in the stock market and created an artificial demand for some stocks by investing heavily into them. He single-handedly rose the shares of ACC by a whopping 4400% in about 3 months. After earning profits, he used to pass on the nominal value to banks, keeping all the profits for himself.

Life was good for Mehta. Business magazines started hailing him and media portrayed him as ‘The Big Bull.’ He lived a lavish life and owned flashy cars. It was the morning of 23 April 1992 that shook his life. Journalist Sucheta Dalal exposed his unethical and unlawful tactics of buying and the prodigy of the Indian stock market was charged with 600 civil action suits and 72 criminal cases. Soon banks started asking their money back and that ended the bull phase in the Indian markets and created a downfall. 

Aftermath

The Harshad Mehta scam led to an immediate collapse in the Indian stock market as it scared a lot of investors who started withdrawing their money. Potential investors also refrained themselves from entering stock markets as this scam created a sceptical image of the same. Numerous banks suffered a lot, including Vijaya Bank, whose chairman committed suicide after the outbreak. 

Harshad Mehta was then charged by the Bombay High Court, which estimated USD 740 million on account of his fraud.

Mehta also addressed the media in which he confessed about donating Rs 1 crore to then Prime Minister, Mr PV Narasimha Rao for clearing his charges. Securities and Exchange Board of India banned him from the stock market and related activities for life. Harshad Mehta died on 31 December 2001 at Thane Hospital, Mumbai after complaining of chest pain. More than 27 cases were still pending at that time. 

While the story of Gaurav remains an inspiration for many of us to work hard and be determined towards our goals, it also reminds us that resorting to unethical and unlawful means brings nothing but misery.

- Harsh Jain

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