The Fall of Harshad Mehta: His Role in Indian Financial History
Harshad Mehta, a prominent Indian stockbroker, played a significant role in one of the most notorious financial scandals in the early 1990s. His actions led to widespread losses and a major crisis in the Indian stock market. This article delves into the background of Harshad Mehta, the mechanisms of the fraud, and the impact of his story on the regulation and ethics of the stock market.
Background and Early Career
Harshad Mehta was born in 1954 in a family business involved in textiles. However, his family's business was not substantial enough to sustain him. This propelled him towards the stock market, which was a different era from today's. During the 1980s, the concept of long-term investing was not prevalent. Much of the research and information sharing were conducted among a few people, mostly big brokers who profited from this practice.
The Fraud Scheme
Mehta's fraudulent activities gained momentum during the 1990s when banks were required to invest a minimum amount in government bonds, specifically on a weekly average basis. Banks that fell short of this threshold would often seek to boost their average by purchasing bonds from other compliant banks at a slightly higher rate. However, these transactions were not straightforward and required trust.
Harshad Mehta managed to establish himself as a top broker and gained the trust of top bankers. He would approach the buyer bank with a promise to secure bonds the next day. In return, he requested the buyer bank to issue a cheque in his name, not the seller's. Mehta would then approach the seller bank, requesting the immediate release of bonds but at a higher premium. This cycle was repeated multiple times, accumulating a significant amount of funds.
With this substantial capital, he would manipulate the stock market. For instance, the price of ACC (Asian Cement Company) was driven from 200 to 9000, a 4000% increase. This was achieved through the strategic and illicit use of funds from the banks. However, it is clear that Mehta’s methods were against legal and ethical norms, as it involved the misuse of bank funds for personal gain.
The Whistleblower and Convictions
The scandal came to light when a whistleblower approached a journalist, revealing the extent of Mehta's fraudulent activities. Following this, the tax department conducted a raid and several cases against Mehta were initiated. These cases dragged on, and subsequently, Mehta faced numerous legal battles spanning over the years. He was ultimately convicted for fraud and spent the last of his days in Tihar jail, a infamous prison in Delhi, India, where he passed away in 2001 due to a heart attack.
Impact and Legacy
Harshad Mehta's story remains a significant chapter in the history of Indian finance. The scandal exposed the vulnerabilities in the stock market and raised important questions about regulation and ethics. Many discussions and reforms focused on strengthening the transparency and integrity of the financial markets. Mehta's actions led to the implementation of stricter norms and regulations to prevent similar frauds in the future.
Furthermore, the story of Harshad Mehta serves as a cautionary tale about the consequences of unethical practices in finance. It underscores the importance of accountability and the need for robust regulatory oversight to protect the interests of all stakeholders in the market.