The story of Harshad Mehta is one that leaves an indelible mark on the financial landscape of India. Known as the “Big Bull” of the Indian stock market, his rise to fame was meteoric, but it was his fall that shocked the nation and led to the infamous scam of 1992. This blog post explores the intricate details of Harshad Mehta’s journey, the strategies he employed, and the eventual unraveling of his empire, all encapsulated in the key phrase “scam 1992”.
Early Life and Entry into the Stock Market
In 1980, a young Harshad Mehta ventured into the Bombay Stock Exchange, unaware that he would soon become a household name. His beginnings were humble; he started as a jobber, trading stocks on behalf of clients. With aspirations of a better life, he moved to Mumbai and enrolled in college, working odd jobs to support his family.
In 1977, after completing his education, Harshad took a clerical job at New India Assurance Company, earning ₹6,600. Despite his stable job, he sought more lucrative opportunities and eventually decided to try his luck in the stock market.
Becoming a Jobber
To enter the trading ring, Harshad needed to become a jobber. After persistent efforts, he secured a jobber’s badge from broker P. Ambalal. His first day was disastrous, resulting in a loss of ₹2,000. However, instead of being disheartened, he learned from his mistakes and honed his skills, quickly becoming one of the most skilled jobbers in the market.
Understanding the need for insider information to maximize profits, Harshad built connections with labor union leaders to gain insights into company production levels. This strategy of insider trading was legal at the time and significantly boosted his earnings.
The Rise of Harshad Mehta
By 1982, leveraging insider information, Harshad had amassed considerable wealth and moved into a lavish home. However, he sought to expand his methods and began using the “pump and dump” strategy, where he would buy large quantities of stocks to inflate their prices before selling them for profit.
His innovative strategies led to unprecedented profits, and by 1985, Harshad was recognized as a wizard of the stock market. His reputation grew as he continued to manipulate stock prices, and he became a prominent figure in financial circles.
The Market Crash of 1986
The turning point came on March 18, 1986, known as “Black Thursday.” The market crashed, leading to panic selling and significant losses for many investors, including Harshad. He faced a loss of ₹1 million and had to mortgage his wife’s jewelry to cover his debts.
Despite the setback, Harshad and his brother decided to re-enter the market by starting their own stock broking firm, Grow More Consultants. They aimed to provide portfolio management services to wealthy clients, which quickly gained popularity.
Innovative Strategies and Success
By the late 1980s, Harshad had established himself as a leading broker, providing lucrative returns to his clients. His firm became known for its aggressive investment strategies, particularly in tea companies that were undervalued at the time.
However, his success drew the ire of older market players, particularly Manu Manek, a bear who profited from short selling. In 1986, a series of adverse budget announcements led to a market downturn, further intensifying the rivalry.
The Money Market and Bank Receipts
To fund his trading ambitions, Harshad entered the money market, where banks lend to each other for short-term needs. He discovered loopholes in the system, allowing him to raise funds through fraudulent bank receipts (BRs). He exploited these BRs to secure loans without actually providing the underlying securities.
Harshad’s manipulation of the money market allowed him to artificially inflate stock prices, resulting in extraordinary growth in the stock market from 1990 to 1992, with the Sensex soaring from around 800 points to approximately 4,500 points.
The Unraveling
Despite his skyrocketing success, Harshad’s empire was built on shaky foundations. In 1991, the Reserve Bank of India (RBI) began investigating the misuse of bank receipts, leading to increased scrutiny over financial transactions.
In December 1991, Harshad took a significant loan from the State Bank of India (SBI) and attempted to manipulate records to hide discrepancies. However, the truth began to emerge, and by April 1992, journalist Sucheta Dalal exposed the scam, revealing that ₹5 billion was missing from SBI accounts, implicating Harshad in the largest financial scandal in Indian history.
The Aftermath of Scam 1992
The exposure of the scam led to widespread panic in the stock market. Harshad’s stocks plummeted, and retail investors lost millions. The scandal not only tarnished Harshad’s reputation but also caused the collapse of several banks involved in the scheme.
On June 4, 1992, Harshad and his brother were arrested, and their assets were seized. The scandal resulted in a long legal battle, during which Harshad remained in and out of jail. He eventually passed away in police custody in December 2001, leaving behind a controversial legacy.
Conclusion
The story of Harshad Mehta is a stark reminder of the potential for greed and corruption in the financial world. His rise and fall encapsulate the complexities of the stock market and the importance of regulatory oversight. While some view him as a fraudster, others see him as a victim of circumstances that were prevalent in the market at the time. Regardless of perspective, the “scam 1992” remains a pivotal moment in India’s financial history.
For those interested in the nuances of stock trading and investment strategies, it is crucial to learn from the past to navigate the complexities of today’s financial landscape.
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