HARSAD MEHTA SCAM 1992

  •  HARSHAD MEHTA : SCAM 1992


  • Harshad Mehta was a notorious Indian stockbroker who became infamous for his role in a major financial scam in the early 1990s. This scandal, known as the Harshad Mehta scam, had profound impacts on the Indian stock market, its regulation, and investor confidence. Here's a detailed look at the events surrounding the scam, its execution, and the aftermath.

    


  • Background of Harshad Mehta


  • Harshad Mehta was born in 1954 in a middle-class family in Mumbai. Initially, he worked as a salesman before gaining a foothold in the stock market. He founded his firm, "Growmore Research and Asset Management," and became known for his aggressive trading strategies. Mehta's meteoric rise to fame was driven by his aggressive speculation in the Bombay Stock Exchange (BSE), where he was often referred to as the "Big Bull."


  • Mehta's reputation as a stock market genius grew rapidly in the late 1980s and early 1990s, thanks to his ability to generate huge returns for his investors. He was also known for manipulating stock prices through a process called "pump and dump," where he would artificially inflate the stock prices, causing a frenzy among retail investors, before selling off his own holdings at a high price. However, it was in 1992 that he orchestrated his most infamous fraud.


  • The 1992 Scam: How It Happened


  • The 1992 Harshad Mehta scam involved a massive financial fraud that amounted to around INR 5,000 crore (approximately USD 1 billion at the time). The scam was essentially a fraudulent manipulation of the banking system, securities, and stock market.


  • Manipulation of Bank Receipts


  • Harshad Mehta exploited a loophole in the banking system, specifically the practice of Bank Receipts (BRs). BRs were instruments used to transfer money between banks for the purchase and sale of government securities. Mehta, leveraging his connections with certain bank officials, created fake Bank Receipts and used them to obtain huge loans from banks.


  • The way it worked was that Mehta would approach a bank, typically a public sector bank, and request a loan against the security of government bonds. However, instead of using real government securities, he used fake BRs to get the money. The banks, trusting the authenticity of these BRs, lent him substantial sums of money. This process allowed Mehta to acquire vast amounts of capital, which he then used to manipulate the stock market.


  • Stock Market Manipulation


  • Mehta took the borrowed funds and began to buy large quantities of shares in select companies, particularly in the heavily traded stocks in the BSE. This created an artificial demand for these stocks, which led to a sharp increase in their prices. His massive buying spree led to a speculative bubble, with stock prices soaring. Mehta's manipulation gave the illusion of a booming stock market, attracting more investors who wanted to capitalize on the rising stock prices.


  • However, this was all part of Mehta's plan to inflate stock prices. He did not intend to keep the stocks long-term but was instead using them as a way to raise more funds. As more investors bought into these stocks, he would sell off his own holdings at the artificially inflated prices, reaping huge profits.


  • The Collapse


  • The scam unraveled in April 1992, when a journalist named Sucheta Dalal exposed the fraudulent practices in a report published in The Times of India. The report revealed how Mehta had manipulated the banking system and the stock market to carry out his massive fraud. The investigation revealed that Mehta had used false BRs to secure loans from multiple banks, causing a liquidity crisis in the financial system.


  • Once the scam was exposed, the stock market crashed. Share prices plummeted, and many investors suffered enormous losses. Mehta's trading practices were found to be highly illegal, and the Indian financial markets were thrown into disarray. The scandal led to a severe loss of confidence in the Indian stock market, with the public accusing both Mehta and the financial institutions that had allowed the fraud to take place.


  • Aftermath and Consequences


  • The consequences of the Harshad Mehta scam were far-reaching. The immediate fallout was a massive loss of investor wealth, with many retail investors losing their savings. The stock market suffered a significant crash, and the crisis led to a tightening of regulations.


  • In the years that followed, a number of investigations were launched, and Mehta was arrested. He faced multiple charges, including financial fraud, embezzlement, and manipulating government securities. However, Mehta's trial was protracted, and he died in 2001 from a heart attack before a final verdict could be reached.


  • In response to the scandal, the Indian government introduced a series of regulatory reforms aimed at preventing such scams in the future. The Securities and Exchange Board of India (SEBI) strengthened regulations in the stock market, and the Reserve Bank of India (RBI) took measures to prevent the misuse of banking instruments like BRs. Additionally, the National Stock Exchange (NSE) was established in 1994 to provide more transparency in stock trading.


  • Legacy


  • The Harshad Mehta scam remains one of the largest financial scandals in Indian history, and it had a lasting impact on the way the Indian financial system operates today. The event highlighted the need for stringent regulatory oversight and more transparency in both the banking and stock market systems. While Harshad Mehta was a brilliant stockbroker, his legacy is marred by his illegal practices and the devastating impact he had on the financial ecosystem of India. https://www.effectiveratecpm.com/c8ti1bgrc?key=b9187a2bee017b9a6079e56bf39be730





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