1990s Harshad Mehta scam

The top photo is of Harshad Mehta in 1991 with his Lexus and the photo under it is that of the same person but being escorted by police in 1992 for fraud.

Mr Mehta, nicknamed Big Bull, was a flamboyant stock broker of Mumbai who rose to instant fame in 1991 due to his aggressive strategies of stock market. He bought a Lexus, a sprawling house with swimming pool and a golf course!! But not many knew about his fraudulent methods.He exploited every possible loophole in banking systems to make quick money illegally.

Two such loopholes were Ready Forward (RF) and Bank Receipts (BR). Let me try to explain in simple words how he exploited the system.

At any point of time, there would be banks wanting to sell their securities (like bonds/shares) for cash and there would be banks wanting to buy securities by offering cash. He used to act as a middleman between such banks.

Suppose SBI wanted to sell securities and ICICI wanted to buy securities. He would go to SBI and assure them that he will find a buyer, take their securities and ask for 1 week time for this process.

Then, immediately, he wil go to ICICI and tell them that he will find a seller and take their cash and ask for 1 week time. Doing this way, he ended up having both the securities and liquid cash for 1 week (which was illegal but banks did that because he had gained their trust). Since he would deal with multiple banks, he would tell SBI that he will pay on Monday, then go to Canara bank and say he will pay them on tuesday and so on. It was such a sophisticated pipeline process, the next Monday when he was supposed to pay to SBI, he would make a deal with IDBI, get their money and pay it to SBI, hence getting a breathing time of another week and the cycle would continue. Phew!! This was the Ready Forward loophole.

The next loophole he picked was the Bank Receipt. In the above example, you saw how one bank would give securities and another would pay cash for such securities. But in banking system, assets would usually not move but only circulated through receipts. A bank would not give securities, but would give a bank receipt of the securities which would be trusted by the next bank and treated as securities itself.

He got fake bank receipts from banks and took the fraud to next level. This way, he made sure he always had crores of rupees as liquid cash and aggressively invested them in stock market, creating an artificial boom and continued making more money.

When the scam was exposed (by a columnist of a newspaper), the banks realized they were taken for a ride and started demanding the cash immediately. But there was no money. It was all a fraud. The stock market collapsed. Millions of innocent stock traders went bankrupt. Bank Chairmen started quitting their jobs taking responsibilty. Chairman of Vijaya Bank committed suicide by jumping from top of his bank building. Harshad Mehta was charged with hundreds of criminal cases.

So what is thought provoking in this? It shows that even without hard work, using illegal means, you can quickly reach the top but it is not sustainable. The fraudster not only spoils his future but also that of innocent people who were never involved in it.

NRN worked hard, became popular for good reasons and made millions of people richer by creating jobs.

Harshad Mehta worked illegally, became popular for bad reasons and made millions of people go bankrupt.