Rags to Riches – Harshad Mehta

Harshad Mehta, the man who became a billionaire just by trading stocks, and was supposedly one of the richest people in India during his time.

Harshad Mehta is often known as the wolf of Dalal Street and one of the greatest stock brokers of all time. In his initial years, Harshad was just like any other guy from a humble background, trying to make it big. He, like any other youngster, tried his hand at multiple jobs including sales, selling hosiery, cement, and sorting diamonds. Nothing worked out for him, and there was a time when he decided that he wanted to enter the world of stocks. Finally, he found a job at Harjivandas Nemidas Securities where he worked as a broker for Prasanna Pranjivandas.

Over a period of ten years, beginning in 1980, he served in positions of increasing responsibility at a series of brokerage firms. By 1990, he had risen to a position of prominence in the Indian securities industry, with the media (including popular magazines such as Business Today) touting him as “The Amitabh Bachchan of the Stock market”

In 1984, Mehta was able to become a member of the Bombay Stock Exchange as a broker and established his own firm called GrowMore Research and Asset Management. A number of eminent people began to invest in his firm, and utilize his services including the then minister P. Chidambaram through Chidambaram’s own shell companies. It was at this time that he began trading heavily in the shares of Associated Cement Company (ACC). The price of shares in the cement company eventually rose from ₹ 200 to nearly ₹ 9000 due to a massive spate of buying from a set of brokers including Mehta. This was maybe a co-incidence for others but a major breakthrough for Mehta and this is where his magic came into play. Mehta justified this excessive trading in ACC shares by stating that the stock had been undervalued and that the market had simply corrected when it revalued the company at a price equivalent to the cost of building a similar enterprise; the so-called “replacement cost theory” that he had put forward.

The game has just begun for Mehta and he went on to become one of the greatest traders that we have witnessed till date. There were people who trusted him and his calls seldom went into loss. With successive investments, Mehta became one of the most sought-after brokers in BSE. There were people who trusted him blindly and invested crores in particular stocks because they were backed by Mehta and here, I am referring to the richest people of the 90s. Mehta was like a magician, he took your money and doubled it in 2 years, he was next to God. He was often called the “Big Bull”. The market seemed to have bowed in front of him. He got the reputation of a massive stock manipulator. If your company’s stock was backed by Harshad Mehta, it was sure to go up. There were dozens of investors who would make money by mimicking his trades and he would obviously charge a hefty amount for it. Mehta was indeed a genius who had known and understood the market so closely that he was able to predict it’s every move.

All being said, Mehta was the hero for common people until the 1992 scam happened. Sadly, no one is satisfied with what they have and greed kills the greatest people. Back in 1992, investing laws were very different and banks were not allowed to invest in equity. Mehta cleverly squeezed capital out of the banking system to address this requirement of banks and pumped this money into the share market, which was totally illegal. While borrowing money from banks, he promised them a high rate of interest. At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. No bank denied him money because Harshad Mehta was the big name in Indian stock markets back then. Mehta used this money temporarily in his account to buy shares, thus hiking up demand of certain shares (shares he could manipulate easily at that time, given his credibility) dramatically, selling them off, passing on a part of the proceeds to the bank and keeping the rest for himself. In simple words, he borrowed huge sums of public money and used his stock manipulation techniques to double or triple it. He just multiplied his personal trades by a factor of 1000, using the massive amount of money that was lent to him by banks.

Another instrument used in a big way was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR. The BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name – bank receipt. It promises to deliver the securities to the buyer. It also states that in the meantime, the seller holds the securities in trust of the buyer.

Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed by any government securities. Two small and little-known banks – the Bank of Karad (BOK) and the Mumbai Mercantile Co-operative Bank (MCB) – came in handy for this purpose.

Once these fake BRs were issued, they were passed on to other banks and the banks, in turn, gave money to Mehta, plainly assuming that they were lending against government securities when this was not really the case. He took the price of ACC from ₹ 200 to ₹ 9,000. That was an increase of 4,400%. The stock markets were overheated and the bulls were on a mad run. Since he had to book profits in the end, the day he sold was the day when the markets crashed.

Consider this as a simple example, I am a bull in the market, who has tons of money. I buy some stocks and claim them to be undervalued. Now, since I’m a big shot in the stock market, lakhs of people follow my trades and would buy the same stock. I pump the price of a stock indefinitely. When the stock reaches its climax, I go ahead and dump it, booking my profit.

Well, the same was done to multiple stocks and Mehta profited heavily. Exploiting several loopholes in the banking system, Mehta and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premium across many segments, triggering a rise in the BSE SENSEX. When the scheme was exposed, banks started demanding their money back, causing the collapse.

He was arrested and banished from the stock market with investors holding him responsible for causing a loss to various entities. Mehta and his brothers were arrested by the CBI for allegedly misappropriating more than 2.8 million shares (2.8 million) of about 90 companies, including ACC and Hindalco, through forged share transfer forms. The total value of the shares was placed at ₹2.5 billion (US$38 million).

In the period between April 1991 and April 1992, the Sensex went into a frenzy and returned 274 percent, moving from 1,194 points to 4,467. That is the highest annual return for the index.

The scam came to light when the State Bank of India reported a shortfall in government securities. That led to an investigation that later showed that Mehta had manipulated around Rs 3,500 crore in the system. On August 6, 1992, after the scam was exposed, the markets crashed by 72 percent leading to one of the biggest falls and a bearish phase that lasted for two years.

Mehta’s game was exposed and everyone was after his life. However, he did make an incredible amount of money from mere stock trading. He is till date one of the biggest manipulators of the stock market we have seen. What would you call a man who can take BSE from x to 2x in a period of 1 year? The God of Stock Markets enjoyed his short-lived riches. He is considered to be one of the first people in India to own a Lexus car. His flashy lifestyle of a sea facing 15,000 feet penthouse in the tony area of Worli complete with a mini golf course and swimming pool, his fleet of a fleet of cars including a Toyota Lexus, Corolla Starlet, Toyota Sera.

There are people who would hate Mehta for what he did. I personally don’t appreciate his approach to becoming rich. After all, it was illegal and equivalent to stealing money from innocent investors. However, Mehta would be remembered forever for his knack for understanding the market and knowing it to an extent that he could manipulate it badly. He lived his life as an unsung hero. Mehta passed away at the age of 47 in the year 2001. He couldn’t live long enough to impart his magnificent knowledge to the commoners. If he was alive now, I’m sure he would be training people how to trade and be a great asset to the Indian economy. Although he was termed as a criminal, he will always be a hero for the common people who made a massive amount of money just by mimicking his trades.