Scam 1992 Explained: How Harshad Mehta and the Banks played the system
Hansal Mehta's SCAM 1992 is everywhere! And that too for all the good reasons. The series perfectly created the world around the Bombay Stock Exchange in the '80s and '90s from which a man rose to unimaginable heights of success who later turned out to be the man behind one of the biggest scams in the country that shook the entire stock market and the entire country! But let's talk about how things went wrong for Harshad Mehta, How did he scam the system?
This tv series is exceptional in every way, from the amazing intro soundtrack to Pratik Gandhi's incredible portrayal of Harshad Mehta, it is a must-watch!
What's common between Harshad Mehta, Ketan Parekh, Vijay Mallya & Nirav Modi? They all found loopholes in the Indian banking system and exploited those loopholes to generate incredible amounts of wealth. Harshad Mehta being the man who started it all. If adjusted for inflation today, Harshad Mehta laundered 24,000 crores in the stock market in 3 years.
Harshad was born into a poor family. After completing his education Harshad worked many small-time jobs but wasn't satisfied. Later he learned about the stock market and wanted to get in. He joined a brokerage firm and started learning about the market in-depth. He was quick to grasp the information and brought a lot of profit to the firm he was working for. Eventually, he started his firm called Growmore Research and Asset Management. As time passed, Harshad Mehta had risen to prominence in the stock market. But he wanted more, and that's where the SCAM part begins.
At that time, the RBI had mandated all the banks to maintain a certain amount of funds in the form of Government Bonds. By the end of every week, every bank needed to have a certain amount maintained or RBI would penalize them. There were Big banks like the SBI or the Citibank and there were small banks, the big banks didn't have any problem maintaining the required amount of funds but certain small banks struggled in doing so. So the small banks always had to borrow the bonds from the bigger banks in exchange for some interest, but these transactions were not done directly between banks, they were done through brokers and one of them was Harshad Mehta.
What Harshad did here was he would approach the banks that were in the need of the Bonds and he'd guarantee them the best deal. He'd then convince them to issue a cheque of a certain amount to his name and then ask the bank for some time. Then Mehta went to bigger banks and ask for the Government Bonds, promise the extra return and again ask them for some time. Since he was so influential and reputed, either of the banks didn't have any problem giving him the extra time. When the deadline approached, Mehta completed the transaction by giving the smaller banks the bonds and giving the bigger banks their Interest. So how was Mehta making money out of this?
Remember the extra time he asked both banks for? During that time Mehta had ridiculous amounts of money as all the funds were issued in his name, so technically until the returning date, all the funds were his to use. Mehta was funneling these funds into the Stock Market by aggressively buying the shares of certain companies and because of this massive liquidity injection, the share prices of these shares would go up and because of that other investors would start buying the same stock in anticipation of more movement. And the reason why this was working so well was the excellent rotation done by Mehta. He was dealing with many banks at the same time and so he never has any problems clearing any deficits. This smart rotation between the borrowers and the lenders was Harshad Mehta's genius
But Mehta still wasn't satisfied, he lusted for more money. He conspired with the officials of Bank of Karad and the Metropolitan Cooperative Bank to issue fake bank receipts that weren't backed by any Government Bonds. Mehta would then give these BR's to other banks and the banks would give him money assuming the BR is backed by the Government Bonds when that was not the case. This money was used to drive the prices in the stock market and when the time came to return the money, the shares would be sold for a profit and the BR would be retired. This game went on for a long time and no one had the idea. This extensive liquidity gave an adrenaline boost to the market and it showed major moves, BSE quadrupled its index in just one year and Mehta's portfolio now grew to almost 2000 crore. Mehta was also known as the Amitabh Bachchan of the Stock Market.
ACC was one of the stocks Mehta pumped. He took ACC's share price from ₹200 all the way to ₹9000. This is a 4400% increase!
Later this Scam was exposed by a Times of India journalist Sucheta Dalal. The newspaper article written by her alerted the RBI and all the other banks. Banks started demanding their money back from Mehta, which wasn't a big deal for him because he'd just sell his shares and fulfill his obligations. But this time around, as soon as the scandal broke the Stock market fell like it never did in years and Harshad had no money to back. Without any delay, necessary actions were taken and CBI took over the investigation. This was the ultimate downfall of Harshad Mehta.
For the complete story and what happened to Mehta after the scandal was exposed, check out the Sony Liv series SCAM 1992. You'll love it!
But did Harshad Mehta steal from the people or was he just smart enough to find the loopholes through which everybody made money? Was he the devil behind every illegal activity in this scam or was he made a scapegoat? All of this is a story for another day!