Harshad Mehta

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, with the financial assistance of associates, when the BSE auctioned a broker's card.[6] He actively started to trade in 1986.[6] By early 1990, a number of eminent people began to invest in his firm, and utilize his services. 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 Rs. 200 to nearly 9000 due to a massive spate of buying from a set of brokers including Mehta.[9] 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.[10]

During this period, especially in 1990–1991, the media portrayed a heightened deified image of Mehta, calling him "The Big Bull". He was covered in a cover page article of a number of publications including the popular economic magazine Business Today, in an article titled "Raging Bull". 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, and his fleet of cars including a Toyota Corolla, Lexus Starlet, and Toyota Sera were flashed in publications. These further exemplified his image at a time when these were rarities even for the rich people of India.[11]

In criminal indictments later brought by the authorities, it was alleged that Mehta and his associates then undertook a much broader scheme, which resulted in manipulating the rise in the Bombay Stock Exchange. The scheme was financed by supposedly collateralised bank receipts, which were in fact uncollateralised. The bank receipts were used in short-term bank-to-bank lending, known as "ready forward" transactions, which Mehta's firm brokered. By the second half of 1991 Mehta had earned the nickname of the "Big Bull", because he was said to have started the bull run in the stock market.[10] Some of the people who worked in his firm included Ketan Parekh, who later would be involved in his own replicate scam.[8]

Up to the early 90s, banks in India were not allowed to invest in the equity markets. However, they were expected to post profits and to retain a certain ratio (threshold) of their assets in government fixed interest bonds. Mehta cleverly squeezed capital out of the banking system to address this requirement of banks and pumped this money into the share market. He also promised the banks higher rates of interest, while asking them to transfer the money into his personal account, under the guise of buying securities for them from other banks. At that time, a bank had to go through a broker to buy securities and forward bonds from other banks. Mehta used this money temporarily in his account to buy shares, thus hiking up demand of certain shares (of good established companies like ACC, Sterlite Industries and Videocon) dramatically, selling them off, passing on a part of the proceeds to the bank and keeping the rest for himself. This resulted in stocks like ACC (which was trading in 1991 for Rs. 200/share) to nearly Rs. 9000 in just 3 months.[8]

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 Metropolitan 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.[12] He took the price of ACC from Rs. 200 to Rs. 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.[13]

On 23 April 1992, journalist Sucheta Dalal exposed Mehta's illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking system to finance his buying.

A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasn't the case in the lead-up to the scam. In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller. In this settlement process, the buyer and the seller might not even know whom they had traded with, either being known only to the broker. This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank.

Having figured out his scheme, Mehta needed banks which issued fake BRs (Not backed by any government securities). "Two small and little known banks – the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) – came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee," the authors point out. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.

This went on as long as the stock prices kept going up, and no one had a clue about Mehta's operations. Once the scam was exposed, though, a lot of banks were left holding BRs which did not have any value – the banking system had been swindled of a whopping ₹40 billion (US$560 million). He knew that he would be accused if people came to know about his involvement in issuing cheques to Mehta. Subsequently, it transpired that Citibank, brokers like Pallav Sheth and Ajay Kayan, industrialists like Aditya Birla, Hemendra Kothari, a number of politicians, and the RBI Governor R.Venkitaramanan all had played a role in allowing or facilitating Mehta's rigging of the share market.[15]

Mehta again raised a furor on 16 June 1993 when he made a public announcement that he had paid Rupees 1 Crore to the then Congress president and prime minister, Mr P.V. Narasimha Rao, as donation to the party, for getting him off the scandal case.[4][18]