The Harshed Mehta Scam.

Updated: Nov 26, 2020

Hey Guys, Welcome Back. Today I want to share with you a story, that tells us the bad side of our stock market and the loopholes in our Banking Industries. Do you know what's common between Harshed Mehta, Nirav Modi, Ketan Parekh, and Vijay Mallya? It's that they all have found the loopholes in our banking sector and made millions out of it. Harshed Mehta Made about 24,000 crores in just 3 years.


Let's discuss his story from the start.



The Beginning:


Harshed Mehta was an average student. He completed his schooling from Raipur, He had also been suspended for not following the discipline guidelines given to the students. He completed his B.Com from Bombay from the Lala Lajpat Rai College. After Collage he took low-level Jobs, selling garments and appliances etc. He didn't know what was he gonna do in his life but.



The Luck Turnaround:


He joined New India Sales Company where he learned about the stock market for the first time. He realized that this what he was born to do, he quit his job in 1981 and joined a stock market brokerage firm, where he learned the stock market in and out.

Within 3 years, he became a BSE broker. By 1990 he had started his firm called “Grow More Research and Asset Management”. He wasn't satisfied and in his lust for money started exploiting the loopholes in our banking sector.

The Deadly Story:


At that time RBI had told all the banks that they had to keep a certain amount in Government Bonds. Checks were done every week and if a bank failed to do so, RBI would penalize them. There were two types of banks, some had no problem keeping there minimum balance in the bonds, but some had major troubles in doing so. For reference, we will call them strong and weak banks respectively. The weak banks had to borrow money from the strong banks to keep their minimum balance, these were not done directly between the banks brokers were involved, this is where Harshed Mehta would do his trick and earn a mammoth.

He approached the weak banks and told them that he will get them the bonds they needed. For this, he asked them for money and some extra time, which all of the banks gave him as he was a reputed name in the banking industry. Now, he would pitch the strong banks and ask for the bonds against money. Here also, he asked for some extra time. At the end of the promised time, he gave the money and the bonds, so everyone was happy.


Harshad Mehta's transactions can be shown by this flow chart:

Credits


But how was Mehta making money, remember the time that he asked for? He used to invest the money he had taken from the weak banks, in the stock market seeing the market rise, the other investors would invest all their money in the stock that Mehta inflated. But still, how would he return the money, here's where his genius would come in, he wasn't just dealing with one or two banks but a whole lot of banks. He took money from a bank to return the money to the other and make a profit using the stock market. He was basically rotating the money.

This was going good but he got more greedy and asked two banks, Bank of Karad and Metropolitan Cooperative Bank, to issue fake government bonds bank receipts, these were just a piece of paper nothing else. He used to give these fake bond receipts to the weak banks as if they were real and the weak banks would give money to him, this money was used to inflate the stock market, at the end he would repay the money and take those fake papers back.

This added liquidity boomed the stock market, the Sensex index quadrupled in a quarter the investors including the normal public were very happy. In fact, a stock named ACC in which Harshed invested boomed from ₹200 to ₹9000 in all this Mehta Inflated his own portfolio by 10x earning about 2000 crore. He was never short in showing off, he bought a 12,000-foot property in Mumbai, cars that were even not affordable to the richest of the rich. But all this got him into trouble.

The End of a Fairy-Tail


An investigative Journalist named Sucheta Dalal from the Times of India exposed him


Ms. Sucheta Dalal


The lending banks started to ask him for the money, remember paying back the money was never a big deal for Harshed Mehta but this time it was different, the stock market bust and Mehta had no money to pay to the banks.


Credits


It took no time for the CBI to investigate, he was found guilty for 70 frauds. By this time Mehta's game was over. He was under criminal custody in the Thane Jail. He took down many other senior officials with him, which included the then Vijaya and UCO Bank's Chairman and top treasures from SBI. But most tragic of all, thousands of investors lost there hard-earned money and never recovered it in there lives. The Hero of the Stock Market became the biggest villain.

Harshad Mehta taken to the Bombay high court on June 5, 1992



The Conclusion:


The Harshed Mehta Scam and the more recent Nirav Modi's scandal are reminder of how vulnerable our banking industry and the stock market are to manipulation. Moreover, they also teach us that when the prices of a stock start to get to the crazy side, intelligent investors start getting more cautious not crazy.



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We will meet again next week. Until then, GOODBYE!

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