Sunday, August 15, 2010

The Bigbull - The Harshad Metha !!

Harshad Shantilal Mehta was born to Shantilal Mehta, a small businessman, and Rasilaben Mehta. He spent his early childhood in Mumbai the capital of Maharashtra and the family moved to Raipur in Madhya Pradesh sometime in mid-1960s.

He studied at the Holy Cross High School, located at Byron Bazaar area of Raipur. After completing his secondary education Harshad left for Mumbai. Supporting himself with odd jobs he completed a Bachelor’s degree in Commerce in 1965 from Lala Lajpat Rai College and started his working life as an employee of the New India Assurance Company. During this period his family relocated to Bombay and his brother Ashwin Mehta started to pursue graduation course in law at Lala Lajpat Rai College. His youngest brother Hitesh is a practising surgeon at the B.Y.L.Nair Hospital in Mumbai. After his graduation Ashwin joined (ICICI) Industrial Credit and Investment Corporation of India.

As a stock broker In the late seventies every evening Harshad and Ashwin started to analyze tips generated from respective offices and to clearly understand the stock market operation they extended their study to regular financial statement as well.

In the early eighties he quit his job and sought a job with stock broker P. Ambalal (who is affiliated to Bombay Stock Exchange) (BSE) before becoming a jobber on BSE for stock broker P.D. Shukla.

In 1981 he became a sub-broker for stock brokers J.L. Shah and Nandalal Sheth. After a while he was unable to sustain his overbought positions and decided to pay his dues by selling his house with consent of his mother Rasilaben and brother Ashwin. The next day Harshad went to his brokers and offered the papers of the house as guarantee. The brokers Shah and Sheth were moved by his gesture and gave him sufficient time to overcome his position.

After he came out of this big struggle for survival he became stronger and his brother quit his job to team with Harshad to start their venture GrowMore Research and Asset Management Company Limited. While a brokers card at BSE was being auctioned, the company made a bid for the same with financial assistance from Shah and Sheth, who were Harshad's previous broker mentors.

He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as well as scrip-specific activities. By the end of eighties the media started projecting him as "Stock Market Success", "Story of Rags to Riches" and he too started to fuel his own publicity. He felt proud of this accomplishments and showed off his success to journalists through his mansion "Madhuli", which included a billiards room, mini theater and nine-hole golf course, and a fleet of imported cars including a custom built Lexus luxury sedan, a rarity in India in those days.

During his heyday, in the early 1990s, Harshad Mehta commanded a large resource of funds and finances as well as personal wealth.

The fall

In April 1992, the Indian stock market crashed, and Harshad Mehta, the person considered the architect of the bull run was blamed for the crash. He had manipulated the Indian banking systems to siphon off funds from the banking system and used the funds to build large positions in a select group of stocks. When the scam was exposed, he was called upon by the banks and financial institutions to return the funds. This necessitated the liquidation of the stock holdings and an exit from the positions which he had built in various stocks. The selling brought about a severe market downturn, creating a selling panic, and the stock market crashed within days. He was arrested on June 5, 1992 for his role in the scam.

Harshad Mehta had been buying shares heavily since the beginning of 1990. The shares which attracted attention were those of Associated Cement Companies (ACC). The price of ACC shares was bid up to Rs 10,000. Mehta justified by the “Replacement cost theory” which argues that “Old companies should be valued on the basis of the amount of money which would be required to create another such company”.

Through the second half of 1991, Mehta was the darling of the business media and earned the sobriquet of the ‘Big Bull’, who was said to have started the Bull Run. But no body in the market could figure out the source of money for Mehta’s investment.

The crucial mechanism through which the scam was affected was the Ready Forward (RF) deal. The RF is in essence a secured short-term loan (typically 15-day) from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jewellery. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price.” It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system.

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 know 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. 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. A “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 mean time, the seller holds the securities in trust of the buyer.

Having figured this out, Metha 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 Cooperative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee. Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, obviously 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.

The game went on as long as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. 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 Rs 4,000 crore (close to $ 1 billion)

The End

The Central Bureau of Investigation which is India’s premier investigative agency, was entrusted with the task of deciphering the modus operandi and the ramifications of the scam. Harshad Mehta was arrested and investigations continued for a decade. During his judicial custody, while he was in Thane Prison, Mumbai, he complained of chest pain, and was moved to a hospital, where he died on 31 December 2001.

His death remains a mystery. Some believe that he was murdered ruthlessly by an underworld nexus (spanning several South Asian countries including Pakistan). Rumor has it that they suspected that part of the huge wealth that Harshad Mehta commanded at the height of the 1992 scam was still in safe hiding and thought that the only way to extract their share of the 'loot' was to pressurize Harshad's family by threatening his very existence. In this context, it might be noteworthy that a certain criminal allegedly connected with this nexus had inexplicably surrendered just days after Harshad was moved to Thane Jail and landed up in imprisonment in the same jail, in the cell next to Harshad Mehta's.