what happened in 1992

8/9/2019 What Happened in 1992

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Rahulshah


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1978-79 Base year ofSensex, defined to be 100.

July 25, 1990 on July 25,1990, the Sensex touched

the magical four-digit figure for the first time and

closed at 1,001 in the wake of a good monsoon

season and excellent corporate results.

January 15, 1992On January 15, 1992, the Sensex

crossed the 2,000-mark and closed at 2,020

followed by the liberal economic policy initiativesundertaken by the prime minister P.V.Narasimha

rao.


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February 29, 1992On February 29, 1992, theSensex surged past the 3000 mark in the wake of

the market-friendly Budget announced by thethen Finance Minister, Dr Manmohan Singh. March 30, 1992On March 30, 1992, the Sensex

crossed the 4,000-mark and closed at 4,091 onthe expectations of a liberal export-import

policy. It was then that the HarshadMehta scamhit the markets and Sensex witnessed unabatedselling.


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September 8, 2005On September 8, 2005,the Bombay Stock Exchange's benchmark 30-share index -- the Sensex -- crossed the 8000level following brisk buying by foreign anddomestic funds in early trading.

February 6, 2006The Sensex on February 6,

2006 touched 10,003 points during mid-session.The Sensex finally closed above the10K-mark on February 7, 2006.


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HarshadMehta was an Indian stockbroker and is allegedto have engineered the rise in the BSE stock exchange inthe year 1992. Exploiting several loopholes in the banking

system. Mehta and his associates siphoned off funds from inter-bank transactions and bought shares heavily at a premiumacross many segments, triggering a rise in the Sensex.

When the scheme was exposed, the banks starteddemanding the money back, causing the collapse.

He was later charged with 72 criminal offenses and morethan 600 civil action suits were filed against him. He died in 2002 with many litigations still pending against

him.


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Harshad Shantilal Mehta was born in a Gujarati Jainfamily of modest means.

His early childhood was spent in Mumbai where his

father was a small-time businessman. His mother'sname was Rasilaben Mehta. His early childhood wasspent in the industrial city ofBombay.

Due to indifferent health of Harshads father in thehumid environs of Bombay, the family shifted theirresidence in the mid-1960s to Raipur, then in MadhyaPradesh and currently the capital ofChhattisgarhstate.


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He studied at the Holy Cross High School, located at ByronBazaar. After completing his secondary education Harshadleft for Bombay. While doing odd jobs he joined Lala LajpatRai College for a Bachelors degree in Commerce.

After completing his graduation, Harshad Mehta started hisworking life as an employee of the New India AssuranceCompany. During this period his family relocated to Bombayand his brother Ashwin Mehta started to pursue graduationcourse in law at Lala Lajpat Rai College.

His youngest brother Hitesh Mehta is a practising surgeon atthe B.Y.L.Nair Hospital in Bombay.

Ashwin joined Industrial Credit and Investment Corporationof India (ICICI Bank) after completed his graduation.Theyhad rented a small flat in Ghatkopar for living.


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In the late 70s every evening Harshad and Ashwin started toanalyze tips generated from respective offices and fromcyclostyled investment letters, which had made their appearanceduring that time.

In the early 80s he quit his job and sought a job with stock brokerP. Ambalal affiliated to Bombay Stock Exchange (BSE) beforebecoming a jobber on BSE for stock broker P.D. Shukla.

In 1981 he became a sub-broker for stock brokers J.L. Shah andNandalal Sheth.

After a while he was unable to sustain his overbought positionsand decided to pay his dues by selling his house with consent ofhis mother Rasilaben and brother Ashwin.The next day Harshadwent to his brokers and offered the papers of the house asguarantee.The brokers Shah and Sheth were moved by hisgesture and gave him sufficient time to overcome his position.


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Mehta gradually rose to become a stockbroker on the Bombay Stock Exchange and

lived almost like a movie star in a 15,000square feet apartment, which had aswimming pool as well as a golf patch.

Harshad Mehta was making waves in thestock market. He had been buying sharesheavily since the beginning of 1990.


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He had been buying shares heavily since thebeginning of 1990.The shares which attractedattention were those of Associated Cement

Company (ACC).The price of ACC was bid up toRs 10,000.

For those who asked, Mehta had thereplacement cost theory as an explanation.Thetheory basically argues that old companiesshould be valued on the basis of the amount ofmoney which would be required to createanother such company.


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His Favourite stocks included ACC

ApolloTyres RelianceTata Iron and Steel Co. (TISCO) BPL Sterlite Videocon.


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Through the second half of 1991, Mehta was thefamous of the business media and earned thename as the Big Bull, who was said to have

started the bull run. But, where was Mehtagetting his endless supply of money from?Nobody had a clue.

On April 23, 1992, journalist Sucheta Dalal in acolumn inTheTimes of India, exposed thedubious ways of Harshad Mehta.The broker wasdipping illegally into the banking system tofinance his buying.


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In 1992, when Sucheta Dalal broke the story about the Rs 600 crore thathe had swiped from the State Bank of India, it was his visits to the banksheadquarters in a flashyToyota Lexus that was the tip-off.

Those days, the Lexus had just been launched in the international marketand importing it cost a neat package, Dalal wrote in one of her columnslater.

The authors explain: The crucial mechanism through which the scamwas effected was the ready forward (RF) deal.The RF is in essence asecured short-term (typically 15-day) loan from one bank to another.Crudely put, the bank lends against government securities just as apawnbroker lends against jewellery.The borrowing bank actually sellsthe 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 team used

with great success to channel money from the banking system.


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A typical ready forward deal involved two banks brought togetherby a broker in lieu of a commission.The broker handles neither thecash nor the securities, though that wasnt the case in the lead-upto the scam.

In this settlement process, deliveries of securities and paymentswere made through the broker.That is, the seller handed over thesecurities to the broker, who passed them to the buyer, while thebuyer gave the cheque to the broker, who then made the paymentto the seller.

In this settlement process, the buyer and the seller might not evenknow whom they had traded with, either being know only to thebroker.

This the brokers could manage primarily because by now they hadbecome market makers and had started trading on their account.To keep up a semblance of legality, they pretended to beundertaking the transactions on behalf of a bank.


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Another instrument used in a big way was the bank receipt (BR). Ina ready forward deal, securities were not moved back and forth inactuality. Instead, the borrower, i.e. the seller of securities, gavethe buyer of the securities a BR.

As the authors write, a BR confirms the sale of securities. It actsas a receipt for the money received by the selling bank. Hence thename - bank receipt. It promises to deliver the securities to thebuyer. It also states that in the mean time, the seller holds thesecurities in trust of the buyer.

Having figured this out, Mehta needed banks, which could issuefake BRs, or BRs not backed by any government securities. Twosmall and little known banks - the Bank of Karad (BOK) and theMetorpolitanCo-operative Bank (MCB) - came in handy for thispurpose.These banks were willing to issue BRs as and whenrequired, for a fee, the authors point out.


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Once these fake BRs were issued, they were passed on toother banks and the banks in turn gave money to Mehta,obviously assuming that they were lending againstgovernment securities when this was not really the case.This money was used to drive up the prices of stocks in thestock market. When time came to return the money, theshares were sold for a profit and the BR was retired.Themoney 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 Mehtas modus operandi.Once the scam was exposed, though, a lot of banks wereleft holding BRs which did not have any value - thebanking system had been swindled of a whopping Rs4,000 crore.


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Mehta made a brief comeback as a stock market guru,giving tips on his own website as well as a weeklynewspaper column.This time around, he was in

cahoots with owners of a few companies andrecommended only those shares.This game, too, didnot last long.

Interestingly, by the time he died, Mehta had beenconvicted in only one of the many cases filed againsthim.

Till now, it is still unknown what was the real storybehind the entire scam.The recent Hindi movie 'Gafla'showed this scam in a different perspective.


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The CBI which is Indias premier investigativeagency, was entrusted with the task of decipheringthe modus operandi and the ramifications of the

scam. Harshad Mehta was arrested andinvestigations continued for a decade.

During his judicial custody, while he was inThane

Prison, Mumbai, he complained of chest pain, andwas moved to a hospital, where he died on 31stDecember 2001.


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Mumbai: Just as the year 2001 was coming to anend, Harshad Mehta, boss of Grow moreResearch and Asset Management, died of a

massive heart attack in a jail inThane. And thuscame to an end the life of a man who is probablythe most famous character ever to haveemerged from the Indian stock market.

In the book,The Great Indian Scam: Story of themissing Rs 4,000 crore, Samir K Barua andJayanth R Varma explain how Harshad Mehtapulled off one of the most audacious scams inthe history of the Indian stock market.


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The Securities Exchange Board of India (SEBI) wasestablished on April 12, 1988 through an administrativeorder, but it became a statutory and really powerfulorganization only in 1992.

Government of India (GOI) issued an ordinance on 30thJan 1992 and pursuant to this ordinance SEBI was set upon 21st Feb 1992.The SEBI Act replaced this ordinance on4th April 1992.

The regulatory powers of the SEBI were increased through

the Securities Laws (Amendment)O

rdinance of January1995, which was subsequently replaced by an Act ofParliament. SEBI is under the overall control of theMinistry of Finance. It has since become a very importantconstituent of the financial regulatory framework in India.

what happened in 1992

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