Harshad Shantilal Mehta
Harshad Shantilal Mehta (29 July 1954 – 31 December 2001) was an Indian stockbroker, entrepreneur, and convicted fraudster. His participation in the 1992 Indian securities scam, which involved approximately ₹30,000 crore, earned him notoriety for his market manipulation activities.
Out of the 27 criminal charges filed against him, Mehta was convicted on only four counts prior to his death from a sudden heart attack at the age of 47 in 2001. It was claimed that he orchestrated an extensive stock manipulation scheme that was financed through worthless bank receipts, which his firm facilitated for "ready forward" transactions among banks. The Bombay High Court and the Supreme Court of India found him guilty in connection with a financial scandal that amounted to ₹100 billion (US$1.2 billion) on the Bombay Stock Exchange (BSE). This scandal revealed significant vulnerabilities in the Indian banking system and the transaction processes of the BSE, prompting the Securities and Exchange Board of India (SEBI) to implement new regulations to address these weaknesses. Mehta's trial lasted for nine years, concluding with his death in late 2001 due to a heart attack.
Early Life:
Harshad Shantilal Mehta was born on 29 July 1954 in Paneli Moti, Rajkot district, into a Gujarati Jain family. He spent his formative years in Borivali, where his father operated a small textile business.
Education:
Mehta attended Janta Public School in Camp 2 Bhilai for his early education. A cricket enthusiast, he did not exhibit exceptional academic talent during his school years and moved to Mumbai after completing his schooling to pursue further studies and seek employment. He earned his Bachelor of Commerce degree in 1976 from Lala Lajpatrai College in Bombay and subsequently held various odd jobs for the next eight years.
Work and Life:
In his formative years, Mehta engaged in various jobs primarily focused on sales, which included selling hosiery, cement, and sorting diamonds. He commenced his professional journey as a salesperson at the Mumbai office of New India Assurance Company Limited (NIACL). It was during this period that he developed an interest in the stock market, leading him to resign shortly thereafter and join a brokerage firm. In the early 1980s, he transitioned to a junior clerical position at Harjivandas Nemidas Securities, where he worked as a jobber for broker Prasann Pranjivandas, whom he regarded as his mentor.
Over the course of a decade starting in 1980, he held progressively responsible roles across various brokerage firms. By 1990, he had established himself as a significant figure in the Indian securities sector, with media outlets, including well-known magazines like Business Today, referring to him as the "Amitabh Bachchan of the Stock Market."
Mehta founded Grow More Research and Asset Management with the financial backing of his associates when the Bombay Stock Exchange auctioned a broker's card, and he began trading actively in 1986. By the early 1990s, numerous prominent individuals began to invest in his firm and sought his expertise. It was during this time that he engaged in substantial trading of shares in the Associated Cement Company (ACC). The share price of the cement company surged from ₹200 to nearly ₹9,000, driven by significant buying activity from a group of brokers, including Mehta himself. He defended this aggressive trading strategy by asserting that the stock had been undervalued, claiming that the market had merely corrected itself by revaluing the company to a price reflective of the cost of establishing a similar enterprise, a concept he termed the "replacement cost theory."
Throughout this period, particularly in 1990–1991, the media elevated Mehta's public persona, dubbing him "The Big Bull." He was featured on the cover of several publications, including the renowned economic magazine Business Today, in an article titled "Raging Bull."His extravagant lifestyle, characterized by a 15,000 square foot penthouse overlooking the sea in the upscale locality of Worli, complete with a mini golf course and swimming pool, along with his collection of vehicles including a Toyota Corolla, Lexus LS400, and Toyota Sera, was prominently featured in various publications. These elements further reinforced his persona during a period when such luxuries were uncommon even among India's affluent class.
Subsequent criminal charges brought by authorities alleged that Mehta and his associates engaged in a more extensive scheme that manipulated the rise of the Bombay Stock Exchange. This scheme was purportedly financed by collateralized bank receipts, which were, in reality, uncollateralized. The bank receipts facilitated short-term bank-to-bank lending, known as "ready forward" transactions, which were brokered by Mehta's firm. By the latter half of 1991, Mehta had earned the moniker "Big Bull," as he was credited with initiating the stock market bull run. Among those who worked at his firm was Ketan Parekh, who would later become embroiled in a similar fraudulent scheme.
Background of the 1992 securities fraud:
Bank funds scam:
Until the early 1990s, Indian banks were prohibited from investing in equity markets. However, they were required to report profits and maintain a specific ratio of their assets in government fixed-interest bonds. Mehta astutely extracted capital from the banking system to meet these requirements and redirected this capital into the stock market. He also assured banks of higher interest rates while requesting them to transfer funds into his personal account, under the pretense of purchasing securities from other banks. At that time, banks were required to engage brokers to acquire securities and forward bonds from other banks. Mehta temporarily utilized these funds in his account to purchase shares, significantly increasing the demand for certain stocks (from reputable companies such as ACC, Sterlite Industries, and Videocon), which he subsequently sold, distributing a portion of the proceeds back to the banks.
The remainder was retained for personal gain. This led to a dramatic increase in the stock price of ACC, which was valued at ₹200 per share in 1991, soaring to nearly ₹9,000 within a mere three-month period.
Bank receipt fraud:
Another significant tool employed was the bank receipt. In a ready forward transaction, the actual transfer of securities did not occur. Instead, the seller of the securities provided the buyer with a bank receipt (BR). This BR acted as a confirmation from the issuing bank and assured the buyer that they would receive the securities they had purchased at the conclusion of the agreement.
Recognizing this opportunity, Mehta sought banks capable of issuing fraudulent BRs or BRs that lacked backing from any government securities.
Once these counterfeit BRs were generated, they were circulated among other banks, which subsequently provided funds to Mehta, mistakenly believing they were lending against government securities when, in fact, they were not. He escalated the price of ACC from ₹200 to ₹9,000, representing a staggering increase of 4,400%. Ultimately, he had to realize his profits, and the day he executed his sales coincided with a market crash.
The 1992 Securities Fraud Incident:
On April 23, 1992, journalist Sucheta Dalal revealed illicit practices in a column published in The Times of India. Mehta was unlawfully accessing the banking system to fund his acquisitions.
A standard ready forward transaction involved two banks connected by a broker who received a commission for their services. In typical scenarios, the broker did not manage either the cash or the securities; however, this was not the case leading up to the fraud. During the settlement process, securities and payments were exchanged through the broker. Specifically, the seller would transfer the securities to the broker, who would then deliver them to the buyer, while the buyer issued a cheque to the broker, who subsequently made the payment to the seller. In this arrangement, the buyer and seller might remain unaware of each other's identities, as this information was typically known only to the broker. Brokers were able to facilitate this due to their evolving role as market makers, engaging in trading on their own accounts. To maintain an appearance of legitimacy, they feigned conducting transactions on behalf of a bank.
Mehta employed counterfeit Bank Receipts (BRs) to secure unsecured loans, utilizing various small banks to issue BRs upon request. Once these fraudulent BRs were generated, they were circulated to other banks, which, under the false impression that they were lending against government securities, provided funds to Mehta. This capital was then utilized to inflate stock prices in the market. When the time came to repay the loans, the shares were sold for profit, and the BRs were settled, allowing for the return of the funds owed to the banks.
The remainder was retained for personal gain. This led to a dramatic increase in the stock price of ACC, which was valued at ₹200 per share in 1991, soaring to nearly ₹9,000 within a mere three-month period.
Bank receipt fraud:
Another significant tool employed was the bank receipt. In a ready forward transaction, the actual transfer of securities did not occur. Instead, the seller of the securities provided the buyer with a bank receipt (BR). This BR acted as a confirmation from the issuing bank and assured the buyer that they would receive the securities they had purchased at the conclusion of the agreement.
Recognizing this opportunity, Mehta sought banks capable of issuing fraudulent BRs or BRs that lacked backing from any government securities.
Once these counterfeit BRs were generated, they were circulated among other banks, which subsequently provided funds to Mehta, mistakenly believing they were lending against government securities when, in fact, they were not. He escalated the price of ACC from ₹200 to ₹9,000, representing a staggering increase of 4,400%. Ultimately, he had to realize his profits, and the day he executed his sales coincided with a market crash.
The situation persisted as long as the stock prices continued to rise, with Mehta's activities remaining undisclosed. However, once the fraudulent practices came to light, numerous banks found themselves in possession of worthless bank receipts, resulting in a staggering loss of ₹40 billion (equivalent to ₹310 billion or US$3.7 billion in 2023) for the banking sector. The banks were acutely aware that they would face accusations if the public uncovered their connections to Mehta's cheque issuances. It later emerged that Citibank, brokers such as Pallav Sheth and Ajay Kayan, industrialists including Aditya Birla and Hemendra Kothari, several politicians, and the RBI Governor S. Venkitaramanan had all either permitted or facilitated Mehta's manipulation of the market.
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