Scam 1992: The Harshad Mehta Story is a Hindi-language biographical, financial thriller streaming television series on SonyLIV directed by Hansal Mehta and co-directed by Jai Mehta. The series is based on the 1992 Indian stock market scam by many stockbrokers, including Harshad Mehta, and on journalist Sucheta Dalal and Debashish Basu’s 1992 book The Scam: Who Won, Who Lost, Who Got Away. The show focuses on Harshad Mehta’s life, meteoric rise, and subsequent fall.
What was the entire story?
Stockbrokers needed to borrow money to invest in the market. However, due to stringent RBI regulations, they could not borrow from banks, the cheapest source of funds. So brokers devised a workaround based on trading in government securities, collaborating with banks, skirting RBI rules, obtaining bank funds, and diverting them to the stock market.
Brokers and banks received assistance from public sector undertakings (PSUs) looking for ways to deploy their temporary surpluses. However, in violation of the rules, PSUs began taking positions in the securities market through bank-run portfolio management services (PMS) schemes.
Between April 1991 and May 1992, this wall of money fueled massive stock speculation, causing the BSE Sensex to nearly quadruple.
How did stockbrokers come into the picture?
Stockbrokers required funds to fund their stock market transactions. These brokers either took proprietary positions in stocks or financed vyaj badla trades.
Many also worked as money market brokers, where corporate bonds and government securities were traded.
Why did banks trade in securities?
Because of two factors, one is to comply with the RBI’s Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) regulations (SLR). As the name suggests, CRR required banks to park a portion of their deposits with the RBI at zero interest. The second reason was to increase their profits, which were at the time quite low.
Bank receipts are said to be at the heart of the scam? What exactly were they?
This was the paper trading era. As a result, there was frequently a delay in the seller bank handing over the physical securities. Sometimes the delay was caused by certificates being held at a different location. In many cases, the issuance of certificates was delayed for several years, and the holders’ only proof of ownership was an ‘allotment letter.’ Furthermore, because the trades were to be reversed shortly, physical delivery for large ready-forward transactions could be inconvenient.
So, until the shares were physically handed over, the seller bank would issue a ‘bank receipt’ (BR) to the buyer of the securities. The BR would no longer be valid once the buyer received the securities.
How were BRs misapplied?
Multiple violations resulted in BRs becoming accepted currency, traded as securities, with the underlying securities rarely changing hands. Banks began issuing BRs even for transactions in government securities, despite RBI rules prohibiting it.
Banks purchasing securities would not insist on delivery within 90 days, resulting in BRs remaining valid indefinitely. As a result, some banks began issuing BRs even though they lacked the underlying securities.
What about the role of foreign banks?
Some foreign banks, such as Citibank, were discovered to be short-selling government securities, which meant that they sold securities they did not own, violating RBI rules. Between April 1991 and May 1992, four foreign banks—Standard Chartered, ANZ Grindlays, Bank of America, and Citibank—accounted for 56% of all securities transactions.
Was there any other aspect of the Securities Scam?
The irregularities in bill discounting by banks are a lesser-known aspect. Many banks ignored the RBI’s bill discounting guidelines and advanced funds to corporations and NBFCs even when the bills were not genuine or did not comply with RBI rules. Corporations frequently use the funds to purchase stock in group companies.
What role did Harshad Mehta play in the Securities Scam?
Harshad Mehta was both a stock market participant and a money market broker. He was a preferred broker for the State Bank of India and its subsidiaries, National Housing Bank, UCO Bank, and ANZ Grindlays. While the banks were supposed to trade securities with other banks, most funds were credited to Harshad Mehta’s personal account. Harshad used the funds for stock market operations, and his replacement cost theory drove stock prices to dizzying heights.
What happened between Harshad and the bear cartel?
A group of brokers, mostly Harshad’s competitors, had many short-sold shares, convinced that the stock market’s euphoria was not supported by fundamentals and that the rally would not last. Thanks to the banking funds at his disposal, Harshad could carry forward his buy positions and push prices even higher. Harshad’s competitors were financially bled as prices continued to rise. They had to purchase shares on the open market to close their short positions, which fueled the rally and cost them more money.
Naturally, they were in a precarious position and faced financial ruin if share prices continued to rise.
How did things begin to fall apart?
Due to rampant securities trading violations, ‘holes’ had developed in banks’ investment portfolios. Because the portfolio was supported by SGL transfer forms or BRs that were either on hand or would be delivered by brokers, these holes went undetected for a long time. Only some people bothered to consider whether the SGL transfer forms or BRs were backed by securities. As a result, books were fraudulently balanced by entering new transactions with SGL transfer forms BRs that were not backed by securities.
What was the event that finally put a stop to the scam?
The RBI began inspecting bank books for irregularities in securities transactions in January 1992. In April, the RBI discovered a Rs 649 crore shortfall in SBI’s investment portfolio. The securities the bank had paid its broker Harshad Mehta were unavailable. Harshad paid up around Rs 620 crore between April 13 and April 24 under pressure from SBI. However, the RBI investigated further and discovered that Harshad had paid Rs 574 crore from his Grindlay Bank account. National Housing Bank cheques drawn in favour of Grindlays Bank and credited to Harshad’s account funded Rs 489.75 crores.
Could Harshad have resolved the issue with SBI without the RBI interfering?
Unfortunately for Harshad, the BSE ceased trading operations on April 16 due to a broker strike in response to SEBI’s directive requiring them to re-register and pay a higher registration fee.
As a result, Harshad could not sell a portion of his holdings and repay SBI. SEBI softened the hike on April 20 in response to broker pressure.
What happened after that?
The discovery of the shortfall in SBI, followed by NHB’s disclosure of the payments, caused a crisis in the securities market. Fake transactions at various banks began to emerge one after the other. As a result, the Bank of Karad and Metropolitan Co-operative Bank, both of which issued BRs and SGL forms with no underlying securities, suffered massive losses and failed.
The CBI had frozen Harshad Mehta’s bank accounts and seized his assets by mid-May. The CBI arrested Harshad three weeks later.
Share prices plummeted after the scam became public and fund flows into the stock market dried up. As a result, the BSE Sensex fell from a high of 4467 in the last week of April to below 2600 by August.