The Rise and Fall of Harshad Mehta: India’s Big Bull

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This is the story of Harshad Mehta, a name that became synonymous with the Indian stock market’s biggest scam. From humble beginnings, he rose to become the “Big Bull” of Dalal Street, only to face a dramatic downfall. His journey is a fascinating, albeit cautionary, tale of ambition, innovation, and ultimately, deception.

From Raipur to Mumbai: A New Beginning

In the 1970s, a young Harshad Mehta, feeling disheartened by his father’s failing business and health, decided to try his luck in Mumbai, the city of dreams. He enrolled in Lala Lajpat Rai College and took up odd jobs to make ends meet, even carrying and delivering materials himself to save money. His entire family eventually moved to Mumbai.

After college in 1977, Harshad joined New India Assurance Company as a clerk. While working, he and his brother Ashwin explored various businesses, but none took off significantly. This led them to the stock market.

Entering the Trading Ring

Back then, the Bombay Stock Exchange (BSE) had a physical trading ring where shares were bought and sold manually. Only jobbers and brokers were allowed in. Harshad, determined to trade, managed to get a jobber’s badge after much effort. His first day was a loss, but he learned from it.

He soon realised that to make big money, he needed insider information. He built connections with people like labour union leaders to get early data on company production. This allowed him to buy shares when production was expected to rise and sell before it fell – a practice known as insider trading, which was legal then.

By 1982, Harshad had made a good amount through insider trading and moved to a bigger house. He then explored the “pump and dump” strategy: buying a large quantity of a stock to drive up its price, then selling his holdings for a profit.

Black Thursday and a New Venture

On March 18, 1982, the market crashed dramatically, known as Black Thursday. Harshad lost nearly ₹10 lakh and had to pawn his wife’s jewellery to pay off brokers. His brother Ashwin’s wife, a freelance beautician, supported the family.

In June 1982, Harshad and Ashwin decided to start their own stockbroking firm, Grow More Consultants, from a small office. Their aim was to provide portfolio management services to wealthy individuals, investing their surplus money for high returns.

The Rise of Grow More Consultants

Harshad noticed that tea companies’ shares were undervalued despite rising tea leaf prices. He advised his clients to heavily buy shares of companies like Macleods, Tata Tea, and Harrison & Malayalam. Within a year, these shares surged, making Grow More Consultants famous and attracting many investors.

By 1985, Harshad was a star in the stock market. However, an old market veteran, Manu Manek, a “bear” who profited from falling stock prices, was unhappy with Harshad’s success.

The Bear’s Attack and a Clever Comeback

In 1986, budget decisions led to a market downturn. Manu Manek and his associates heavily short-sold shares of SPIC, a stock Harshad had invested in. Rumours spread that Harshad owed over ₹1 crore and would go bankrupt. To counter this, Harshad paid off his dues 14 days in advance, spreading the word and boosting his reputation, though he incurred a ₹1.5 crore loss.

He bounced back by serving institutional investors, becoming one of India’s largest institutional brokers. But Harshad wanted more; he aimed to be a major investor himself, not just a broker.

The Money Market and the Scam’s Genesis

Harshad set his sights on the money market, where banks lend each other short-term loans, often using bank receipts (BRs) as collateral. Banks typically issued BRs instead of physically transferring securities.

Harshad noticed a loophole: banks often transferred money to brokers in advance for deals. This money sat in the broker’s account for days before the deal was executed. Harshad started investing this money in the stock market, artificially inflating stock prices before completing the money market deals.

He also found that BRs weren’t always verified. He bribed smaller banks like the Bank of Karad to issue fake BRs. This allowed him to get funds from one bank, invest them in the stock market, and use fake BRs to cover the loan with the lending bank.

The Big Bull and Market Inflation

Between 1990 and 1992, Harshad used these methods to pump massive amounts of money into the stock market. The Sensex, which was around 800 points in May 1990, soared to nearly 4,500 points by April 1992 – a 460% increase in just two years. His favourite stocks, like ACC and Apollo Tyres, saw phenomenal growth.

Harshad became known as the “Big Bull.” His influence was so great that even mentioning his name in connection with a stock could cause its price to rise. Media portrayed him as a larger-than-life figure, India’s highest income tax payer.

The Unraveling

In 1991, the RBI received tips about the misuse of BRs in the money market and issued stricter guidelines. Despite this, in December 1991, Harshad took ₹500 crore from the State Bank of India (SBI) to inflate stock prices. He bribed an SBI employee to manipulate records, but SBI officials eventually discovered a ₹500 crore securities gap.

As SBI pressured him for repayment, Harshad sought time and borrowed from another bank, NHB, to make installment payments. However, journalist Sucheta Dalal of The Times of India exposed the scam on April 23, 1992, reporting the missing ₹500 crore from SBI accounts and linking it to Harshad Mehta.

The Aftermath

The exposé led to parliamentary outcry and investigations by the Income Tax Department, RBI, and CBI. The entire scam, involving the artificial inflation of the stock market using bank funds, came to light. Retail investors lost billions, and banks like Bank of Karad and Metropolitan Cooperative Bank collapsed.

The total size of the scam was assessed at over ₹4,000 crore. Harshad Mehta and his brother Ashwin were arrested on June 4, 1992, and their assets were seized.

Legacy

After a seven-year legal battle, Harshad Mehta died in police custody in December 2001 at the age of 47. His story remains controversial, with some viewing him as a scamster and others arguing he was unfairly targeted for practices common at the time. The truth likely lies somewhere in between.

Key Takeaways

• Harshad Mehta used a combination of insider trading, pump-and-dump schemes, and money market manipulation to inflate stock prices.
• The scam involved the misuse of bank receipts (BRs) and the artificial inflation of the stock market, leading to massive losses for investors and banks.
• Media exposure played a significant role in uncovering and publicizing the scam.
• The incident led to stricter regulations in the Indian financial markets.
• Harshad Mehta’s story highlights the potential for both immense wealth creation and devastating financial fraud in the stock market.

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